I found this an extremely interesting article. This is not least since, coincidentally, I am writing a short section on the Irish loan funds in the 2nd completely updated edition of my 2010 book “Why Didn’t Microfinance Work?’ due out early next year with Bloomsbury.
Let me make two observations related to what I wrote. I challenge the very common idea that the loan funds were the forerunners of the modern microfinance movement. First, you did not mention the radical politics of Swift and how he saw the loan funds as a way of helping the poor for sure, but also as a backdoor way of advancing his staunch anti-capitalist/anti-English/anti-Imperialist views. There are many reasons why the loan funds would promote such goals - promoting self-sufficiency meant not buying from the hated English; targeting support at good businesses and turning away poor prospects and directing them to other social programs, thus saving hapless individuals from their likely fate, showed the correct (non-capitalist) way to do business; validating the general concept of not-for-profit enterprise as opposed to capitalist for-profit enterprise; and so on. Since Swift’s ideological position and goals are the exact opposite of those individual capitalist goals (see Hayek, Friedman, etc) that gave life to the modern microfinance movement in Latin America in the 1960s under USAID tutelage, I find it really hard to agree with those that claim Swift’s loan funds are the first microfinance institutions. Apart from some obvious operational similarities, their respective goals were a million miles apart.
Second, Hollis and Sweetman’s work is very interesting, but also in a way that you did not refer to. They precisely pinpoint the fall of the loan funds to 1843, which is the year when the nascent financial elites likely bribed Irish government regulators to pass regulations that forced the loan funds to drop their social mission, cooperative format, commercialise and become for-profit financial businesses but in a way that they could not compete with the private commercial banks just getting started. The end of the loan funds was made inevitable. Many soon began to lose clients, some were taken over by greedy entrepreneurs and turned into their own money-making machines, and so on. My point here is that his destructive conversion episode is very similar indeed to what happened to begin to destroy the modern microfinance movement and effectively led to its fall from grace. This is to say that the microfinance industry was also forced, from the 1990s onwards, to commercialise and become a for-profit business and to drop all remnants of its original social mission. The result of this transition is now all around us: the largest microfinance institutions now rake in Wall Street-style profits from their reckless lending activities in the global south, while the evidence that microfinance is having a quite destructive impact on the global poor overall is now, in my opinion, beyond a doubt.
Thanks for the comment! It depends what you mean by 'forerunner'. I'm not claiming that the Irish loan funds are in any way historically connected with later microfinance developments, or that modern practitioners of microfinance were even aware of its existence.
Interesting – what is your source for Swift's motivation in setting up the fund? The only primary source I could find was the Sheridan biography, which mentions it only in passing. Since the material is so little to go on, isn't it just speculation to say that he did it for any specific set of reasons? Admittedly I don't know that much about Swift: the loan funds were not to my knowledge mentioned in 'The Reluctant Rebel', which was the biography I consulted. From the title you would think it would have a particular focus on things Swift did for rebellious reasons!
"their respective goals were a million miles apart" So, as a matter of nomenclature, it maybe would have been better if completely different words were used for profit and non-profit microfinance. But Roodman in his book uses the word 'microfinance' to refer to systems with a wide variety of goals and structures. Muhammad Yunus has said that what distinguishes microfinance is that it can make profit, but there can't be external shareholders. And, even if you use a more restrictive definition, there were Irish loan funds run on both a for-profit and non-profit basis, so I'm not sure how that would be a basis for excluding them entirely.
I hope I was clear that the 1843 legislation was a big reason for the decline in the loan funds! But the famine also presumably contributed, sending default rates sky high, right? I understand H&S's paper as saying that the loan funds could no longer compete because the interest rate was limited, compared to banks, which sounds very different to telling them to "drop their social mission".
As for the general effects of microfinance, I'm not really in a position to say – Roodman's book is certainly the main source I've read on this topic. But if you're able to dig up a source that's more specific about Swift's motivations and how his loaning worked, or other sources about loan funds besides H&S, we could do a follow-up comments response post.
Thanks for the interesting response. Swift was a radical anti-capitalist/anti-Imperialist and, very much like George Orwell, I think the evidence shows that his radical beliefs have been incorporated into both his writings and also his other projects, like the loan funds. One good source for Swift’s radical beliefs and how he built them into his works is Prendergast (2014), though familiarity with today’s microfinance model is not a strong point in the paper so the nuances of the argument I'm making are lost a little.
But my point is simple: Swift’s loan funds were (1) very radically different in structure and motivation from the modern microfinance model in so many ways, and (2) the modern microfinance movement has explicitly rejected, actively militated against, and even forbidden almost all of the fundamental building bricks of Swift’s loan funds being used by todays microfinance sector, so I don’t buy the argument that the loan funds can also be the direct forerunner to today’s microfinance movement. It’s like saying that, because a cat and a dog both have four legs, they must have the same grandparents.
