The Next Decade of Microfinance
Thanks for your thoughtful critique and ideas on how CGAP can best support the healthy growth of microfinance. We welcome your analysis of where the industry has come during a really exciting period in its development and growth. And we agree that we all need to do much more work to ensure that the 2.7 billion people still financially excluded today gain access to safe, reliable, and well-priced services that can help improve their families’ lives.
As we celebrate 15 years of CGAP, we are also reflecting upon where the industry has come, and where CGAP can be most useful in helping to advance financial access for the world’s poor. Like you, we believe that advancing financial access isn’t just about expanding access from a sheer numbers perspective—though that’s critical—it’s also about the quality of that access. This requires ensuring the establishment of healthy business practices, strong governance and oversight, and most important, developing products and services that meet the real needs of poor people, an area where the industry still sorely lags. On that last point, we have all learned a lot from the book published earlier this year, Portfolios of the Poor.
Your analysis of an industry that has become an “overcharged bull” is true of some markets. Indeed, we have written about the perils of unchecked growth, warning of the need to address core internal vulnerabilities within microfinance, and making recommendations on how to strengthen the industry. We also took a strong—and with some, unpopular—position on governance around the Compartamos IPO. IPOs and 70-100% growth are the vivid symbols of rampant growth in pockets of India. But as a global organization, we are sharply aware that such buoyant growth is far from uniform. In still too many regions and markets, the opposite scenario prevails where access to financial services remains limited to a tiny percentage of the population. Even the global averages [23% growth in borrowers] mask what is really a very uneven picture.
CGAP’s messages have evolved as the industry and wider climate develops. We recognize that an approach that served the industry and its clients well at a time when it was in its infancy may not always hold today. We appreciate your generous recognition of the important role that CGAP has served for the industry in helping to establish consensus around some core principles and standards. We also believe that our founders were quite visionary in recognizing a need in the industry and in creating a global platform in CGAP through which debate could be had, and consensus reached.
CGAP continues to play an important role as a platform for a wide range of stakeholders to engage around standards, and agree on norms of practice. But the context in which we are working today has changed radically. And we must adapt.
Where the emphasis of our work in the early days was on establishing core standards of financial transparency and reporting, significant progress has been made and others continue to take that forward, so our emphasis today has shifted toward other areas needing attention, such as social performance reporting, consumer protection, and responsible finance. Some current work in this area includes the social performance reporting awards, developing consensus guidelines for MIVs that cover ESG, substantial policy work on consumer protection, and CGAP’s key role in the SMART campaign. None of this is a reversal from the achievements made on financial performance, but the rounding-out of those achievements to ensure that the industry best serves its mission to help poor clients. And we continue to support the MIX as a platform where institutions can report both financial—and increasingly social—performance in one place.
There are many useful insights in your analysis, though your interpretation of CGAP positions is not always accurate, or up-to-date. Even if “zero-tolerance-for-delinquency” language may once have been useful as a counterweight for a widespread lack of collection discipline, you are clearly correct that 100 percent on-time repayment is neither practically achievable nor even desirable in principle, most basically because it would imply exclusion of all clients who present any credit risk. CGAP did talk about zero tolerance in our early years, and will even plead guilty to having failed to nuance the concept adequately. But we’ve been clear for many years now that zero tolerance for delinquency is not feasible or appropriate. (And of the many MFIs we’ve recognized with grants and awards, we can’t remember one that ever had zero delinquency.) Or to take another example, our view about loan renegotiation has not been that it should never happen, but rather that it should not be used to avoid sound collection discipline or to conceal repayment problems.
We appreciate your acknowledgment of our work with mobile network operators and other new technologies, including G2P (government-to-people) payments, to promote financial inclusion. And it is also obvious that people living in extreme poverty need more than financial services: a whole range of interventions from livelihoods support to business development, education, health services, and even addiction counseling or other services related to the social issues that can be bred by poverty, are necessary. CGAP is committed to advocating for the needs of those living in extreme poverty. Our work with “microfinance plus”, including the CGAP-Ford Foundation graduation program, which now has 9 pilots active in 7 countries, has reinforced some key lessons: 1) the importance of savings; 2) people living below the poverty line need more than financial services; and 3) doing it well is hard. Any organization can claim to do all this, but each of the interventions mentioned above is a highly specialized business. Few organizations have the set of skills, or can even acquire the set of skills needed to provide such a complex set of services. Our experience with the CGAP-Ford Foundation graduation program has taught us that, often, quite an elaborate series of institutional partnerships and alliances are needed to deliver the right mix of services to very poor people. There are impressive organizations building businesses to address the range of needs they identify—a group of us recently had the privilege of visiting Jamii Bora which takes this approach in their work with slum dwellers in Nairobi—but in many more cases, partnerships will be critical to success.
