Microcredit: What can we learn from the past?

World Dcvelopmenr Vol. 26, No. 10, pp. 1875-1891, 199X 0 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0305750X/98/$ - see front matter

PII:SO305750X(98)00082-5

Microcredit:

What Can we Learn from the Past? AIDAN HOLLIS University of Calgary, Alberta, Canada and

ARTHUR SWEETMAN University of Victoria, British Columbia, Canada Summary. Six microcredit organizations of 19th~century Europe are compared to identity what institutional designs were conducive to success and sustainability. Organizations that depended on charitable funding were more fragile and tended to lose their focus more quickly than those that obtained funds from depositors. An ability to adjust interest rates also appears important in sustainability. Examining historical microcredit is particularly useful since it offers an opportunity to explore the characteristics of organizations which were sustained over many decades, a perspective which is rare in modern microcredit banks and programs. most of which are less than 15 years old. 0 1998 Elsevier Science Ltd. All rights reserved

Key words -

Europe,

United

Kingdom,

Germany,

1. INTRODUCTION “Microcredit,” or the provision of small-scale financing to entrepreneurs, has become a popular if controversial method of facilitating development, not only in poor countries, but even in the poorer areas of the richest countries. Traditional commercial banks have failed to meet adequately the demand for credit by poor people who cannot offer physical collateral, but who may nevertheless be creditworthy. Local organizations, which are able to acquire information about borrower characteristics at a lower cost than banks, have therefore been promoted as a method of enabling the poor to acquire productive capital. But most modern microcredit organizations (that is to say, institutions which make only small loans) are less than 15 years old, and a large proportion of these microcredit banks have failed, owing to high default rates. Sustainability is therefore one of the major issues in microcredit. This paper examines six historical European microcredit organizations (MOs) that operated in four countries-England, Germany, Ireland and Italy-at various times and with different levels of success, and attempts to draw some lessons from them which may be helpful in determining what organizational characteristics are likely to lead to sustainable operations. Referring to historic organizations is valuable because their long histories, sometimes spanning

Italy. Microcrcdit,

institutions

over 100 years, help to provide guidance on issues that cannot be addressed in institutions formed only 10 or 15 years ago. Examining these institutions also helps to place modern MOs in context: microcredit has a lengthy and distinguished history with many successful organizations. We examine a lending charity which made loans to young entrepreneurs in 18th century London, two systems of loan funds in 19th century Ireland, and three credit cooperative movements which started in the late 19th century in Germany, Ireland, and Italy. Given differences in cultures, technologies, geography and the like, care must be taken not to apply simplistically structures that are successful in one time and/or place to another. Nevertheless, insight can be gained by studying the experiences of diverse organizations to look for common patterns. We believe that the six historical institutions studied here cast some light on at least seven specific issues faced by modern MOs. First, putting

what what

is the effect is essentially

of the

subsidies? Or, same question

We would like to thank Francesco Galassi and Tim Guinnane for kindly providing information on the Italian and German cooperative systems, Edward S. Prescott for helpful comments, and the Entrepreneurship Research Alliance at the University of British Columbia and the University of Calgary for financial support. Final revision accepted: I April 1998.

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another way, how should interest rates be set? Most current MOs are supported by subsidies from governments or nongovernment organizations (NGOs). For example, Morduch (1997) shows that even for Grameen Bank, which is the model for a large number of new MOs, interest rates would need to double for the bank to break even, after accounting for subsidies received. What is the prognosis for such institutions if and when the subsidy is withdrawn? If a subsidy is provided, what should it fund? There remains substantial disagreement on this issue. Johnson and Rogaly (1997, p. 64) argue that it is still an open question even whether “financial sustainability is an achievable objective,” and Buckley (1997) notes that evidence of sustainabili~ in modern microcredit organizations is rare. In the United Nations Development contrast, Programme’s (United Nations Development Programme, 1997, p. A.5) MicroStart guide states “International experience shows that that successful intermediaries have achieved operational efficiency in three to seven years, and full self-sufficiency, i.e., covering all financial costs at non-subsidized rates within live to ten years.” Further, it recommends that after a start-up period, “Interest charges by the retail unit should be set to cover the cost of capital (at the opportunity cost, including inflation), administration, loan losses and a minimum return on equity” (1997, p. A4). Another view was put forward by the 1997 Microcredit Summit (Microcredit Summit, 1997), whose declaration states that successful MOs should have both “a culture, structure, capacity and operating system that can support sustained delivery to a significant and growing number of poor clients” but need only have “interest rates adequate to cover the cost of operations” (p. 18) and not necessarily that of capital. The latter, of course, leads to an apparent contradiction, since if interest rates do not cover the cost of capital, delivery to a growing number of clients is not feasible without ever-increasing subsidies, which might not be thought of as sustained delivery. An “emerging consensus,” according to some microcredit proponents, is that even where subsidies are provided, they should be directed at operational costs, rather than taking the form of low interest rates or lax repayment policies’. It is, however, impossible to define whether an interest rate is low without also considering the costs of servicing the loan. While everyone agrees that self-reliance is an important principle, subsidies continue to be the sine qua non of most microcredit programs’. This leads directly to questions about what interest rates

are reasonable, and what criteria should be used in setting them. Should rates be set centrally or determined at branch level by lending managers? Second, is it important, useful, or necessary for MOs to have a savings role? Or, in other words, how they should be funded? Many see encouraging savings as a “good thing,” but many MOs have a focus on credit rather than on saving. For example, Grameen Bank has historically made few attempts to attract savings from its members or other locals, and has been financed by loans from other organizations. In contrast, Robinson (1995) reports that the BRI bank in Indonesia has successfully attracted savings from poor people as a major funding source for its operations. Hulme and Mosley (1996, p. 56) show that institutions with savings functions tend to have lower rates of default. Von Pischke et al. (1997, p. 25) note that microcredit administrators and borrowers “make qualitative distinctions between funding based on the source” and are better stewards of money from local depositors than of money from government or donor agencies. While it is clear that attracting savings may be important in terms of long-term sustainability, a focus on savings may be distracting from credit issues, and it also exposes savers to the risks of the MO. A third question relates to the scale of operation. The issue is that large-scale activities may be required to generate sufficient economies of scale to make an operation sustainable, but the larger the operation, the more difficult it is for it to be close to its borrowers (Johnson and Rogaly, 1997)“. Fourth, how should MO workers be paid, if at all? Christen et al. (1995) find that financially viable institutions have lower salary scales. In contrast, Chaves and Gonzalez-Vega (1996) claim that the high wage scales in Indonesian microcredit banks act as an efficiency wage which creates incentives for employees to act in the interest of the banks. Fifth, should MOs have strict limits on loan sizes to ensure that funds are focused on the poor only? Tied to this issue is whether it is appropriate for such MOs to increase the size of loans to successful borrowers. The latter can be helpful for the MO, since it has already acquired information about the borrower’s characteristic, and it can encourage repayment by offering to lend a larger amount in the future (Stiglitz and Weiss, 1983). Some MOs have maintained limits on loan size, however, because it allows them to focus their limited resources on the poorest borrowers, while successful borrowers can graduate to the ordinary banking system. For

