Foreign Affairs Committee on April 30th, 2012

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Could you give me some examples of some of these cooperatives that have been working in the underdeveloped countries?

[Christopher Dunford]

Generally, the most successful examples, as I alluded to, are the financial cooperatives in West Africa and some other countries. When it comes to reaching out into rural areas and to poorer communities, the financial cooperatives have been more successful than have the agricultural cooperatives. There are always isolated examples of successful agricultural cooperatives, but they tend to be more problematic.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Why is that?

[Christopher Dunford]

I'm not a student of cooperatives per se, so I don't know that I can give you the texture of what works and what doesn't work in agricultural cooperatives.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

But there is evidence that the agricultural cooperatives are not as successful.

[Christopher Dunford]

That's correct.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Is there any particular reason?

[Christopher Dunford]

I alluded to the reason that I think is most commonly cited. I'm not sure how much hard evidence there is, but generally it's the size. When it gets over a certain size, then the ability of all the members to really participate in governance is diluted, and that opens up the opportunity for corruption, for things to happen in secrecy, for money to be absconded with, and so on.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you very much.

[The Chair, Conservative, Dean Allison]

Thank you very much.

We're going to start our second round, which will be five minutes of questions and answers, with Mr. Williamson.

[John Williamson, Conservative, New Brunswick Southwest, NB]

Thank you, Chair.

Mr. Dunford, thanks for being with us here today. It was good to hear your insight.

I want to back up a little bit and get your thoughts on some questions. At the end of the day, what you and other groups involved with microcredit are really trying to do is develop markets in these countries—or rather, you're trying to use the power of the market, if you like, to help countries develop.

Would you agree with that assessment? Why do you do it this way as opposed to just giving money to education or some of the other building blocks of societies or countries?

[Christopher Dunford]

You'll recall in my opening remarks that I made reference to the fact that microfinance for people who are so poor that they're chronically hungry really should be regarded as a social service, in the sense that poor people are engaged in financial transactions generally in the informal sector with relatives, friends, money lenders, shopkeepers. Poor people need to do a large number of financial transactions to smooth their consumption, as the economists would say, so that they have enough money to buy enough food to get through each day.

You hear about people living on $2 a day or $1 a day, but that money doesn't come in on a nice regular payment of $2 a day. It comes in maybe $4 on one day and no dollars for the next three days, and then maybe $6 the following day, and so on. They have a problem of being able to intermediate with other sources of funding to borrow, to save, and to depend on each other's mutual help in order to get by, to stretch their money to make sure they have enough food on the table, if they have a table, every day.

Microfinance for the poor needs to be seen more as building a social infrastructure for social service. The fact that it starts with financial service rather than with health or education is because financial service is something the poor are very accustomed to paying for, and often at a high premium; they're not accustomed to paying for health and education and other such services. As a result, it's difficult to build a delivery infrastructure that's self-sustaining in a private sector sense by focusing on education and health and other such services. It is possible to do it when focusing on financial services.

What this means is that microfinance for poorer people tends not to be a market development or an economic development activity. It's much more about creating the social service infrastructure that can help these people take advantage of whatever economic opportunities are made available by true economic development. You do have a higher-level loan type service generally to what are called SMEs, small and medium enterprises, which in rural areas would be agricultural. There's a value chain between the producers and the consumers. If that value chain is developed, powered by small and medium enterprises, agricultural development, then the poorer elements of that population can tap into that value chain if they've taken care of their basic financial, health, and education needs in order to be able to move away from the margin of survival to actually take advantage of whatever economic opportunities are there.

We should see a distinction between poverty reduction through economic development and poverty alleviation through social service.

[John Williamson, Conservative, New Brunswick Southwest, NB]

I agree with you, but in the end you are in fact creating a market. You're putting in place the rules and institutions so that people can come together, trade, and increase their holdings of resources, of money, of savings.

Would you agree with that characteristic, that in fact you're creating a market?

[Christopher Dunford]

Yes.

[John Williamson, Conservative, New Brunswick Southwest, NB]

I think that's important. Tell me if you think I'm wrong or if you think I'm off track. That's important because those rules and institutions are so important for development to happen. It's difficult to point to countries that have lifted themselves out of great poverty without those rules and institutions. We're finding that microcredit works because it is built on voluntary trade and in bringing people together. Would you agree with that, broadly speaking?

[Christopher Dunford]

Yes, absolutely. I appreciate your clarification.

The microfinance movement worldwide definitely is creating a more structured and dependable market for financial services for the poor, giving them access to services they didn't have before. Microfinance institutions are superior to money lenders and friends and relatives as sources of capital primarily because they have many features of the banks, although the banks might find it uneconomic to reach such people. They have many features of the banks. They're rule bound, they're reliable, and they're fairly impersonal, so that people can do business with them without having to share their family secrets with the rest of the community, as is often the case with friends and relatives, certainly, and even money lenders.

It's really creating a more formal market for financial services in communities that have not had such a formal market before. That is a huge improvement in itself. There's no question that microfinance has achieved that. Whether it has achieved true economic development in the sense of moving the poor into the marketplace in a substantial way with true businesses, that's still debatable.

