Good Customer Service versus Bad Regulation
Learning from Gandhi:
addressing the current
dilemmas in microfinance
Hinduism and Microfinance
The Financial Crisis
A Sketch of a Credible Explanation
Money Market Funds, Bank Runs and the First-Mover Advantage
The Morality of Money Lending
The Case for Central Bank Liquidity Facilities for Institutional Money Market Funds in the Offshore Market
Creating Sustainable Micro-lending in London
Darwin and Philosophy
David Hume's "Of Suicide"
Is God a democrat?
The Risk Premium
Associate Research Fellow
Institute of Philosophy
School of Advanced Studies
University of London
Professor, Banque Popualire Chair in Microfinance
Control, Law and Finance Department
Burgundy School of Business
During the past forty years the modern microfinance movement has grown rapidly (Daley-Harris, 2004) (Reed, 2013). Microfinance institutions (MFIs) have been established in most low-income countries, in many middle-income and in some high-income countries. The range of products and services offered by MFIs has proliferated, while funding sources have become diversified. By the early years of the twenty-first century microfinance was widely celebrated as a transformative practice, which stimulated sustainable economic and social development in even the poorest communities, and in particular amongst women (Yunus, 2003).
In the past five years serious questions have been raised about the conduct of some MFIs, about the integrity of their methods, and about the consequences of their activities (Ashta & Hudon, 2012) (Bateman, 2010) (Sinclair, 2012) (Roodman, 2012). Some of these challenges have been - quite clearly - politically motivated attempts to tarnish the reputation of leading microfinance practitioners. Others, however, have been the result of painstaking research into the practices and impacts of MFIs in different parts of the world. As a result, the microfinance industry is being forced to formulate the case for its own defence.
In particular the industry has started to address three sorts of question:
1) What are the business goals of MFIs? Are MFIs making excess profits from the provision of financial services to the poor, which are then remitted to investors and managers as reward? Should they aim instead to serve the poor by providing good quality financial services, at the lowest cost, with no financial rewards for the investors?
2) Do the business practices of MFIs match the highest ethical standards? Are MFIs giving priority to the expansion of their business rather than making sure that their products are appropriate to their customers' needs? Do they have policies in place to ensure that products are provided only when there is a reasonable probability that they will make the customer better off? The skills required to manage a business that has the twin objectives of financial success and social impact (the "double bottom line") are harder to acquire than the skills required to manage a business that has only one of these objectives (Armendáriz & Morduch, 2010). Can MFIs demonstrate the ability to use these skills?
3) Is there reliable evidence that demonstrates that MFIs have a beneficial economic and social impact on the lives of their customers? Are MFIs assuming that the products they provide are having a beneficial impact, without devoting time and resources to measure this impact? The success of the microfinance sector has often been promoted by means of anecdote and stories of individual transformation; should the sector, instead, collect more data to enable a thorough and impartial assessment of its impact on the lives of its customers?
The researchers and practitioners who are attempting to answer these questions inevitably draw upon the wider theoretical literature that discusses the concept of "good business practice". This literature is itself greatly influenced by ethical and religious thought, and the different traditions of moral reasoning.
The aim of this paper is to consider the teaching of Mohandas Gandhi (1869-1948) and suggest the relevance of his thought to the current dilemmas facing MFIs. Gandhi was an inspirational political leader and India, the country of his birth, is also home to the largest and fastest growing MFI sector. Notwithstanding Gandhi's remark that credit is "the co-operation of scoundrels" (McLaughlin, 1974, p. 112), there does seem reason to think that his teachings might be of relevance: he thought and wrote a great deal about the ethics of economic activity and acknowledged the influence of a number of other important moral thinkers on the development of his ideas. While we consider the study of Gandhi's life and thought to be of great pedagogical value for microfinance practitioners, we also caution of the need to be selective. Just as Gandhi borrowed ideas and insights from a wide range of sources, adapting them for his own purposes while discarding those parts he found to be suspect, so too the contemporary microfinance sector should be ready to be selective in its borrowing from Gandhi.
This paper is organised as follows. Section 1 provides a short summary of the modern microfinance movement, its main characteristics, growth and successes. It then details the various problems that have beset the movement in recent years: some political, some financial and some ethical. Section 2 provides a brief introduction to the life of Mohandas Gandhi and the various ethical and religious traditions that influenced his thought. Section 3 summarises Gandhi's main ideas and teachings. Section 4 considers the relevance of Gandhi's thought for the modern microfinance movement and suggests how his thought might help us to answer the questions we have posed in this Introduction.
Section 1: The modern microfinance movement: growth, successes and problems
Evidence for the success of the microfinance movement includes the rise in the number of institutions which are providing microfinance, the extent of their outreach to the poor, and their levels of profitability. There is no definite count of the number of MFIs, although someone from the World Bank once mentioned 10,000 and this number has stuck. Many in the sector believe the figure is closer to 100,000, if we were to count all the small cooperatives. About 3,700 of these MFIs now provide some data to Microcredit Summit and a smaller sample of about 1,000 institutions provides voluntary data to Microfinance Information Exchange. The exact figures differ from year to year.
Figure 1 shows that the number of institutions reporting to Microcredit Summit is growing year on year and was around 3,700 in 2012, up from 2,000 in 2001. More important, it shows that the number of clients has been growing consistently for over a decade, to reach about 200 million in 2012, although there was a dip recorded in 2011. Finally, the Figure shows that about 60% of these are very poor clients.
Figure 1: Growth of MFIs and clients, 1997-2012
Source: Microcredit Summit
Table 1 shows that many MFIs are profitable. In addition to the last five years for which data is available (2008-2012), we have also included data for 2000 and 2005 to show the overall trends in the data. The number of MFIs reporting is growing (consistent with Microcredit Summit data) but in terms of profitability the numbers are stable over the period. The average Return on Assets (ROA) for the sector is close to zero, undoubtedly pulled down by some very high losses in those MFIs that populate the left-hand tail of the distribution.
Table 1: Returns on assets for MFIs, 2000-2012
More relevant, the median ROA is between 1.4% and 2.1% in all years, even during the global financial crisis (2007-2009). On average, around 70% of MFIs achieve a positive ROA; of these, about 25% achieve a ROA greater than 5%; finally, about 7% achieve a ROA that is greater than 10%. These numbers would be much higher if we were to use Return on Equity (ROE) as our measure of profitability. However ROE is a less reliable indicator since many NGOs either do not have any equity or have very low capitalisation. What we can see clearly is that lending to the poor has been profitable for MFIs, even during the years of financial crisis.
How was the microcredit sector able to grow from one borrower - or from one group of borrowers - to 200 million borrowers? The following, rather typical answer explains why microcredit was able to enter the market successfully and why additional financial products were then offered to customers. Although the true story is probably not quite as neat as this, the typical answer it is sufficiently accurate to set the stage for our discussion.
The typical explanation indicates that there was a widespread financial exclusion problem to be solved and that microcredit was the social innovation which solved it. The financial exclusion problem had three elements. First, in order to cover the transaction costs of small loans interest rates needed to be high, which was often legally or socially unacceptable to commercial lenders. Second, there were asymmetric information problems: since the commercial lenders had no good insight regarding the credit histories of the borrowers they were unable to distinguish good from bad risks. Third, many commercial lenders thought there was a lack of complementary physical, human and social capital, which could allow the borrowers to improve their livelihoods sufficiently to repay their loans (Armendáriz & Morduch, 2010).
