“You need different regulation for microfinance; sometimes that’s hard to get.” — Lars Thunell, Executive Vice President and CEO, International Finance Corporation
What do actress Natalie Portman, former Senegalese president Abdou Diouf and deputy mayor of Paris Anne Hidalgo have in common? They are all signatories of the Paris Appeal for Responsible Microfinance, an international petition to clean up the microfinance sector.
Sometimes a good idea turns sour — especially when unethical forces enter into the picture and particularly when that good idea is unregulated. To a large extent, that is what has happened to microfinance. The industry, hailed at the outset some 30 years ago as a brilliant idea for solving global poverty, has been increasingly beset by unscrupulous and usurious lenders, some of whom charge their impoverished clients interest rates up to 100 percent. Some debtors, driven to desperation, have committed suicide.
STABILIZING MICROFINANCE AMID MISSION DRIFT
Now with the Paris Appeal, the sector is making a concerted effort to regain control of the global microcredit industry and stamp out illegal and unethical practices. This week, the secretariat of the Microcredit Summit Campaign, a project of the RESULTS Education Fund, a poverty alleviation non-profit based in Washington, DC, sent out an email asking for more signatories to the appeal, which was written by Convergences 2015, a non-profit discussion forum launched in 2008 that, according to its website, is the “first permanent platform in Europe dedicated to international cooperation, microfinance, social business…sustainable development…social entrepreneurship and to a social and solidarity-based economy aimed at reducing poverty and promoting the MDGs.”
“To answer the excessive commercialization of microfinance and other drifts brought about by such commercialization, the Paris Appeal brings back fundamental values to the sector and offers a series of actions aimed at improving practices and impact,” according to European-Microfinance.org.
DOUBLE-OBJECTIVE: FINANCIAL VIABILITY AND SOCIAL IMPACT
According to the Paris Appeal, the signatories believe that microfinance institutions (MFIs) “must pursue a long-term double objective of financial viability and social impact…by leading a policy of moderate interest rates, and by complying to the highest standards of information and client protection.” The appeal also calls for governance, efficient reporting and control systems, a system of supervision, a prevention of mission drifts and a code of conduct to which microfinance investors must subscribe.
“To breathe life into this fundamental basis of rules and regulations,” the appeal states, “in the respect of the diversity of microfinance, the signatories are launching an appeal for Responsible Microfinance General Assemblies, to be organized in each greater region of the world and for each large category of stakeholders, under the aegis of an Organization Committee mandated by the G-20.”
A GROWING INDUSTRY NEEDS REFORM
Overall, microfinance has played a positive role in the campaign to eradicate poverty. According to the State of the Microcredit Summit Campaign Report 2012, over 137 million of the world’s poorest received a microloan last year. While that is an impressive number — especially considering that a decade ago, that number was 19 million — it is dwarfed by the over 3 billion people living on less than a dollar a day, almost half the world’s population.
But while the sector needs to grow — particulalry in the areas of insurance, savings and money transfer — it is also clear that reform is needed before it gets too big to control. The Paris Appeal is necessary step in the right direction.
From PR Web
Microfinance: Is there really a crisis? That is the question posed by an upcoming live webinar on 4 October, organized by Local Voice 4 Development. Panelists include former South African First Lady Zanele Mbeki and UN advisor Sanjay Sinha.
Until recently, Microfinance was globally perceived as one of the most powerful instruments in the fight against poverty. Today, media are shining a spotlight on reported abuses, the public is asking questions, funders are losing interest and governments are considering intervention. The Local Voice 4 Development webinar aims to dispel the perception of crisis and solicit opinions, information and perspective from key industry leaders.
Amsterdam-based organizer Bob Bragar, a highly regarded professional within the industry, hopes the webinar will raise awareness and bring people together to understand what is really going on in the industry. Panelist will share their insights from different organizations working on the ground around the world. “This webinar is not just a presentation,” says Bragar: “It will be a place for discussion where everyone will be encouraged to interact.”