MICROCREDIT

example, Grameen Bank will only admit as members people with assets worth less than half an acre of land (Khandker et al., 1995). Sixth, how sensitive are microcredit institutions to cultural differences between countries? Another way of phrasing this is to ask whether an institution which has been successful in one country should be expected to succeed in another country. This is an important issue, since many development donors are pushing MOs to replicate the structure of relatively successful organizations such as Grameen Bank (see e.g., Todd, 1996). It may be, however, that replication is not a useful strategy, depending on the sensitivity to cultural differences. Whether microcredit stimulates the macroeconomy over long periods, encouraging growth and development, is a final issue that we attempt to address using the information presented in this study. There is no doubt that providers of small-scale credit can make a significant difference in the survival and opportunities of microenterprises, as shown by numerous studies (e.g. Barham et al., 1996; Hulme and Mosley, 1996), and there is also a growing consensus, as noted by Levine (1997, p. 689), that “the development of healthy financial markets and institutions is a critical and inextricable part of the growth process.” Others such as Grosh and Somolekae (1996) note, however, that the importance of microenterprises in the development of largerscale industry is an as yet unresolved, though undoubtedly important, issue; and others, such as Buckley (1997, p. 1081) have cautioned that microcredit is not a panacea, and that significant economic progress may require not just finance, but “fundamental structural changes.” The key findings of this research are that longlived microcredit organizations rely on depositors, at least some of which are local, for the major part of their funding. Organizations which accepted deposits are able to make many more loans because of their deposit base. In addition, we note that depositors in MOs need not necessarily be poor, but a substantial fraction should be local. Further, depositors are observed to demand regulation by an independent, or quasiindependent, body to protect their interests, but this regulator also serves to protect borrowers. Flexibility in determining interest rates is found to increase substantially the level of operations of MOs. The organizations we examine not possessing these features tended to fail more quickly and suffered from a lack of organizational direction. We also observe that subsidies which reduce transaction costs may be useful, but none of the institutions studied had ongoing

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financial transfers, suggesting that in a large class of cases they are not required for sustainability. Further, no correlation is observed between the operations of MOs and the size of the long-run growth rate of a country. For the European countries in our sample, sustainable microcredit was observed in the highest, and lowest, growth rate countries, while it similarly failed in both high and low growth rate countries.

2. BRIEF HISTORIES In this section, we offer, in chronological order, brief histories of six historical microcredit organizations. There are a large number of such institutions, and the information available on each varies tremendously. We select ones which offer in their design both similarities and variations, and we include three credit cooperatives because of their considerable importance and success in microcredit. England’s lending charities are least like the others, but their history is instructive and so they are included.

(a) English lending charities As Adam Smith (1776; reprinted 1983, p. 195) (Smith, 1983) observes in the Wealth of Nations, “Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little.” This difficulty was apparently well noticed, since hundreds of people left bequests to fund revolving loans for ambitious young men. Jordan, who made a study of philanthropy in England in this period, reports that approximately 3% of all money available to charities during the period 1480-1660 was designated for this purpose. He observed: “Our own reading of literally hundreds of wills in which merchants testify to the great good accomplished by these loan funds, as well as the clear evidence that very little of this capital was lost, attest to the enormous social and economic value of this instrumentality of social rehabilitation” (Jordan, 1959,p. 267)“. Most of these funds were left in the trust of town councils and trade organizations. About two-thirds of the funds had a nominal rate of interest of zero. Those that charged interest to borrowers typically required the interest be paid out to some local charity. Jordan estimates that each year over 150 aspiring young men were launched on trading careers by these lending charities (Jordan, 1960, p. 176)5. As the banking

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system developed, there was a decrease in new bequests to this kind of charity. One of the more important of such charities was founded by Samuel Wilson who, in 1766, bequeathed E20,OOO to the Corporation of London to be lent out to “young men who have been set up one year, or not more than two years, in some trade or manufacture, in the city of London, or within three miles thereof’ Inquiring Concerning (Commissioners for Charities, 1829, p. 471). Wilson’s charity stipulated that each loan should be between flO0 and E300; that the maturity should be no more than five years; and that the interest rate be 1% for the first year and 2% thereafter. The trustees were fairly successful in administering the money. Losses over the first 20 years were reckoned in 1804 to have been just f2262, or around 11% of the total, which would have been less than the total interest collected from borrowers. One should not infer, however, that almost all borrowers were successful; it is clear that a large proportion of repayments were obtained from the two cosignatories every borrower was required to have. Indeed, the difficulty of securing repayment was such that by 1795 all borrowers were required to have at least three cosignatories, and from 1821, four cosignatories. Despite the many cosignatories required, Wilson’s charity nevertheless suffered substantial defaults in later years and was eventually shut down by the Corporation of London. Increasing the number of cosignatories had the effect of making it more and more difficult for a new trader of little reputation to obtain a loan, but offered good protection to the trustees who mainly wished to ensure that they obtained repayment. This feature developed in many of the lending charities. An equally culpable misuse of the funds was the common resort of trustees who, mistrusting the security of any applicant actually in need of a loan, directed the money towards wealthy, established merchantsfrequently city councillors who were, perhaps, flattered to call themselves young men’. Another problem widely observed in such charities was excessive administrative expenses. For example, in 1822, the charitable loans committee in Nottingham charged the charity f33 for 144 bottles of wine for the committee’s consumption! (United Kingdom, 1829). In some cities, the charities appear to have been subsumed in the discretionary accounts of the city councillors charged with administering them. It is not easy to determine whether Wilson’s charity, or the other English lending charities, were successes. Wilson’s charity operated for

over 50 years, as did many of the other hundreds of small loan funds founded throughout the United Kingdom, which should perhaps help us to judge them reasonable successes. But since the persons who founded these lending charities were almost always dead, this meant they relied on administrators who were unlikely to have a real interest in the goals of the charity, except, perhaps, to ensure that they could not be blamed for poor lending decisions. Defaults often required expensive and time-consuming lawsuits to obtain recovery of the funds from the defaulter or his securities, and trustees were not eager to devote time or money to such pursuits. As a result, these charities tended to slip away from the intentions of their founders and ended up financing established traders who could offer security (and could therefore obtain a loan from a commercial source) or who had some personal connections to the administrators. An equally important weakness of these charities was that since they relied entirely on donated capital, they tended to be small, and therefore had relatively high administrative expenses for their few loans. (b) The Irish Reproductive Loan Fund Institution While in England, the lending charities offered quite substantial loans to traders, in Ireland in the early 19th century, loans were required for a quite different class of borrower: very poor farmers, agricultural labourers and dealers. Following a famine in 1822, some f55,OOO of charitable donations were given for the formation of the “Reproductive Loan Fund Institution” (RLFI) in Ireland. This capital was administered by a committee in London and distributed to committees in the nine Irish counties worst affected by the famine; the county committees were then to distribute this to voluntary associations in towns which would lend the proceeds out in small loans. The loans were restricted to being less than f10, and they were to be repaid over the course of 20 weeks. The effective interest rate was set around 12%, though fines were sometimes levied for late repayments. The RLFI benefited from special legislation which reduced the transaction costs of making small loans and effectively made the local associations preferred over other non-bank creditors. Some critics of the system observed that the sums advanced to the local associations were so small, typically &200 or f300, that the local managers “were obliged to borrow capital wherever they could obtain it” (Madden, 1857, Vol. 5, p. 9) to augment the monies available for loans. As a result, it was claimed that these funds