Different experiments by MFIs in different parts of the world indicated that group lending, together with a mix of incentives to repay and strong control procedures, could overcome all three elements of the problem. Thus, the standard procedure for a successful MFI was to provide credit to a group of jointly-liable borrowers, with some combination of staggered lending, progressive lending, public repayments and weekly repayments as incentives and controls. Of course there are many variants of the kinds of groups and the kinds of incentives that have been successfully introduced. The concept of group microcredit has been hailed as a social innovation and has rapidly diffused worldwide.
Microcredit turned out to be an easily replicable solution, if systematic discipline was applied. In each village, the credit agent followed the same model. The primary concern was to ensure that people repay. If one person was allowed to default, many others might try to get away with it and the MFI would go bankrupt, since it was not backed by physical collateral. To reduce costs, many MFIs only offered one standardized loan product.
Over time, as some people's business grew faster than others, their credit needs started to diverge. To cater for these differing needs, individual lending was provided to these known borrowers. Some incentives such as progressive lending and frequent repayments were retained. In other cases, loans backed by physical collateral were introduced.
Once it was recognised that microcredit could be profitable - because, it turns out that, just like the rich, the poor mostly repay - commercial banks started to downscale and enter the microcredit market. Then some not-for-profit MFIs converted themselves into for-profit companies. The microfinance bonanza was now underway. Today, half of microfinance assets are with banks (Cull, et al., 2009) and most of them offer loans to individuals.
To expand faster and build on their success, MFIs started gathering savings (in countries where the legislation permitted) and in other countries, they took deposits from existing borrowers. Both of these products enabled MFIs to lower their financing costs. In many cases, micro-savings attracted even more customers because it became clear that the poor often did not have adequate options to protect their savings (Rutherford, 1999) (Rutherford, 2001) (Collins, et al., 2009).
Following these two successes, other financial products were conceived including micro-insurance, also a form of savings, which helps to overcome disruptions in the provision of funds for consumption needs (Dror & Jacquier, 1999) (Cohen, et al., 2005). Making micro-insurance work was often problematic since the local character of the MFIs makes them susceptible to systematic risk from disasters, such as droughts. Thus micro-insurance products often required collaboration between a group of MFIs, which covered a larger area and were therefore less vulnerable to the impact of a disaster (Churchill & McCord, 2012).
One form of micro-insurance which did work well at the local level was a form of mutual insurance against non-repayment of the loan for health reasons. The insurance contract was limited to the duration of the loan and hence was within the capacity of a single, local microfinance institution to provide on its own. A period of ill-health might be a catastrophe for an individual and their family, but these costs could be absorbed by an MFI in small settlement, so long as the average likelihood of ill-health within the community was understood and properly priced.
The advent of new technology, especially the rapid spread of mobile telephony in developing countries, has led to the instant success of micro-transfers and micro-payments in those countries where MFIs have been allowed by regulation to experiment with product innovation.
Thus, the product set has evolved from microcredit to microfinance.
If microcredit is such a beautiful story - that shows that we can do well by doing good - why did it decline in scale during 2011? And why does it experience frequent crises, such as those in Bolivia (in 1999), the "no pago" movement in Nicaragua (in 2008-9), the failure of Zakoura in Morocco (in 2008-9), the significant decline in repayment rates in Bosnia-Herzegovina (in 2008-9), problems in Pakistan (in 2008-9) and, finally, the major crisis in Andhra Pradesh (in 2010-2011)?
One reason, evidently, is that beautiful stories are often too good to be true. Microcredit has frequently been presented as the story of a gallant knight fighting to save a poor damsel in distress from the clutches of the moneylender, thereby winning fame and fortune. This experience of fame spurred the knight towards hopes of greater glory, hopes that were founded on being able to save more and more damsels than was humanly possible. Amid increasing competition between rival knights, jousting for the right to save the most damsels, over-ambition has caused serious damage to the sector.
A CGAP study (Chen, et al., 2010) suggested that the main reasons for the crises in Nicaragua, Morocco, Pakistan and Bosnia & Herzegovina were:
1. Concentrated Market Competition and Multiple Borrowing. The largest MFIs have remained concentrated in densely populated, high-growth urban areas and new competitors have launched in the same areas to lower their client acquisition costs. This concentration of lenders has enabled borrowers to take multiple loans, increasing their total borrowing without any of the MFIs knowing the scale of their total debt.
2. Overstretched Systems and Controls. The high growth rates reported by some MFIs were unsustainable. Rapid business expansion has meant that new staff were recruited very quickly, with little time available for training. As a result, MFI started to poach trained staff from each other, especially mid-level managers. Moreover, fast rates of growth placed strains on internal control processes, since auditors and compliance managers do not increase at the same rate as the rest of the staff.
3. Erosion of MFI Credit Discipline: Growing competition combined with high growth targets provided incentives for the sales force to reduce its credit standards in order to take on new, more-risky borrowers. Innovations in infrastructure, such as money transfers by mobile telephones, can create efficiencies but they also reduce levels of human contact. Similarly, using agents to introduce customers tends to lead to reductions in the quality of credit checks, since the agents do not also have the responsibility for maintaining relationships with the borrowers, including income collections.
The authors of the CGAP study recommended that MFIs temper their growth objectives with the aim of improving the quality of their client services. In addition they proposed the creation of credit information bureaux and financial access mapping to identify those markets that are less saturated with existing credit providers. These recommendations were already known to MFIs, although reminders are always useful. Nevertheless, the report stressed the urgency of the creation and use of credit information bureaux.
In the same year (2010) the very successful Initial Public Offering of SKS in India created a political crisis. High interest rates for microcredit loans were being justified by the high transaction costs for small loan amounts; but they were also generating high levels of profitability, which in turn financed high growth rates (Flintoff). The appropriateness of the for-profit business model for microfinance was called into question and in Andhra Pradesh, where SKS is headquartered, this took on a highly political character. It was alleged that MFI practices now included harassing borrowers for repayments and that this had led to increased stress among the borrower community, and in some cases had led to suicides (Ashta, et al., 2011). In response, the state government of Andhra Pradesh passed an Ordinance with a series of measures which, together, meant that microcredit could no longer function in that state: repayment rates dropped from over 95% to below 20%.
A close examination of the microfinance sector in India showed similar problems to those identified with earlier crises elsewhere. High growth rates and increased competition in a saturated market had led to multiple borrowings by each borrower, leading in turn to over-indebtedness and credit risk. These high growth rates accompanied a shift in business goals, as many MFIs moved from not-for-profit to for-profit. Mission drift meant that the social bottom line was either forgotten or became merely rhetorical. The MFI sector began to receive criticism from the media, the public and politicians, creating regulatory risk: if the industry was not able to control itself the regulator would intervene (CSFI, 2012).
Although the Indian federal government and the Reserve Bank of India immediately took measures to limit the fall-out from the Andhra Pradesh Ordinance, the damage was already done: microcredit in Andhra Pradesh has still not recovered. The fall in microcredit activity in Andhra Pradesh was so large that the Microcredit Summit reports this as the most important single reason for the decline in world-wide outreach from 205 million to 195 million borrowers during 2011, despite growth in other markets (Reed, 2013).
There are additional factors in play, which have contributed to the problems in the microfinance sector. Donor-fatigue has set-in, because the miracles that had been promised, in terms of rapid poverty reduction, failed to materialise in all cases. This has encouraged the shift from a not-for-profit model to a for-profit model, to attract financial investors (or impact investors) to replace charitable donors. These investors are looking for some financial returns as well as social impact, which in some cases has led to lower quality credit checks, the targeting of better-off customers and an increased focus on consumer finance rather than lending to small businesses. After the problems in Andhra Pradesh and, to a lesser extent, Nicaragua, Morocco, Pakistan and Bosnia & Herzegovina, investors have become wary (Reed, 2013).