- Zanele Mbeki (South Africa), former First Lady and chair of the Women’s Development Bank Trust
- Sanjay Sinha (India), managing director of Micro Credit Ratings International and a member of the UN Advisors Group on Inclusive Financial Sectors
- Luis Derteano Marie (Peru), president of Grupo ACP, a leading microfinance investor in 10 countries throughout Latin America
- Mikhail Mamuta (Russia), director of the Russian Microfinance Center and president of the National Partnership of Microfinance Market Stakeholders
- Damian von Stauffenberg (Germany), founder of MicroRate, the world’s first rating agency specializing in microfinance
To attend, REGISTER HERE
Local Voice 4 Development is dedicated to the idea that local leaders are the key to solving local problems: “We believe in development. We believe in dialogue. And we believe that local voices must lead this dialogue if action to combat poverty is to have lasting effect. Our mission is to provide a forum for committed people around the globe to confront the slow pace of progress. We are here to talk and, more importantly, to listen.”
From Next Billion
In the quest to reduce and eventually eliminate poverty, there exists no silver bullet. Poverty is a complex problem that requires the cooperative assistance of people from the top to the bottom of the economic pyramid. Economic stimulus through access to capital for microenterprise or personal use is one instrument that has experienced widespread accolades as well as criticism as it has grown in size and popularity.
Microcredit, or microfinance, more broadly, has taken the bottom-up approach of providing access to capital to those who previously did not have the opportunity. As microfinance has grown, its overlay between driving “real” impact using semi-traditional economic methods has made it the darling of social enterprise. Early successes and rapid growth have even inspired some Microfinance Institutions (MFIs) to go public. As access to capital became more widespread, perfect-storm-like conditions began forming in conjunction with a global recession. Repayment failure rates have started to rise, and areas like Andhra Pradesh have been saddled with accusations of corruption and abusive lending practices.
Initially utilized to provide small amounts of capital infusion to microenterprises that were considered “unbankable” by larger institutions, microfinance has evolved to provide an increasing number of financial instruments to consumers at the bottom of the pyramid (BoP). This shift has not come without growing pains – pains experienced on both the lending and borrowing side of the equation.
As the industry matures, the cracks in the model have become more apparent. When an idea built from good intentions scales, hidden costs begin to grow and the call for more structure becomes louder. These cracks are not just on one side of the equation, and need to be addressed through collective effort by borrowers and lenders.
Splitting it out even further, lenders and borrowers can be categorized into two groups: bad-intentioned and good-intentioned.
|Lenders||Abuses position of power to extort profit from borrowers||Provides access to capital with ample attention paid to borrowers’ needs and lenders’ limits|
|Borrowers||Exploits (multiple) MFIs to seek rapid financial gain||Seek capital infusions with effective means and the intention to pay back over time|
This post does not focus on the larger picture of whether or not microfinance is an effective tool towards improving social welfare, but instead outlines some “next steps” moving forward to structuring the industry in a way that limits the impact of bad-intentioned lenders and borrowers, while providing a smoother experience for good-intentioned participants.
Improved Regulation of Lenders
The idea around regulating MFIs is nothing new. In 2001, The Financial Sector Development Department of The World Bank put together a self-described “work in progress” entitled “A Framework for Regulation Microfinance Institutions.” In 2006, a team from the IRIS Center at University of Maryland published a piece that compared microfinance regulation in seven countries.
The issue that remains is the inconsistent adherence to and implementation of these regulations and experiments. The experimentation stage needs to graduate to more collaborative and larger-scale implementation.
One of the causes of strife that has been clearly publicized by the media is abusive lending practices by MFIs. After the alarm was sounded, the Andhra Pradesh government took action and “introduced a new law to ban unfair debt collection practices and prevent borrower suicides and trauma.” The lack of oversight into interest rates and debt collection allows bad-intentioned lenders to prey on borrowers.
MFI oversight and regulation in conjunction with synergizing best practices among MFIs and NGOs from different countries is a step in the right direction toward preventing abuse. Cross-collaboration between MFIs that have experienced unique situations can help to build a strong set of best practices for the various lending environments and cultures that MFIs face.
Good-intentioned lenders, on the other hand, can be equally abused by bad-intentioned borrowers looking to obtain multiple microloans from various lenders with no plans of repayment. Understanding that many MFIs operate in areas with little-to-no (technical) resources, many lenders still rely on a paper tracking method. How are they to know that the borrower has received loans from five other MFIs in other areas before this one? Technology needs to be utilized (even in the most basic forms) to create a more effective tracking mechanism for borrowers and their ability to undertake another loan.
