Can Data and Transparency Strengthen Microfinance?

CGAP has long viewed information and transparency as a crucial component in shaping the microfinance industry. We have come to expect that consistent, reliable data strengthens microfinance performance and policy dialog. With this goal in mind, CGAP and MIX organized an event in Nepal on 29-30 March 2011 and invited key organizations from six countries in South Asia that play critical industry building roles in their respective countries.

The six countries – Afghanistan, Bangladesh, India, Nepal, Pakistan, and Sri Lanka — are unique, each with a diverse range of young and mature microfinance industries and varied histories on the use of data and information. For the purposes of discussion we divided these initiatives into three main categories:

• Annual state of the sector reports such as the Pakistan Microfinance Network (PMN)’s Pakistan Microfinance Review, ACCESS’s Indian State of the Sector Report, and M-CRIL’s Microfinance Analytics Report.
• Access mapping such as MISFA’s monthly performance reports, the PMN’s Micro WATCH in Pakistan and Sa-Dhan’s Microfinance Map of India.
• Interest rate transparency with the MF Transparency report on India.

Use of these and other tools varies considerably across South Asia. For example, some of the younger sectors, such as Afghanistan and Pakistan have shown enthusiasm to develop information products that effectively monitor the financial performance of the sector. Some products in other countries have been an instrumental in driving new policy. For example, India’s SOS report was used by the Malegam committee to develop their recommendations for a new microfinance legal framework. Some thematic areas of data collection, such as client protection and credit bureaus remain elusive across the region, although efforts to better capture this information are underway.

So what? Do information initiatives result in better and more easily available services for the poor? Should microfinance industries in most countries build the data systems and analysis as a key part of building their industry infrastructure? The event in Nepal provided some answers to these questions:

• You get what you measure. For many years now, the focus has been on raw outreach numbers and financial sustainability as two of the most important indicators. While the emphasis on sustainability may have helped establish a permanent industry, the indicators may inadvertently also incentivize providers to focus on their largest source of income – their loan portfolio; thus encouraging a single product approach at the expense of the quality of services, and a wider product menu. The industry should do more to prioritize measures of quality, and in particular measures to understand better clients and their needs.
• Data and transparency is preventative rather than curative. Solid policy dialog is always informed by sound data and may also be part of the cement that holds an industry together. Where crises have already emerged, data and information alone won’t fix the problems. Data and transparency efforts may be more effective when introduced sooner as a preventative measure, rather than a reconstructive effort after a crisis.
• The messenger matters. Data and analysis are important, but it’s important to have credible messenger. In Pakistan, for example, the central bank has taken a lead in the use of data to drive policy discussion as the nodal point within the government. In Afghanistan, the industry level apex funder plays a similar focal point role.
• There is a debate in South Asia about shifting the microfinance dialog from poverty alleviation toward financial inclusion. Framing microfinance as a matter of poverty alleviation as opposed to financial inclusion has important consequences. In some industries across South Asia, the narrative has switched to financial inclusion whereas in some other countries the narrative remains focused on poverty alleviation. Financial inclusion focus shifts towards measurements of financial inclusion progress. The poverty alleviation dialog pushes the discussion towards impact analysis. The balance of this debate often shapes the data solutions that are deemed important.
• Politics matter. While information products are important to understand the sector, it’s hard to overstate the importance of each country’s unique and complex political landscape.