Moreover, let me add once more that I found it strange how microfinance advocates commenting on this issue often simply omit what happened after 1843, which was the date when the loan funds began to be destroyed by the imposition of more commercialisation, more (unfair) competition from a proto-financial elite, and the loan funds were quickly turned into profit-maximising units, with the result that they no longer had any real concern for Ireland’s poor thereafter, and so lost popular support. The reason this crucial sequence is omitted, I’m of the opinion, is that these were the very same capitalist/market forces that destroyed the original social mission-driven microfinance movement from 1990 onwards and turned it into just another financial intervention bent on maximising profit and making the life of the poor even worse than it could be. If you are trying to link the loan funds to today’s microfinance model, that would be an extremely awkward fact to highlight and, even more, to explain. You mention Roodman – in his book, his fairly long discussion of the loan funds actually ends precisely in the year 1843, presumably, as I said, in order to avoid having to tell the reader what happened after, why and by whom. A good example of 'distortion by omission' if ever there was one.
Finally, let me add that the same problematic lineage argument has also quite often been made with regard to the German cooperative sector founded in the mid-1800s. For the same reasons have noted here, I tend to reject this argument as well. I tend to agree in fact with Phil Mader (2011), a brilliant scholar on these issues, that the reason why today’s microfinance advocates want to link their clearly failing movement to earlier ones also promoting financial services is that it is nothing more than a desperate attempt to “associate the former with the successes of the latter”.
Nicely written, you made the story have a nice arc.
Kind of funny how Grameen and Gombeen sound kind of similar.
You say “It also gave depositors more information about creditworthiness, making them more likely to invest.” - so were the depositors allowed to make a profit/interest?
Interesting overall how no/low interest loans were seen as a form of charity. Can sometimes be seen as predatory today. Perhaps a cultural/tactical error.
"so were the depositors allowed to make a profit/interest?" For some funds yes, for others no. The Hollis and Sweetman papers I linked to seem to be by far the dominant scholarly resource on this, and they don't provide a detailed breakdown. "were seen as a form of charity" Yeah, there definitely was some opposition to the loan funds, but it's hard to say how prevalent it was. I thought the story was pretty striking about how widely opposed in Ireland any attempt to limit their interest rates were
Great article as always Sam, thanks for this
I found this an extremely interesting article. This is not least since, coincidentally, I am writing a short section on the Irish loan funds in the 2nd completely updated edition of my 2010 book “Why Didn’t Microfinance Work?’ due out early next year with Bloomsbury.
Let me make two observations related to what I wrote. I challenge the very common idea that the loan funds were the forerunners of the modern microfinance movement. First, you did not mention the radical politics of Swift and how he saw the loan funds as a way of helping the poor for sure, but also as a backdoor way of advancing his staunch anti-capitalist/anti-English/anti-Imperialist views. There are many reasons why the loan funds would promote such goals - promoting self-sufficiency meant not buying from the hated English; targeting support at good businesses and turning away poor prospects and directing them to other social programs, thus saving hapless individuals from their likely fate, showed the correct (non-capitalist) way to do business; validating the general concept of not-for-profit enterprise as opposed to capitalist for-profit enterprise; and so on. Since Swift’s ideological position and goals are the exact opposite of those individual capitalist goals (see Hayek, Friedman, etc) that gave life to the modern microfinance movement in Latin America in the 1960s under USAID tutelage, I find it really hard to agree with those that claim Swift’s loan funds are the first microfinance institutions. Apart from some obvious operational similarities, their respective goals were a million miles apart.
Second, Hollis and Sweetman’s work is very interesting, but also in a way that you did not refer to. They precisely pinpoint the fall of the loan funds to 1843, which is the year when the nascent financial elites likely bribed Irish government regulators to pass regulations that forced the loan funds to drop their social mission, cooperative format, commercialise and become for-profit financial businesses but in a way that they could not compete with the private commercial banks just getting started. The end of the loan funds was made inevitable. Many soon began to lose clients, some were taken over by greedy entrepreneurs and turned into their own money-making machines, and so on. My point here is that his destructive conversion episode is very similar indeed to what happened to begin to destroy the modern microfinance movement and effectively led to its fall from grace. This is to say that the microfinance industry was also forced, from the 1990s onwards, to commercialise and become a for-profit business and to drop all remnants of its original social mission. The result of this transition is now all around us: the largest microfinance institutions now rake in Wall Street-style profits from their reckless lending activities in the global south, while the evidence that microfinance is having a quite destructive impact on the global poor overall is now, in my opinion, beyond a doubt.
I’d value any comments/corrections!