Just like sub-prime lenders in the developed world, MFIs now face much greater scrutiny by regulators, investors and the wider public. How should they respond? One possibility would be to return to the values that inspired the modern microfinance movement at its inception. For lenders this would mean caring for customers by designing products and services appropriate for particular local needs; for borrowers this would mean developing the self-discipline of regular loan repayments and the self-discipline of regular savings. These are precisely the values we associate with the teachings of Gandhi.
Section 2: Gandhi's life and influences
Mohandas Gandhi was born in Gujarat, India in 1869 and came to London, aged 19, to study law for three years. He spent most of the next 23 years in South Africa, working as a lawyer, a newspaper editor and a political activist. He established two experimental farm communities where he implemented his ideas regarding the importance of manual labour, self-sufficiency and vegetarianism, together with his belief that men and women of all religious and ethnic backgrounds could live and work together harmoniously. The first major statement of his political and economic beliefs was published as Hind Swaraj in 1909.
In 1915 he returned to India where he established another community, or Ashram, and joined the political struggle for Indian independence. Once again he edited newspapers and organised peaceful resistance to British rule. He became president of the Indian National Congress in 1920, spoke and published widely on Indian politics and led the famous "Salt March" in 1930. Despite numerous imprisonments he continued to campaign for Indian independence, which was finally achieved in 1947. His appeals for religious and political unity, especially between the Hindu and Muslim communities, went unheeded and India was partitioned along religious lines at its foundation. Gandhi was assassinated by Nathuram Godse, a Hindu extremist, in January 1948, at the age of 78.
Gandhi was influenced by a number of his near contemporaries and he made a lifelong study of religious and ethical thought. Gandhi's originality lies in his synthesis of a range of disparate ideas and his application of these ideas to practical social action. As Bhikhu Parekh notes, Gandhi was able "to draw upon both the Indian and Western traditions of thought and interpret each in the light of the other. He worked out an unusually broad-based moral and political theory that offered him a unique vantage point from which to identify the strengths and limitations of the two traditions and speak in a language at once uniquely Indian and intelligible to the Western audience" (Parekh, 1989, p. 4).
In this section we describe five important influences on Gandhi's thought.
a) Hinduism: Gandhi grew up in a religious family. His earliest and deepest influences were Hindu and these shaped the way in which he interpreted thinkers from other religious traditions. Hinduism is not creedal in form, but is concerned with the patterns of life, some of which are seasonal and ritualistic while others are disciplines that develop gradually through the different stages of life (Chatterjee, 1983, p. 14). Traditionally there were three or four stages of life for a Hindu man: first, as youth, a time of education; second, as house-holder, a time for work, marriage and family life; third, as forest-dweller, a time for retreat to a secluded life to prepare for death; fourth (in some cases), as an ascetic, a time during which strict austerity would be practiced (Parrinder, 1975, pp. 4-5).
Gandhi adopted the Hindu conception of religion as what you do rather than what you believe. However, he re-interpreted the notion of stages of life, first by adopting asceticism throughout his life and, second, by refusing to retreat from active life during his old age. He rejected the idea that the attainment of moksha (that is, the goal of unity with the cosmic spirit) should be pursued by disengagement with the material and social world. He believed that we should dissolve our self through the gradual elimination of selfish desires, much as traditional Hindu thought proposed; but he also believed that we shed our individuality primarily through our active engagement with the world and in particular through our service to others (Parekh, 1989, pp. 95-99). Gandhi found support for his revisions to Hindu traditions from his study of the Gita, with its emphasis on the importance of our daily work to overcome the suffering that we find around us. For him, Hinduism was primarily a moral system that stressed the duty of active engagement rather than withdrawal (Klausen). Gandhi's spiritual goal was not the transformation of his consciousness, but the transformation of his relationships with others through service.
Gandhi did not read the Bhagavad Gita until his second year in England, when he was twenty years old (Gandhi, 2008, p. 26). He read selectively, choosing to ignore some of the Gita's violent aspects, perhaps because he was learning about the Sermon on the Mount at the same time. Gandhi learned the importance of engaging one's enemy in battle, without also needing to destroy one's enemy. He learned that action and renunciation are both important, and that actions rightly performed are better than actions shunned (Bhagavad Gita, Chapter 5). This combination of the duty to act decisively, without also acting destructively, probably contributed to his development of the theory of satyagraha.
Gandhi adopted the Jain theory of the many-sidedness of truth (Chatterjee, 1983, pp. 32-34), which was important both for his religious syncretism and for the development of his theory and practice of satyagraha: if each of us has only a fragmentary view of the truth then none of us has the right to impose our view upon others. The regard we demonstrate for the well-being of others - especially our opponents - will reveal our respect for that fragment of truth to which they have access. Gandhi retained the Hindu belief that we all share in one universal soul: the atman, the inner self, is not an individual self but a part of a wider, cosmic spirit (Parrinder, 1975, pp. 10-11). The underlying unity of humanity requires us to respect and serve one another: for Gandhi, true religion is found not in a statement of our beliefs but through our service to others.
b) Stoicism: It is not known whether Gandhi read works by or about the ancient Greeks when he was a student in London, however we know that when he first moved to South Africa he read The Perfect Way by Anna Kingsford and Edward Maitland, which advocated a blend of esoteric Christianity and vegetarianism. In this book, the authors wrote approvingly of both Hindu and Ancient Greek thought (Guha, 2013, p. 84). Although Gandhi admired Socrates, it was Stoic ethical ideas that were more closely aligned with Gandhi's thought and practice. For the Stoics, to live according to virtue was to live in agreement with nature; they believed that living a virtuous life was sufficient for happiness, and that those things that were neither virtues nor their opposites (those things that neither help us nor harm us) should therefore be a matter of indifference to us (Kenny, 2004, pp. 282-3). Likewise, Gandhi adopted an attitude of indifference, or emotional detachment, with regard to many elements of everyday life (Sorabji, 2012).
Another aspect of Stoic thought that resonates with Gandhi's political practice is the ideal of cosmopolitanism. While early Stoics, such as Zeno, proposed a theory of citizenship based on common ownership and political virtue, the later Stoics, such as Chrysippus, gave greater emphasis to the moral potential of each man, considered as a man rather than as a citizen. The "cosmic city" was an ideal community based on a shared understanding of the ethical demands of nature and reason, unconstrained by the need for physical proximity (Schofield, 1999 ). In Stoic thought, traditional citizenship was transformed into an ideal of cosmopolitan moral agents, who are mutually supportive of each other in their efforts to live well and to seek justice. This ideal accorded well with Gandhi's practice of building friendships and alliances across traditional boundaries of race, nationality, religion and sex. In Gandhi's model communities, all were welcome so long as they adhered to the disciplines of the community and pursued an ethical life.
c) Tolstoy: C F Andrews, the British missionary and educator, described his friend Gandhi as "a saint of action rather than of contemplation". This phrase captures the manner in which Gandhi approached Christian ideas from his student days in London until his death. He was much impressed by Christ's life and teaching, in particular the Sermon on the Mount; he was far less impressed by the church, with its emphasis on doctrine rather than deeds. He regarded the Protestant missionaries' focus on personal salvation as self-absorbed. He thought conversion from one religion to another was pointless, since all extant religions offered merely partial access to the one true religion: the trick was to learn from other religions while making adaptations to the religion of one's birth. Gandhi's appropriation of elements of Christian thought was, therefore, typically Hindu in character.