Support of Borrowers
The other side of the coin, especially relating to over indebting, comes back to financial knowledge and management of borrowers. Good-intentioned borrowers who unintentionally overburden themselves with more debt than they can handle pose another challenge to lenders. These borrowers should not be shunned by MFIs, but instead educated, encouraged, and advised on how to manage finances. The good intentions that microfinance was predicated upon need not be restricted to simply providing capital and walking away. There is a “soft” opportunity here to educate consumers and strengthen their credit position when they are able to take on more debt.
A quick scan on MixMarket.org can tell you the social responsibility provided to the clients that the MFI serves. Ranging from financial education to training and consulting, these services often correlate with the rating differential of the coveted “5 Diamonds” to the concerning “1 Diamond.” With an increased amount of effort, the MFI can protect itself from lending to borrowers who will end up defaulting and causing losses, while at the same time protecting borrowers from bankruptcy and increased hardship.
The deeper you go into the solutions, the more you start to understand that what is good for the lender is good for the borrower. Losses benefit no one, especially when the borrower does not have sufficient collateral to fall back on in the instances of default.
These growth pains are indicative of an industry that has achieved partial success but needs continued refinement. These enhancements should balance the industry’s mission to serve the unbankable with improved regulation to limit bad-intentioned participants.
Mollo from the Eastern Cape!
A couple weeks ago I travelled up to Kruger National Park where SEF held two days of meetings regarding operations policy and procedures. Since February I have been collecting policy recommendations from field staff and documenting the pros and cons of certain policies. It seems that there has been reluctance to drop certain policies, even after new policies have been created to replace them. The result is a confusing tangle of policies and general confusion about which policy to apply where. Over time, some policies have become best practices and some best practices have become policy, without the appropriate changes to the operations manual. The goal of the meetings was to rectify this.
Many issues were discussed at the Kruger meetings but I will only mention a couple here. Firstly, SEF has a policy that no two members of the same loan group should have an age difference greater than 20. The policy is meant to ensure homogeneity among groups. Over time, this seems to have become a best practice and many development facilitators simply write a memo to their supervisor if they form a group that violates the policy. The memos go ignored, for the most part.
Through some analysis we found that there is a significant difference in drop-out rates when one compares centres with groups that violate the age difference policy to centres that have no groups that violate the policy. Interestingly, it was found that the difference almost completely disappears when one compares violating and non-violating groups within the same centre, then averages this difference across all centres. This method of analysis controls for all ‘centre specific’ variables, many of which have their own effect on drop-out rates. In conclusion, it appears that the age difference policy is very likely to be dropped.
Another policy that came up regards gender within groups. SEF has two loan programs, one of which is for clients who come to SEF with existing businesses. Within these groups only, policy permits one male member. Through discussion at Kruger it was determined that SEF would no longer permit new groups in this program to have male members. There was strong sentiment that male clients become overly dominant within groups and problematic, especially as groups’ loan sizes increase. It was put well by one meeting participant who claimed, ‘males are not inherently bad clients, our model is just not appropriate for servicing them.’ Staff members were encouraged to think of models that might be appropriate for male clients in the future.
All in all, I believe the meetings were very useful. I know I certainly learned quite a bit from the discussions. Also, it was great to see Kruger Park. Being tardy due to elephant traffic is definitely a first for me. Don’t think I will have many opportunities to use that excuse in the future!
By Andrew Wismer
I have been working closely with a SEF regional manager who has been working in microfinance operations for quite a while and he has shared with me some of the staff shenanigans that he has seen in his time. Unfortunately, a big part of operations managers’ jobs is providing spot checks on the activities of their underlings. Managers work very hard at detecting acts of fraud committed by field workers – it is interesting to hear of what they have found in the past.
To understand fraudulent actions one must understand the system within which field staff work and the structure of their incentives…and disincentives. These of course directly impact decisions. For example, development facilitators (DFs) are given financial incentives to maintain clients. Even if a DF is providing the organization many new groups they can still miss out on certain commissions if they have a high drop-out rate. There has been an interesting case where one DF, wishing to maintain a low drop-out record, began entering his new incoming clients under the names of outgoing clients. One can imagine how problematic it is for a financial institution to be providing loans to individuals under false names. Signatures were forged… the whole ordeal was a mess.