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were “mainly carried on for the advantage of petty usurers” (Madden, 1857, Vol. 5, p. 9). Unfortunately, the committee in London that was supposed to regulate the RLFI was apparently completely inactive. The London committee did, however, have an annual income of at least f268, which it distributed, perhaps to its directors, as “incidental expenses” (United Kingdom, 1844, p. 2). When the competing Central Loan Fund Board, described below, suggested that all loan funds should be regulated by it, the suggestion was, not surprisingly, rejected by the London directors of the RLFI (Madden, 1857, Vol. 5, p. 11). Its first report, ominously, was not written until 1844, 22 years after the foundation of the Fund; thus there are no records for these loan funds until that date, at which time it became clear that the performance of the local loan funds varied dramatically across the nine counties. The Report of 1844, which was informed by reports from the county committees, claimed that out of loans of f57,435, bad debts constituted only f292. In subsequent inspections, it was discovered that this extraordinarily low default rate was only possible because some local associations had not always troubled themselves with making loans to the industrious poor, but had in many places kept a large portion of the funds “lying unproductively in the savings bank” (United Kingdom, 1847, p. 2) or had provided false accounts to the county inspector’. Just as this deceit and incompetence were being uncovered, the Great Famine of 1845-1848 overwhelmed Ireland, and it was decided to shut down all lending operations in 1847 and transfer the remaining money to other charities. While it appears that in some areas the funds were reasonably well managed and benefited the borrowers, on the whole the RLFI system could reasonably be assessed a failure: despite substantial capital, it quickly became the victim of corruption and ineptitude. At the heart of its failure lay poor regulation and monitoring by the central committee and/or local management that was unable to operate local funds appropriately. This is particularly remarkable since, as will be seen in the next section, in the same period other loan funds were being established and operated successfully in Ireland without the benefit, at least initially, of a supervisory body. It appears that the London committee was not able to identify and obtain the services of the right “type” of local volunteer to oversee the RLFI funds. (The legislation which applied to all funds in Ireland allowed for paid clerks to handle the day-to-day operations of the funds, but required

local volunteer management.) This emphasizes the importance of a particular type of local information that is required by an external funding body seeking to establish a microcredit operation in a distant location.

(c) The Irish loan funds Laws principally designed to apply to the RLFI had the side-effect of allowing other loan funds, which had no connection with the RLFI, to be founded in Ireland. These loan funds (which bear a striking similarity to the BKK bank of Indonesia) are discussed in much more detail in Hollis and Sweetman (1997a,b)). Loan funds were established by donations, or interest-free loans, from (at least ostensibly) altruistic individuals. This initial capital was increased by interest-bearing deposits, and the proceeds lent out at interest. Owing to the risk of loss by depositors and the possibility of illegally high interest charged to borrowers, legislation was passed in 1836 to establish a central board in Dublin to regulate these independent funds, whose main goal was seen to be poverty relief. The Board was financed by a small charge on each loan fund, which was obliged under the legislation governing the funds (with the exception of “Reproductive Loan Funds”) to become registered, follow approved rules, and report annually to the Board. More loan funds were founded as a result of the establishment of the Board which audited each fund, published annual reports summarizing their activity and distributed information on how to operate a fund. By 1843 there were about 300 funds operating across Ireland making, in total, around 500,000 loans annually. The initial capital endowment of the system was at the most about f30,OOO. Lending was, however, about 10 times larger with the funding arising from the substantial deposits the funds attracted. Although the maximum loan size was f10, the average loan was only about f3.3, a little less than the average per capita income of the poorer two-thirds of the population, and all loans were repaid over 20 weeks. In the early 1840s these loan funds were lending to around 20% of all Irish households annually. About 1650 loans were extended annually by the typical loan fund which had, on average, only 20 depositors with an average deposit of f60 each. Although the funds received no government funding, they were exempted from paying the “stamp tax” on contracts, which saved them as much as 2% annually on the amount outstanding.

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The loan funds’ annual reports include many examples of borrowers who were saved from grinding poverty by borrowing. A couple of examples will suffice to show that the borrowers were similar to borrowers in many modern microcredit organizations. “[One borrower] holds a small mountain farm; got a loan, and laid out W.[pounds] on flax, which enabled him to set his four girls at work, spinning; with their help, he paid the instalments, and was 41. better at the end; bought a cow for that sum, which is now worth 61.; has at present three cows, and says he is so well off that he may give up borrowing” (Third Annual Report of the Loan Fund Board (1841) p. 13). “A.B., formerly a day labourer, and frequently assisted by a kind neighbour in the maintenance of his family, has, by means of the Loan Fund, raised himself to independence, and is now possessed of a cow, a pony, and a good cart, with a small patch of land, which he farms to good purpose” (Third Annual Report of the Loan Fund Board (1841) p. 14).

Not all the reports on the loan funds indicated satisfaction with their activities. An 1845 inquiry into the state of Irish agriculture and landholding interviewed a large number of (mainly wealthy) farmers and landowners, many of whom held that loan funds were injurious to “the lower classes” who “do not know how to calculate, and . . .are apt to waste the money” (Kennedy, 1847, p.225). Ireland was overwhelmed in the late 1840s by a catastrophic famine-the Irish “potato famine” or Great Famine-which led to an excess mortality of around 12% of the population, and the emigration of as many again. Like the RLFI, these loan funds were severely damaged by the famine, and about half closed by 1850. Those that survived grew back strongly, however, and in 1853 loan funds were making over 200,000 loans annually. During 1850-1880, commercial banks expanded their networks very substantially though, and the loan fund system slowly shrank. In 1880, however, the system still consisted of 75 funds making 89,590 20-week loans. Near the end of the century the system size grew again, but this growth represents an unsavory part of the system’s history. During the 1880s and 1890s many supposedly “charitable” loan funds were taken over by profiteers who abused the system by charging borrowers extra fees and renewing loans continuously over years, or sometimes even decades. Profits made by these practices were extracted in the form of very high wages and salaries. This abuse was possible for two principal reasons. First, under the legislation establishing the system the funds had very

