MFIs Should Do Responsible Finance
Responsible finance is not an output resulting from good intentions. It is an input in to business to ensure its relevance to customers and other stakeholders. This means that institutions should design their products, processes and staff training to think, plan and deliver responsible finance. The institutions should have an appropriate collective mindset and back it up with a set of practices that look at the customer as a valuable person who has to be nurtured and sustained. If the institution level initiative on responsible finance is effective and purposeful, then industry-level initiatives become easier to implement.
Today all stakeholders demand responsible finance from microfinance institutions (MFIs). It is only fair and reasonable that they should expect the MFIs to be responsible to their customers. But let’s take a step back and examine what the stakeholders do to the MFIs—does their behavior qualify as responsible? Let me look at the other stakeholders in turn.
How many lenders and funders of MFIs are transparent in their dealings? Many arrangements are opaque and do not make clear the implications of the funds offered to the MFIs. Lending in foreign currency while fully knowing that institutions are incapable of dealing with currency risks, writing shareholder agreements that make it difficult for MFIs to undertake second cycle equity funding, passing on interest cost hikes to MFIs even when expecting them to hold down the prices to the borrower, charging several types of appraisal, monitoring and commitment fees to MFIs when MFIs are expected to charge understandable all-in-one prices to customers: these are only some of the practices that funders adopt. Many investors approved of mega growth plans without adequately questioning the risks to the MFI and their customers. The few MFIs that approached the capital markets did so with not only consent, but also active encouragement of ‘socially oriented’ investors. Even today some of these socially oriented investors refuse in their shareholder agreements to agree to allocate a part of the profits for development of MFI customers. Well-run cooperative institutions find it difficult to access funds as they are not in an ‘appropriate’ form. Let us remind ourselves that many MFIs found to be not-so-responsible had directors on the board of governance from among the same stakeholders that demand responsible performance.
The state should have a vested interest in ensuring that poor customers get a fair deal. Yet did the state create an enabling environment for this? By choosing not to regulate or by introducing inappropriate regulation, governments have an impact on poor clients too. Introducing interest, margin caps, and loan ceilings regulation could drive customers into the informal sector, and away from regulated financial services. Governments may also place unrealistic burdens for providing affordable services on MFIs. If poor cannot afford high food prices, the baker and grocer do not offer lower prices–and governments do not demand this of them. They find other ways to deal with the welfare responsibilities. But in microfinance governments sometimes even legislate this without fully understanding the cost structure of MFIs.
Technical assistance (TA) providers gave advice to MFIs to change their business models and products. Some of this advice resulted in considerable harm to the customers. Community-owned institutions were been routinely asked to change form. Ratings agencies consistently offer lower ratings to institutions in a non-profit form . If boards were comprised of community representatives from among customers, the MFIs were given lower ratings. Products that were long term with sensibly structured lumpy repayment installments were changed to weekly one-year loans on advice from expert consultants. The limitations of software prevented many institutions from offering products that were more friendly to customers. MFIs were not always free to choose the service provider: in several cases they had to use the services of those already identified by funders.
Meanwhile scholars and academics ask for evidence from MFIs that they have cured poverty. No doubt this stems from the tall claims that MFIs themselves make in their mission statement, marketing pitch, and in the endless conferences. Small amounts of money given for short periods of time can only have a limited impact on a poor household’s economy. When gradually increasing doses of this high-priced loan is given for many cycles, it is possible that the household builds some assets. For such changes to take place, however, several other conditions must be fulfilled. The poor need access to natural resources (including water), access to technology and skills, and access to markets if they are to apply their tiny capital to good use. Can MFIs ensure these? They can at best refrain from giving loans where customers want loans without having access to the other resources required. Rather than question the MFIs’ inability to eradicate poverty, we should be questioning our naïve assumptions. Maybe we should also question the state about why the fundamental access to these other resources is lacking.
Responsible finance is not just the responsibility of the MFIs. Other stakeholders have a role to play. These stakeholders should exhibit the same virtues that they demand of MFIs. Let all of us in the sector examine our roles in governance, funding, design of business models and products, advice and guidance, regulation and research. Are we responsible and thus creating an environment in which MFIs can deliver value to customers? This does not mean that MFIs should not do their job. They need to be accountable to their clients, but others should support MFIs in this objective and help make it possible.