Microfinance or, Micro Loan Sharks - SPM will tell the difference
The current process, now undersay for creating a set of standards (social performance management) for global MicrofinanceI is essential if we are to prevent the rapacious and greedy from pirating the sector and further victimizing the poor of the world.
I would like to use this open forum to draw sector attention to the serious problem of mssion drift within the larger MFI community.
A casual google search on “”Microfinance Problems” pulls up 780K hits. If only one percent are relevant we have a real issue here. in the last year of so, he business press and others have been quite critical of the whole MFI model. When the dialog in the board room is more about PAR (portfolio at risk) than SPM, (Social Performance Management) then, there is mission drift. Principal among these is a paper by Jonathan C. Lewis, appropriately titled: "MicroLoan Sharks" Published this summer by the Stanford School of Business.
Some of us have been participating in the SPM dialog and the Imp-Act consortium. To me, the whole existence of Social Performance Management as an externally derived necessity is prima facie evidence for pending loss of mission. SPM was created out of the need for reasserting the social mission ov Microfinance. It was created because so many MFI’s seem to have lost their mission and drifted into the commercial mind-set, providing no social net, no BDS, no social mission at all except for enlarging the portfolio. If it were not so, then SPM would not be necessary.
There is no creation of man that cannot be perverted in its use and application. Indeed what is irksome to me is that so many so called MFI”s are not lending to the bottom of the pyramid at all, seeking instead the “unbanked” commercial class in developing countries and actually supporting the informal sector. Because thay can, they pirate the name MicroFinance and wrap themselves in the cloak of respectability while blatantly profiteering. In fact, many of these are in reality, not Microfinance Institutions at all, but really Micro Loan Sharks.
This post is also about transparency, actually. There is a dramatic need for such transparency and not only on the part of the MFI community. Particularlly I refer to the dynamics between the MFI in the field and the funder/investor web that supports them The responsibility of theNGO’s, Intermediaries, SRI’s, Private Investment Banks, Civil SocietyPara Statals.
"There is something unseemly about profit-maximizing investors backing an MFI that charges the world's poorest people 100 percent interest" Jonathan Lewis, Stanford
It is my wish to draw those who agree and disagree with me into an important dialog. To focus our attention and raise the level of discourse to speak to important questions about the complex series of interconnecting financial and “other,”relationships that exist. It should be self-evident that If one is to profit from a commercial transaction engaging the very poor, then one should be prepared to open the curtain of OZ and demonstrate the fairness and probity of the the mechanisms that lie within.
What do you think?
Jerry
I would like to use this open forum to draw sector attention to the serious problem of mssion drift within the larger MFI community.
A casual google search on “”Microfinance Problems” pulls up 780K hits. If only one percent are relevant we have a real issue here. in the last year of so, he business press and others have been quite critical of the whole MFI model. When the dialog in the board room is more about PAR (portfolio at risk) than SPM, (Social Performance Management) then, there is mission drift. Principal among these is a paper by Jonathan C. Lewis, appropriately titled: "MicroLoan Sharks" Published this summer by the Stanford School of Business.
Some of us have been participating in the SPM dialog and the Imp-Act consortium. To me, the whole existence of Social Performance Management as an externally derived necessity is prima facie evidence for pending loss of mission. SPM was created out of the need for reasserting the social mission ov Microfinance. It was created because so many MFI’s seem to have lost their mission and drifted into the commercial mind-set, providing no social net, no BDS, no social mission at all except for enlarging the portfolio. If it were not so, then SPM would not be necessary.
There is no creation of man that cannot be perverted in its use and application. Indeed what is irksome to me is that so many so called MFI”s are not lending to the bottom of the pyramid at all, seeking instead the “unbanked” commercial class in developing countries and actually supporting the informal sector. Because thay can, they pirate the name MicroFinance and wrap themselves in the cloak of respectability while blatantly profiteering. In fact, many of these are in reality, not Microfinance Institutions at all, but really Micro Loan Sharks.
This post is also about transparency, actually. There is a dramatic need for such transparency and not only on the part of the MFI community. Particularlly I refer to the dynamics between the MFI in the field and the funder/investor web that supports them The responsibility of theNGO’s, Intermediaries, SRI’s, Private Investment Banks, Civil SocietyPara Statals.
