A Year in Review: 2010

January 28, 2011    

Two thousand and ten was a decisive year for the microfinance industry, and a turning point for poor people’s access to finance globally.

Early in the year CGAP released new research that raised concerns about the pace of growth in some markets and the degree to which that could strain MFIs’ internal systems and the local microfinance market. By the end of the year, the unfortunate turn of events in the Indian state of Andhra Pradesh took center stage. In between, we saw the SKS IPO, and much debate about different approaches to delivering services, high interest rates, and the various facets of commercial microfinance. Fundamental questions were raised about the impact of microcredit. And that’s what dominated the headlines.

But behind the scenes there was deep and lasting progress on poor people’s access to formal financial services, and some notable public milestones to celebrate. 2010 was in fact a year of some significant breakthroughs for our field. Financial Access 2010 showed that access to financial services had continued to grow in 2009, despite the financial crisis. The G20 took up the cause of financial inclusion, and in June endorsed "Nine Principles for Innovative Financial Inclusion" at the Toronto Summit, and in November at the Seoul Summit made financial inclusion one of 9 key pillars of the G20 development agenda. This permanent commitment to the principles of financial inclusion was formalized by the launch of the Global Partnership for Financial Inclusion (GPFI) at the Seoul Summit. The GPFI involves not only member countries, but also non-G20 leaders, and key private and civil society organizations, to implement a Financial Inclusion Action Plan that is informed by a variety of global perspectives.

Discussion about the impact of microcredit—precipitated by the publication in 2009 of two studies using randomized controlled trials by Abhijit Banerjee, Esther Duflo, Rachel Glennerster, and Cynthia Kinnan, and Dean Karlan and Jonathan Zinman—continued through 2010. In January, CGAP weighed in, publishing an analysis of the benefits of microfinance in a Focus Note, “Does Microcredit Really Help Poor People?.” In October we co-organized a 3-day conference with the Financial Access Initiative (FAI), Innovations for Poverty Action (IPA), the Abdul Latif Jameel Poverty Action Lab (J-PAL), Moody’s Corporation, and Deutsche Bank to share new research results. By then, the tone had shifted from questioning the impact of microcredit, to exploring ways in which the results of the studies can be used to improve the design of a range of different products to better suit the needs of poor people.

Results released at that meeting from randomized controlled trials on two pilots in the CGAP-Ford Foundation Graduation Program in India were particularly promising.

Households that participated in the Bandhan Graduation Pilot in West Bengal had experienced a 25% average monthly increase in consumption, and the treatment households also saved more than the control group—nearly twice as much on average. The early results from SKS’s Ultra-Poor Program were less clear-cut. But participants are saving more, and are less likely to borrow from moneylenders than the control group—an important finding since high levels of debt amongst poor families in Andhra Pradesh was one of the major issues that emerged in 2010.

At the end of July SKS, the largest microfinance institution in India with nearly 6 million clients, went public on the Bombay Stock Exchange. The IPO was 13 times over-subscribed and attracted leading investment groups, such as Morgan Stanley, JPMorgan, and George Soros’ Quantum Fund. The company valuation reached the top of the offer band price at US$1.5 billion. In early October Andhra Pradesh’s chief minister passed “An Ordinance to protect the women Self Help Groups from exploitation by the Micro Finance Institutions in the State of Andhra Pradesh.” In a Focus Note that provided background on a fast-moving situation, CGAP raised a number of issues that the maturing industry must grapple with, including governance issues, ownership issues, and concerns about the limitations of a business model that is entirely based on a single financial product—lending. In the coming months, CGAP regional specialists collaborated with IFC colleagues to provide input to the Reserve Bank of India and the Indian Ministry of Finance on regulating the microfinance sector in India.

In a blog post as part of a series on the SKS IPO on the CGAP Microfinance Blog, Carlos Danel, co-founder and executive Vice President of Mexican microfinance bank Compartamos, pushed back against the criticisms of commercial business models and argued that three years after the first microfinance IPO, far from experiencing mission drift, poor clients in Mexico were benefiting from the influx of capital, and that the market was more competitive and less concentrated.

In the past 42 months, he said, Compartamos had grown from serving 614,000 clients to serving 1.75 million, a 191% increase in outreach. He also described a picture—though admittedly “painfully slow”—of diversifying products to offer voluntary saving services, housing loans, and micro-insurance products.

