Guest Articles

December 21

Chuck Waterfield

Businesses Behaving Badly: The Troubling Parallels Between Microfinance and Facebook

I left microfinance five years ago, after spending three decades in the sector. I stopped using Facebook three years ago, after using the platform for about 10 years. The parallels between the two led me to the same decision with both.

These are the thoughts I had this morning as I was milking my goats – my new occupation, during which I usually enjoy the beautiful morning light and sounds and spend time with my animals. But the recent controversies around Facebook now force thoughts of microfinance to percolate in my head even during milking time.

These thoughts have led me to a difficult conclusion: I don’t believe microfinance is rotten to the core, and I don’t believe Facebook is an entirely evil corporation. But business pressures have pushed both in the same directions, alienating large numbers of formerly enthusiastic supporters, and raising fears that without external intervention, things will only get worse.


The Beginnings: An Exciting Opportunity to Make a Difference

At their inception, both microfinance and Facebook were envisioned as innovative ways to reach the masses and provide them with services they would value and benefit from. Both told us that their services were very affordable compared to the alternatives – indeed, Facebook was, and remains, free for users. Both initially attracted smart, dedicated people who were drawn by the exciting idea of helping to create something that had never been done, and that could “change the world.” (Since its founding, Facebook’s mission statement has focused on the social good of connecting users with the people in their lives.) Many early microfinance and Facebook employees chose to take salaries below their market potential, because they considered these missions to be a noble pursuit.

The creation of Facebook may have been motivated primarily by the hopes of generating great wealth, but microfinance was absolutely never envisioned as something that would be lucrative. Initially, there was little hope of even covering expenses. For many years, the microfinance industry didn’t even measure return on investment; we measured what percentage of our expenses was actually paid by income (we called it Operational Self-Sufficiency) – and we were proud when we could cover over 50%.


The Transition: Moving Away from the Original Mission 

Despite their modest origins, Facebook and microfinance ended up reaching much greater scale than imagined. They both drew an increasing amount of public attention, and began attracting more – and higher profile – professionals. This new wave of people came in with a blend of motivations, and the clarity of the original mission began to blur.

With this growth, management in both had to figure out how to make the numbers work. Scale was increasing, but expenses were increasing faster than income. Both went out in search of MBA-types to create solutions. Microfinance also invested in developing business skills internally – I participated in these efforts through my Microfin software and the 126 Business Planning courses I organized from 1997 until 2013, which drew 3,200 microfinance professionals.

Both Facebook and microfinance ultimately decided that increasing income was far easier than controlling expenses. Facebook went big into advertisements and developed systems to collect and monetize data about (in other words, to spy on) everything we did while using Facebook – and even when using other websites and online services. And we users were, for the most part, unaware – at least at the beginning. Similarly, microfinance decided that hiding the true cost of loans was an easy path to greater income. In most countries, there were no rules against concealing this price, so true prices escalated while the advertised interest rates appeared to remain stable. It got so confusing that even people inside the industry did not know what prices were truly being charged for loans, or which microfinance institutions (MFIs) in a market were less expensive.

Facebook went from being a financial puzzle – a nice idea with no viable path to revenue – to one of the most profitable businesses on the planet. Microfinance went from being an inspiring concept with no viable financial future, to a booming industry where institutions subsidize their own early startup years with free grant money, then flip from NGO projects to for-profit cash cows that enable a handful of insider investors to get stunningly rich without having to take any prior risk.


The Problems Escalate

Facebook never anticipated that it would become a tool used to manipulate public opinion, interfere in elections, and amplify the voices of racists, scammers, terrorists and political ideologues. Microfinance never anticipated becoming a home for the very payday lenders and usurers that the industry was created to displace. Yet in both cases, that’s exactly what has happened.

To take just one example, the 1,100 payday lending businesses in South Africa, many quite large and very profitable, created the Microfinance South Africa association in 1996. They charge an average price of 350% on loans. Not wanting to be associated with the payday lenders, the dozen very small, struggling “true MFIs” in the country (which charge prices “only” in the low-100% range) created their own separate association.

In response to these issues, stakeholders in both enterprises took action. People involved in the early stages of Facebook have spoken up about the company’s increasingly troubling impact, the damage it’s already doing, and the potentially greater damage it could do in the future. Some early microfinance practitioners did the same. The debates started in the early 2000s, pitting the “poverty lending” group against the “massification” (i.e. scaling-up) group. All hell broke loose in April 2007, when the Compartamos IPO created a 350-to-1 ROI for a tiny group of insider investors in a 100% cash-out so blatant that it became hard for even the sector’s defenders to ignore.


The Search for Solutions

Due to this prolonged and uncorrected damage, many professionals who were drawn to work in Facebook and microfinance because of their original visions began to walk away. Others chose to stay, because of the elements of the businesses that still had positive impact – or because of the money. Some disaffected early employees became critics of these businesses, whose arguments attracted a lot of attention and led to a small number of initiatives that aimed to make mid-course adjustments. But in both cases, the power of money won hands-down – or at least it has won so far. Those making the money argued for “free speech” in the case of Facebook and for “free markets” in the case of microfinance.

So what’s the best path forward? You can do an internet search (I refuse to say “Google”) and find hundreds of articles with proposed solutions for Facebook, ranging from:

  • having the company’s leadership make internal decisions to create increased societal good with lower short-term profit levels, to
  • creating a social media industry self-regulation group to make rules that limit the damage the members are inflicting, to
  • creating government regulation to define what is allowed and what is prohibited.

You can do the same search for solutions for microfinance, and you will find options like:

  • expecting the leadership of each institution to show self-restraint in pricing and profit-taking, even though many of their peers have decided to get rich;
  • having the industry collect and publish data on pricing/profits, and expecting peer pressure to motivate self-restraint;
  • having the industry self-regulate, to create a boundary between the ethical providers and the profiteers;
  • changing the sector’s name/brand to “financial inclusion,” so it doesn’t get lumped in with the “bad guys” the media has labeled as microfinance;
  • finally starting to educate the regulators that the sector has traditionally (and intentionally) kept in the dark because powerful industry leaders thought more regulation would just “cause trouble.”

To be fair, the similarities between Facebook and microfinance have limits: Facebook is more problematic; microfinance is a muddle. But both have decision-making structures driven heavily by profit targets. Both might be more receptive to reducing their social damage if it wouldn’t reduce their profit-taking quite so much. In “real life,” whether you call yourself double, triple or even quadruple bottom line, when profit is one of those bottom lines it carries about 90% of the weight in decision-making.

So as the months and years progress, we’ll probably see lots of talk, lots of hand-wringing, and lots of clear examples of ugly things happening in some corners of Facebook and among some actors in microfinance. We’ll also likely see some attempted interventions from the outside world, like the major corporations that recently pulled their ads from Facebook until the company gets its act together, and the Reserve Bank of India’s successful efforts to improve the behavior of the country’s microfinance providers. Notably, this modest momentum toward positive change also has something in common: It is generally imposed by external stakeholders and threatens the profit margin of the business unless it complies. Again, that is an essential lesson about “real life.”


Chuck Waterfield has 30 years of experience in microfinance.


Photo courtesy of Glen Carrie


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Finance, Social Enterprise, Technology
corporate social responsibility, corporations, financial inclusion, microfinance, NGOs, social enterprise, startups