Archive for: mfis

A Negros Women For Tomorrow (NWTF) business development officer demonstrates the features of a solar portable lighting device during a group meeting in Palawan, the Philippines.

Offering financial products that enable poor clients to purchase clean, low-carbon alternatives to kerosene, firewood and other conventional fuels is perhaps the most direct way in which microfinance can be mobilized to combat climate change and preserve ecological resources.

Of course, from the perspective of a client who lacks access to modern energy, the appeal of alternatives like small-scale solar charging devices and efficient cookstoves, is not, nor likely ever will be, about cutting carbon. Fortunately, it doesn’t have to be. Energy poor households and businesses aspire for access to solutions that save them money and time, deliver superior and higher levels of service, facilitate new forms of work and leisure, and maximize convenience. This means that clean energy end-user finance is rooted in the immediate needs and preferences of clients, and therefore driven by bottom-up consumer demands rather than top-down appeals to environmental stewardship. Read the rest of this page »

With around 20 million borrower accounts estimated for March 2012, India still has one of the largest microfinance industries in the world – even though the number is much lower than 32 million in October 2010 when the microfinance crisis began.  However, in March 2012 it also had the dubious distinction of having perhaps the worst portfolio quality in the world (at the national level).  Since October 2010 commercial bank lending to MFIs, which made up over 70% of their funding, has been consistently drying up mainly because of perceived political risk. Read the rest of this page »

Some time ago, I was on a microfinance panel organized by USAID together with two respected industry leaders:  Shari Berenbach, Director of USAID’s Microenterprise Development Office, and Sam Daley-Harris, the out-going Director of the Microcredit Summit Campaign.  Somebody from the audience told me afterwards: “It was fascinating to hear three such different views” – and I suspect she was just polite enough not to say “totally disconnected.”

A recent déjà-vu moment reminded me of that conversation and the conclusion that I had come around to:  we weren’t that disconnected and probably had the same starting point, but we stressed three different directions of evolution from the original microcredit idea. These three directions are not mutually exclusive.  In fact, from a development perspective they are all required.  We just each stressed one dimension that seemed more plausible or comfortable – perhaps for a combination of reasons such as institutional mandates, philosophical beliefs, and pragmatic biases. Read the rest of this page »

The most rapidly obsolescing part of my book, Due Diligence, is chapter 6, which reviews the statistical evidence of the impact of microfinance on poverty. Since I put the text to bed, working papers have appeared that test microcredit in Mongolia and Bosnia & Herzegovina and microsavings in Malawi and Chile (though the latter is marked “do not cite or circulate”). There’s also the Morocco microcredit study, which I didn’t catch wind of until too late in the book production. Add all these to the trials of microcredit in India and the Philippines and of microsavings in Kenya—the one that initiated this wave of research in 2009—and we have five credit studies and three savings ones. Read the rest of this page »

The Arab Spring took everyone by surprise. There was a series of underlying factors, among them being  a young and growing population, improved education levels for men and women, and decreasing fertility rates, all leading to a vast number of people seeking better economic and social opportunities and questioning traditional patriarchal structures. In addition, unemployment, corruption, and increasing inequalities or concentration of economic power in the hands of a few, led to simmering frustration. As access to new technologies (e.g., mobile, Internet) facilitated the organization of a civil movement, massive uprisings started across the MENA region, now referred to as the Arab Spring, in regard to hopes of a brighter future. Read the rest of this page »

Fresh Data from IFMR’s Study Reveals a Complex Situation

The crackdown by the Andhra Pradesh state government on microfinance institutions was based on a number of assumptions about what’s happening with microfinance here in India.

[In case you haven’t been following what’s happened over the last month, check out a good overview of what’s happened by David Roodman here, and other analysis by N. Srinivasan, Vineet Rai, Beth Rhyne, and the Wall Street Journal.  A sampling of articles in the Hyderabad press that helped precipitate the backlash is here:
Times of India September 29, 2010, Times of India October 18, 2010, Times of India October 26, 2010, Times of India October 28, 2010]

For those not familiar with Indian microfinance, an important distinction to make is that the controversy now is about one type of microfinance institution in India, which makes up about half of the microfinance market.  These are what I’m calling “MFIs” here – institutions (both for-profit and not) that make loans to groups of five women in “joint-liability groups,” mostly following the original model of the Grameen Bank in Bangladesh.  MFIs give loans directly to these groups of women, but are not allowed to accept deposits.

