First published in e-MFP's Spring 2011 Newsletter
by Marc Bichler, e-MFP Chairman
The o
nce so cheerfully upbeat international microfinance community, fuelled by the inspiring successes of industry pioneers and the effectiveness, across the continents, of thoroughly run microcredit programs designed to help poor clients invest and work themselves out of poverty, lately seems to be getting a beating : consumer-lending to the poor leading to over-indebtedness, in turn leading to suicide, irresponsibly high interest rates, unrealistic interest rate caps, alleged misuse of donor funding, too much money chasing too few microfinance institutions (MFI)… The list of recently published darts of criticism targeted at actors at all levels of the microfinance industry looks longer by the day.
What has happened? Has microfinance lost its innocence? – A closer look at matters under attack is revealing at least two kinds of unsurprising, yet sobering observations:
First, microfinance or inclusive finance, as we like to say with a heightened sense of purpose, comes into the realm of finance; it is money business, and – as such – first and foremost a matter of trust. When trust as the underlying basis of any deal is betrayed, the intended mutually beneficial transaction is doomed. This is exactly what happens when microfinance institutions fail to screen their client’s intention to invest a loan into a revenue generating activity or their ability to repay the loan plus interest. This is also what happens when a microfinance institution, while growing and prospering, does not lower interest rates billed to their clients and changes their focus from poverty alleviation to sheer greediness. This is most certainly what happens when corrupt credit officers or managers tamper with their clients modest savings deposits.
Like in sports, the foul play of one reflects badly on the whole team, but it hardly invalidates the team’s collective efforts, nor does it invalidate the rules of the game. Shocking as the sometimes deadly consequences of ruthless lending may be, such regretful incidents must not lead to jump hastily to all too general conclusions. Today the focus is every so often on isolated shortcomings, while the quiet benefits of fair inclusive finance to millions of poor men and women are overlooked. This does not mean that the shortcomings should not be addressed; of course they should. But even more importantly, intellectual honesty requires looking at the picture as a whole.
Hence my second set of observations. When the rules of the game are unclear, outdated or simply do not exist, matters tend to get out of hand. Badly adapted legislation, regulation and supervision unfortunately provide a fertile ground for trust-breaking behaviour. Most of the time such weaknesses are not intentional; they are often merely rooted in a wrong or incomplete understanding of what inclusive finance is about and what specificities have to be woven into the equation in order to achieve the intended goal of giving access to adapted financial services to parts of the population of a country or a region that so far had been excluded from such services. Even though microfinance is roughly obeying the same set of basic rules as traditional finance, it requires specific attention at several levels: mindful monitoring at the client level (i.e. promoting financial literacy), institutional strengthening at the MFI level (i.e. improving management skills) and a better understanding at the political, regulatory and administrative levels of daily constraints for MFI and poor men and women in areas that remain unchartered territory for the formal financial sector.
In this regard, one can be comforted by an ever increasing concern by actors in the field, as well as by the international community, to set the framework right for inclusive finance. Efforts to that end are underway in different international fora, at the UN, at the International Financial Institutions, in CGAP, at the European Union and at the G-20. New sets of important data are nowadays available to better understand the constraints and options of microfinance clients and innovative methods of evaluation illustrate what works and what does not. It hardly comes as a surprise that the most promising ideas and initiatives for suitable and effective microfinance are blooming in institutions and organizations with multi-stakeholder format. Indeed, the complexity of the challenges at hand when it comes to financial inclusion calls for the combined knowledge, expertise and wisdom of actors with the most diverse professional and geographical backgrounds, public and private, formal and informal, from the North and from the South.
So, while microfinance may have lost its original innocence, serious efforts are underway to compensate such loss with increasing maturity. By the way, responsible advocates of inclusive finance never claimed that the microfinance toolbox (microcredit, microsavings, microinsurance, remittances…) was the unique answer to world poverty. As a toolbox, it can provide specific elements of answers to specific questions, but only if the overall environment is conducive to development in general.
The European Microfinance Platform (e-MFP) is perfectly set up to play a pro-active, positive part in this common endeavour. Over the past years e-MFP has become the centre of excellence we had hoped for right from the start. Our platform for discussion and exchange serves as a valuable knowledge management tool – open to constructive criticism – and has generated a multitude of synergies. Growing interest of international financial markets in economically viable yet socially responsible microfinance dares us to live up to the promise of sustainable financing for development. Access to funding is no longer the main obstacle – a rare opportunity in times of otherwise shrinking foreign direct investment and stagnating international official development assistance! To recognize such opportunities and to consciously take action is the best way to avoid any crisis. Side by side with like-minded partners, e-MFP stands ready to shape that new reality.
