Changes in the Microfinance Industry?

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Permalink Reply by Soham Banerji on February 20, 2010 at 1:30pm

Through my experiences with Grameen Bank in Dhaka, Bagladesh, I believe it is extremely important that we make sure that Microfinance is truly helping the individuals that need it the most. Information sharing and increased community involvement will be of utmost important in the future as the uncertainty of the financial world has become apparent.
I think it is also important that we encourage transparency within the industry which will promote increased faith and trust in the system in the future.
Of the 150 villages that I reached out to in Dhaka that used micro-credit, most suffered from inadequate training programs and high interest rates, I believe it is important that we incorporate programs that address these issues for micro-finance as a whole to be sustainable in the future.

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Permalink Reply by Paloma on February 20, 2010 at 2:27pm

There are several areas in which I would like to see change or particular focus placed as the industry moves forward.

1. I think that recent skepticism around microfinance has generated a more critical approach to evaluating actual impact, which in the long run will be good for the industry, as it forces MFIs to closely examine their policies and practices. Going forward, I would like to see more rigorous comparative analysis of different MFI models and their effectiveness, and have these findings disseminated in a broad and transparent manner. For instance, what are the merits of individual versus group liability? The impact on entrepreneurial success of providing training programs? I would also like to see more evaluations of MFIs conducted that are based on metrics other than income growth, such as consumption smoothing and changes in gender or household dynamics. The publication of these findings will help MFIs worldwide to more effectively evaluate and improve their policies and their real impact.

2. As mentioned, I would like to see more collaboration between MFIs. The Summit and Mix Market are great and are serving crucial needs, but I think that more can be done to effectively share best practices and metrics techniques. Perhaps even an online database solely for member MFIs where documents can be posted for the benefit of more fledgling organizations and there can be constant blog communication regarding pertinent issues/challenges? This kind of collaboration could also help avoid reinvention and wasted resources.

3. Increased integration of other services into the MFI sphere, as Grant mentioned. I think that one of the most valuable aspects of the work that MFIs are doing is that they create a unique vehicle for (mostly) women to collectively discuss and exercise shared agency in addressing community issues. This capacity should be cultivated through integrated education and should be harnessed to inspire community involvement in development projects related to health, water, education, etc. Also, as Casey Marie mentioned, a focus on the provisioning of savings and insurance alongside credit is key - the diversification of MFI product offerings as well as the integration of other services.

4. Further development of and awareness efforts around MFI online lending platforms that allow individuals to give to entrepreneurs, such as Dvelo, KIVA, etc. This is a way not only of mobilizing increased credit and growing the industry but moreover educating those individuals who give about the importance of development work, and inspiring them to get involved.

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Permalink Reply by Romina Kazandjian on February 20, 2010 at 4:05pm

Greater local/community involvement in MFIs
I believe that entrepreneurs from developing countries are their own best advocates and problem-solvers. Not only should their needs and concerns guide policies and practices, but they should also more actively take part in decision-making within MFIs rather than simply be on the receiving end. The power of innovation of such empowered individuals should not be underestimated not only in being able to make a palpable change in their own lives and these of their fellow community members, but also on a global scale. Creating meaningful, lasting and equitable partnerships among such individuals is crucial for transmitting knowledge and exchanging “lessons learned”. Local entrepreneurs are the best asset for MFIs to reach the members of the community that need their help the most. Also, they are the ones who are most intimately acquainted with the culture and national psyche of the people; therefore, they know how local markets operate, how to listen to them and what incentives can influence them. For instance, in my home country Bulgaria, where the Roma population is the main target of microfinance activities, very few members of this group are part of the MFIs’ leadership and decision-making boards. Moreover, I would like to see more MFIs reach remote rural areas, instead of focusing mainly on the urban population.

Integration of microfinance in a broader development strategy
Microfinance has an astonishing power to change the lives of people by empowering them to initiate the change themselves. Yet, it should not operate in void but should rather be more integrated in a broader development framework. Developing countries’ governments should be more educated about the benefits of microfinance and so should be IGOs and IFIs. Such institutions should collaborate more with MFIs and support their activities in the field.