easy access to the Justice of the Peace to enforce repayment, and this meant that although a fund did not take physical security from borrowers, it could easily seize the assets of defaulters (or their securities). This conferred an advantage over other moneylenders and a degree of monopoly power in some remote districts. Second, the regulatory Board at that time was reluctant to close down funds, even where it was known they were exacting illegal charges on borrowers and generally abusing the system, since it depended on them for its financing. Such abuses eventually led to a government inquiry in 1896, which forced some legislative changes including reducing the system’s enforcement capabilities for loans that had been renewed. The new legislation was, however, defective and it took 10 years for the legal situation of the funds to be resolved, leading to a significant decline in the numbers and activities of the loan funds. By 1904 there remained just 57 funds making 32,278 loans. The system slowly declined over the following 50 years and the last fund closed in the 1950s. As noted above, one of the interesting characteristics of the loan funds is that they were constrained in the maximum nominal interest rates they could charge borrowers or pay depositors, and this was constant over time, primarily due to government neglect, despite changes in outside interest rates. As a result, when outside interest rates were high (low), depositors tended to move their assets out of (into) the loan funds. Fortunately, the Irish loan funds are one of the few historical MOs for which detailed records are still available. We take advantage of this to explore more formally how important the interest rate restraint was on the effectiveness of the loan funds by performing a regression using annual data covering the period 1850-1914. The dependent variable is the total amount of fund lending (circulation) per capita in 1890 pounds. Of the variables available over the period, circulation best captures the total level of fund activity. In our specification, both the dependent and the independent continuous variables are in logarithms, and hence the coefficient estimates can be interpreted as elasticities. As an indicator of the opportunity cost of capital, we used the average annual yield on British government bonds (Yield). Other regressors are the annual values of crops and livestock, and these agricultural series determine the length of our analysis. A change in the legal status of the loan funds in 1896, as a result of the inquiry mentioned above, caused a major structural change in the operations of the funds which we allow for in our

MICROCREDIT

modelling. For details of the econometric specification, see Appendix A. Column 1 of Table 1 shows our preferred specification, while columns 2-4 show alternative specifications that illustrate the robustness of the result of interest-the effect of the outside interest rate on the level of activity, measured by the total circulation of the fund system. The interest rate (yield on government bonds) has the expected negative effect. During this 65-year period the mean yield was 3.00 with a minimum of 2.25, maximum of 3.46 and standard deviation of 0.299. Since this represents the yield on alternative investments and, being set in the London market, it is clearly unaffected by loans to the poor in Ireland, the causality is clear. Depositors were apparently quite sensitive to the rate of return offered by the funds relative to the opportunity cost of funds, and the magnitude of the interest rate effect, with coefficients ranging from -1.38 to -0.96, is quite striking. These coefficients imply that an increase in the yield on

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government bonds from 2.9 to 3.0% would have caused the loan funds’ total lending to fall by between -3.3% to 4.8% in the short run, with the preferred specification giving the larger numbers’. Equations 2 and 3 have smaller coefficient estimates for the yield primarily because the structural change resulting from the 1896 inquiry is not adequately accounted for in those models. In equation 4, the coefficient’s magnitude increases again since the period after the inquiry is simply ignored in estimating the effect of the yield on circulation, so the turbulence following the inquiry does not affect the estimate. Such a large effect implies that had the interest rate restrictions been lifted, loan fund operations might well have expanded, and many more borrowers and depositors could have been served. In looking at the other variables’ coefficients, it is interesting that the total value of annual loans increases when harvests are above average. They also increase when increments to livestock are high, but decrease the following

Table 1. Time series regressions of total circulation by the Irish loan funds 1850-1914’

(1) lag (Amt Circ) Yield lag (Yield) Yield pre-1896 crops lag (Crops) Livestock lag (Livestock) Trend 1850-1914 Trend 1850-1895 Trend 1896-1914 Yr = 97 dummy Yr = 96 dummy constant post 1896 dummy R2 Durbin h B-G :va’ue

0.68*** -1.32** 0.06 0.15* 0.01 0.49*** -0.20* -0.01* 0.02** -0.19 0.25* 22.57** - 57.01 0.96 0.67 5.59 0.232 64

(4 (0.094) (0.542) (0.589) (0.085) (0.081) (0.098) (0.117) (0.005) (0.009) (0.123) (0.141) (10.76) (25.26)

(3) -

0.79*** -O.Y6* 0.66 -

(0.082) (0.538) (0.545)

0.20** 0.04 0.44*** -0.33*** - 0.0003 -

(O.&S) (0.084) (0.099) (0.106) (0.003) -

-0.28** 0.09* 2.50 -0.23*** 0.95 -0.12 2.61 0.625 64

(0.122) (0.125) (6.25) (0.070)

0.74** * -1.05* 0.73 0.24*** 0.07 0.44* ** -0.29* -0.001 3.71 -0.27*** 0.95 0.84 2.00 0.735 64

(4) 0.69*** (0.613)

{::!Z:; (0.145) (0.150) (0.003)

(0.094) -

-1.38*** 0.15** -

(0.373) (0.060)

0.46*** -0.17 -0.01**

(0.098) (0.117) (0.004) -

(5.42) (0.075)

2378*** - 1.61*** 0.95 -0.34 1.66 0.798 64

(8.71) (0.395)

’ All continuous variables are in logs; the trends are in years. B-G (p-value) is a Breusch-Godfrey test for autocorrelation in the residuals. The statistic presented tests four lags; other lengths (not shown) were also examined. Jarque-Bera tests did not reject normality of the residuals. For equation 1 and equation 2 BreuschPagan tests did not reject homoskedasticity; heteroskedasticity consistent standard errors are used for equations 3 and 4 where heteroskedasticity is induced when the allowances for the 1896 reforms are removed. *Standard errors in parentheses. 10% level of significance; **5% level of significance; ***l% level of significance. Sources: Loan fund data are extracted from the Annual Reports of the Commissioners of the Loan Fund Board of Ireland (United Kingdom 1851-1915) (United Kingdom, 1915). Agricultural data are taken from Turner (1996, p. 108). Interest rate yields are from Homer and Sylla (1991). Population estimates are from Mitchell (1992, p.77ff). All monetary values are deflated to 1890 pounds using the average price of bread in Dublin, from Mitchell (1988, p. 771). While this is obviously not an ideal index, we have some confidence in it since it moves fairly closely with the UK consumer price index presented in Mitchell (19Y2, p. 846ff); the latter index is not used because of a break in the series in 1871.

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1882

year; perhaps livestock are a form of savings instrument that reduces reliance on the funds somewhat. The Irish loan funds should be considered generally successful, despite episodes of corruption. They achieved an extraordinary penetration rate in an extremely poor country, with a very small capital base and no government finance. While there was considerable variation across the system, individual funds lasted for over 75 years, and the system itself for well over 100 years. This persistence was all the more remarkable given the extremely turbulent Irish macroeconomy, high rates of emigration, and a number including the of severe negative shocks catastrophic “Great Famine” of the 1840s. (d) German Raiffeisen credit cooperatives In the 1840s Germany was the birthplace of a system of credit cooperatives that grew to become highly successful during the latter half of the 19th, and the first part of the 20th, centuries’. There were limited liability and mainly urban cooperatives (so-called Schultze-Delitzsch banks), and unlimited liability Raiffeisen and Haas cooperatives. We focus on the latter type here. They are particularly worthy of study because the cooperative has been the single most enduring and most widespread form of organized microcredit institution in the world. Raiffeisen imitators became important financial intermediaries in virtually every country in Europe; in North America, they grew to prominence in the early twentieth century as credit unions; they also spread to China and colonial India where, by 1946, they had over nine million members (Woolcock, 1997). There are also many modern credit cooperatives whose basic form is almost identical to that of the earliest Raiffeisen cooperatives.