"There is something unseemly about profit-maximizing investors backing an MFI that charges the world's poorest people 100 percent interest" Jonathan Lewis, Stanford
It is my wish to draw those who agree and disagree with me into an important dialog. To focus our attention and raise the level of discourse to speak to important questions about the complex series of interconnecting financial and “other,”relationships that exist. It should be self-evident that If one is to profit from a commercial transaction engaging the very poor, then one should be prepared to open the curtain of OZ and demonstrate the fairness and probity of the the mechanisms that lie within.
What do you think?
Jerry
Tags: corporate social responsibili…, csr, green marketing, greenwash, microfinance, microfinance problems, sustainability, sustainable development
Replies to This Discussion
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Permalink Reply by Andrew on -
Jerry,
I am in no way an expert on MFI, but I could easily imagine such a concept being abused in a similar manner to the way in which critics believe that the concept of Socially Responsible Investing is being abused today.
Whilst disclosure and accountability requirements within the industry should not be unnecessarily burdensome, they should be sufficient to ensure that investors, governments and the general public can understand and assess the real social impact the microfinance fund in question.
Under no circumstances should any recipients be charged 100% interest. That's exploitation, not a service to the community.
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Permalink Reply by Jerry Peloquin on -
Andrew...
Of course you are correct in your concerns. I share them which is why I am on this issue. I am thinking something like the ISO 9000 quality standards currently used in Industry. The subscription would be voluntary and the MFI would get a branded seal of approval. The donors/Investors would recognize that seal and give preferential funding to those who are authorized to display it.
The interest rates are deceptive... (like here in the US) an MFI may claim a 30%, but when one adds up fees and service costs the rate is significantly higher. The term we are using is "effective interest rate."
Thanks for responding... look for my Editorial byline on The Micro Capital Monitor and on my Social Mission Blog.
Jerry
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Permalink Reply by P. Uday Shankar on -
Dear Jerry ,
I like the way you present your points. May sound hard hitting for the new-generation microfinanciers but for people like me your thinking is very much in tune with mine.
Looking at the way many players were entering the "lucrative microfinance market" in India and getting worried about the erosion of the social factor I sent an article to a leading business newspaper which had an exclusive weekly page on social entrepreneurship/CSR. The article was not published. Please go through the article and I shall get back in this discussion with my own latest views on the matter.
Reminiscences of a Microfinance Practitioner
Microfinance was just making an entry in many parts of India when I was part of a small team of social entrepreneurs which was assigned the onerous task of extending microfinancial services through a Microfinance Institution (MFI) to already established Self Help Groups (SHGs) in the district of Kanyakumari in Tamilnadu in 1998. Despite the high literacy levels and a conspicuous predominance of branches of banks in the district, the poor women members of the SHGs were not in a position to either open savings-bank accounts or avail loans from the banks. During our initial visits to the community we found that the poor women members needed heavy doses of social inputs first before extending financial services.
Time spent on social intermediation was part of our investment in the business. The initial two hours my team used to spend with each group was our first social investment and this helped us in mutually understanding each other. Within the next two years we were able to create an impact in the district through a professionalism which was not only newfound in the rural areas of that district but was also interspersed with a never-seen-before customer friendly attitude, repeat loans as incentive for prompt repayment of earlier loans, absolute transparency in transactions, adequate amounts and easy modalities.
Every other day we had a chance for innovation. An easy mode of repayment was devised for the SHGs making use of their savings-bank accounts in the banks’ branches in their vicinity. They used to remit religiously the EMIs in their bank accounts and we would collect the amounts through cheques obtained earlier from the groups. At a time when most of the group members had not even seen a cheque book and none of the bankers had issued cheque books to SHGs, it was a challenge for us and this was where we had to spend considerable time on social intermediation. The group members had to be trained in using cheques and in affixing signatures uniformly. One of the exercises introduced by the MFI was to make the members sign in an eighty page note-book to get a uniform signature! Thus managers were convinced about the uniformity in affixing signatures before they issued a cheque book.