Self-sustainability
Although I believe that partnerships between MFIs, IGOs, IFIs, foundations and NGOs definitely have a positive effect on the work of all of these types of organizations, I am convinced that MFIs should strive toward greater self-sustainability. Dependence on grant-making institutions has unwanted implications regarding the freedom and effectiveness of MFIs. The philanthropic aspects of microfinance have been the inspired engine behind its success; yet, we should not forget that such institutions are not charities, which is exactly why they have been so successful. “Enlightened self-interest” is the correct approach in my view.

Technology
Utilizing innovative technology such as mobile-phone based money transfers (like M-Pesa in Kenya, etc.) has the promise to decrease transaction costs and make microcredit readily available to populations in more remote rural areas. The recent boom of ICT in sub-Saharan Africa, which has now made mobile phones available to one in every five Africans, reinforces this notion.

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Permalink Reply by Pia Gugnani on February 20, 2010 at 4:56pm

Recent studies such as Banerjee et. al (2009) and Karlan and Zinman (2009) have showed that Microfinance cannot be treated as a miracle drug to end poverty. However, these studies have also shown some significant positive effects of microfinance on business outcomes and the composition of household expenditure. I believe that the success of microfinance hinges upon the degree of its flexibility in the future. It is in the nature of microfinance to be an innovative financial instrument and thus I would like to see some of the following changes in its structure-

1. Evaluation
Last summer, I had the opportunity to interview about 125 beneficiaries of microcredit in Ghana. Although, I was pleasantly surprised at the reach of MFI's, I was left feeling disappointed with the social outcome. I spoke to many people who had been taking these loans for 6-8 years but have seen no increase in their wealth base or standard of living. I believe that a regular evaluation of the client base would help achieve the larger goal of creating wealth. If clients are not showing any increases in per-capita consumption, then they should be provided extra assistance in the form of credit or consulting, that will help them increase their standard of living.

2. Increased emphasis on savings component
Recent studies have shown that technology can help people save more. With the help of text-reminders, we can encourage existing MFI customers to save more. These savings, after accruing interest could then be used for further re-investment in business and/or home and lead to wealth creation and not debt-accumulation. MFI's can try using different techniques to provide incentives to increase saving- creating benefit for both the MFI and the customer.

3. Replicating studies across different settings
MFI's have traditionally targeted groups of women because they believe that a woman is more likely to transfer the benefits from access to credit to her family and her children's education, thus creating maximum social welfare. However, Karlan and Zinman (2009) has shown that expanding access to credit only led to increased profits in male business ventures and the returns to capital was negative for female business ventures. These males also then used these additional profits to send their children to school. Thus, I believe that is necessary to replicate these studies across different settings. If it is in fact true that males not just in the Phillipines (the site of the study) can record higher profits and invest in education ,then we may be not creating as much social impact as possible by eliminating the men from access to microcredit.

4. Eliminating the information silo effect
Lastly, I echo some of the sentiments stated above about more collaboration and coordination between MFI's and between MFI's and the state.

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Permalink Reply by Sasha Noelle Anderson on February 21, 2010 at 6:28am

Though it has at times been quite controversial, I am in full support of opening up microfinance for disadvantaged groups in so-called “developed” countries. We often assume that countries in the West have completed the process of development, when in fact they too are on a journey of societal improvement and have to combat not only lingering poverty and economic marginalization due to discrimination, but will need assistance in order to shift to more sustainable, earth-friendly business practices. I think the future of microfinance should definitely include deeper penetration of western markets in order to assist immigrants, indigenous populations, and the socioeconomically marginalized.

Specifically, I think US immigration reform could be tied to microfinance. One of the main reasons used to block making immigration faster and easier is that foreigners take jobs from existing citizens. But the beauty of business innovation is that jobs are not a limited factor in the economy; new ideas and businesses continually open up space for new job positions. If immigrants had the option to be set-up with small, low interest, “micro” loans, financed by people’s donations rather than government money, then they could become a positive entrepreneurial force to benefit America. Often, highly qualified and educated immigrants are put to work in job positions that do not allow them to use their skills, resulting in a loss to potential economic productivity. Microfinance seems a perfect way to ensure that these people have the means and support to make use of their qualifications. Entrepreneurship is a very “American” value that should be fostered alongside English-language training and constitution-memorization as part of our immigration procedures.