Another opportunity for fraud arises when a client’s account falls into arrears. Through persistence most of these loans are still collected eventually, but in some cases loans are eventually written off as bad debts. There have been incidences where field staff workers, knowing that the organization has given up on certain clients, continue to solicit the former clients for their repayments, and then keep them for themselves.
In a most elaborate scheme, one development facilitator made themselves a member of a ‘secret’ group that was part of a centre but not to the centre leadership’s knowledge (all groups are part of centres which have a ‘centre leadership’ consisting of member clients). To take this loan for themselves the field worker even had to collude with the teller at the post office bank who issued fraudulent deposit receipts. In another recent case a development facilitator resigned from their position then proceeded to collect money from clients, ‘on behalf of the organization.’ Yeish!
These types of experiences are common among most microfinance organizations. Through experience managers come up with crafty ways of detecting misconduct. For example, regularly rotating staff to different areas – this can be revealing. Also, SEF no longer accepts copies of bank deposit receipts from clients/field staff; original receipts are mandatory. DFs are not permitted to touch any cash during centre meetings and there are regular and mandatory manager spot checks on pretty much all operations procedures. Regional managers spot check zonal managers, who spot check branch managers, who spot check development facilitators. Also, each centre’s leadership is provided with the direct contact information of branch managers so that they can report any misconduct they observe.
I mentioned that in order to understand these actions one must understand the system that field workers work within – this system extends outside the control of the organization. South Africa has very unique and strict labour laws which can greatly hinder employee discipline. An employee can be caught directly stealing from their employer and if the employer does not go through specific disciplinary steps which include an in depth hearing, testimonies before a third party, and so on, the employer can still be legally required to pay that employee their salary. Employees can simply not show up for work for weeks without making any contact, and under the current legal framework SEF cannot automatically let them go.
These laws are in place to protect existing jobs in South Africa but many would argue that they hurt job creation. As an example, one of my colleagues here told me that he would like to hire a maid but would never do so because he would be obligated to continue paying her even if her services were inadequate or even if she was caught stealing! These strict labour laws also make things difficult for the NGOs that work within South Africa. It is interesting to consider, SEF lends money to thousands of poor clients without collateral and yet the organization needs only one lawyer on staff: a labour lawyer who’s time is entirely dedicated to resolving human resource issues. Human resource legal fees and the need to pay employees even after instances of misconduct affect the interest fees that SEF must charge. What hurts SEF, hurts its clients – the poorest people of South Africa.
I just got back from another math session in Butterworth. There is a new education initiative rolling out here at SEF. Over the past month we have begun to provide math and Microsoft Excel training for operations managers. I have been leading math sessions at the Butterworth Zone office for the branch managers there – a group of seven in total.
Each manager has been provided a booklet that provides step by step explanations on how to solve certain problems and multiple practice problems for them to do on their own time. The curriculum was developed here at SEF and has a microfinance operations focus. Presently, in the first module of the curriculum, we are working on long division and calculating percentages.
Before starting with the math sessions I was given a briefing on the education system here in South Africa. I was warned to start with the very basics in my sessions as many South Africans have been let down by their education system. A student here may decide early in secondary school that they have no interest in math. Such a student may receive failing math grades all through high school and, as long as they pass their other courses, they will be pushed through the system. It is possible for a student to get all the way through secondary school and even attend certain post-secondary institutions without a grasp of basic mathematical concepts.
Given these conditions, it is important to note that SEF’s branch managers are still very capable individuals. Each manages 6-7 field workers and oversees the financial accounts of thousands of clients! You can imagine that they are busy people; hence the math training was met by some resistance at first but I they understand now that for them to grow in the organization they will need to continuously be upgrading their skill base. It is especially important for SEF to invest in its field staff this way because all managers are hired internally in the operations department.
On another level, I think that this program will also have a positive impact on staff morale and turnover. When staff sees that their employer is investing in their professional development, loyalty is created. The whole microfinance model is based on loyalty and trust. It is great to see that we are now strengthening this among staff while putting new powerful tools in the hands of microfinance operations managers.
By Kanini Mutooni
The last year has seen the microfinance industry criticized and in some cases compared with the sub-prime mortgage crisis that started in the US in 2007. Indeed there is a crisis of confidence in the sector owing to such issues as over indebtedness, commercialization of Microfinance institutions and a lack of interest rate transparency, not to mention the trials and tribulations of the Nobel Prize winner, Mohamed Yunus.