Groups always had a problem when managers changed in bank’s branches. In one such case in 2000 a new manager of a branch chanced to see one of the pass books of a group which had availed loans from the MFI and found that there were regular remittances by the group between the 25th and 30th /31st of every month. When he enquired the women members of the group they informed the Manager that they had availed a loan initially from the MFI and based on their promptness of repayment repeat loans were also availed. Flabbergasted, the manager enquired about the MFI, its promoters, the CEO of the MFI, quantum of the loans and the rate of interest and immediately offered a loan to the group! Though the women appreciated the offer they were empowered enough to have the audacity to tell him that the same branch had made them walk six to seven months for a loan in 1998 and expressed the fact that they were happy with the MFI. Put off by the response the Manager denied issuing cheque books to the group. Any amount of convincing by the entire group and the NGO promoter of the group did not pay any dividends. Finally my colleague and I visited the Manager and the first thing he did was to shout at us, “Why are you in this business when we are there to do it?” This question has remained embedded in my mind and during the nine year period, as CEO of the MFI, I had to listen to the same sort of questions from various bankers till I quit the MFI in April 2007. The manager went on to say that the same groups would have remitted in the ‘same’ pattern even if the bank had extended a loan. All efforts to convince him that we were in the business of microfinance and that we were involved in both financial as well as social intermediation went down the drain. As I moved out of the branch in Marungoor in Kanyakumari district my thoughts went back to my rural-banking days when banks on an average were able to recover only around 70% of their loans. Moreover even if there were good intentions to extend loans, along with the required dose of social inputs, where did they have the time and personnel in the banks, I wondered as I came out, not to talk of the missionary zeal required for the job.
Over the past ten years MFIs have proved that mere financing the poor will not be successful and social intermediation was sine qua non for a successful microfinance delivery system. As a microfinance practitioner I am keenly watching the entry of banks, international microfinance institutions, financial institutions and new generation MFIs entering into the microfinance market in a big way. Though, I strongly believe and foresee a point of time when the Indian poor will be fully educated and would be empowered enough to decide where he/she has to avail financial services, I am also aware that, that point of time is not around the corner. The poor in the villages are still gullible and can be easily taken for a ride. The new thrust in “microfinance business” sans social intermediation is a dangerous proposition. We still need to educate our poor.
The best thing that has happened to microfinance globally is the metamorphosis of an NGO into a financial institution. Most of the MFIs which have emanated out of this transformation still maintain the social angle in every action of the MFI. Hundreds of such institutions globally are now talking about a double bottom-line in their balance sheets- one financial and the other social and have now started introducing a Social Performance Management system to keep a tag of the social development of their clientele. “Social intermediation is distinct from the provision of social welfare services in that social intermediation enables beneficiaries to become clients able to enter into a contract involving reciprocal obligations. The level, nature and time horizon of the investment required for social intermediation varies with the barriers facing a given target group. It is also likely to depend on the level of responsibility in financial intermediation that the client group is required or willing to acquire.”- Sustainable Banking with the Poor- Lynn Bennett and Carlos E. Cuevas.
If MFIs that are now mushrooming in India are mainly looking at the booming economy and the lucrative Rs 75,000 crore microfinance market and are under the impression that with over ten years of existence of microfinance in India the necessary social inputs have already been extended by the NGOs, NGO-MFIs and MFIs, they are making a grave mistake. In a recent meet of MFIs I had a chance to meet an entrepreneur and when enquired about his background he said that he was in the smart card business and after a brush with many MFIs he got fascinated by their work and decided to start a MFI! In direct contrast to the earlier model of NGO transforming into a NGO-MFI and then into a full fledged MFI, what is now happening is, we have international MFIs, financial institutions, banks and entrepreneurs entering into the microfinance market. From the economics point of view competition is welcome but then from the practitioner’s point of view I am skeptical about the social angle of the new developments. If intentions are to build social capital then microfinance delivery systems at present in our country still need an appropriate dose of social intermediation.
“Investment in social intermediation is necessary to increase the capacity of the poor to access and productively use microfinance services. Such investments, among other things, should support (a) awareness-building programmes on a broad range of microfinancial services; (b) information dissemination on service providers; (c) basic literacy, numeracy and skills training for women, ethnic minorities, and other disadvantaged groups; and (d) social mobilization for the formation of community-based organisations and solidarity groups to actively participate in microfinance markets.” (Developing sustainable microfinance systems- Ashok Sharma- ADB).
More than ten years from now there may not be a need for social intermediation as is being done now. The future mF customer armed with more literacy, empowerment and consumer awareness, would be in a position to choose financial services from a plethora of MFIs and banking institutions, through his/her own judgment and would not be under any societal/government/NGO pressure to seek services only through groups or use peer pressure to repay loans and pay insurance policies, in an open regulated market where private and government outlets will compete with each other to provide the best services at competitive rates for their services. Till that dream comes true, let us look at the economic empowerment of the poor, through professionally managed microfinance services, which involve both financial and social intermediation to create a total financial inclusion and the required social capital to face the competitive market and the socio-economic challenges to be faced in the future.