Internationally, I think the interaction between microcredit and agriculture will be of utmost importance and should be a focus of microcredit institutions. I’ve done a lot of volunteering and research in the broad issue area of “food politics.” Specifically, supporting local agriculture and preserving biodiversity through community seed banks. I think microfinance is a vital resource for communities (particularly women’s co-ops) looking to start small-scale community agriculture projects such as markets and seed banks. These seeds banks are going to be crucial when we discover that we have stopped growing most of the natural flora found in our varied ecosystems, and instead are left with a few varieties of genetically-modified crops that lack the necessary genetic diversity to be sustainable. Support for such agriculture projects today is going to be very important in our near, mono-culture, future.

Finally, I believe that the ultimate goal of development practitioners should be to work themselves out of a job. Ideally, people within countries in Africa and the Middle East should be assisted to gain the resources to set-up and administer their own banks and community organizations, in order to generate domestic jobs and increase ownership over development practices. I do not know a whole lot about what is being done towards this goal (that’s one of the things I hope to learn about at the Summit!), but I think microfinance organizations should definitely be working towards this in the future.

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Permalink Reply by Davis Winslow on February 21, 2010 at 3:42pm

Microfinance has shown a lot of promise. We've all heard the statistics and success stories. From what I have learned, there a few things that I think would help microfinance move forward.

1) Continue developing holistic banking services. It is apparent that microfinance is not simply micro-credit. Micro-savings has proven to be monumental in producing economic growth. The introduction of safe, reliable, and secure savings accounts can dramatically improve the lives of the poor. Micro-insurance is another service that has produced positive results. If microfinance can continue to branch out and deliver a variety of banking services to meet the needs of economically impoverished people, it can become an extremely powerful economic force.

2) Susatainability: business viability without mission drift. This to me is the pinnacle of what decides microfinance's future. There is already a lot of talk surrounding the idea commercializing microfinance, and I do worry about extreme interest rates and the possibility of mission drift when profit-motivated investors enter the mix. But I also think that for microfinance to live up to its potential it must become self-sufficient. The key is sustainability. While that word is overused, I think it sums up what I hope for microfinance's future. If microfinance can achieve commercial viability without losing its focus on fairly serving the poorest of the poor, its potential is through the roof. For this to be done, leaders in microfinance will have to figure out the balance between commercial viablity and social empowerment, and between commercial sustainability and economic exploitation.

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Permalink Reply by Zarif Islam on February 21, 2010 at 5:03pm

Microfinance has done a lot of good for many developing areas of the world, but in my opinion it has the potential to do much, much more. The problem is that to reach that potential it must have support. Obviously, support will come with increased awareness of and more involvement in such programs, but I would take it a step further to say that a pluralistic approach to microfinance must be taken. An approach that not only provides individuals with the opportunity to receive microfinance loans, but that allows for a greater say in a countries’ policy-making that would allow such an individual to be
successful. There needs to be a push to make governments and other large institutions aware of the role that microfinance plays in development and what kind of policy measures may be mutually beneficial.

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Permalink Reply by Jessica Loiacono on February 21, 2010 at 8:34pm

Though I am somewhat of a newcomer to the practice of microfinance, it is obvious that it is far from perfect or the cure-all that many assume it to be. That being said, the potential of microfinance to revolutionize the way development and foreign aid are practiced (and an overhaul is certainly needed) is enormous. I believe wholeheartedly with Muhammad Yunus's proposition that people should merely be given the tools to create a better life for themselves. Because access to credit underlies all that improve quality of life (health, education, etc), it really has the potential to change the world. There are several things I think microfinance should address to really be successful:

1. Continue to constantly monitor, modify, and adapt: Obviously, the best solutions are the product of years (and decades) of trial and error, evaluation and adjustment. Microfinance is no exception. I think it's important for practicioners to avoid sensationalizing microfinance for fear of it becoming another band-aid solution, as so many other fantastic ideas in development have. Microfinance solutions must be adjusted to fit the area and population they are serving This includes regions in or recovering from conflict. Conflict areas need special attention and different strategies if they are to be successful.

2. Remember the big picture: It is my belief that just like there is no one cause of poverty and underdevelopment, there is no single solution. Microfinance has been most successful when used in conjunction with education initiatives, health care provision, political representation, etc. They are all connected, and to abandon the pursuit of any one need would be a disservice to those trying to climb out of poverty.

