April 21st, 2009 at 3:08 am, Peter van Dijk ()

Dear Richard and all contributors,

I would like to add something that has so far I think not been mentioned but is I assume the final objective of MF, namely more money that can safely be managed by the poor, rural and other citizens excluded from formal finance (so that they get less poor on a sustainable basis).

If one considers sustainability of MFIs an issue on its own there is the risk that the Do-Gooders of this world, the Robin Hoods, politicians, political hopefuls, religious organisations and charities, oppose such sustainability by using the classic argument that financial businesses are like what they often call are all banking professionals (which I think is not true, there are many socially committed bankers – and I do not mean those billionairs that throw some money around as charity), namely thieves, and that the poor cannot afford financial business practices. This was true when MF became a hit in the 1990-ies, and it is still a powerful argument that leaves many hardened Microcredit and Microfinance experts without a powerfull and accepted response.

If MF has the role of enable poor, rural and excluded citizens to manage better and safely their money, then they will become less vulnerable, is it not? If that is so, the conclusion can be that the litmus test for MFIs is whether they sucessfuly attract deposits from the poor, rural and excluded citizens and they can lengthen and stabilise those deposits with concrete appropriate savings products and by intermediating such deposits successfully. Poor, rural, excluded people will do their best to select those organisations that they consider are the best in safeguarding and managing the money they depend on from day-to-day. You can guess what performance indicators they look for in such (micro-)FI…..

If the last conclusion is correct, I wonder whether development finance institutions (DFIs) or International Financial Institutions (IFI) apply the right funds and supporting instruments for that purpose. Many IFIs, DFIs work with more charitable organisations and often use trustfunds (not commercial funds) to set up and fund local MFIs that thus have weaker incentives to attract local deposits or that in other ways distort competition with local MFIs that want to link up with local banks or transform themselves to deposit-taking FI’s. Finally, in my logic and experience, many foreign government owned organisations, agencies and private charities do not have an advantage in local know how over local governments; so why do people argue against local government owned MF organisations (banks, MFIs, programs, such as BRI as you rightly mention Richard) why not against the foreign organisations? (Would you now also argue against the new admin of the USA owning and managing local banks and prefer foreign sovereign funds to manage US banks that are now requested to rely more on public US savings instead of on the interbank market?) I really do not understand that.

Kind regards, Peter

April 25th, 2009 at 9:03 am, V.Rengarajan ()

Thank you Richard for your positive response to my views on sustainability . Some observations on Peter’s posting.
1.The final objective of MF as assumed by Peter is “ more money that can be safely managed by the poor. Rural and excluded from formal finance.This requires some clarity in the MF platform. Here the factors such as money (micro credit) MFI, management of money, subsidy are all the “means” for achieving the final objectives of MF that is reduction of poverty or vulnerability in the poverty sector.(The goal of CGAP/WB under MF) Under the concept of Micro finance, the sustainability of this final objective (benefit at clients’ level) need to be sustained and it should be tested through a high quality impact research as asserted by Richard.. Any research or study on MF or MFI should not therefore confine to the sustainability of the means alone. Since they are all interrelated.
2.The safe or successful management of money may reflect the quality or efficiency of the ‘means’ (the institutions and the players in the supply side) and therefore not necessarily on the sustainability of final objective of MF i.e. reduction in poverty at client level. It therefore calls for clear identity of final objective of MF
Some basic theoretical facts on ‘money’ (micro credit) functioning at grass root level, I hope, are useful for MF analysis
1. ‘Money ‘ alone from any sources be it formal, or non formal or informal , cannot fetch the desired level of achievement of objective/ goal namely reduction of poverty or vulnerability or enhancement of social and economic status of poor ,rural , and excluded ones unless it is linked with physical supporting system for its functioning. and delivering the expected good. (In Indian banking parlance, physical supporting system, otherwise called forward and backward linkages, represents non credit inputs such as capacity building, financial literacy, availability of raw materials, marketing, transport, linking roads, storing, prices, health, education etc besides micro insurance in rural front in particular). This linkage of “money with adequate supporting non monetary inputs is ‘sine quo non ‘ while micro financing the poor community if poverty reduction is to be sustained at micro level.
2. It is unfortunate that most of the discourses on MF and MFI have a limited assumption at surface level that when money (Micro credit) is delivered to the clients, the ultimate goal of poverty reduction or decrease in vulnerability is ensured.

