Do the Poor Get a Better Deal from Microfinance?

Among our multitude of social purposes, are there any we all can share?  I believe there are at least two.

First, we want the unbanked to have access to good-quality financial services.  Second, we want these people to get a better deal from microfinance than they have been getting without microfinance.  Given that the public (and the press) insist that we offer evidence of achievement of our objectives, it is fortunate that these two are not only broadly shared but also relatively easy to measure and report on.  Here, evidence can unite us!

I can illustrate the point.  In March 2011, I participated in the second meeting of what has become the Microfinance CEO Working Group (MCWG).  I was there as CEO of Freedom from Hunger (Steve Hollingworth is now our CEO and member of the MCWG).  Others there were Michael Schlein of ACCION International, Rupert Scofield of FINCA, Mary Ellen Iskenderian of Women’s World Banking, Rosario Perez of Pro Mujer, Scott Brown of World Vision’s VisionFund, Bill Morgenstern of Opportunity International and Alex Counts of Grameen Foundation (by phone from Uganda!).

These eight U.S.-based microfinance support organizations, including some of the pioneers of global microfinance, had come together out of renewed concern about the tarnished brand of microfinance.  The microfinance crisis in India had delivered a true body blow to the industry’s reputation. We realized we could not speak for the industry, but we could speak for a major grouping of industry leaders.  What would we have to say to the industry about our own continuing commitment to defend the ideals and practice of microfinance?

We found common voice in support of three industry initiatives: Smart Campaign, Microfinance Transparency and the Social Performance Task Force (SPTF).  Our support was expressed in the January 2012 open letter: Road Map for the Microfinance Industry: Focusing on Responsible and Client-Centered Microfinance.

The Smart Campaign makes a distinction between those who are ethical and those who are not.

Microfinance Transparency focuses on one aspect of client protection and makes a distinction between those who are transparent in their pricing and those who are not.

SPTF makes a distinction between those who are committed to a social mission and those who are not (or will not show that they are committed or even that they have a social mission).

So MCWG is supporting the notion of making distinctions between different actors in the industry.  The purpose of these initiatives is not to condemn those in the “not” category but to help them be more self-aware and, if they don’t like what they see, to know how to change their classification.  There is no insistence that an MFI have an explicit social mission; only that if they claim they have a social mission, they have to show evidence of at least their commitment to achieve that mission (even if they cannot provide client-level evidence that they are in fact achieving it).  This is really just extending the notion of transparency to include “truth in advertising” (just as clients need protection against false or confusing information about services and their cost, donors/lenders/investors need protection from false or confusing information about the purpose of the MFIs seeking their support).

MCWG considered including the Seal of Excellence for Poverty Outreach and Transformation in Microfinance among the endorsed initiatives.  Not yet, we decided, because the Seal initiative is nascent relative to the other three, but more importantly because we were uncomfortable that the Seal initiative was not something all eight CEOs could endorse, as they were not all devoted to poverty alleviation per se.

In my last post, I presented the objection to the Seal as divisive of the industry.  While I agreed that the Seal may indeed prove divisive, I also contended that similar seals of excellence should be (and some already are) in development.  Each of the major objectives of microfinance should have the guidance and recognition opportunities provided by its own seal of excellence.

Many times I’ve heard my peers reasonably object to the time, effort and cost associated with collection of all this evidence of progress toward objectives.  Instead, they argue, let’s focus our scarce resources on reaching more people with more services that are obviously beneficial and appreciated.  This attitude toward collection of impact evidence comes from a business perspective, in which customer response is sufficient to judge success.

However, this is not the development perspective, in which subsidy of any sort by society must be justified by evidence of positive social return on the investment of public and philanthropic funds.  Much as I sympathize with the business perspective, I have to counter that the public (and the press) think that microfinance is funded for a social purpose and therefore achievement of that purpose has to be demonstrated with solid evidence.

Here’s a proposal regarding evidence collection that can unite us.

The most basic narrative of microfinance is that the poor are able to get loans from microfinance providers at substantially lower interest rates than are charged by local moneylenders.  This assertion seems so “obvious” that it has become an operating assumption.  But ask yourself: How much do we as an industry really know about the comparatively “good deal” the unbanked are getting from microfinance providers?

This question is fundamental for the defense of microfinance as a “good thing.”  I will devote the next Theme (Two) to this question.  It is a good deal more complicated than it looks at first (like everything in life!).  I invite you to help me with your ideas, suggestions and referrals to evidence.  Feel free to comment now – even on whether or not this is an important question to ask.

  • http://www.bottombillionfund.org Tom Coleman

    ARE MF CLIENTS BETTER OFF because of MF? And, in what ways are they better off?

    This is typically not a question we expect business to answer?

    Are consumers and our society “better off” because we have tobacco companies?

    Are consumers and our society better off (in strictly economic terms all costs and benefits considered) because of McDonalds and Coca Cola?

    Evidence question—do clients use MF instead of moneylenders or do they use both in different ways?

    The interest rate question is a very good question. It may be the most measurable piece of costs. It does not address clients’ benefits. But, there are other important costs and the credit products of MF and moneylenders are not the same (apples to apples) although they overlap and may even complement at times in how they serve clients.

    Perhaps a better question than interest rate cost to clients of MF credit versus moneylender credit, is the question “what is the return to the client based on all costs (time, learning how to use products and services effectively, meeting lender requirements, etc.) and returns/outcomes for clients?”

    BUSINESS PERSPECTIVE
    Focus on the firm, institutional sustainability, institutional development, service delivery, repeat customer business, growth in total number of customers, number of profitable customers, most profitable customers, acceptable returns to shareholders or other funders

    Provide quality products and services. It is up to the client to use them effectively.

    Sustainability of institutions is the common goal measured by continuing customer business and continued shareholder investment.

    Well defined single bottom line of profit.

    DEVELOPMENT PERSPECTIVE

    Possibly greater focus on client outcomes (more than only repeat client business) BUT conditioned by diverse organization management social goals and priorities and by the interests of funding sources, national and political interests of provider and recipient countries, aid politics and strategic economic interests.

    Often influenced by charity mindset more often than by long term client interests and client self-sufficiency

    Client outcomes (and possibly impact of program to the extent practically measurable) can be important—BUT no assurance that they trump other competing stakeholder interests.

    Typically there is no financial incentive to support a focus on client outcomes or impact.

    No clear common social goal across industry—which makes it very easy in practice for financial goals and measures to trump social goals and measures.

    Bottom Billion or extreme poor—over 90% live in Asia and Africa, less than 10% live in Eastern Europe and Latin America.

    2003 CGAP Report—over 90% of foreign investment in MF went to Eastern Europe and Latin America. Less than 10% went to Asia and Africa.

    2010 CGAP report—over 50% of foreign investment in MF went to Eastern Europe and Latin America. 38% went to Asia and Africa.

    SOCIAL ENTERPRISE PERSPECTIVE—MFI or MFIF as a social enterprise

    Possibility of creating a clear focus on a single well defined social goal—subject to satisfying donors or social investor interests.

    Possibility of creating financial incentives to support specific social goals

    Perhaps we need a new institutional model (a hybrid of traditional non-profit and for profit business) in MF to pursue goals such as MF that does the most possible to help end extreme poverty.

    Maximizing a particular social goal and financially sustainable but not profit maximizing.

    Lead by example.