After a relatively slow start, Raiffeisen cooperatives in Germany grew with astonishing rapidity at the end of the 19th century. In 1885, there were only 245 Raiffeisen cooperatives, but 25 years later the system had grown to over 14,500 rural cooperatives with about 1.4 million members. Members of German Raiffeisen cooperatives, who alone had borrowing privileges, had unlimited liability for the cooperative’s deposits. This enabled the cooperatives to raise money at a reasonable cost. Loans were made for a variety of purposes, and each loan was supposed to be vetted by the cooperative committee. Borrowers were typically required to provide the guarantees of two cosignatories. Loan sizes varied from under f10 (like the Irish Loan Funds) to over f250 (larger than those granted by Wilson’s charity in London). Table 2 shows the numbers of loans outstanding of various sizes in 1910 in the entire system”. Management expenses were not trivial. In 1907, they represented 4.5% of the amount of loans made that year. Loans tended to be long term, however; Wolff (1910) reports that the average loan term was approximately six years, so management expenses were less than 1% of the total loan portfolio”. Profits were allocated to increase capital, or occasionally “to some public work of common utility benefitting the district” (Wolff, 1910, p. 136). In the case of dissolution, any residual capital was to be used for founding a new cooperative or some useful public work. The presence of many small rural cooperatives led to the formation of central banks which accepted deposits when individual cooperatives had excess deposits, and made loans when they had excess demand for loans. Guinnane (1997) reports that the “centrals” sometimes benefited from subsidized government loans. These centrals also acted as lenders of last resort,

Table 2. Number of loans by loan size for the German Raiffeisen credit cooperatives in 1910 Size of loan (f)

f250 All loans Source: United Kingdom (1914), p. 212.

Number of loans outstanding, Dee 31, 1910

% of loans outstanding

61,070 102,556 59,176 63,889 44,764 32,814 11,749 376,018

17% 27% 16% 17% 12% 9% 3% 100%

1883

MICROCREDIT

sometimes “bailing out troubled cooperatives with emergency loans” (Guinnane, 1997, p. 12). This must have been an important function, since cooperatives tended to have rather small reserves: Wolff (1910) notes that the cooperatives’ own capital averaged only 4.5% of the amount of advances. The Raiffeisen cooperatives were highly successful in avoiding large losses for depositors. Contemporary observers claimed that the success they obtained in their lending operations resulted not only from the members knowing personally who was borrowing, and for what purpose, but also from their strong incentive to ensure that all loans were repaid: “There is nothing to sharpen the wits of people concerned, to make them watchful, critical, observant, inexorable, like effectual liability” (Wolff, 1910, p. 150). Of course, for this principle to work, it was also necessary that each cooperative operate in a very small region, so that members could have good information about each other without great effort. Guinnane (1994b) points out that contemporary sources observed that the farmers and labourers likely to be cooperative members tended to live near each other and to have strong identification with their villages. In addition, cooperatives were the first type of German business enterprise required to be audited regularly. Audits were biennial and their quality was apparently relatively good, with auditors spending several days on each cooperative (Wolff, 1910, p. 134; Guinnane, 1997, pp. 5, 13). Cases of embezzlement by treasurers were frequently reported, but the German credit cooperatives, unlike the Irish loan funds, appear to have been generally successful in recovering such losses: perhaps this is related to the difference in rates of emigration. The organizers and promoters of the cooperatives claimed that they conferred substantial benefits on their members, by allowing them to borrow at rates far below those charged by moneylenders. Since the Raiffeisen cooperatives were mainly rural, projects financed by them were typically agricultural: buying manure and feedstuffs; purchasing livestock, draining fields, and sinking wells. Cooperatives could be set up easily enough: all that was required was a few individuals willing to accept the associated unlimited liability. Then the cooperative would seek deposits and make loans to its members. Often the “central” would provide a significant deposit to assist in a cooperative’s foundation. A characteristic of the cooperative form is homogeneity of member wealth and social status, which is a function of

the unlimited liability, since the richest members effectiveb bear the liability. This has two effects: richer persons do not wish to join the cooperative, and existing members wish to exclude relatively poor people from joining. Despite this, the evidence on the Raiffeisen cooperatives in Germany is that they did considerable lending to the very poor. The fact that 17% of loans were for less than f.5 (Table 2) suggests many of their borrowers were very poor, and this is corroborated by anecdotal evidence. Over time the Raiffeisen cooperatives developed into commercial banks that were indistinguishable from other commercial banks.

(e) Irish credit cooperatives The Irish credit cooperatives were modelled on the Raiffeisen (unlimited liability) cooperatives in Germany and were started in 1895 with government encouragement and subsidies to help meet the demand for credit by smallholders12. A complete history may be found in Guinnane (1994a) and United Kingdom (1914). Despite receiving considerable deposits from the state, which accounted, at times, for over half the deposits of the cooperatives, these organizations never bloomed and even at their peak in 1909 were inconsiderable, with total loans of only f57,640 in all Ireland. In contrast to the experience of the German cooperatives, the Irish ones were unsuccessful in attracting deposits, which made their impact small and unsustainable. A number of factors may be blamed for this. First, at the time the cooperatives were being set up, Ireland already had a well developed system of banks, and the government-run deposit-taking Post Office Savings Bank, in particular, was extremely convenient and secure. Since the latter paid 2.5% on deposits, and the credit cooperatives were unable to pay more than 4%, it was clearly very difficult to attract deposits, given the variation in risk. Since cooperatives were no more convenient than the universal Post Office Savings Banks, a minimum condition for attracting deposits was that the cooperative present very low risks. This was difficult to do since the credit cooperatives somewhat resembled loan funds, many of which had closed with depositor losses in 1896 and 1897. A report on the cooperatives (United Kingdom, 1914, p. 145) remarked that “The failures thus associated with so many Loan Fund Societies have proved an almost insurmountable obstacle in many districts to the winning of the people’s confidence in [Cooper-

WORLD DEVELOPMENT

1884

ative] Credit Societies.” There were additional problems in Ireland compared with Germany. For example, “in some districts the difficulty of obtaining a suitable secretary, possessed of the necessary capacity for keeping the books and records of a Society, is almost insuperable” (United Kingdom, 1914, p. 145). Overall it would be difficult not to judge the Irish credit cooperatives a failure: despite substantial government assistance, the system never matured and it remained inconsequential throughout its brief history.