There has not been much comment on how the industry can be saved and be helped to get back on the right track where it was about 5 years ago. The comment below gives a flavor of how the microfinance industry can attempt to get back on track and continue to make an impact.
At the outset, most actors believe that microfinance does indeed reduce poverty and increase the level of financial inclusion for the unbanked. What I believe the industry needs however is hard and fast data to actually show the good that it does. Mix Market and Microfinance transparency are two organizations that have spearheaded data collection within the industry and have made some strides in getting data together that present the impact of microfinance in the lives of poor people. These two organisations should however focus more providing data that gives more information on the quality of services given by MFIs rather than focus on numbers of borrowers reached for example. A focus on more qualitative data would help MFIs improve their products and how they interact with their clients and would also help the world see the non-financial impact that microfinance can make. They should also focus on providing more geographically representative data as my view is a lot of their data is India and Asia centric which a huge gap in African MFI space.
Innovation is a key area that the microfinance industry could explore further in order to improve its efficiency and possibly reduce its operational costs. For example, more MFIs should take advantage of mobile money for their clients which would mean that clients can settle their loans using their mobile phones and also receive payments using their phones. This would reduce the need to travel or complete numerous forms for loan disbursements. This could lead to increased efficiency and reduced staffing costs for Microfinance Institutions. This initiative has already been introduced by MTN Rwanda in partnership with other banks and financial institutions. MKESHO, another mobile money payment system has given MFIs and commercial banks in Kenya a true run for their money as the take-up by clients has been exceptionally high since its introduction.
‘Microfinance plus’ is another key area for consideration. By this I mean the additional (free) non-financial services that Microfinance institutions provide their borrowers. This could be Aids counseling, financial education, clinical services, or schools. Obviously the level and quality of the services provided will be dependent on the capability of the MFI and some small MFIs may see this as an increase in their overheads which may be unsustainable. The advantage of these non-financial services is that they go a long way in improving the lives of the existing and new borrowers and ensures that they remain loyal to the MFI. This could translate to better repayment rates for the MFI and lower levels of delinquencies.
Whilst the above 3 strategies may not create an overnight change and resolve all the issues within the microfinance industry, I believe that they are a strong starting point to getting the industry gradually where it was a few years back when Yunus won the Nobel prize and where microfinance was referred to by the Nobel prize committee as ‘the most liberating force that exists’.
About the Author: Kanini Mutooni is the founder of MyAzimia and Inuka. MyAzimia is a company that provides technology solution for companies wishing to set up P2P and micro lending online portals. Inuka is a microfinance lending portal that facilitates the provision of credit to female-owned businesses in sub-saharan Africa.
Molo! I apologize for my absence these past couple weeks – I am certainly being kept busy here on the Eastern Cape. This week I want to comment on safety here in South Africa. As far as developing countries go, South Africa could be considered a relatively safe country. That said, coming from Southern Ontario – some of the conditions here in SA are much different than what I am used to back home. I am definitely not used to living behind electric fences and guarded gates! Also not used to crime reporting taking up such large sections of local newspapers.
I have a great respect for the risks that microfinance field workers bare to bring poverty relief to Africa’s poor. Most staff members do not have their own transportation and rely on hitch hiking regularly. Meanwhile, as representatives of a financial institution they can be considered targets. On one occasion while traveling with a development facilitator we caught a ride with a local who was headed to our destination. I was startled to see he had a gun with him when I got in the front seat of the truck. It turned out he was a teacher in the village and just had it for protection.
A while ago I was in a village that takes about a two hour car ride to get to because the road is so bad you can only go 25-35 km/h. I was there with a branch manager and a development facilitator in training. When we were done our tasks and leaving the village, the front suspension of the car completely gave out. This area I was in is one of South Africa’s poorest – the village is not on any maps and the road has no name or number.
So, we were waiting for a tow truck and the other two were talking in Xhosa when the trainee said to me, ‘I am worried because there are too many tsootsies around here.’ I asked what tsootsies were and she said, ‘gangsters.’ I asked why she says they are gangsters and she
said, ‘because they will come to your car, break all your windows, take everything then kill you if you look at their faces.’ I replied, ‘ya, that is gangster.’ Wow – I was a little uncomfortable.