The other half of the microfinance market in India are “Self-Help Groups,” or SHGs.  This model has been promoted by the Indian government, and involves larger groups of roughly 10-25 women, who save amongst themselves and distribute their pooled savings as credit amongst the group.  Since the late 1980’s, these groups have been increasingly “linked” to commercial banks – meaning the bank gives a loan to the group, the group distributes credit to its members as needed (which is a lot more money than if they only lent out their pooled savings), and the group is responsible for repaying the bank loan, sometimes directly to the bank, sometimes through a separate “SHG promoting institution.”

The ordinance passed by the Andhra Pradesh state government was targeted at the first group of institutions, “MFIs,” and is at least partially (perhaps mostly) intended to stop them from competing with the second group of institutions, SHGs.  It’s only the MFIs that are affected by the current crisis.  Clients in Andhra Pradesh have essentially stopped repaying MFI loans, but SHG loans continue to be repaid for the time being.  It’s worth noting that some of the loudest complaints about MFIs have come from the Andhra Pradesh state agency that oversees and promotes the SHG program.  See here.

More than six months before these problems came up, the Centre for Micro Finance at IFMR Research, with funding from the Banker’s Institute for Rural Development at NABARD, conducted a household survey of 1,920 households in rural Andhra Pradesh to understand their access to and use of financial services.  Led by Doug Johnson and Sushmita Meka, this was a representative survey of the state’s entire rural population, rich and poor, and collected detailed information on household savings and borrowing from SHGs, MFIs, banks, moneylenders, friends and family, and other sources.  What we found is startling, and challenges many of the assumptions people have about microfinance in Andhra Pradesh.

Assumption 1:  The poor in Andhra Pradesh are “over-indebted” because of microfinance institutions pushing loans on them that they don’t need.

Debt is indeed prevalent in rural Andhra Pradesh.  An estimated 93% of all households have some sort of loan outstanding.  But only an estimated 11% of rural Andhra households had a loan outstanding from an MFI.  In contrast, 37% of rural households had a loan outstanding from commercial bank, 53% from an SHG, and a staggering 82% had a loan outstanding from an informal source, including friends, moneylenders, landlords, and others.

Overall indebtedness amounts are driven by informal loans and bank loans.  For people with loans outstanding, median outstanding amounts are Rs. 35,000 ($778) for informal loans and Rs. 20,000 ($444) for banks, but only Rs. 8130 ($181) for MFIs and Rs. 4600 ($102) for SHGs.

Assumption 2:  People frequently take loans from multiple MFIs, sometimes using one loan to pay off others.

“Multiple borrowing” is rampant.  Eighty-four percent of households had at least two loans outstanding, and one household we spoke with had 19 loans.  But the vast majority of these loans are informal.  Of course, even if we ignore informal sources, multiple borrowing is still pretty common.  But it’s not limited to people who lend from MFIs.  Multiple borrowing from banks and SHGs is pretty common too.

• 17% of households with an SHG loan outstanding had multiple SHG loans outstanding, and 58% had at least one more loan from a formal source.
• 26% of households with a bank loan outstanding had multiple bank loans outstanding, and 74% had at least one more loan from a formal source.
• 28% of households with an MFI loan outstanding had multiple MFI loans outstanding, and 82% had at least one more loan from a formal source.

We also find evidence that people who take multiple loans frequently take them out at the same time and for the same purpose, rather than staggering them as you would if you were using one to pay off the other.  This bundling of several loans suggests that many people just find it difficult to get all of the credit they need from one place.

Of course, just asking people whether they use new loans to pay off old loans may be a simpler way to answer this.  And of course they do.  Twenty-five percent of MFI loans are used, at least in part, to pay off other debts.  But so are 20% of SHG loans, and 15% of bank loans, though only 7% of informal loans.

Usage of Loan Money by Type of Lender

Assumption 3:  MFIs are specifically targeting existing Self-Help-Group members with loans.

Well…maybe.  Seven percent of households have both an SHG loan and an MFI loan outstanding.  And having an SHG loan makes a household 6% more likely to also get a loan from an MFI compared to households who don’t have SHG loans.  Clearly there is some targeting of the same population, but not a lot.

These results call into question the common impression that rural households in Andhra Pradesh are saturated by private MFI lending.  If anything, the survey shows that there may still be considerable room for expansion in the state given the high levels of borrowing from informal sources.