(f) Italian Casse Rurali The Cusse Rurali of Italy were also modelled very closely on the German Raiffeisen credit cooperatives but, unlike the Irish cooperatives, were highly successful, at least in the North of Italy. Details on the Cusse Rurali are drawn from Galassi (1996, 1997) and Wolff (1910). The first Italian cooperative was established in 1883, and was widely imitated. Growth was assisted by the encouragement of the Roman Catholic church after 1891; by 1916 there were 2,100 casse rurali, with 115,000 members, operating in Italy. These cooperatives were all in small towns and villages, with the larger towns and cities being served by the limited liability Ban&e Popoluti. The typical cassa had between 20 and 60 members, and only they could borrow from it. Borrowers typically had to provide cosignatories, and sometimes also physical collateral. Loans were of various effective maturities, but were renewed every three months. Casse raised funds through public deposits, and they obtained loans from savings banks secured through the unlimited liability of the members. Members were required to work gratis for the cooperative, and fines were imposed on members who failed to attend meetings. In the North of Italy, where these cooperatives were relatively successful, the casse obtained most of their funds through current and savings accounts, while in the South, where they were much less common, loans from banks were more important. Some casse developed into savings institutions, and often these institutions had deposits two or three times as large as their loan portfolio, with the excess being placed in savings banks. Each member of the CLISS(I had one share, giving equal voting rights. Dividends were not paid on these, and profits were used either to increase the capital of the cooperative or “applied to common purposes, as the Committee may decide” (Wolff, 1910, p. 350). In the case of

dissolution of the cooperative, the residual capital was required to be distributed to other cooperatives or alternative charitable purposes. Proponents of the cusse claimed that they had brought “relief, comfort, independence and education” to the poor of Italy (Wolff, 1910, p. 331). Wolff interviewed many borrowers, who though miserably impoverished when borrowing from the usurer, became comfortably affluent by borrowing from the casse. He makes an important distinction between access to credit and price; the borrowers already had access to credit through usurers, and the key contribution of the casse was to reduce the cost of borrowing and enable the borrowers to retain a surplus. In the early 1920s the government brought the casse rurali under the supervision of the Ministry of Finance and the central bank, and forced many of them to merge, sometimes with urban cooperative and mutual aid societies. This government intervention led to a decrease in the number of casse from 2,263 in 1926, to 1,748 in 1937. Combined with the effects of the depressed macroeconomy, this intervention caused a 43% drop in total liabilities and a 67% reduction in the value of the Cusses loan portfolio. They rebounded, however, in the 1950s with the Italian “economic miracle.” That the loan portfolio was so seriously reduced is hardly surprising given the change in institutional structure imposed by the government. The local nature of the casse meant they had good information on local borrowers; with increased size, they lacked the same kind of specific information about members. The casse rurali essentially duplicated the success of the German unlimited liability cooperatives, achieving tremendous penetration throughout the North of Italy. Although, like other cooperatives, there was a natural tendency for their membership to become financially homogeneous and to exclude the very poor, anecdotal evidence suggests that the casse mrali were successful in serving a large proportion of poor members.

3. DISCUSSION What do we learn from the successes and failures of the microcredit organizations discussed above? Table 3 summarizes characteristics of the six organizations examined. It is noteworthy that all the lending systems shared some common points. For example, each of them had independent offices making loans locally. All

4.5% little; some subsidized government loans

350 some to charities 10% none direct; reduction in taxation limited

little around 14% yes little 600 150 increased capital 80% none direct; reduction in taxation limited

little

0%

1 unit only varied

20

100

no profits

100% none

no depositors

Competition in microcredit market Real interest rate

Unit independence Use of volunteers

Size (loans pa per unit)

Loans per unit normalized to annual loans Use of profits

Capital/Ioan ratio Government subsidies

Depositor liability

“Those figures marked with an asterisk are estimates

distributed to depositors?

yes varied, declined over time 1600

local fl-fl0 2 cosignatories

local flOO-f300 2 cosignatories

Geographic spread Loan size System of securing loans little formal early, increasing around 14%

declining amount over 20 weeks local fl-fl0 2 cosignatories

20 weeks

up to 5 years

Length of loans

unlimited

25 plus some current a/c activity 150

varied by co-op and by borrower yes considerable

little

yes; semi-annual audits various; up to 10 years; average of 6 years local various 2 cosignatories

yes, improving

no

no

yes

yes

little

Raiffeisen credit coops 1907

no depositors

Irish LF 1843

Depositor knowledge of lending operations System of regulation

Irish RLFI 1825

Wilson’s Lending Charity 1766

Characteristic

Irish credit coops 1910

varied increased capital

200* distributed to depositors? 45% some; 25% of assets provided by gov’t

unlimited

< 10% none

varied

yes considerable

varied by co-operative

various, but renewal required at 3 months local fl-f5 2 cosignatories; collateral sometimes required moneylenders only

no

yes

Rurali 1907

Italian Cane

235

yes little

6%*

considerable

local f2-f50 2 cosignatories

various

yes, but few depositors little; not effective

Table 3. Summary of the characteristics of the six microcredit operations studied”

1886

WORLD DEVELOPMENT

required borrowers to provide two cosignatories who were jointly liable for repayment. This common ground allows us to focus on the distinctions between the organizations, as we address the key issues in microcredit discussed in the Introduction. We first turn our attention to the issue of government subsidies and setting of interest rates. Both the RLFI and the Irish loan fund system under the Board had an ongoing indirect subsidy in the form of an exemption from a tax normally required to register contracts; this was certainly very important given the large number of small loan contracts they were making. Except for the lrish credit cooperatives, however, none of the institutions we examined received substantial direct financial subsidies from government, although several benefited from subsidies through charitably donated capital, or interestfree loans, in the initial years of their operation. Without this start-up capital it is almost certain the organizations would not have existed, but it is striking that they were successful in operating without ongoing subsidies. This is particularly interesting since 19th century Ireland was extremely poor. Some observers (e.g. Christen et al., 1995) have commented that in many situations it may simply not be possible to operate a financially viable MO because of poverty or geography. However, sustained operation by the Irish loan funds under the Board suggests that poverty should not be an insurmountable obstacle to the existence of microcredit without ongoing direct subsidies, as long as there are at least some individuals in the region able to make deposits. Regarding interest rates, the evidence from historical MOs suggests that, with certain provisos, they should be set locally, unconstrained by restrictions designed ostensibly to protect borrowers’ interests. While we have only limited data on the interest rates charged by most of these historical institutions except for the Irish loan funds, this one case demonstrates very clearly the effect of limiting the interest rate on the ability of funds to attract deposits. As seen in the regressions of Table 1, the success of the loan funds as depository institutions, which had a direct impact on their scale of operations, was closely tied to the interest premium they paid to attract deposits. When outside interest rates increased, and the premium decreased, deposits were withdrawn and loan fund activity shrank considerably. In contrast, Raiffeisen credit cooperatives were free to determine what interest rates would be charged on each loan, and what rate of interest would be paid on

deposits. This allowed them to compete effectively with banks and serve a very large number of borrowers. This difference, along with the loan size restrictions, may explain the slow decline of the Irish funds while the German cooperatives developed into commercial-type banks. Two important points follow from this comparison. First, restrictions on the rates MOs pay and charge are likely to restrict their scale of operation, and thus interest rates should be determined by the local MO, not by a distant regulatory body. Second, interest rates should be flexible and responsive to outside rates. A caveat to this conclusion is, however, also suggested by the history of Ireland’s fund system. As discussed above, many of the supposedly “charitable” loan funds were taken over by profiteers in the 1880s and 1890s and did not necessarily serve their borrowers well. This is particularly evident from the fact that some borrowers were indebted continuously for very long periods of time, sometimes decades. Funds which set illegally high rates of interest were able to do so because of the monopoly power they possessed and despite the legal interest rate restrictions. Thus, we would caution that while the Irish experience suggests that the funds would have been better served by the ability to set interest rates locally to reflect local circumstances, at the same time allowing funds such latitude might well have led to even worse abuses. Thus regulators should be aware of the problems that can arise in lending operations when MOs possess some degree of monopoly power. Our second question, whether MOs should have a savings role receives a strong answer from the historical MOs. The most striking contrast in our study is between those organizations which had depositors and those which did not. England’s lending charities, the Irish RLFI, and many of the Irish Cooperatives had no, or very few, local depositors and therefore no one with incentives to ensure appropriate lending. Tied to the absence of depositors, these organizations were also (essentially) unregulated. In a large part this occurred because it was depositors who demanded ongoing competent regulation and a monitoring authority to enforce standards and provide information about asset quality. All of the organizations without depositors, not surprisingly, therefore deviated from their original goals and disintegrated. In contrast, those organizations with depositors were forced to maintain asset quality in order to retain their deposits. This, in turn, provided some protection to borrowers, whose interests were secondarily