The Christian writer who influenced Gandhi most deeply was himself a fierce critic of Western society. In his later years, Leo Tolstoy abandoned fiction and wrote instead about the arts, religion and the need for social reform. The Kingdom of God is Within You offers a detailed critique of the established church in Russia, for its support of the repressive violence by the state against its own people. Tolstoy argued that Christ's teaching to resist evil without violence was being embraced by ordinary people whose faith had not been corrupted by the church (Tolstoy, 2010 ). This distinction between the true teaching of Christ and the hypocrisy of the establishment churches, strongly influenced Gandhi. Tolstoy advocated celibacy, the simple rural life and vegetarianism, all practices that Gandhi also championed.
In the Appendix to Hind Swaraj, Gandhi lists twenty works by other writers that he recommends for further study: six of these are by Tolstoy (and none of these are works of fiction). Echoing Tolstoy, Gandhi described his ideal society as the Kingdom of God: "The British Government in Indian constitutes a struggle between the Modern Civilisation, which is the Kingdom of Satan, and the Ancient Civilisation, which is the Kingdom of God". By Ancient Civilisation, Gandhi meant the ancient civilisation of India, which was, he said, "the best that the world had ever seen" (Gandhi, 2009 , p. 7). Thus Gandhi used Christian terminology to praise early Hindu culture. Likewise, while he had no sympathy for the idea that Christ was uniquely the "Son of God", he happily referred to Christ as the "prince of satyagrahis" because his only weapon was the weapon of love (Chatterjee, 1983, pp. 55-56).
d) Ruskin: Henry Polak, Gandhi's friend in South Africa, thought that Gandhi was too absorbed in religious questions and insufficiently interested in economics (Guha, 2013, p. 185). The principal, perhaps exclusive source of Gandhi's economic ideas was John Ruskin, who was hostile to the style of political economy that was dominant in his day and remains so in ours (Stimson, 1888), (Fain, 1943) and (Dantwala, 1995). Ruskin made his name as an art historian and critic, but in later life turned his attention to political and social issues. According to R G Collingwood, he was a man "at cross-purposes with his age", a phrase that could equally well be applied to Gandhi. Ruskin laughed at those who were sceptical of his economic views because he had never bothered to read books on political economy: "Did they suppose", he asked, "that I had got my knowledge of art by reading books?" (Collingwood, 1971 , p. 43). Economists were not impressed: Bagehot reviewed Ruskin's work under the headline, "Aesthetic Twaddle versus Economic Science" (Winch, 2009, p. 136); and Schumpeter said of Ruskin that "all he did was to add generous indignation to half-understood observations and undigested pieces of reading" (Schumpeter, 1994 , p. 411).
The central message that Gandhi drew from Ruskin, and in particular Unto This Last (1860), was that modern economics was solely concerned with increasing the quantity of goods available for purchase, but was not concerned with improvements in the quality of life, either of those who made the goods or those who purchased them. Gandhi thought that modern societies had become too acquisitive: "Formerly, men were made slaves under physical compulsion, now they are enslaved by temptation of money and of the luxuries that money can buy" (Gandhi, 2009 , p. 35). Gandhi thought that lower levels of consumption would improve working conditions for the poor and allow more time for social and religious activities. His dislike of large cities and his advocacy of the self-sufficient village as the best model for economic activity reflected his hostility to the consumerism he observed in India and the West. He was, however, willing to accept gifts from wealthy supporters to fund his work (Guha, 2013, p. 385; 399); one of his donors noted that "it costs a great deal to keep Gandhi in poverty" (McLaughlin, 1974, p. 161).
Ruskin had complained that Britain's embrace of the doctrines of political economy was the first instance in history of a nation's establishing a systematic disobedience to the first principles of its professed religion. Gandhi likewise thought that economic policy and political processes should be subordinated to the religious values of society. If the rejection of modern urban life in favour of traditional village life resulted in lower levels of wealth, that was an acceptable outcome because the spiritual benefits out-weighed the materials deficits: "....economic progress.... is antagonistic to real progress. Hence the ancient ideal has been the limitation of activities promoting wealth" (Erikson, 1970, p. 281). Gandhi also thought that village life, which would encourage a culture of non-violence, would be more peaceable than life in the city. Ashis Nandy has noted both that religious violence in modern India has been concentrated in the cities, and that Gandhi remains one of the few critics of modern society to have drawn attention to the way in which violence has become an instrument of governance (Jahanbegloo, 2006, pp. 22-24;109-112).
e) Thoreau: Gandhi first read Thoreau's essay On the Duty of Civil Disobedience in 1907 when he was leading the Indian passive resistance movement in South African (Gandhi, 2008, pp. 28-29). The essay, which dates from 1849, opens with the slogan, "That government is best which governs least". Gandhi was generally sceptical of the role played by government in a modern state; he spent most of his life organising opposition to the governing powers in South Africa, India and Britain. Gandhi was, therefore, well disposed both to Thoreau's critique of government and also to Walden (1854), his eulogy to the simple life lived in harmony with nature. Two of Thoreau's works are cited in the list of recommended reading in the Appendix to Hind Swaraj.
Thoreau's argument emphasises the importance of individual action against an unjust law. He points to the importance of withdrawing tacit support: "The soldier is applauded who refuses to serve in an unjust war by those who do not refuse to sustain the unjust government which makes the war" (Thoreau, 2003 , p. 271). If the actions of government are unjust, it is the duty of the just man to refuse to pay his taxes and if necessary, to go to jail. The penalty for civil disobedience is worth paying because collusion with an unjust government diminishes each of us morally: "It costs me less in every sense to incur the penalty of disobedience to the State that it would to obey. I should feel as if I were worth less in that case" (Thoreau, 2003 , p. 277). Although Gandhi wrote that he had worked out his own theory of satyagraha prior to reading Thoreau, there is little doubt that his arguments reinforced Gandhi's conviction that principled opposition to unjust laws was the best strategy to adopt for his campaigns, both in South Africa and India (Hendrick, 1956).
Thoreau's use of the word "duty" chimed with Gandhi's view that the modern preoccupation with rights was a mistaken inversion of the basis of social and political obligation: "real rights are a result of performance of duty" (Gandhi, 2009 , p. 79). Gandhi thought that each person should pursue their own dharma, which meant that each should do their duty, offering themselves in service to others, including help in putting injustices to right. Gandhi espoused voluntarism as his preferred mechanism for social, political and economic change. Like Thoreau, he relied on conscience as his guide, thereby giving precedence to personal sincerity over collectively agreed decision-making. Only when individuals took responsibility for their own lives, and lived in a disciplined and dutiful way, would swaraj be possible: personal self-rule is the precondition for political self-rule.
Section 3: Gandhi's thought
Throughout his life, Gandhi combined professional practice, first as a lawyer and later as a journalist, with political activism and theoretical reflection. He sought to integrate theory and practice: he reflected upon his activism and he lived his philosophy. Gandhi's thought can be summarised by six key ideas, all of which are inter-connected. When considered together these ideas bring the personal and the political, thought and action, into one coherent vision of how life should be lived.
a) Satyagraha: A neologism, adopted by Gandhi in 1908 to describe the tactics of the movement he led in South Africa. The word's literal meaning is "firmness in adherence to truth", but for Gandhi it meant specifically the combination of organised non-violent resistance to unjust laws with continuous agitation for political reform (Gandhi, 2009 , pp. 86-97).Satyagraha drew upon the writings of both Thoreau and Tolstoy, and was also shaped by Gandhi's reading of Hindu texts, in particular the Gita. He read the Gita as an allegory of life, describing our internal struggles. Gandhi interpreted the violence portrayed in the Gita as being that required to kill the evil tendencies that we all find within us.