The point isn’t that Indian MFIs don’t need a greater degree of regulation – by their very success, Indian MFIs have achieved a level of importance that would warrant more careful and dedicated scrutiny by the appropriate regulatory authority (which is almost certainly not the state government).  But ill-conceived measures based on knee-jerk reactions which don’t take into account the needs of microfinance customers will only end up hurting the poor in the end.

–Justin Oliver

This post kicks off a special blog series on the microfinance crisis in Andhra Pradesh, India. Over the coming weeks we’ll be featuring a variety of voices on the issues raised by this crisis and what it means for the future direction of microfinance. We welcome your participation in this discussion through comments.

Dear Sanjay,

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,
Alexia.

After reading Neil MacFarquhar’s article “Banks Making Big Profits from Tiny Loans”, I was shocked to hear about how exorbitant are the interest rates that some microfinance institutions (MFIs) around the world are charging their borrowers and saddened to hear that the focus of these institutions has clearly drifted from helping the poor.  However, in my experience, founding Wokai, a China-focused microfinance organization (www.wokai.org), I have to point out that high interest rates is not a universal problem.  In fact, China is facing the opposite issue: interest rates charged by MFIs are too low.

Read the rest of this page »

A couple of interesting nuggets from the Global Investment Congress in New York last week: first, as my colleagues Xavier Reille and Jasmina Glisovic-Mezieres have highlighted in a recent Web article, microfinance investment vehicles are currently over-liquid. It’s quite a reversal from just a year ago, when in the context of the spreading financial crisis, the concern was lack of liquidity. Today instead the issue for the funds is placing money. Indeed, responsAbility just  announced that it has temporarily suspended new subscriptions to its Global Microfinance Fund in order to reduce the share of liquid assets from 30 percent to 10 percent of the fund volume. (The plea from the microfinance networks was to reach down to Tier II and Tier III MFIs, but as Ann Miles of BlueOrchard pointed out, that’s easier said than done: “We’d love to go deeper in the market and invest in Tier IIs and Tier IIIs,” she said, “But as fund managers wearing our fiduciary hat, we can’t do that. We need investors who are prepared to take more risks…”)

Read the rest of this page »

Jake Kendall, Program Officer at the Bill & Melinda Gates Foundation and guest blogger for the Microfinance Blog shares his thoughts on recent research that explores ways to increase savings. 

A key psychological barrier to savings is that the payoff (the future purchase) is remote, whereas the pain of forgoing current consumption is immediate, and therefore more salient. Recent research by two different research teams highlights ways to help clients overcome this barrier.

Dean Karlan and Sendhil Mullainathan of the Financial Access Initiative conducted randomized field experiments in Bolivia, Peru, and the Philippines, in which banks sent clients direct mail or SMS reminders to save. On average, across the three experiments, the authors find that reminding clients to save increases their savings by only 6%.

But as any good marketer knows, how  the reminder to save is communicated makes a big difference. Reminders that refer to a specific savings goal (for example, buying a scooter) connected with a mention of the means to achieve it (for example, making a deposit) were the most effective, inducing 16% more savings than regular reminders in Peru. The authors posit that by making the future payoff to savings more salient in the present, they helped clients overcome the temptation to consume.

Consistent with this theory, the reminders were particularly successful for clients who found it especially difficult to trade rewards in the present  moment for a reward in the future relative to the easier task of trading between a reward that will merely happen soon vs. in the future (which in the literature is referred to as being “time inconsistent”). For these clients, getting any kind of reminder increased savings by 47% relative to clients who didn’t get reminders.

Microfinance institutions (MFIs) often require borrowers to save a certain percentage of their loan with the MFI to act as collateral. Through in-depth interviews with clients of Pro Mujer in Peru, Michael Ferguson of Microfinance Opportunities finds in a separate study that mandatory savings features of some microfinance loan products are highly valued. A majority of clients reported that the mandatory savings requirement helped them commit to reaching their savings goals, and some clients indicated that mandated savings are less painful than other modes of saving because the deposits are lumped in with the loan payments they were already making.

Probably the most pervasive challenge the poor face in saving is that they live too far away and would pay too high a fees to want to deposit their money with a financial institution. The two studies cited above indicate that, beyond lowering transactional barriers, innovations that reduce the salience of the  “painful” part of savings (making the deposits) or increase the salience of the “pleasurable” part of savings (the future purchase) are also important considerations.