MICROCREDIT

protected by the regulators. Germany’s cooperatives, as mentioned, were the first businesses in the country required to be audited regularly, and the Irish fund system under the Board was also regulated, even if the quality of the monitoring varied over the years. The importance of depositors to the sustainability of microcredit institutions should therefore not be underestimated. This study suggests that organizations based on government funds (such as the Irish cooperatives) or on donations (such as the English lending charities and Irish RLFI) are likely to experience difficulties in obtaining repayment, in the direction of the organization, and in longterm sustainability. It is difficult to determine the relative importance of the roles played by depositor monitoring and the regulatory authority in maintaining asset quality, since the supervision is usually only imposed to protect depositors. Our historical comparisons do, however, permit some inferences. Regulatory oversight was not present at all in the Italian credit cooperatives, and only became a feature of the Irish loan funds after they had already achieved prominence. Thus, it would appear that a central regulatory authority is not essential for success. In contrast, the three effective microcredit organizations we examined all had depositors. That the historical record of governmentfunded microcredit is not good was observed as early as 1910 by Wolff (Wolff, 1910; pp. 19-27). He discusses numerous instances where high default rates resulted from attempts by the governments of France, Germany, Belgium, and Italy to establish and fund loan banks. Later, however, credit cooperatives flourished in the same locations. He notes the temptation for governments to assist microcredit organizations: “To the eye of the zealous social reformer co-operative banks, though multiplying fast, do not multiply nearly fast enough” (p. 189). Wolff is highly critical of all types of government aid to credit cooperatives, arguing that it robs the institution of the right incentives to attract savings, which, in turn, provide incentives for savers to monitor the operations of the cooperative. After a thorough review of failed government interventions, he concludes, “If you want to distribute State charity, call it by that name” (p. 219). Third, we asked how the scale of an MO is likely to affect its prospects. There are two levels of scale: first, the size of the organization at a local level, and second the cumulative size of all affiliated units. With respect to local scale, the historical institutions suggest that a wide range of sizes can be sustainable. As Table 3 shows,

1887

local branches of these organizations had between 50 and 3.50 borrowers on an annualized basis, with no particular pattern of success”. On the scale of the organization as a whole, however, it is notable that only the large institutions, or systems, were able to support any kind of regulatory body. Larger institutions are also likely to be better able to attract government attention which may sometimes be positive. Fourth, we asked about pay scales. Here the historical institutions offer little guidance, although it is clear that the more successful, sustained institutions made considerable use of volunteers. These organizations mobilized depositors to work for the MO, both in giving guidance and information in credit decisions, and, in the case of the cooperatives, in assisting with the administration. By contrast, the pure lending-oriented institutions were necessarily reliant only on paid staff. Fifth, are limits on loan size helpful in encouraging loans to the poor? The Irish loan funds and RLFI both had limits on the size of loans they could make, and tended to make loans much smaller than the maximum, although the constant nominal size did become a binding constraint for the funds under the Board late in the century. Germany’s cooperatives did not have such limits but still managed to serve many poor borrowers; indeed, their financial strength was related to the wealth of their members, so that had they been limited to small loans they also would have discouraged wealthy members and hence found it more difficult to attract deposits. Thus, the historical institutions studied here provide little guidance on this issue, except in showing that MOs can serve a range of borrowers. Sixth, how does culture affect the success of MOs‘? And are structures and techniques likely to be transferable across countries? While it is beyond the scope of this analysis to try to compare cultures and levels of trust between the countries under study in any detail, we can observe that culture is not the only essential element in successful microfinance. Raiffeisen’s system of credit cooperatives was adopted wholesale in both Italy and Ireland. It succeeded in only half of Italy, and failed dismally in Ireland, at least partly for cultural reasons (although culture was probably not the only reason for these failures). Galassi (1997) and Woolcock (1997) argue that it succeeded only in Northern Italy because the culture there was characterized by higher trust between individuals, whereas in the South, the culture was one of familism, in which the individual’s first duty was to members

1888

WORLD DEVELOPMENT

of his family. This meant that it was difficult for inter-family institutions to obtain cooperation for the founding of casse. Similarly, Guinnane (1994a) argues that the Irish economic and social environment was not suitable for credit cooperatives when they were introduced, perhaps because there was already a well-established competing system of savings banks, or perhaps because the Irish culture was not suited to the discipline of finance. The hypothesis he raises is that while a cooperative can benefit from the informational advantages created by members’ shared social activities, this advantage will be undermined when sympathy (or solidarity) makes it difficult for the cooperative to acquire accurate information or use social pressures on members to repay their loans. That the Raiffeisen-style cooperatives failed in Ireland, however, does not mean that no microcredit organizations could succeed, however, as shown by the success of the loan funds, which relied almost entirely on relatively wealthy-but still local-depositors for their funding. Thus the failure of a particular organizational form does not indicate that the culture prevents all microcredit, but rather that the structure of the MO needs to be molded around the underlying cultural norms and institutions. Finally, looking at the relationship between macroeconomic growth and active and widespread microcredit, there is no evidence that MOs are sufficient to improve measurably a country’s macroeconomy. Given the many economic influences on a country, knowledge about its microcredit is not sufficient to predict an outcome. The four countries studied span the range of growth rates in Europe in the period studied, and the level of microcredit “success” does not seem to be correlated with those growth rates. This does not, however, diminish the importance of microcredit’s poverty relief function. It is possible that in some locations, for example, Ireland, microcredit served primarily to relieve poverty whereas in Germany, where the

cooperatives grew into commercial banks, it had a greater role in economic development. It does, however, suggest that microcredit is not likely by itself to make a major difference to a country’s growth path.