Anyway, everything was alright in the end. We did not get out to look under the car because we didn’t want anyone to see that we were stranded. The tow truck came but it took about 6 hours for the guys to find us – by then it was dark. One of the tow truck guys was obviously intoxicated but he was the not the one driving thankfully. The guys had to tow us back with us still in the car because there was no room in the truck. That was an interesting…and bumpy ride!
I ended up staying the night at the house of the branch manager because there was no way for me to get back to my place in East London.
This experience is giving a great sense for what these field workers go through to do their jobs. I do not want to paint South Africa as a scary place. I have been here for two months and have not had any real problems. One just has to be smart about where they go, with whom and at what time here. South African people are a vibrant bunch and amazing personalities shine under these conditions on a daily basis. This really is an awesome adventure.
“Last week I was asked to learn about the lives of two clients from the village of Kwelera and report to an international donor on my findings. Here is my report – enjoy!”
Tapping Entrepreneurship: The Kwelera Case Studies
As a Small Enterprise Foundation (SEF) intern, coming from Canada, I was asked to learn about the lives of two clients from the village of Kwelera. Following a centre meeting, I sat with Nontemeko and Caroline for a candid chat about their life experiences. Since SEF only began operating in Kwelera about nine months ago, both women are relatively new clients. Below are my findings.
Oxford Journals’ Health Policy and Planning has published a paper on the benefits of integrating microfinance and health protection services for very poor families and says the program should be expanded.
PR Log Press Release
The March 2011 edition of Oxford Journals’ Health Policy and Planning has published a paper that examines the benefits of integrating microfinance with health protection services and makes recommendations that can inform policy and program design for expansion of the practice.
After a review of multiple studies, the paper concludes that microfinance institutions (MFIs) are capable of contributing to health improvements by increasing knowledge that leads to behavioral changes, and enhancing access to health services through addressing financial, geographic and other barriers. The authors found evidence of positive health outcomes in nutrition, infectious disease, maternal and child health, domestic violence, and malaria.
Illness and poor health are widely recognized as important contributors to trapping families in poverty, sometimes despite their best efforts to start and sustain small businesses and other income-generating activity. Even one episode of a serious illness can cause a family to lose valuable assets and to slide back into grinding poverty. This paper is important because it highlights the important opportunity for health and microfinance to be combined as a more effective strategy towards greater economic security among the world’s poor. The poor need access to a coordinated set of financial and other development services to improve household resources and health. The studies analyzed provide promising evidence that MFIs offer a unique and underutilized opportunity that could be more widely deployed for the delivery of health-related services to those most in need.
As the number of studies on the practice grows and more microfinance practitioners learn of the potential benefits and low cost of integration, value-added microfinance is expanding and being adapted for application in new regions and settings.
The paper’s lead author, Sheila Leatherman, a professor at the Gillings School of Global Public Health, University of North Carolina, Chapel Hill, pointed out that, while the quality of some of the studies is uneven, the evidence of positive health benefits in diverse areas such as maternal and child health, malaria and other infectious disease, and domestic violence would indicate that the microfinance sector offers an underutilized opportunity for delivery of health-related services to many hard-to-reach populations.
The paper recommends that more rigorous research is needed to inform policy and guide program implementation, but useful evidence now exists to point towards a ”clear opportunity, perhaps even an imperative, for the microfinance and public health communities to engage with each other more actively and collaboratively.”
Ms. Leatherman is a member of Freedom from Hunger’s Board of Trustees. Her co-authors on the paper are Marcia Metcalfe, Director of Microfinance and Health Protection, Freedom from Hunger; Kimberley Geissler, PhD student and research assistant at University of North Carolina; and Christopher Dunford, PhD, President and CEO of Freedom from Hunger.
The PDF of the research report, “Integrating microfinance and health strategies: examining the evidence to inform policy and practice,” can be found at www.ffhtechnical.org/resources/research-reports.
Freedom from Hunger is a nonprofit international development organization that brings innovative and sustainable self-help solutions to the fight against chronic hunger and poverty. Our staff works with 112 local partner organizations in 17 countries to deliver microfinance, education and health protection services to more than 2.4 million women and families in Africa, Asia and Latin America. www.freedomfromhunger.org