Thanks for the comment! It depends what you mean by 'forerunner'. I'm not claiming that the Irish loan funds are in any way historically connected with later microfinance developments, or that modern practitioners of microfinance were even aware of its existence.
Interesting – what is your source for Swift's motivation in setting up the fund? The only primary source I could find was the Sheridan biography, which mentions it only in passing. Since the material is so little to go on, isn't it just speculation to say that he did it for any specific set of reasons? Admittedly I don't know that much about Swift: the loan funds were not to my knowledge mentioned in 'The Reluctant Rebel', which was the biography I consulted. From the title you would think it would have a particular focus on things Swift did for rebellious reasons!
"their respective goals were a million miles apart" So, as a matter of nomenclature, it maybe would have been better if completely different words were used for profit and non-profit microfinance. But Roodman in his book uses the word 'microfinance' to refer to systems with a wide variety of goals and structures. Muhammad Yunus has said that what distinguishes microfinance is that it can make profit, but there can't be external shareholders. And, even if you use a more restrictive definition, there were Irish loan funds run on both a for-profit and non-profit basis, so I'm not sure how that would be a basis for excluding them entirely.
I hope I was clear that the 1843 legislation was a big reason for the decline in the loan funds! But the famine also presumably contributed, sending default rates sky high, right? I understand H&S's paper as saying that the loan funds could no longer compete because the interest rate was limited, compared to banks, which sounds very different to telling them to "drop their social mission".
As for the general effects of microfinance, I'm not really in a position to say – Roodman's book is certainly the main source I've read on this topic. But if you're able to dig up a source that's more specific about Swift's motivations and how his loaning worked, or other sources about loan funds besides H&S, we could do a follow-up comments response post.
Thanks for the interesting response. Swift was a radical anti-capitalist/anti-Imperialist and, very much like George Orwell, I think the evidence shows that his radical beliefs have been incorporated into both his writings and also his other projects, like the loan funds. One good source for Swift’s radical beliefs and how he built them into his works is Prendergast (2014), though familiarity with today’s microfinance model is not a strong point in the paper so the nuances of the argument I'm making are lost a little.
But my point is simple: Swift’s loan funds were (1) very radically different in structure and motivation from the modern microfinance model in so many ways, and (2) the modern microfinance movement has explicitly rejected, actively militated against, and even forbidden almost all of the fundamental building bricks of Swift’s loan funds being used by todays microfinance sector, so I don’t buy the argument that the loan funds can also be the direct forerunner to today’s microfinance movement. It’s like saying that, because a cat and a dog both have four legs, they must have the same grandparents.
Moreover, let me add once more that I found it strange how microfinance advocates commenting on this issue often simply omit what happened after 1843, which was the date when the loan funds began to be destroyed by the imposition of more commercialisation, more (unfair) competition from a proto-financial elite, and the loan funds were quickly turned into profit-maximising units, with the result that they no longer had any real concern for Ireland’s poor thereafter, and so lost popular support. The reason this crucial sequence is omitted, I’m of the opinion, is that these were the very same capitalist/market forces that destroyed the original social mission-driven microfinance movement from 1990 onwards and turned it into just another financial intervention bent on maximising profit and making the life of the poor even worse than it could be. If you are trying to link the loan funds to today’s microfinance model, that would be an extremely awkward fact to highlight and, even more, to explain. You mention Roodman – in his book, his fairly long discussion of the loan funds actually ends precisely in the year 1843, presumably, as I said, in order to avoid having to tell the reader what happened after, why and by whom. A good example of 'distortion by omission' if ever there was one.
Finally, let me add that the same problematic lineage argument has also quite often been made with regard to the German cooperative sector founded in the mid-1800s. For the same reasons have noted here, I tend to reject this argument as well. I tend to agree in fact with Phil Mader (2011), a brilliant scholar on these issues, that the reason why today’s microfinance advocates want to link their clearly failing movement to earlier ones also promoting financial services is that it is nothing more than a desperate attempt to “associate the former with the successes of the latter”.
Nicely written, you made the story have a nice arc.
Kind of funny how Grameen and Gombeen sound kind of similar.
You say “It also gave depositors more information about creditworthiness, making them more likely to invest.” - so were the depositors allowed to make a profit/interest?
Interesting overall how no/low interest loans were seen as a form of charity. Can sometimes be seen as predatory today. Perhaps a cultural/tactical error.
"so were the depositors allowed to make a profit/interest?" For some funds yes, for others no. The Hollis and Sweetman papers I linked to seem to be by far the dominant scholarly resource on this, and they don't provide a detailed breakdown. "were seen as a form of charity" Yeah, there definitely was some opposition to the loan funds, but it's hard to say how prevalent it was. I thought the story was pretty striking about how widely opposed in Ireland any attempt to limit their interest rates were