In South Africa thesatyagraha movement opposed the imposition of mass registration of Indian residents and restrictions on the free movement within the country. In India, passive resistance was adopted in the struggle for political independence from Britain. Gandhi repeatedly argued against the use of violence for political ends. Instead, he proposed that the means employed by a political campaign must reflect the ends that were desired. Through peaceful resistance, the campaign would persuade or shame the governing powers into concessions, but without unleashing violence that would taint the character of the eventual political settlement. Gandhi thoughtsatyagraha "a force containing within itself seeds of progressive self-restraint", which had the capacity to prevent the escalation of violence in political life (Mantena, 2012, p. 462).
To employ satyagraha as a political tactic required considerable dedication, self-sacrifice and suffering. Gandhi thought that those who wanted to become satyagrahi should "observe perfect chastity, adopt poverty, follow truth and cultivate fearlessness" (Gandhi, 2009 , p. 94). In addition the satyagrahi was likely to face violence and imprisonment at the hand of the ruling powers. It was far from clear, however, that satyagraha would always be successful as a political strategy, and Gandhi's argument in Hind Swaraj is weak on this point. Aurobindo Ghose argued that Gandhi had claimed for a limited truth "a universality which it cannot have" (Klausen, 2014, pp. 185-6). There were many other contemporaries who regarded satyagraha as inappropriate in contexts where the ruling powers did not feel themselves to be constrained by law and reputation in the same way as the British in India (Buber, 2005 , pp. 113-126) (Weil, 1987 , pp. 152-153). Later commentators have noted the limited range of cases in which Gandhi's tactics could be successful (Freedman, 2013, pp. 347-350); and that Gandhi's successes were in no small part due to his legal training and understanding of the British laws and culture (Khilnani, 1992, pp. 197-198).
b) Swaraj: Literally, home-rule or self-government, Gandhi uses this term to forge a strong connection between the personal and the political. He argues that political self-rule without personal self-discipline is worthless; self-government in politics in impossible unless individual citizens also achieve self-government in their personal lives: the autonomy of each is a condition for the autonomy of all (Gandhi, 2009 , pp. 70-72). Gandhi was highly critical of those who campaigned for Indian home rule at a purely political level. He thought that replacing English rulers with Indian rulers would change nothing beyond appearances: it would be English rule without the English. He argued that the British had not conquered India, rather the Indians had invited them in and allowed them to rule; the first step towards independence, therefore, was for Indians to terminate acquiescence in their own subjugation.
Gandhi did not know India well - its peoples, its culture, its politics and its preparedness for independent government - in 1909, when Hind Swaraj was written. Nevertheless, Gandhi's assertion, that the substitution of the colonial power by a local political elite would not herald substantive political change, has been borne out repeatedly in the past fifty years, in Asia, Africa and Latin America. Likewise, his argument that national independence would only be genuine when brought about by the individual agency of multitudes of Indians found an echo in the anti-colonial arguments of Franz Fanon (Howard, 2011). The idea that a political entity can only govern itself well when its citizens practice self-discipline and self-control can be traced back to Stoic thought. Quite how this idea might be applied in practice to India, either in 1909 when the population exceeded 250 million people, or today when the population exceeds one billion, remains wholly unclear.
c) Civilization: Gandhi believed that ancient Indian civilisation was the best, not because the East was better than the West, but rather because the traditional was better than the modern (Gandhi, 2009 , pp. 33-37; 64-69). The West in general and Britain in particular had, he thought, abandoned its traditional Christian values in favour of a secular, materialistic civilisation. Drawing on the work of Ruskin, he argued that modern civilisation was based on the pursuit of physical comforts and bodily pleasures and had abandoned interest in and respect for spiritual values; it gave priority to economics at the expense of religion. The pursuit of purely material pleasures had led to the rapid growth of industries which created monotonous work, in awful working conditions, and led to the growth of unhealthy cities and the separation of rich from poor. Like Tolstoy, Gandhi was a champion of the village, manual labour, and an integrated community life in which all members of the village recognised the contribution of the others (Rivett, 1959).
Gandhi's hostility to modern civilisation was not merely a reaction against the factory system of nineteenth century; Hind Swaraj contains critiques of railways, the modern legal system, contemporary medicine, and modern education practices. Not surprisingly, as a practising journalist he was less critical of the printing press and the modern newspaper, both of which were necessary to communicate to his supporters in the non-violent struggle. He not only admired earlier times when life was simpler, he thought he could re-create this pre-modern life in the working communities he established in South Africa and India. He was against economic development as both a process and an end (Rosen, 1982). Gandhi did not just reject the conveniences and attributes of modern society for himself, he argued that all Indians must abandon them and return to the traditions of village life. Lawyers, doctors and others, he said, should give up their professional work and learn to spin their own cloth instead; even Rabindranath Tagore, he said, should learn to spin (Sen, 2005, pp. 100-101).
d) Swadeshi: Literally, belonging to one's own country, Gandhi adopted this idea from a protest movement in Bengal in the early twentieth century, which opposed British plans to partition the region on religious grounds. The swadeshi movement encouraged Indians to buy and use only products made in their own country. It was an economic boycott that aimed to hurt the British by not buying clothes made from imported cloth (Gandhi, 2009 , pp. 19-22). Gandhi extended the idea to encompass a wider principle, that of local self-sufficiency for all basic goods and products. He saw that traditional Indian crafts and cottage industries were in decline, as locally made products were being replaced by machine-made imports, mostly from Britain. His aim was to limit trade and imported goods as far as possible, and to renew traditional crafts and hand manufacturing within a system of self-sufficient villages, as Ruskin and Tolstoy had both advocated.
Gandhi's hostility to machines and industrial production was partly based on his judgement that Indian imports of British-made goods was a better deal for Britain than for India. He also spoke out against the industrialisation of India, because he feared that it would promote the modern, consumer society that he so detested. In his later writings he somewhat modified his views, and accepted that home manufactured goods were preferable to imported manufactured goods. However he never abandoned his view that handmade goods were better than machine made goods, and that self-sufficiency was more likely if India remained a village based economy and resisted the temptation to mimic the West by embracing modern industry and international trade. He recognised that this would mean both fewer and more expensive goods, but reasoned that this would reduce the temptation for Indians to abandon spiritual values for the pursuit of material satisfactions.
e) Duty: Gandhi rejected the modern idea that political and social rights were entitlements. For him, duty came first; rights were secondary (Gandhi, 2009 , pp. 79-80). Gandhi accepted the traditional Hindu idea that the various aims of life - whether material success and influence (artha), sensual pleasure (kama), or spiritual insight and experience (moksha) - should all be pursued within an ethical framework that insisted upon integrity and honesty (dharma). Each person should seek to discover and then to follow their own dharma, or calling, and by serving themselves they would serve others too. These services would produce benefits for the wider community, but these benefits were not entitlements: they were the by-product of each person following their calling and their duty. For Gandhi, the conscience of each person was paramount, and regardless of what the law required, each should act according to their conscience and follow their calling.