In recent years and in some quarters the term “commercialization” has been used to denote greed, excessive profit, and uncontrolled growth—with all the negative consequences that entails for poor clients. Even though we have seen negative effects and excesses in some countries and institutions, we continue to believe that on balance the commercialization of microfinance has yielded great benefits for poor people. Overall, it has led to more professional, safe, and predictable services. It has resulted in the broadening of services beyond credit, most particularly the offering of safe savings services, and it has meant that many, many more people have access. The entry of socially responsible investors—still a much more prevalent source of funding than purely commercial investors—has opened up new opportunities for microfinance, and thus for poor people.
Clearly, cases of abuse need to be tackled, and tackled swiftly. There are refinements and improvements to practices needed, as well as greater transparency on all fronts. But we should be wary of chalking up every negative occurrence to a label of “commercialization”, and focus on the real challenges facing the industry. We need to reach agreement and develop practices around reasonable pricing and profits, governance, and what constitutes “responsible finance”—particularly getting a handle on the over-indebtedness of poor clients. At the same time, in many parts of the world the biggest challenge is not the excesses. It remains, quite simply, the basic challenge we’ve always had: reaching those who are still unserved, and developing the right kinds of knowledge and business models to do it well.
One of the hardest questions we ask ourselves constantly at CGAP is where we can add most value. We believe that our strengths as an organization lie in spotting and documenting trends, taking risks, and innovating so that successes can be taken forward by our members, partners, and others. Our best role is not so much in implementing models whose success is already proven, but in experimenting with unproven concepts, convening and sharing knowledge, helping to define standards and good practices in new areas, and advocating. As the microfinance landscape becomes ever more complex we, like so many other organizations in this field, constantly need to re-evaluate the focus and scope of our work and the technical skills and expertise needed to help us to achieve our mission.
And we do not undertake this reflection alone. We hope that over the coming years CGAP will continue to be a key player in facilitating a more ambitious and expansive microfinance industry, with many new players and many new ways of working. But one thing is for sure: our mission is not one that can be achieved by any one organization. We fully believe that any advances will be made in partnership. So as we think about CGAP’s future role, and focus on where we can most add value, we’re also thinking about where we can work with others to achieve our shared vision of universal access to high-quality services that can help improve lives—something that people everywhere deserve.
With best wishes,
SKS Microfinance is trying to raise $250m by going public. In their pitch to investors, SKS mentioned that they were charging 28% interest and that they can potentially charge upto 40% rate. How will anyone potentially benefit by taking a loan at such usury rates?
Also, if SKS has a successful public offering, we can expect copycat acts raising risks for both borrowers and lenders alike.
Dear Alexia and Sanjay
One commonality in both of your posting on next decade MF, which I also agree, is that qualitative dimensions assume more importance in microfinance if candid poverty reduction as its ultimate goal is to be realized. Along with you I have some moot points .for ensuring the qualitative perspectives in the next decade micro finance activities.
First, in this regard, Alexia’s points such as healthy business practice, strong governance, development of products and services matching the needs of the poor clients etc., are vital. but establishing these ideals at grass root levels calls for ethical and moral responsibilities among the players in both supply and demand sides .In the presence of ‘non ethical character of modern economics’ (Amartya Sen) how to address these challenges in the modified agenda and what are the strategies for ushering in quality performance with ethical parameters be it in pro poor product development or financial inclusion or healthy business practices in the next decade?
Second, success of financial inclusion or expansion or access largely hinges on basically on adequate access to physical capital in terms of road, bridges, canals, warehouses, transport, and market yards besides electrical power and telecommunication. Here mere insistence on financial access or inclusion therefore will not deliver well qualitatively. Evidently as is the case in India , poor physical infrastructural facilities as referred to above, explains why the ‘credit deposit’ ratio in some of the eastern states remain low over several decades. This kind of situation prevails invariably in many under developed and developing countries as well in the world. Hence how to sequence the development priorities avoiding ‘putting the last (credit) first’ approach particularly in the context of poverty reduction through micro finance.