P.Uday Shankar
Microfinance Consultant and Trainer
Coimbatore, INDIA.
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Permalink Reply by Jerry Peloquin on
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Uday...
Wonderful, excellent. You experience fully validates our belief that knowledge is equally important to capital in the MFI sector. Our company (an NGO) ... and, a new one at that ... works at the top of the MFI's lending limit. We are investors and trainers. We have a business incubator model and out intention is to creat jobs in poor communities ... as to your very appropriate reference to "social inputs," I will say this I you would have social justice, first you must establish economic justice. The two are inextricably linked.
Yes, there are too many micro bank managers like the one you describe... far too many.
Jerry
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Permalink Reply by uyufyukbjh on -
I believe that MFI should be about competition. In other words, micro-finance initiatives should lend to the poor at better rates than the commercial banks, because they're not interested in creaming off a fat profit, only in getting a reasonable return on their loan and on empowerment and social advancement.
There will always be someone willing to lend at a rate of 100% or greater to the poor. Our own societies have proved it over and over again. What matters is to have more lenders, and thereby give the poor more choice and more options, and drive down the cost of loaning to them.
I don't think that artificial restrictions on the rates of interest charged by lenders will do anything except force some of them out of the market, and thereby reduce the choice that the poor have in lenders.
"Social" MFIs will not lend to everyone, and therefore the people that they reject will need other options, such as commercial banks. As long as the process and the charges and profits are transparent to everyone, then only the less well-informed or less business-minded will suffer from the availability of high-rate loans.
Please bear in mind that Darwinism applies here too, and not everyone deserves a loan or a cheap loan, and if some suffer from availing themselves of a bad contract, then that improves the fitness of the whole. Many suffer from the unavailability of credit at the moment. Fewer will suffer if credit is available to them, but expensive, because some will repay anyway.
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Permalink Reply by Jonny H on -
I agree with you but these days with investors pulling out money out of MFI it is heard for the funds to compete with major bank rates. If they beat up each other too much they won't be able to stay in business.
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Permalink Reply by Jerry Peloquin on
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This is a repl to: yuyufyukbjo
Somehow I missed your post here... forgive me, but I will now respond as I should have earlier.
No, I respectfully disagree. The MFI is not about competition. It is about moving the poor out of poverty. That is why the first MFI was founded, not to create wealth for a few, bur to build prosperity for the many. It was conceived as a social mission project and the first MFI's were all NGO's, non profits whose goal was not profit but sustainability (there is a difference) I have no idea where you get your sense of BoP economics but the poor have no access to commercial banks ... the MFI is the lender of last resort. The next step is the loan shark. Everyone deserves an opportunity for a reasonablely priced loan *not a loan in excess of 100%. Here you go to jail for that.
I am from the Yunus school of self help groups tied to a lending institution and not the other way around. What has happened is that as soon as people realized the poor were good risks they upped the interest rates and killed the social programs to maximize profits. Good capialism, bad Social Action.
The poor pay back at the 98+ % rate. It makes a great target for loan sharks.
Jerry
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Permalink Reply by Jerry Peloquin on
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his is a repl to: yuyufyukbjo
Somehow I missed your post here... forgive me, but I will now respond as I should have earlier.
No, I respectfully disagree. The MFI is not about competition. It is about moving the poor out of poverty. That is why the first MFI was founded, not to create wealth for a few, bur to build prosperity for the many. It was conceived as a social mission project and the first MFI's were all NGO's, non profits whose goal was not profit but sustainability (there is a difference) I have no idea where you get your sense of BoP economics but the poor have no access to commercial banks ... the MFI is the lender of last resort. The next step is the loan shark. Everyone deserves an opportunity for a reasonablely priced loan *not a loan in excess of 100%. Here you go to jail for that.
I am from the Yunus school of self help groups tied to a lending institution and not the other way around. What has happened is that as soon as people realized the poor were good risks they upped the interest rates and killed the social programs to maximize profits. Good capialism, bad Social Action.
The poor pay back at the 98+ % rate. It makes a great target for loan sharks.