Gandhi's emphasis on duty and calling drew upon his religious conception of life as well as Stoic writings. He dismissed the modern, secular conception of rights, whereby individuals make their own choices about their lives within a framework of social and political rights, guaranteed by their community. Gandhi thought that the enduring value of Indian civilisation was the emphasis that it placed on a simple and unchanging village-based life, with few wants all of which could be supplied by manual labour. Gandhi also embraced the spiritual benefits of discipline and hardship: in 1906 he wrote that we "would all profit from the kind of simplicity and solitude we find in gaol" (Guha, 2013, p. 330). His voluntary austerity also suggested a lack of appreciation of beauty and pleasure. As one critic noted, his community farms grew vegetables but had no room for flowers (Parekh, 1989, p. 209).
f) Spiritual truth: Gandhi was a deeply religious man, but in many ways a religious radical. He was a lifelong reader of Hindu religious writings, particularly the Bhagavad Gita, and in early life was greatly influenced by the teachings of the Jain mystic Raychandbhai, who became a friend and mentor (Guha, 2013, pp. 140-142). He accepted the Jain teaching that there was one basic religion, which is associated with the idea of truth, and that all the particular religions were different attempts to grasp this one fundamental, spiritual truth. Many of his close friends in South Africa were Jewish and he was also friendly with a number of Christian priests. Whether they be Hindu, Jain, Muslim, Jew or Christian, all seekers after truth share a common set of values and ideals; and all can learn from each other's experiences and discoveries. In this respect Gandhi's thought represents a modern version of Chrysippus' ideal of ethical cosmopolitanism.
Like Tolstoy, Gandhi's beliefs informed his own devotional life and the choices he made regarding the conduct of his daily life. He was a strict vegetarian and fasted regularly; despite a teenage marriage and a family of four children he took vows of chastity in his thirties and encouraged his friends and followers to do likewise; he prayed and meditated daily, as part of a disciplined lifestyle, with no time for leisure or luxury; he often put the interests of others before the interests of his own family, and he expected his children to adopt his own strict lifestyle when they became adults. Many of these practices reflected his considered judgements regarding the right way to live and to behave but, like Thoreau, he also paid close attention to the "inner voice" of conscience as a guide to action. For a political leader of such importance he was a humble man who made many close friends, and who showed great respect for the religious beliefs of others.
Section 4. The Relevance of Gandhi's work for the microfinance sector.
In Sections Two and Three we have summarised the principal influences on and the key concepts of Gandhi's thought. It is now time to distil those insights and practices that are most relevant for the microfinance sector, in particular as the sector addresses the challenges that were set out in Section One. Two characteristics of Gandhi's thought - that he blended Eastern and Western influences, and that he tested his theories in practice - are suggestive of his relevance. As we have already noted, microfinance has spread widely in both developing and developed economies, and MFIs now connect borrowers and lenders through global networks of financial intermediation. In addition, the sector faces significant challenges in developing business practices that appropriately reflect the movement's ideals. The microfinance sector needs to articulate a set of shared values that are comprehensible to a wide range of global participants and which have clear practical relevance in the way that MFIs carry out their business. Gandhi's thought - which is both global in scope and practical in application - suggests what some of these should be.
a) Focus on the poorest: Gandhi put the physical and spiritual well-being of the individual at the heart of his political activity. As Bhikhu Parekh comments, "Tagore and Gandhi placed concrete human beings rather than such abstractions as state and nation at the centre of their political thought, and considered their well-being the highest political value" (Jahanbegloo, 2011, p. 92). Gandhi also gave greatest weight to the needs of the poorest; he believed that building an inclusive society should start from the bottom. He campaigned to remove social and cultural restrictions on the so-called "untouchables" - whom he called the Harijans (literally, "the children of God") - and he welcomed them into his Ashram, to work alongside others as equal partners (Gandhi, 2008, pp. 212-213). Likewise, he encouraged women to participate in social and political life, and recognised the importance of their contribution outside of the home.
Gandhi was determined to humanise social and economic life and to ensure that none were excluded; he insisted that those who were widely regarded as the lowest in society - whether the "untouchables", the destitute, or women - must become "included". In this respect, Gandhi's work can be seen to prefigure the early ambitions of the microfinance movement: to provide financial services to the poorest of the poor and to leave no-one behind. This ambition has been abandoned by some MFIs, which have sought instead to provide services to those who are relatively poor, but not to those who are truly destitute. Gandhi, by contrast, said: "Let us get rid of destitution and learn to live with poverty" (Jahanbegloo, 2006, p. 136).
There are some MFIs which are reaching out to these poor people (Hashemi & de Montesquiou, 2011). In some cases, they consider it their corporate social responsibility to reach the most destitute. Examples would include programs such as Jamii Bora in Kenya, Grameen Bank's Struggling (Beggar) Members Program, and Palli Karma-Sahayak Foundation's Programmed Initiatives for Monga Eradication in Bangladesh. In other cases, MFIs copy the BRAC model, which consists of cross-subsidising and investing in the poorest as part of a graduation model. The poor are first given charity, then taught savings management, then education and finally provided with some capital to start their business. Once they cross the poverty line, they are provided stable access to credit and regular coaching. These strategies are particularly important for MFIs that operate in places where the public funded welfare provision is in short supply, and often difficult to access.
There are sound reasons for financial service companies to segment their potential customer-market, and to target those segments that they consider to be relatively under-served. Taking the widely-used business concept of the "bottom of the pyramid", it is clear that there are several layers close to the bottom where customers have significant financial needs that remain unmet by mainstream financial service providers. By providing good quality services to these customers, MFIs are expanding the network of financial inclusion, which is a valuable social and economic goal; and they are demonstrating the financial viability of sub-prime lending that is reasonably priced and responsibly provided. Nevertheless, to stay true to its mission the microfinance movement must also retain its ambition of extending the network of financial inclusion to all: that means making the poorest of the poor - those at the very bottom of the pyramid - a priority customer segment. The raison d'etre of the microfinance sector should be to demonstrate that there is no group, anywhere who should be thought of as "financially untouchable".
b) Develop a contextual, multi-product response: Gandhi repeatedly emphasised the interconnections between economics, culture, politics, religion and society; he resisted the compartmentalisation of life, which he saw as one of the undesirable features of modern civilisation. Ruskin claimed that the central idea of modern political economy - "that an advantageous code of social action may be determined irrespectively of the influence of social affection" - was a delusion (Ruskin, 1985 , p. 167). For Ruskin, economic thought could not be separated from ethical and religious thought. Gandhi made the same claim about politics: ".... I can say without the slightest hesitation, and yet in all humility, that those who say that religion has nothing to do with politics do not know what religion means" (Gandhi, 2008, p. 65). The persistence of poverty was not simply an economic problem to be tackled by technical adjustments to government economic policies; it was a social, political and religious challenge that must be confronted by social, political and religious activity.
Gandhi's holistic approach to poverty alleviation contrasts with many poverty-relief initiatives - both in developing and developed economies - that have foundered because their design did not take account of the wider social and cultural context (Banerjee & Duflo, 2011). For MFIs the lesson to be learned is that financial exclusion is almost always connected to a wider form of exclusion, either social, political or cultural. Poverty is not a natural condition; sometimes it is the result of traditions and customs that have yet to be reformed; sometimes it is the by-product of poor policy decisions; and sometimes it is simply the outcome of negligence and lack of interest. In each of these cases it is important not just to identify the immediate financial needs of the poor, but to deliver financial products and services in such a way that the wider needs of the poor are properly addressed. Microfinance is, as the name suggests, primarily a financial intervention; but to be successful microfinance cannot solely be a financial intervention.