Deposit services gained increased and welcome attention through the year. In February 2009 the Bill & Melinda Gates Foundation committed $38 million to 18 microfinance institutions in South Asia, Latin America, and Africa, to encourage them to expand their savings offerings. In August the Basel Committee on Banking Supervision issued its first guidance on the regulation and supervision of depository microfinance, the culmination of a substantial workstream on microfinance which CGAP co-chaired with the Central Bank of Argentina. CGAP made the business case for savings, arguing in an Occasional Paper published in September that total client profitability made good business sense. In November, the Bill & Melinda Gates Foundation released new research and convened key players to exchange knowledge and solidify progress on savings. 

At the same time, significant progress was made through 2010 on the issue of responsible finance. In April CGAP hosted a virtual conference “Responsible Finance: Making it Work in Microfinance.” Led by moderators from MFIs, investors, governments and NGOs, participants from across the world debated topics ranging from acceptable return on equity levels to whether we need a “Responsible Finance Certification” in microfinance. By May, more than 1000 microfinance institutions, networks, and investors had signed on to the Client Protection Principles, a set of core principles encompassing key issues such as pricing, collections practices, mechanisms for redress of grievances, and avoidance of over-indebtedness. The Smart Campaign made solid progress with its research and advocacy agenda, raising key issues for the industry around the practices that distinguish microfinance in terms of social responsibility and good business. And social performance reporting took center stage, with three hundred and fifty MFIs now reporting to the MIX on key indicators of social performance developed by the Social Performance Task Force.

And CGAP made an impassioned plea for the microfinance industry to examine the empirical evidence on over-indebtedness: to come to a common definition, and agree indicators to measure what levels of over-indebtedness exist.

There were significant developments at a national level too in making financial inclusion a policy imperative, including progress on regulating the sector in some countries. In July, Russian President Dmitry Medvedev signed a new microfinance law that CGAP, working in tandem with the Russian Microfinance Center, had been instrumental in helping to reformulate to conform to global best practice.

Another high point for 2010 was burgeoning innovation in branchless banking, where we saw new partnerships and new products emerge at a fast pace. In May Equity Bank and Safaricom’s M-PESA service joined forces to launch M-KESHO, a new product that linked poor people to full banking services via their mobile phones—an innovation that was supported by a grant from CGAP.

It was quickly followed by Equity Bank and Orange linking up to offer Iko Pesa, an alternative banking service for Equity customers. CGAP has a strategic relationship with Orange covering their plan to launch mobile banking products in all their Africa markets.

Beyond Africa the pace of development of branchless banking models and products increased dramatically in Mexico, Brazil and Pakistan, boosted by enabling regulation and increased interest on the part of banks, consumer product distribution companies, and mobile telephone companies. CGAP’s global knowledge of how to establish useful business partnerships involving multiple companies to deliver services was an important contribution in these markets.

In March the UK’s Department for International Development (DFID) committed GBP 8 million, and in September the Bill & Melinda Gates Foundation awarded an additional USD6 million grant for the next phase of the CGAP Technology Program. This funding supports the next phase of CGAP’s work with alternative business models for financial inclusion and adds some new work. One promising new line of work is linking government social payments to poor people (or G2P) with a financial inclusion agenda, enabled by the use of technology. CGAP added G2P projects in Ethiopia and Pakistan where governments have large expanding social protection programs they want to link with a financial inclusion agenda, taking advantage of rapidly growing mobile telephone networks. G2P also demonstrates how financial inclusion can benefit—and benefit from—other social programs to better bring formal financial products to the unbanked, while reducing administrative costs for governments to deliver social programs. In one story CGAP reported from Brazil, residents in the remote town of Autazes no longer had to travel 12 hours by boat to pick up their government payments, instead accessing them at local retail stores set up as banking agents.

The metamorphosis taking shape in so many different ways across different continents, geographies, and cultures is changing the face of poor people’s access to finance. New business models, new players, and new partnerships are emerging. Product innovations that focus on the real needs of poor clients are beginning to enter the picture. And regulators around the world now clearly see financial inclusion as part of the basic infrastructure of their economy.

An industry that was inevitably, and perhaps rightly, focused on supply, is now entering a new phase where demand is becoming the key factor for business success, and where understanding poor clients, and focusing on their needs is quite simply the core of the business.