3.’Money’ is not the direct and readily consumable input. The money is to be converted into the required forms of development inputs. The money is only a medium of exchange facilitating the transaction of goods and services. Here again the exchange or transfer could be effected only in the presence of those goods/services (timely and adequately) as well the capability of the poor clients for such a transaction. The safe management of money at client’s level with the expected level of income generation and capabilities for depositing the surplus largely hinges on the effective integration with supporting input system with micro credit money in the demand side on the one hand and the quality of MFI’s products and services matching to the needs of the poor and the incentives (like lottery prizes, insurance coverage, scholarship for poor children by BRI and Bank Pertanian Malasyia) from supply side on the other.
(For innovative MF products and services in selected countries in Asia refer Dr.V.Rengarajan ‘Extending a Helping Hand: Matching the Financial Needs of The Rural Poor URL;WWw.apraca.th.com/html/8books/books/14extendinghelphand.html 1998

May 2nd, 2009 at 3:04 am, S.Santhanam ()

Dear all
In my opinion, scale is not an issue for attaining sustainability by an mFI. mFIs with just 1000 clients can become sustainable and at the same time, mFIs with over 100,000 clients may not be sustainable. As mentioned by Rengarajan and Peter, sustainability should be seen in the context of wealth creation of the client combined with the wealth creatin of the mFI concerned and not the wealth creation of the mFI per se. A client of mFI is basically a poor person. By joining / making use of the services of a particular mFI, whether he/she has come out of poverty should be the prime measure of sustainability. But, mFI needs time to make it happen. So, it would depend upon factors such as age of an mFI, proportion of its clients who have crossed over the poverty line to the total clients, per capita cost of providing services to clients and changes in net surplus/ deficit in operations of the mFI. Of course, one major assumption here will be that a client to cross the poverty line, he/ she would take up some income generating activities or use resources to reduce debt burden or increase opportunities for family to create wealth. Two examples are given below:
mFI- A: Client base – 1000; age of mFI: 3 years; 200, 400, 400 clients joined each year; about 250-300 clients have gone out of poverty of which large number of them are those who joined in the first year; per capita cost of providing services by the mFI either reducing or stable; change in net result of operation of the mFI is positive and in proportion to the clients who have crossed the poverty line. Then, one can reasonably claim that the operations of that mFI are sustainable.
mFI-B: Same as mFI-A excepting the fact change in net result of operation of the mFI is positive and NOT in proportion to the clients who have crossed the poverty line. Then, one can say that the operations of mFI-B is not sustainable.
It should result in a ‘WIN-WIN’ situation. If not, it is not sustainable. After all, what we want is ‘Social Banking with Profits’which institutions like BRI (a govt outfit) could demonstrate, while a number of mFIs in private sector are unable to do so even after providing mF services for decades.

May 6th, 2009 at 11:26 am, V.Rengarajan ()

Thank you Santhanam for reiterating the point that primary focus of MF should be on sustainability at client level .I agree that prime measure for such sustainability is in terms of whether the MFI clients who used their services, have come out of poverty line. Here I wish to reemphasize that crossing the poverty line (whatever agreed line) at client level need not be at a point of time or one time affair. Once the client crosses the poverty line , that level should be sustained permanently with or without depending any further any assistance from the organization which stimulated the benefit at first. These kind of sustainability at client level alone go a long way in making a dent in global poverty canvas.

August 4th, 2009 at 5:26 am, Devmag ()

Hello everyone!
This was quite interesting, however, I am not sure whether sustainability of microbanking is exactly tackeling the issue of fighting poverty. Of course, it is an important aspect as no serious organization wants to throw good money after bad.

However, I agree somewhat with Murdoch (1999) – the question is not whether or not is completely sustainable, but whether it actually can achieve its objectives – namely reducing poverty and improving the quality of the lives of the benefactors.

This is an issue of impact assessment, where the evidence is far more unclear. It appears that there needs to be a shift in focus from microfinance delivery to support the development of human capital and skills necessary to foster development of those microenterprises; most of them do not grow much, which is I think even more important of an issue, which should be tackled first hand. As through the growth of microfinance customers’ businesses, eventually als microfinance institutions can “graduate”.

And here, maybe microfinance potentially distorts some things. It makes becoming a small scale entrepreneur possible for many individuals — but do they really have the skills to graduate their business? Or do they just pursue their activities to smooth consumption, with no intention to grow?
These kind of businesses will not provide growth and thus, jobs for others, thus, not effectively reducing poverty.

Maybe there needs to be a shift in focus, away from the wide availability of microfinance to a deepening of the activities – but these are just my few cents.

March 29th, 2011 at 9:25 pm, Weekly Round Up March 30 – 2011 | Connect the Dots ()

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