[John Williamson, Conservative, New Brunswick Southwest, NB]

Fair enough. And that's something we will see over time, I suppose. Anyway, I appreciate it, and keep up the good work.

I should introduce myself. My name is John Williamson. I just appreciate your comments today. Thank you for joining us.

[The Chair, Conservative, Dean Allison]

Thanks, Mr. Williamson.

We're going to move over to the opposition. Mr. Dewar.

[Paul Dewar, NDP, Ottawa Centre, ON]

Thank you, and thank you to our guests for joining us today.

I have to lay out a bit more of the equation here, because I think as important as microfinancing is—and you touched on this earlier—it's one aspect of dealing with, as you put it, those who are the extreme poor and the billion that we often talk about who are hard to reach. I think many people have put forward ideas around how we can drill down and get to people who are often abandoned, and certainly microfinancing has its place.

I also find it interesting that you're working in a part of the world that is French-speaking, and you have partnered with a Canadian institution as well. I just think that's kind of an interesting dynamic. We have someone from California talking to us here in Canada about how you're connecting with someone in Quebec and doing development, which I guess is something we can be proud of here, and good on you.

Would you agree that we shouldn't look at taking microfinancing and putting it at the head of the line, versus investing in the eradication of TB, or malaria, or supporting capacity of health services?

[Christopher Dunford]

Yes, I would agree that certainly microfinancing needs to be seen as one tool in a multi-tool tool kit for economic development in general, and in particular in relation to helping the very poor. It's just one tool. However, there is one argument, which I think is a pretty strong one, that I've alluded to for putting microfinance at the head of the queue. It has the potential—and in some cases has clearly done so—to create a delivery infrastructure, a social service delivery infrastructure, that is self-sustaining and that the poor themselves are willing to pay for that infrastructure.

This is done to the extent that that infrastructure can be used to deliver other services, either by the microfinance institution itself or by other institutions that are using that same infrastructure—and when I refer to infrastructure, I am referring to the softer human infrastructure. Just imagine. You have in the developing world every day these groups of women, mixed groups of men and women, and more individual contacts between men and women and microfinance institutions. There's this interaction occurring between an outside agency and people living in very low-income communities, and it's creating a social intermediation in which trust is built between outsiders and insiders in these communities.

That's an infrastructure, if you will, that enables the delivery of services, initially microfinance services because that's immediately in demand. But when you offer other services alongside the microfinance services, or encouragement to use other services at these microfinance meetings, whether they be one on one or in groups, they in fact are creating a social infrastructure for service delivery. In that sense, it might be worth giving prior consideration, in terms of what comes first, to get the microfinance institution in there first, and then take advantage of that infrastructure, if in fact it's creating true social intermediation.

[Paul Dewar, NDP, Ottawa Centre, ON]

You wouldn't advocate taking away funding for already pre-existing programs to be replaced by—

[Christopher Dunford]

No.

[Paul Dewar, NDP, Ottawa Centre, ON]

I say that because I'm in the opposition here. We have a government that's capped its development aid budget and is cutting back on things like funding the TB projects that we've done in the past.

Of course, as a politician I want to make sure we're clear about what we're talking about, not replacing one for the other, but certainly advancing the idea of microfinancing, its value, as opposed to saying that we can cut our aid budget on the one hand, and, oh yes, by the way, we can sprinkle around some microfinancing and look as if we're having a great impact.

That's my job to point that out, not yours, and I have just done that.

Finally, I just want to ask you about microloans, because I think a lot of people would be surprised when they hear the rates that are charged for microloans. Could you just touch on what's the average? And of course people will want to know why the cost is so high.

[Christopher Dunford]

Sure. This is, of course, a very controversial area, particularly with the advent of profit-maximizing investors investing in microfinance. There have been some spectacular examples in India and in Mexico of investors making a great deal of money when an IPO is issued for a microfinance institution.

The issue for interest rates is that it is more expensive to reach the poor. Quite often you have to take the bank to them, which means you equip a credit agent with a motorcycle and off they go into the hinterland, or even if it's in an urban area, it requires leaving the bank and coming to the community. That, by itself, requires special training, special support, transportation, and so on, so it's more expensive, plus the economies of scale are not so favourable in that it costs as much to make a thousand dollar loan as it does to make a hundred dollar loan. If you have a whole bunch of hundred dollar loans, that's problematic from the point of view of making enough money to cover your costs.

Those are the basics, but there's also a good deal of difficulty in really understanding what microfinance institutions actually charge, what the true effective interest rate is. Even the providers of such loans often don't really understand the true APR of their loans. There's a movement afoot to really become much more transparent about this so that the poor, when they have alternative sources of financing, can compare them more on an apples-to-apples, and oranges-to-oranges basis.

You asked about the average. It depends on the country. Mexico is very high,so 80% APR would probably be typical. In Bangladesh it would be maybe 20% to 30% APR.

[The Chair, Conservative, Dean Allison]

Thank you.

Ms. Brown.