3. Similarly, remember environmental issues: This one is pretty self-explanatory. There is no point in increasing your quality of life if we won't have a world to enjoy it in. As the world experiences huge food shortages, it's important to take care of what gives us food. There is potential to feed and house the whole world, we just have to be smart about our resources

4. Data collection! This one is so important and goes along with evaluation. We have to be able to quantify microfinance's success in order to truly deem in successful. Experts around the world are calling for data and proof.

5. Sustainability- Is it possible? Can microfinance institutions exist without subsidies and grants? I'm not convinced that the answer is a resounding yes. Those working in microfinance need to either a) work towards true self-sufficiency and figure out how it's possible (the better alternative) or b) admit that microfinance is a way of using foreign aid/private giving more effectively.

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Permalink Reply by Elvira Omondi on February 21, 2010 at 11:22pm

I would like to see decreased costs of lending accompanied by increased number of lendees.

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Permalink Reply by Cristina Roman on February 21, 2010 at 11:25pm

There is increasing press surrounding the idea that microfinance keeps individuals in poverty because of the exorbitant interest rates. I think this factor has to be weighed against the idea of self-sustainability within MFIs. I think the irony that microfinance institutions promote self-sustainability while continuing to seek grants is interesting. I would like to see a “practice what you preach” method of operations, but I’m not sure that’s possible, which ties back into the idea of high interest rates. Should MFIs charge higher rates in order to be self-sustainable when that may negatively impact clients?


As Paloma said, I think the harsh criticism regarding MFIs could ultimately benefit them if channeled effectively. Social Enterprise Associates and SEEP Network are currently working on the Microfinance Reporting Standards Initiative, which I believe could be key for small to medium-sized MFIs- and I apologize for the shameless plugging :) This initiative will offer much-needed transparency, regulation, and uniformity across the field. Of course, this is just one piece of the puzzle.

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Permalink Reply by Xinquan (Paul) Gu on February 22, 2010 at 1:23am

1. Shift towards sustainability, for-profit model

Microfinance is currently only serving a tiny fraction of the the world's people with no access to capital. Given the number of such people, profitable microfinance would have dramatic room for growth. Instead of being dependent on donations, microfinance would have direct access to world capital markets, giving both purely profit-driven as well as socially-conscious investors an avenue to meaningfully contribute to the microcredit movement. Efforts such as those by Unitus are already transforming MFI's across the world from non-profit to for-profit models, allowing them to tap into the vast resources of the financial markets. This development would be revolutionary for the MFI industry, in the experience of some MFI's allowing the expansion of services to 100x as many needing clients.

In addition, for-profit microfinance would uniquely create the appropriate relationship between positive contribution to the community and monetary reward. This direct relationship between generating positive social value and earnings is the way the capitalist system is supposed to work to optimize social results.

2. Focus on business training/consulting

While many MFI clients do have entrepreneurial ideas, they often lack the business skills the optimize use of their microloan and future business gains. For example, lack of cash flow planning or basic accounting can severely hinder even a business with a great idea. As such, providing basic training to MFI clients is something that has the potential to drastically increase the returns on loans and improve the welfare of MFI clients. That said, this training must be provided in a cost effective way, either through group classes or self-help books, in order to keep down the per client costs of MFIs.

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Permalink Reply by Sophia Dawkins on February 22, 2010 at 4:09pm

I hold the adamant belief that people cannot empower other individuals; people can only empower themselves. One aspect of microfinance programming that development interventions under-emphasize is the power of microsavings groups to sow the seeds of confidence and self-empowerment.

Where individuals face resource constraints or lack start-up capital for income generation activities, microsavings groups provide a low-risk starting point for people to pursue their aspirations. The Mpendulo Project run by the Nelson Mandela Metropolitan University in the Eastern Cape, South Africa shows just this. In environments like the Jeffreys Bay Township, where Mpendulo operates, beneficiaries struggle to honor loans of any type. However, savings groups have provided the foundation for participants to achieve basic economic resilience before establishing credit relationships.

Savings groups serve as building blocks so that the very poorest can reduce their exposure to risk and pursue their hopes. I hope to see greater focus on savings groups as institutions that share the fruits of the microfinance industry with the most vulnerable.

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