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.
Srinivasan gets to the root issue. Responsible practice is needed, but we don’t consistently practice responsibly. That isn’t always the fault of the MFI, even though blame is often placed on the MFI. The industry is a complex web of stakeholders, and we all need to dialogue and work in coordination to achieve the desired goal of responsible practice.
There aren’t many industries that can take on this challenge of disciplined coordination, but I believe that Microfinance, because of our roots, has the potential to use our original roots to strengthen and maintain the health of our work and ensure that financial services for the poor continue to be a service for the poor.
A balanced view.
But, a number of issues remain unanswered. With all the difficulties including the Andhra Pradesh strangle hold on MFIs, has any MFI gone out of business? Most of those big MFIs working in India started very small with great Mission and Vision Statements. But, they all could survive by tweeking their operations and virtually becoming contract MFIs (dancing to the tunes of investors). Initially, NABARD and SIDBI were the main funders of these MFIs. The operations of these two organisations with these MFIs were/ are very transparent and without any strings attached. But, how many of these MFIs have approached and taken advantage of the transparent way NABARD and SIDBI offered their finance and how many of them used the funds genuinely for the purpose of lending only. As opposed to this, MFIs preferred to take funds from international funders knowing fully well that there were strings attached. Because the promotors of these MFIs know fully well that they can manage the investors.
Prof Sriram’s paper on SKS (pl see the link) http://indiamicrofinance.com/commercialisation-microfinance-india-discu… has touched upon the ways some of the MFIs tweeked their business models to hoodwink the funders. Sometimes, both needed the supoort of the other for their mutual benefits ( you scratch my back and I will do it for you).
In the MF sector, the governmnets and regulators are known constraints and the MFIs know how to move around them and still get their business done.
In many a business, it is often told that while the business is doing badly, the businessman continues to grow. It is true of MF sector also. While the personal wealth of all the MFI promotors have gone up multi-fold, the sector is still struggling and there is not a single case of an MF client who has grown in the same proportion. MFI promotors know fully well the underlying principle of the economic theory on (i) the law of marginal utility, (ii) consumer surplus and (iii) income effect and use them in their business models which are always advantageous to them and not the consumer.
Let MFIs really feel that they have a mandate to help the poor and not make money out of them through usurious means.
My observations may appear a bit cynical, but, sometimes truth is a bitter pill to swallow.
Mr Sinivasan is asking the question that most MFIs would like to ask. how does one expect the MFI alone to be responsible if other stakeholders who deal with such MFIs are not responsible themselves, is a fair question.
this is a question which has insufficient answer in the current context. today, there are still banks in India who lend to MFIs at over 14%, knowing fully well that the MFI’s margin gets squeezed at a borrowing cost over 14%. and yet these banks cite the current situation and make their money at the expense of the poor MFI.
however any kind of irresponsible behaviour of any of the other stakeholders does not condone irresponsible behaviour of the MFIs. MFIs are ultimately the last mile connectivity with the clients and given the lack of sufficient market information by such clinets, MFIs are in a position to take undue advantage and hence the responsibility is much higher on the MFIs than other stakeholders.
as far as Equitas is concerned, we hold a simple philosophy. Responsibility in all our actions with all stakeholders and not just clients is something we believe is part of our genes and hence we will need to be totally responsible in our actions, irrespective of what others do. over the long run, this is always bound to keep such institutions sustainable and strong, whatever may be the short term challenges. hence we believe responsibility in action is part of the soul of the organisation and this itself would eventually influence other stakeholders to modify their behaviour vis a vis such model institutions