Third, I fully agree with Sanjay on ‘over charging bull concept’. Here I wish to share some more related points. Right from the tortoise phase to bull phase why ‘micro credit alone’ has been allowed as ‘be all’ and ‘end all’ in micro finance arena while the acknowledged fact reveals that MF is package of services including micro savings , micro insurance , remittance services and other pro poor financial services which are essentially needed for poverty reduction.. In fact every one in the field endorses the view that micro credit is not a ‘silver bullet’ and mere credit alone can not bring desired impact in the poverty sector unless it is integrated with other non financial inputs (physical, human etc.,) besides other MF service. But what happened in the field. Mere uncontrolled infusion of micro credit in the unethical market scenario (thanks to micro credit summit global show ) has over charged ‘the bull’ and the eventualities include over delinquency, multiple lending , multiple borrowing, debt trap, glittering recovery rate, high rate of drop out/push out/group mortality( in SHG/MF system) suicides, ultimately perils and crisis( although inherently) in this segment .
In this context, I feel that we have failed to work out a strategy for ‘single window’ concept for delivering all MF services coupled with other non financial services needed for the poor for a sustainable poverty reduction. Despite the presence of many institutions with different products, the target poor are not ensured with all these services collectively. Even the so called MFIs also confine to credit services only. (exceptions like BRAC) The policy makers, the proponents of MF and even rating agencies (CRIL) have more focused on the sustainability of functioning of supply side mechanism (financial &organizational) rather than social impact (benefit) sustainability at poor client household level. (In CGAP Blog posting also).
Even in the case of the new institution like MFI why should it confine to micro credit only knowing mere credit is not adequate for the said purpose – poverty reduction’ for which the whole MF concept emerged? However from the tortoise phase to present phase, what is visible is a clear the trajectory for MFIs indicating the institutional transformation from NGO to MFI and then NBFC and LAB (Local Area Bank) It may indicate a qualitative institutional growth with financial soundness as it drew global level policy makers’ attention .But the ‘means’ are taken care of in the process while the ‘end ‘at ultimate stage is sidelined if not neglected. Global debate (CGAP MF Blog posting) discusses on the question related to the positive impact of micro credit on poor! Further series of impact studies also failed to establish any direct causal link between better availability of financial (more particularly credit) services from MFIs and increasing client incomes as highlighted by Sanjay.. I agree with him that ‘over charging the bull’ has resulted market saturation in many places and eventually vulnerability in many places instead of removing or reducing vulnerability. This is irony.
. It is therefore suggested that there is an imperative need in the next decade of MF to focus more on demand side perspectives for ensuring integrated input services besides micro credit either by single or multi institutions in a coordinated manner to the same target groups. Gap’s ‘Graduation approach’ for the poorest is encouraging but again micro insurance is not adequately linked .There is much grass to water. The CGAP may reverse back to keep their acronym as CGA poorest from CGA poor for a stronger advocacy for the poorest in the mind set of MF practitioners( I have argued this in CGAP blog already)
Fourth, reg ‘MIX’, despite limitations in the area like accuracy, uniformity in concepts, ratios, and reporting etc there is some transparency. The fact on the coverage of ‘non poor’ also by MFIs as revealed in MIX is causing greater concern
Fifth, .Micro insurance (MI) still remains Cinderella over 3 decades. CGAP has not adequately focused MI as vital tool for reduction of vulnerability of the poorest in the bottom layer under MF concept. At least in next decade this MF input need to promote either individually or integrated with credit product. While many commercial banks in India have insurance linked credit product( livestock master policy , crop insurance) and are evincing interest for foraying into insurance sector there by providing integrated MF services -savings, credit insurance ) the MFI s need to be directed to ensure provision of integrated MF services in the next decade either singly or severally to their poor client
Sixth, the MF sector scenario with drifting from ‘mission driven sector’ to ‘equity valuation driven sector’ (Sanjay) really is causing great concern in the context of reaching millennium development goal. Further, in the process, many NGOs (social change agents) after turning to MFI (money lenders) have lost their credibility and confidence among the poor – a loss of socially minded human capital at grass root level. These kinds of negative impact also need to be watched and corrected in the next decade of Micro finance
6.In the last instead of having MFI with all its regulatory complexities in the unethical competitive market environ , why not we encourage and promote self Help Group Federation as a mini MFI rotating their own funds with their own rules self-reliantly without depending on external sources . Instead of financial rating agencies , participatory social audit may certainly facilitate for bringing a quality self management resulting candid reduction in poverty and at the same establishment grass root democracy. After all MF emerged as a panacea for the poor in poverty segment and not necessarily as a product to be sandwiched between the ‘bear’ and the ‘bull’ in the capital market
Though i am very new to micro finance or development sector, yet based on my less than 3year experience, here is my two-paise worth comments:
1. The one decade between creation of CGAP and today has seen a sea-change. No more is CGAP required to work to increase access to micro credit. even in a few pockets in any country where access is still nil or low, the normal market forces itself would take care of expansion.
