Friday, November 5, 2010

Bootleggers, Baptists, and MFIs

A few years back, the now Clemson University Professor Bruce Yandle, wrote a famous paper that provided a crude theory of the demand for and supply of social policy regulation by invoking the parable of Bootleggers and Baptists.

Fervently supported by Baptists, early last century, some American states promulgated laws to ban Sunday sales of alcoholic beverages at legal outlets. Surprisingly, the biggest supporters of this legislation were the Bootleggers, who benefitted from the reduced availability and the opportunities to black market. In simple terms, Baptists demand prohibition to make alcohol illegal, while the criminal Bootlegger wants it to stay illegal so he can stay in business! And what's more, the Bootleggers even came to rely on the Baptists to monitor enforcement of the restrictions that benefit them!

Much the same framework can be used to analyse the current strident demand for strong regulation of the micro-finance institutions (MFIs) in India. Instead of alcohol, MFIs are the target of regulation. The Government has suddenly emerged as the moralizing Baptist in support of the exploited borrowers.

Who are the Bootleggers? In so far as the direct competitors of MFIs are the moneylenders, they stand to gain the most from any action that curtails the activities of MFIs. I cannot but avoid the feeling that the good old Shylocks are laughing all the way to the bank!


Anonymous said...

Good one. A similar analogy oft quoted in the echelons of bureaucracy, the stricter the boss/regulation, greater is the income potential of the corrupt underlings.

Jayan said...

(It is moot question -- who supports prohibition in Gurarat!! )

A normal moneylender does not have such power or influence to fight against MFI. The problem lies with moneylenders who are politicians, govt official or landlords. A good MFI will free farm-worker free from clutches of landlord. A good MFI means people can do business legally and not depend on local politicians/govt officials favor.

gulzar said...

thanks. in an earlier post, I had blogged on the impact of a strict officer on the corruption economy

jayan, all along my assumptions are for a good MFI. as you said, a large number of MFIs do all their dirty activities under the cover of local political support.

Jayan said...

Who will the parties to enforce any kind of regulations on MFI? Police? Local politician? Another NGO(most likely to be controlled by politicians)

Since the MFI came to solve a problem and the problem still exists a direct regulation may not be the correct way.

May be we should start multiple areas to "attack" MFI.

*With absolute maximum interest rate. -The rate the MFI charges is actually not the problem.. otherwise why someone went to them in the first place

* The recovery mechanism.
-Is this not enforcible today? When MFI tries to bend rules, police/govt agencies could take control.. just like way raid 'hoarders'. I doubt its efficiency anyway. Instead of writing-off the loan(as cried by many political leaders), govt could take over the loan with "high" rate retained.

*Introduce competition.
-Allow bank to charge much more interest rates in specific cases. The risk and cost is high, so there should be some direct benefit to any bank to target some of the sectors targeted by MFIs. There are many NBFCs now. May be they could help.

*Stop writing-off the loans as vote bank politics.
-OK, that is -out-of-syllabus

*Analyse cases and check why something worked, and some failed.
-Instead of focusing on the failed elements, let us replicate what worked.

Happy Deepavali,

David said...

Hi Gulzar, I have enjoyed your blog and am pleased that you have read Bruce Yandle's paper. Bruce is an old friend and I grew up among Baptists and Bootleggers.

Like you, I've also found that this simple analogy has many examples through out the world and, especially in the most long lasting conflicts. In fact, I would argue that when problems are most difficult to resolve, there are probably multiple antagonists who all seem to have a stake in perpetuating that problem.

Sridhar said...

While the new breed of successful MFIs are using state-of-art finacial models, technology and management practices, they continue to use the brutal and age-old coercive loan recovery methods adopted by traditional money lenders. Hope the UID would be utilized by the MFIs and banking outlets in the near future to create loan profiles that can aid new credit approvals and risk assessment. Once such a system has been put in place suitable laws should be made preventing institutional lenders in using agents and muscle power to recover the loans.

gulzar said...

thanks david. i agree. sridhar, UID can play an important role in creating a credit bureau.

jayan, i agree with most of ur points. regulations are difficult to enforce. while the government agency (in this case, the DRDA) will play the direct role in regulation, the other stakeholders - police, politician, NGO etc - have different roles. but, as u said, the issue will be efficiency of regulation.

incidentally, the AP regulation stops short of imposing an interest rate cap.

introducing competition is fine, though it has to be again regulated - otherwise the bankers will bid themselves to the lowest common denominator when the going is good.

and very belated diwali greetings