There are two models available of MFIs that address the need for multi-inclusiveness. One makes use of a faith-based model, such as SKDRDP, which describes itself as a complete livelihood model. SKDRDP is an NGO headed by a religious leader in South India. It provides loans at interest rates of 13% when the average rates in India are 24%. It developed as a local community organisation and has now spread to the rest of Karnataka State, with more than a million members (Harper, et al., 2008). A second example is the savings and credit cooperatives which are the dominant model in much of West Africa (Ouédrogo & Gentil, 2008). These organisations employ a local, bottom-up model of cooperation, where the links between savers and borrowers are transparent, and based on human scale.
To address the wider needs of the poor, MFIs need to provide a range of products and services, which together offer a rounded solution to the problems of financial and social exclusion: these would include savings products, insurance products, money transfer products, and financial education to improve confidence and capability. Those MFIs that only provide low cost credit are less likely to meet the full needs of their customers and are themselves more vulnerable to financial shocks. MFIs should also review - and experiment with - the delivery of these products to their customers. Rather than trying to be as cheap as possible, they should ensure that they become as effective as possible; which means taking account of the social, cultural and religious context. One of Gandhi's great achievements was to develop self-confidence and self-respect among people who previously regarded themselves as powerless to change their own circumstances, something that MFIs would do well to emulate.
c) The importance of self-discipline: Throughout his life, Gandhi stressed the need for self-discipline, whether among satyagrahi or political leaders. Only the man or woman who manages their own life well, who learns how to control their desires and to focus all their efforts on the goal they have set themselves, will be successful in the long run. To change the world we must change ourselves first. There is a coercive flavour to many of Gandhi's campaign strategies: he forced individuals to confront the problems they faced and he forced governments to make themselves accountable to the demands of justice.
MFIs should also place great emphasis on the need for self-discipline. First, the act of borrowing money and then repaying over a period of time, requires self-discipline on behalf of the borrower. Those MFIs that require the borrowers to save first - to demonstrate the ability to put money aside, before they give them the first loan - are supporting the principle that their customers should demonstrate austerity even in poverty. The borrower must be sufficiently organised and motivated to make interest and capital payments to the lender; but if they do so they are likely to be able to continue to access credit for their personal or business needs. However, if the borrowers manage their portfolios through a multiplicity of loans and savings outlets (Collins, et al., 2009), it might be possible for them to suggest austerity while also borrowing recklessly. The greater use of credit bureaux could solve this problem.
While the early MFIs often relied on the social pressure of group lending, many MFIs have now transferred the obligation to repay to individual borrowers, rather than a group. This shift towards personal obligations to repay their loans, and to disclose all their borrowing to credit bureaux, fits more closely with Gandhi's insight that each person should take responsibility for their own actions, and that fulfilling one's duty is a way of demonstrating swaraj in one's private life. This is especially important in societies where the institutional norms that would generate social (and legal) pressure to repay are either weak or absent.
Second, each MFI should itself demonstrate self-discipline in the way in which it raises capital to lend to borrowers. Rather than adopting reckless strategies to grow market-share rapidly, or abandoning independence by becoming dependent upon public sector funding, MFIs should develop business plans that achieve and maintain their independence and sustainability. Like Thoreau, Gandhi was an advocate of voluntarism: it was the organised actions of individuals and groups that would make changes for the better in society. He was sceptical of the ability of government to make worthwhile reforms because of the corruption of the political process. Gandhi's thought combined the goal of pushing power down to the people, encouraging them to be self-sufficient; and, at the same time, challenging individuals to take responsibility for themselves, showing discipline in their personal and public lives. This combination of institutional independence and personal responsibility provides a good blueprint for the business model of MFIs: they should be self-reliant institutions that encourage self-reliance among their customers.
d) Be open to the benefits of social innovation and appropriate technology: Gandhi was like a one-man NGO, surviving on donor funds while he pursued the various causes and experiments he devoted himself to. Likewise some not-for-profit MFIs are obliged constantly to provide reports to their donors on the scale and the impact of their work. Hinduism does not condemn business activity that earns money; rather it is the hoarding of wealth which is considered as unworthy. Brahmins (and teachers) are expected to beg for their living, so that every day their community can determine whether their service is to be rewarded. Gandhi was born into the merchant caste (the Vaishya) but throughout his life he lived as a Brahmin and a teacher. His advocacy of the need to live frugally and his practice of relying on donations for his farm communities, reflected the caste that he practiced rather than that into which he was born. In this sense, he can be considered as a social innovator who flouted many of the social norms and orthodoxies of his times.
It is possible for MFIs to be financially sophisticated without abandoning other, non-financial values. Developing a compelling ethical approach to economics requires us to take both ethics and economics seriously, rather than substituting one for the other. It also requires that MFIs learn to measure their economic and their social impact accurately, and ensure that both are taken into account when planning new products and services. While Gandhi favoured the village over the city, MFIs should seek to serve their customers wherever they choose to live. If the poorest of the poor are to find work to earn their living they need to produce goods and services; and these goods and services need to be sold to others. Growth in the demand for goods and services might be a sign of incipient materialism; but it is also the principal driver for the growth of employment that will help the poorest to escape from, at best, subsistence farming and, at worst, destitution. Supporting economic growth should not be the only goal of the microfinance sector, but it must be one goal.
Gandhi was an advocate of appropriate technology, by which he meant technology that did not replace human labour with machines. MFIs, however, will need to make use of technology if they are to keep the costs of their products and services as low as possible. In addition, appropriate management information systems provide intelligence on customer needs and behaviours, which are important for MFIs to attend to if they are to serve their customers well. New technologies, such as crowd-funding, provide new opportunities of connecting investors to lenders, although they are virtually proximate rather than geographically proximate, as Gandhi might have wished. Likewise mobile telephony can be used to gather information and to transfer money quickly and safely, but it reduces face-to-face contact with customers which diminishes the quality of the relationship between borrower and lender.
e) Learn from experimentation: Gandhi liked to talk about the importance of making experiments: his Autobiography was sub-titled "The story of my experiments with truth". He subjected religious ideas - whether the traditional Hindu beliefs that formed his religious inheritance, or the Muslim and Christian beliefs that he came across in his reading - to close scrutiny, and dismissed those that he found to be suspect. He spent time collecting evidence before he decided to launch one of his satyagraha campaigns, and used this evidence to make the case for change or reform, whether political or economic, for example, when he organised the mill-workers' strike in Ahmedebad in 1918 (Erikson, 1970, pp. 229-392). Gandhi repeatedly emphasised the connection between means and ends (Gandhi, 2009 , pp. 77-85), and argued that the means employed should always reflect the ends desired. Gandhi was skilled at designing symbolic actions to highlight a cause, or to challenge an injustice: by the way he dressed, by spinning cloth, by marching, by fasting, by gathering salt, by burning registration cards; but he always looked beyond the symbolism to the political outcome that he wanted to attain.
In his autobiography (Gandhi, 1927), there are numerous examples of his experiments: with himself, his family and the wider community. He thought of his life as an experiment in role playing: "Playing the husband" and "Playing the English Gentleman" are chapter titles in the book. His experiments with himself included dietetics and vegetarianism. In other cases he included his family: for example, encouraging his wife to bake unleavened, wholemeal bread; and discouraging his children from learning English because he believed that this would allow them to become better rooted in their own culture. Within the wider community, he experimented with a community farm, the Phoenix settlement in South Africa, where all community members were paid the same wage for agricultural labour. In their spare time they published a newspaper, Indian Opinion, which Gandhi edited.