Jerry
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Permalink Reply by Dave ODIGIE on -
Hi Jerry,
Thanks for this thought provoking piece. While I agree with you that so many "so called MFIs" are not lending to the bottom of the pyramid at all but instead chasing the unbanked commercial class, I believe that the challenge of access to finance is so big that the only way to reach the large population waiting for access to financial services is to provide this service profitably. I do not subscribe to charging the poor 100% interest but the only way we can encourage financial institutions and Investors into this risky segment of the market is when they can cover their cost of service delivery and make a little profit on their investment. The poor are willing to pay the interest if only they will have access. Some poor in Nigeria pay as high as 120% interest rate from money lenders and they are still coping. While Corporate Social Responsibility is good, it is not sustainable if it cannot cover its cost of service delivery.
Let me share some facts with you all about a recent financial survey conducted by EFINA in Nigeria.The finscope survey was developed and surveyed 22'000 people across Nigeria.
Some key highlights from the presentation. (NIGERIA HAS A POPULATION OF OVER 140 MILLION PEOPLE)
Banking profile
1. 74% of the adult population has never been banked, 85% of adult of females are unbanked. The main reason for not having a bank account is due to lack of money, while the most important reason for wanting a bank account is to save money. 61% of the unbanked would like a bank account. Only 3 % of the adult population use a microfinance bank
Access
2. 53% of adult Nigerians are financially excluded (no formal or informal access to finance)
Savings
3. 38% of the adult population are currently saving, 26% of those come from the lowest income group LSM1. most are saving in case of an emergency.
Loans
4. Only 7% of the adult population currently has a loan, but 18% have a credit facility at a shop/kiosk. Loans are risky, 26% of those have missed a payment. Most important reason for a loan is to expand a business.
Insurance
5. Only 2% of Nigerian adults have access to insurance. 65% of Nigerian adults have either not heard of insurance or do not know what it means. Most insurance products are fake
Technology
6. 53% of Nigerian adults have access to a mobile phone
It was also revealed that only 2% of Nigerian 140 million people have access to formal financial institution and 53% of adult Nigerians are financially excluded (no formal or informal access to finance). This scenerio is similar to many other developing countries.
My recommendation is that we can meet the TRILPE BOTTOM LINE by being economically viable (do business with a profit), socially responsible and environmentally acceptable. Commercial Microfinance service delivery may be the fastest way to provide access to the financially excluded in our societies.
Thanks
Dave ODIGIE
Abuja, Nigeria
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Permalink Reply by Jerry Peloquin on
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David, thank you so much for this Finscope summary. As impressive as the data are, I must say I disagree with your major premise. "...lending to the poor is a great risk." It is simply not born out by the data. When you say "profit," the implication to the pure business model says, "... how much profit? The answer is always. How much can I get? Not what is right? Not what can they afford, but What can we get?
And that, is THE problem with "profitable," business with the BoP. If you do not have at least sixty percent of your borrowers below the poverty line. If you charge more than 50% interest, if you do not have full transparency in your lending, then you are not a microfinance instition. YOU ARE INDEED, A LOAN SHARK.
Sorry, it's how I see it.
Jerry
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Permalink Reply by Dave ODIGIE on
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Hi Jerry,
which option is better;
1. Insist on lending at very low interest rate with more emphasis on social responsibilities, thus restricting many microfinace players into the BOP thereby denying over 3 billion people access to financial services which can help move them out of poverty
or
2. Encourage Commercial approach to Microfinance service delivery that will charge a competitive interest rate to cover their cost and make a reasonable profit to continue as a going concern.This will increase the number of players in the sector, thus increasing competition and giving the poor choices. What the poor need is ACCESS. They are already used to paying very HIGH interest rates from money lenders.
"Its insanity to continue to do the same thing and expect a different result". I think what the poor need is CHOICES and we cant give them options except the sector is attractive and competitive to would be investors and players. What will move people out of poverty is ability to access finance and use it for productive ventures that will yield a return to pay back the loan profitably. Gradually, after many loan cycles, the active poor can break away from the poverty cycle.
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Permalink Reply by Jerry Peloquin on
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I understand your position. Certainly no one want to deny credit to anyone. Those most in need are the BoP. Let's serve their needs FIRST.
BUT installment lending with weekly collections is a short term strategy for solving the poverty problem. What is needed is sustainable growth business not only one strategy. Jobs are needed not just sustenance loans. Our solution is to provide patient capital investment and incubated trainiing and support ... see our position paper: A Trasformative Approach to Socially Responsible Investment. www.microventuresupport.org
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