the boot, now is actually on the other leg. the challenge now is to see how to reduce the access and prevent a bubble and serious default situations from the client side. with so many MFIs offering easy credit and hardselling them too, in pursuit of their own growth of portfolios and valuations, more and more poor are being tempted with easy credit and an uncomfortable percentage are bound to borrow beyond their means. what started as a support to them might land them in serious trouble. here, i would like to suggest the foll agenda for CGAP:
a. In India, a new association MFIN (Micro Finance Instiitutions Network) has been formed with all NBFC-MFIs as members. they have drawn up a code of conduct which restricts the number of MFIs which can finance a person and also the maximum amount they can lend. this, if implemented properly with buy-ins from all concerned will lead to lot of sectoral good. CGAP should see how it can help MFIN in India to implement this and look at similar initiatives in other countries
2. Profit and Profiteering: With more and more MFIs becoming commercial from a structure point of view, there are going to be pressures on showing profits. while it is commonly agreed that any entity must make profits to be sustainable, what is the right level and what is too much? there is no debate on this nor benchmarks. i believe CGAP should take substantial and immediate steps to generate a proper debate on definiting what level of profit is ok and at what level it becomes profiteering. this, combined with norms on transparency msut be made into a benchmark so that separate rating exercise can be carried out by the rating agencies and give a rating for companies from their social/business perspective. this can help separate the true ‘Mission focussed MFIs’ from the profit focussed ones. CGAP should also talk to regulators, investors and bankers to ensure that their treatment is different to these two sets of MFIs.
3. so far we are still talking of only credit supply. but let us go back to the name of CGAP: Action against poverty. we know supply of credit alone does not achieve this. so what is CGAP doing about being true to its own mission??? Here the foll are the steps i would suggest for CGAP:
i. Look around the world at MFIs and others who are doing interventions on eduation, health, skill development, food security etc for the poor and see which are scaled up versions. such models must then be taken out and widely shared with the rest of the community to multiply such interventions.
ii. put together a team of specialists and committed people to further study such models and also build on new models as required and help show case such models to practitioners. get these models implemented and monitor same for performance metrics and then help take successful models to all its partners worldwide.
iii. there are many other networks which work with instittions serving the poor. CGAP must become the nodal agency between all these networks so that all good things happening anywhere get world wide attention and replication
iv. we need some bold statement of intent from CGAP on the above. some examples are:
WE WILL ENSURE THAT WITHIN THE NEXT 5 YEARS:
I. WE WILL ENSURE HIGH QUALITY EDUCATION TO BE PROVIDED TO ATLEAST 50 MILLION CHILDREN FROM THE UNDER PRIVILEGED SECTIONS OF THE SOCIETY
II. WE WILL ENSURE THAT HIGH QUALITY PRIMARY HEALTH CARE IS PROVIDED FREE OF COST OR AT 25% OF THE NORMAL COST TO ATLEAST 100 MILLION POOR
III. WE WILL ENSURE THAT NOT A SINGLE POOR GOES TO BED ON AN EMPTY STOMACH OR BORROWS TO EAT
IV. WE WILL ENSURE THAT ATLEAST 50 MILLION PEOPLE ARE NOT ONLY PROVIDED SKILL DEVELOPMENT TRAINING BUT THEIR MONTHLY INCOME GOES UP BY ATLEAST 50% TO THEIR CURRNET LEVEL WITHIN 6 MONTHS OF THEIR COMPLETING THE TRAINING
i know some of the above look mother-hood statements and difficult to measure but then a human issue such as Action against Poverty cannot be converted to simple metrics. and if we put our heads together i dont see why we cannot come up with proper methods of measuring these, and I am very happy to be of any help that CGAP may want of me. if we dont do this hard work, and instead, continue to try and convert our focus and actions to ‘easy to measure’ metrics, then the dream of ‘Action against Poverty’ will remain just that … dream.