4. CONCLUSIONS It would not be appropriate to apply the lessons from this brief review of historical microcredit organizations to modern situations without due regard for the many differences in cultures and institutions between historical Europe and modern less developed countries. Indeed, Galassi (1997) notes that culture can be extremely important; in Italy the same institution with the same legal framework was much more successful in the relatively “higher trust” North than in the South. Moreover, of the two “clones” of the Raiffeisen cooperatives of Germany, the Italian one prospered while the Irish one failed, suggesting that organizational success is highly sensitive to the local environment14. It would be equally inappropriate, however, to ignore the valuable knowledge about sustainability that historical MOs can teach us. The failure of so many microcredit schemes in the last 30 years might perhaps have been avoided had they been more closely modelled on the systems that worked in Europe in the last century. The most striking conclusion emerging from this review is that depositor-based MOs tend to last longer and serve many more borrowers than MOs financed by donations or government loans. That this is the case should hardly be surprising: organizational theory-and intuition-strongly predict that institutions require correctly aligned incentives to be successful. MOs with depositors benefited from having interested parties overseeing the operations and withdrawing their deposits when problems began to emerge. Depositors also provided information on, and monitored, borrowers, and performed administrative tasks in some instances. This study also suggests that MOs can indeed be sustainable, even financially successful, in very poor countries for long periods of time, and that the key to such success is getting the organizational structure right. In contrast, the amount of capital dedicated to the project seems to be less important, except perhaps in completely destitute locations without any wealthier inhabitants. A good institution can be successful in attracting local depositors, who in turn serve to protect the health of the organization.

NOTES 1. See, for example, Johnson and Rogaly (1997, p. 2. For example, of the 11 “successful” microcredit 64). The sentiment is echoed by Gurgand et al. (1994)

programs studied by Christen et al. (1993

only five

188Y

MICROCREDIT

were profitable in the sense of generating inflationadjusted positive returns on assets. Hulme and Mosley (1996) depict the donor community as somewhat schizophrenic on this issue: calling for self-sufficiency, but praising operations that are not, and continuing to donate. In discussing this issue, it is important to note that self-sufficiency only refers to the operations of an MO as a financial intermediary. Most observers, even the UNDP MicroStart guide, agree that any non-financial assistance to the poor (e.g. education) provided by a microfinance operation should be accounted for separately, and this aspect of a program might continue to receive subsidies. 3. For a discussion of financial merits of group lending see Prescott

structure (1997).

and

the

4. Unfortunately Jordan was not careful about annotating his evidence, which relies on his reading of probate records. 5. Jordan’s method for calculating this figure of 150, however, leaves something to be desired. He arrives at a figure of f38.332 as the total available capital by summing all the endowments of lending charities without bothering to account for the considerable losses which some of them sustained. This he divides by 3.6.years (as the average loan duration) and by f70 (as the average amount of capital required to start trading in London) to obtain 152 career launches per year. 6. For examples of this, see Markham and Cox (1898, Vol. 1, p. 349); and Chinnery (1965, Vol. V, pp. 63-64). 7. Tricking the inspector would cult: he claimed to have inspected

not have been diffi“a year’s accounts of

a voluminous and intricate nature which he came was changing Kingdom, 1847. p. 3).

whilst the coach by horses” (United

8. Since this is a dynamic model with a lagged dependent variable, the coefficient of interest can he interpreted as the short run effect of changes in that variable, while the long run effect (equal to the coefficient of interest divided by one minus the coefficient on the lagged dependent variable) is only approached asymptotically. on the German 9. For more information see Guinnane (1994b, 1997) and Banerjee

cooperatives

et d. (1994).

10. It is worth noting that these data come from a report of an Irish committee established to introduce a Raiffeisen-style system in that country. A substantial amount of cross-country learning occurred even at the turn of the century.

11. This compares favourably with most current MOs. Ten of the eleven programs reviewed in Christen et cd. (1995) had administrative expenses of Y-214 of the average outstanding loan portfolio. 12. Subsidies were national Co-operative 13. By “annualized,” borrowers is multiplied in years.

in the order of f2000 Alliance, 1905. p. 221). we mean that by the average

(Inter-

the number of length of loans

(lYY4a) discusses the importance of the 14. Guinnanc social and economic environment, in comparing the success of the German against the failure of the Irish cooperatives. Given the current interest in this type of “cloning.” as exemplified by the organizations discussed in Todd (1996). the varying success of similar organizational forms in Europe suggests that modern replica lion is likely to have equally uncertain results.

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WORLD DEVELOPMENT

1890 seedbed

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Guinnane. T. (1994b) Culture and Coooeration: Credit Cooperatives in Late Nineteenth-Century Germany. Yale University Department of Economics, New Haven. Guinnane, T. (1997) Regional organizations in the German cooperative banking system in the late 19th century. Research in Economics 51, 251-274. Gurgand, M., Pederson G. and Yaron J. (1994) Outreach and Sustainability of Six Rural Finance Institutions in Sub-Saharan Africa. World Bank Discussion Paper 248. Holhs. A. and Sweetman. A. (1997a) Microcredit in PreLFamine Ireland. University of ‘Calgary Department of Economics Discussion Paper 97-05, Calgary. Hollis, A. and Sweetman, A. (1997b) Complementarity, Competition and Institutional Development: The Irish Loan Funds Through Three Centuries. University of Calgary Department of Economics Discussion Paper 97-06, Calgary. Homer, S. and Sylla, R. (1991) A History of Interest Rates, 3rd ed. Rutgers University Press, NB. Hulme, D. and Mosley, P. (1996) Finance against Poverty, Vol 1. Routledge, London. International Co-operative Alliance (1905) Report of Proceedings at the Sixth Congress of the International Co-operative Alliance. P. S. King, London. Johnson, S. and Rogaly, B. (1997) Microfinance and Poverty Reduction. Oxfam, Oxford. Jordan, W. K. (1959) Philanthropy in England 1480-1660. George Allen and Unwin, London. Jordan, W. K. (1960) The Charities of London 1480-1660. George Allen and Unwin, London. Kennedy, J. P. (1847) Digest of Evidence taken before Her Majesty’s Commissioners of Inquiry into the State of Law and Practice in Respect of the Occupation of Land in Ireland. Alexander Thorn, Dublin.

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PhD dissertation, Brown University.

MICROCREDIT

1891

APPENDIX

To obtain the results in Table 1, a standard autoregressive distributed lag model of the form:

y, = r +

,!, B,yt-,

+ i:

‘i,xt-,

+

6T+u,

,=”

where u,-IID(O,a’) and T may be a vector of time trends was specified. The parameters p and q were initially set at high values and we tested down to the final specification. See Davidson and MacKinnon (1993, sect. 19.4) for a detailed discussion of the model. Preliminary testing revealed that the series were stationary. Four variations of the final specification are presented in Table 1 to explore the robustness of the results. Equation (1) is the most encompassing and is our preferred specification, allowing for each of the variables of interest and its lag. The trend and intercepts are allowed to change

before and after the inquiry of 1896, and dummy variables are used for the inquiry year and the year following it because of the massive changes in the system at that time. These structural breaks are reduced in equations (2) and (3) as first the trend is consolidated and then the yearspecific dummies are removed. The coefficients of interest are relatively robust to these changes although they reduce somewhat. Finally, in equation (4) the insignificant lags on crops and the yield are removed, and yield is crossed with a dummy variable that is 1 prior to 1896, and 0 in 1896 and following. In effect, the interest rate is not allowed to operate following 1896. The resultant coefficients are very similar to those in equation (l), except that the standard errors are smaller when the lags are dropped. Cyclical variations in the economy are accounted for by the agricultural variables.