Like Gandhi, MFIs should try to experiment continuously. This might require them to abandon the single product approach that many MFIs have adopted. Only by experimentation will MFIs be able to discover what could lead to greater success for their customers. The greatest benefit that the microfinance sector can offer is a robust, evidence based route out of poverty; symbolic activity that leads to failure is of no real benefit at all.
Although Gandhi talked about the importance of learning from his experiments, he was sometimes stubborn to the point of obstinacy, refusing to see that some of his most cherished beliefs and strategies were not always effective. His "Letter to the Jews", published in November 1938 (Buber, 2005 , pp. 106-111), argues that Jews in Germany could employ the strategy of satyagraha in much better conditions that those which faced the Indians in South Africa. This represents a clear error of judgement on Gandhi's part and he refused to acknowledge evidence that his favourite tactic had only limited applicability in the struggle of political change.
Similarly, when MFIs ignore evidence that their practices are causing harm rather than doing good - for example, in Nicaragua at the time of the "no pago" movement or in Andhra Pradesh during the crisis of 2010 - then they themselves become vulnerable to Gandhi-style campaigns against their activities. While Gandhi would probably not have welcomed intrusive government intervention in the voluntary sector, he would probably have supported non-violent campaigns of non-repayment against MFIs if it became clear that they were exploiting their customers, by putting profitability ahead of customer service.
MFIs should subject practices and products to evaluative scrutiny and be honest about failure. There is no long-term advantage - particularly for the poorest of the poor - if a MFI pretends that it is making a positive impact, when the balance of the evidence suggests the contrary. MFIs should be transparent in their activities, for example indicating the total costs of credit, after taking into account not only interest payments, service charges and capital repayments, but also compulsory savings, deposits and cash flow irregularities.
f) Don't make the best the enemy of the good: Gandhi set himself strenuous personal goals, often based on solemn vows, with regard to his diet, his family life, his form of dress, his daily work and the simplicity of his lifestyle. Margaret Chatterjee observes that, "Gandhi agreed with H D Thoreau's advocacy of the simple life but was not attracted to his nature mysticism. Gandhi's life was singularly free from ecstasies. There was no time for contemplation when there was so much work to be done. Just as there are material luxuries so also there can be luxuries of the spirit. Gandhi has no patience with either" (Chatterjee, 1983, p. 175). He set demanding standards for his own family, often with painful consequences, and for his followers. He made heavy demands on the Indian people, asking them to make themselves worthy of political independence, when many of them struggled to make ends meet. Gandhi's life was saintly, but not exemplary: he tried to live his adult life entirely in the service others, which is not a reasonable standard to expect others to aspire to.
Gandhi himself came from a relatively well-off and politically influential family; his embrace of poverty was a choice made in adult life, not the predicament into which he was born. However much we admire Gandhi few if any of us will be able to live as he lived. Nor should we place the burden of living a self-sacrificial way of life on others, especially those who are poor. As Isaiah Berlin says in his essay on Rabindranath Tagore, "One must seek to improve mankind by available means, not by demanding of them the unattainable virtue which only the saints can emulate" (Berlin, 1996, p. 263). While MFIs should expect their customers to act responsibly - to repay their loans and to save for the future - and should promote personal financial responsibility, they would do well not to assume that their customers aspire to sainthood. We know that humans are imperfect, subject to frailties and failings of reasoning and of judgement. MFIs should take their customers as the people they are, not as the people Gandhi might have wanted them to be.
In summary, Gandhi showed in politics that there was another way "to do business", a way that placed great emphasis on reaching out to those who were most excluded, which treated the problems of the poor holistically and which instilled in the poor a new self-confidence that they could be the authors of their own improvement and progress. In all these respects, Gandhi has much to teach the microfinance sector. He would have welcomed a model of financial service provision which saw its task in ethical as well as economic terms, and which sought to build successful and self-sufficient communities rather than business empires.
Gandhi was not much interested in economic thought, and much that he wrote and thought about economics was borrowed wholesale from Ruskin, who was also poorly read in the subject. Gandhi's disdain of material progress has been characterised as a psychological accommodation with poverty (Rosen, 1982). It is not an attitude that has found favour in India since his death. As Edward Luce writes, ".... if Gandhi returned to India today, he would be surprised by much of what he found. India in the early twenty-first century is an increasingly self-confident, materialist and globalised place" (Luce, 2006, p. 9). At the end of his life he wrote that, "One should earn just enough to support oneself and one's family. To have a bank balance would thus be incompatible with this idea" (Gandhi, 2008, p. 101); which suggests that he also did not understand the importance of savings in helping to smooth income and consumption. Gandhi himself relied on handouts to keep his Ashram going; he did not always apply his strictures about self-reliance to his own economic experiments.
Gandhi's limited understanding of the role of finance in delivering improved outcomes for the poor, together with his reluctance to admit to the limited effectiveness of his principal political tactic - the satyagraha - suggest that his ideas need to be supplemented by other, more realistic business strategies. For MFIs and their customers to flourish, business activity must also flourish; this means that products and services must be produced, sold and consumed. Finally, while his life inspired millions of people in India and elsewhere, MFIs should not assume that their customers will want to live as Gandhi did. Gandhi can and should be an inspiration without also being a role model.
We started this paper with three critical questions that the microfinance sector has started to address. Our paper has shown that these are issues on which Gandhi could provide some helpful guidance.
First, what are the business goals of MFIs? Gandhi would argue that MFIs should focus on serving the very poorest. Profits should be retained by the MFI, which would manage them as a trustee on behalf of the wider community, perhaps by offering subsidized loans and other services. Another option would be for MFIs to structure themselves as cooperatives, where the profits belong to the customers.
Many MFIs focus on women and this is something Gandhi would have supported. He considered them to be one of the two most discriminated groups within the community, the other being the lower castes, or Harijans. MFIs that wanted to follow Gandhi's ideas would work with the outcasts of society and provide them with credit and other financial services. In developed economies this means the long-term unemployed and those who cannot work because they provide full-time care to the young or the old.
Second, do the business practices of MFIs match the highest ethical standards? Gandhi argued that both the means and the ends of social action must conform to the highest ethical standards. Microcredit grew quickly because of the narrative that it helped the poor to help themselves out of poverty by starting their own businesses. Over time this objective has become diluted somewhat, with new products and services designed to assist with personal consumption smoothening. Gandhi would challenge MFIs to return to their original objective, not least because he believed in the ethical value of work and disdained consumption above the bare minimum.
Gandhi would not interpret "the double bottom line" to mean the balancing of reasonable profits with social aims, but would instead argue for the maximization of social impacts. Such impacts are, of course, impossible without long-term financial sustainability; in turn this requires that MFIs reinvest surpluses into the business, or that donors continue to support the operations. Either way, Gandhi would also encourage MFIs to remain vigilant about cost-control.
Third, is there reliable evidence that demonstrates that MFIs have a beneficial economic and social impact on the lives of their customers? The poor require greater financial inclusion and low-cost credit is only part of the solution. To create a greater impact MFIs should provide a wider range of financial services such as savings, insurance and payment processes. Savings and insurance help to cultivate self-discipline, which would be in line with Gandhi's wider vision of personal well-being, even if he was not in favour of "bank balances".
Gandhi liked to experiment and it is important for MFIs to continue to search out better ways to improve the financial lives of the poor. Gandhi was also a great communicator: he would not have hesitated to use anecdotal evidence if it was beneficial for a worthy cause. In the case of microfinance the best anecdotes are those which tell of borrowers who are able to improve their lives by their own actions and initiative, thereby providing hope to other poor people.
Arvind Ashta thanks the Conseil Regional de Bourgogne for partially co-financing his research.
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