Comments on: How Sustainable is Microfinance, Really?

By: Isha Wedasinghe Miranda

Isha Wedasinghe Miranda — Fri, 08 Jan 2010 05:35:42 +0000

Strength in the board of governance to the MFI productivity.
It is all depends on Good Governance and Practice and vision .
It is the strong relationship and social responsibility to their stakeholders. Most noted segment is highly productive application of the guide is to use it to improve social performance by analyzing governance.
This governance tool allows the MFI to design and put into place processes that ensure consistency between various aspects of its social mission and its activities. For example, through analyzing governance, the MFI will be able to identify strengths and weaknesses affecting the impact of its outreach strategy: such as
 Do actors have a shared vision of the outreach strategy?
 Is information available on the profile of clients?
 Do operational decisions lead to effective outreach?
 Are loan officers able and motivated to reach target groups?
 Do monitoring procedures assess the implementation of the outreach strategy?

all above needs to address to be sustainble in the industry. It does not matter if the organizations is CBO or NGO or INGO in all levels. But important is will this organzations has the capacity for broader outreach. Productive product and could MFI members have the benefits too.

By: Richard Rosenberg

Richard Rosenberg — Wed, 21 Oct 2009 13:15:16 +0000

I think Peter is right: microfinance shouldn’t be identified with microenterprise development. Most of the credible studies of loan use that have come to my attention show that much (often most) of the loan proceeds are used for non-business purposes. There’s a bit more discussion of this point in my book review of Portfolios of the Poor on the Microfinance Gateway (http://www.microfinancegateway.org/p/site/m/)

Rich

By: Peter van Dijk

Peter van Dijk — Tue, 22 Sep 2009 12:03:26 +0000

Dear all,
Money and Financial Services make purchase and exchange of all goods and services possible, be they physical protection, shelter, health care, food, transport, good quality water etcetera. Microfinance is a tool to help poor and rural people to make better use of money (they have and need to survive) and financial services.
So the deepening and widening of a local financial sector, measured on a macro-level or measured on village level, can easily demonstrate the poverty alleviation effect Microfinance has, or not.
Enterprise development and ensuring that loans are used well for businesses goes well beyond the objective and influence of money and financial services. It has more to do with the business person’s self-confidence, his/her networks, the surrounding infrastructure, education etcetera.
I advocate strongly for a separation between micro-enterprise development and Microfinance in the context of financial sector development as decided by governments.
Kind regards, Peter

By: Devmag

Devmag — Tue, 04 Aug 2009 10:26:10 +0000

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.

By: Richard Rosenberg

Richard Rosenberg — Wed, 24 Jun 2009 20:48:28 +0000

A couple of comments re scale and client benefit:

(1) Santhanam says that sustainability is not closely tied to scale. The data supports him. Regression analysis by Adrian Gonzales of the MIX indicates that economies of scale in microcredit become relative unimportant early on in the growth cycle: the cost curve flattens out after about 3,000 clients. And of course, even below that level, higher costs can covered by higher interest rates.

(2) We’ve been told for years that microfinance gets people out of poverty. My non-expert reading of the economic literature on this topic leaves me agnostic: I don’t think we know the answer yet. But even if the main impact of microfinance is “just” consumption smoothing, that’s a big contribution to poor people’s well-being–see, for instance, the fabulous new book Portfolios of the Poor by Collins, Morduch, et al. Consumption smoothing is dismissed as a mere palliative only by people who seldom face any threats to their own basic consumption needs.

By: V.Rengarajan

V.Rengarajan — Wed, 06 May 2009 16:26:54 +0000

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.

By: S.Santhanam

S.Santhanam — Sat, 02 May 2009 08:05:12 +0000

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.
santhanam.s

By: S.Santhanam

S.Santhanam — Sat, 02 May 2009 08:04:52 +0000

By: Peter van Dijk

Peter van Dijk — Tue, 28 Apr 2009 04:01:13 +0000

Dear all,

I find it sad that after so many years, some still limit Micro-Finance to credit and defend the idea that MF should include all kinds of non-financial services.

In his response to Richard and me, Dr. V. Rengarajan, does explain my point that money is in fact the universal tool for acquiring all goods and services all people need for survival and strengthening their asset base for a better and better manageable future, away from the insecurity, vulnerability and dependence of poverty (simply defined as “not having”).

For Micro-Finance to achieve the potential I feel it has in poverty alleviation, it needs to be specific and clear (resulting in a common mindset of all stakeholders) and not be a subject for research and consultancy that has developed such a multi-billion dollar industry in the world.

The poor need a safe way to manage the money they depend on for day-to-day life, and it needs to be THEIR money, not others’, not debt or charity (such socio-political debt or charity can be part of social safety nets for the poorest of the poor that have no access to other networks, but they need to be small minorities so that their care can be manageged in a sustainable manner as governments of the wealthy nations do).

Kind regards, Peter

By: V.Rengarajan

V.Rengarajan — Sat, 25 Apr 2009 14:03:10 +0000

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