Microfinance Focus, January 30, 2012: Dr. John Hatch is the founder of FINCA and the creator of Village Banking—a unique and influential method for delivering small loans, savings, and other financial services to the poor worldwide. Over 22 years with FINCA, Hatch served as president, and as chief of party for programs in El Salvador and Guatemala. He retired as FINCA’s director of research in 2006.
Hatch continues as a FINCA board member, advisor, speaker, lecturer, and fundraiser. He is continuing his research on the impact of Village Banking and is active in FINCA’s annual student symposium and research awards competition.
In an exclusive interview with Microfinance Focus, he discusses the future of microfinance industry and FINCA’s efforts to stay committed to its social mission.
Microfinance Focus: What are some of the factors that you think contributed to the accomplishments of FINCA?
John Hatch: FINCA has been extremely successful in terms of excellent management of its programs. I think it is the best managed microfinance program in the industry because we have been blessed with an outstanding Board of Directors and over the years we have developed very strong field staff team. From the very earliest times there has been a strong rigorous focus on loan repayment discipline and on administrative systems which allow us to monitor late payments very carefully. We have five or six programs with hundred percent repayments. Average payment for all our programs is in the high nineties.
When a client has not made a payment, our management knows about it within six or eight hours and a credit officer will be talking to this client within 24 hours. This type of oversight has created a great discipline among our clients. It is one of the reasons why external donors and investors have trusted us with their money. They see that our programs are extremely well managed. I think our management quality is our strongest suit.
Microfinance Focus: FINCA offers microfinance services in post conflict societies. Tell us about your experience in doing so.
John Hatch: What we have observed in most post-conflict societies is the destruction of a lot of social capital. People stop trusting each other and as a result it becomes harder for us to use the group credit model which we have been known for in other parts of the world.
Our primary methodology is called Village Banking where we create groups of 18-25 women borrowers, similar to Grameen lending model. But what we found in post conflict societies is that people don’t know that many neighbours they can trust.
So the group size in those kinds of setting has shrunk down to almost a solidarity group of 4-6 members. That is the best we can hope for in some of those societies.
The second thing, especially in former Soviet Union countries is the zero interest on the part of borrowers in Savings. They have lost their faith in banks and in savings. The only kind of service they want from the program is credit.
Microfinance Focus: Tell us about Microfinance and needs of the elderly.
John Hatch: Microfinance institutions tend to homogenise everybody as a client and fail to distinguish the differences between clients who are very young and clients who go through life stages.
A mother who has a new born baby has a set of needs for infant child care. For a woman whose children are in elementary school, the priorities get shifted to keeping those kids in school. The next stage is when the women’s children have completed the elementary school and they need to go on to high school. Financing secondary education is a huge economic challenge for most families which creates the need for little scholarships and loan assistance for education become extremely important.
When children then go out and start their own families, the woman is often left out on her own resources. Many times children move away, their support payment stops coming and this creates a very vulnerable time for the client.
So as the clients get older, their needs and priorities change. To just group all of them as clients of the same loan product does not make sense. We have to be more sophisticated in designing collateral activities and products that serves the client’s specific needs at different times of their life cycles.
99 percent of microfinance movement does not offer pension products. There are only five or six microfinance institutions which have created pension programs. We need to think ahead 10-20 years in the life of our clients, who will then be not able to work. They desperately need assets on which they can rely on.
The trouble is that you cannot create these programs unless you get clients to start saving at very young age so that by the time they retire they have set aside assets which are significant enough to support them in their old age.
These are issues which have received very little attention overall in the movement.
Microfinance Focus: From charitable donations to the present day commercial microfinance, how the landscape of social finance changed over the years?
John Hatch: I think it is becoming more diverse and diversity is good. Anybody whether they are a non-profit or for-profit commercial bank, if they are providing services that reach the poor, that is the bottom line that should determine whether or not they can be considered as part of the movement.
Therefore, as long as they show a strong focus on serving the poor clients, I welcome the trend towards commercial banking. This is making possible for large amount of additional capital to enter into the system. We are no longer dependent on government grants which are quickly disappearing. In times of economic depression, even private donations are shrinking very desperately.
I think the microfinance movement has proved that it is very strong compared to commercial banking systems that don’t lend to poor to the extent that now private capital investment is coming into our field, which is something we could never call on before. I think this is going to be a good trend.
However we need to be very careful that in becoming commercial institutions, we do not create share ownership structures that allow Boards of Directors and senior staff of microfinance institutions to become wealthy from profits from the sale of their shares.
As FINCA has commercialized its banks, it has created a Holding Company that supervises those banks. The primary rule of the Holding company is that no member of the FINCA Senior Management or Board of Directors is allowed to buy stocks in the commercial microfinance institutions that we have created. That is a very big distinction as it removes the element of greed of making profit from the sale of your shares.
We insist that in all our commercial banking operations, FINCA has minimum 60-70 percent control of the capital. That is our money and not the investor’s money. That way if at the end of the year we have a million or two as income, FINCA can say that this margin is not going to be distributed as dividend rather it will go back to grow the loan portfolio.
We explain to our investors that if they want to invest in us, they have to invest in our social mission. Most of our investors are fine with that. The market for investment outside microfinance is so tenuous right now that they are willing to park their money in social performing institutions. It is a win-win situation for everybody.
Microfinance Focus: What is your opinion about the recent microfinance crisis in India and in Bangladesh?
John Hatch: I think the crisis is perhaps the result of our growth. The Movement now is so strong and so well self-capitalized that we are pretty much beyond the control of governments. Probably 70 percent of the capital in microfinance is coming from the private sector, donors or self generated profits or anything except government funding. We are 85 percent free from government assistance at this point of time. That makes politicians very nervous. Here we are rolling around close to 200 million clients and this has been created by a private sector initiative not by governments.
The attacks on Prof. Yunus are in part out of jealousy of politicians that they are not getting credit for the biggest poverty alleviation initiative on the planet today. That is where they are beginning to hassle some of the bigger microfinance institutions, focussing on some of the negatives. They are trying to find out faults and trump up false charges to discredit the movement.
The truth is that the movement is far larger and growing much faster than any government can possibly hope to control.
Microfinance Focus: Do you think that there are certain rules which need to be re written in microfinance?
John Hatch: The institutions that have gotten into trouble have been a benefit to the rest of the movement in the sense that their mis-steps have alerted the rest of the movement in what can go wrong. So there is a silver lining in some of these disasters.
As long as we continue to build institutions that are very much like for-profit banks, we have to be careful in how we structure the rules that allow for sale of share capital. When people buy shares they have to know that they will not be able to expect normal dividend or returns like other commercial banks might offer them and they will never be able to have a controlling number of shares in the microfinance institution.
Microfinance practitioners must own that capital so that they can determine what happens when they generate surplus and how we redirect it back into program growth and member services instead of putting it out of the door as dividend income to our investors. They have to know from the very beginning that this is a different type of investment return model and they should satisfy themselves with modest returns.
Microfinance Focus: How do you think the future microfinance industry is going to evolve?
John Hatch: I think it is going to continue to grow and will grow briskly despite the possibility of a second dip in the international economy. I have believed from the beginning and I will believe to my dying day that microfinance is the only initiative on the planet that is growing faster than poverty itself. As a result, just by continuing its current growth trend, it has the potential of reaching a several billion families around the planet. I truly believe that by 2025-30, we will have a world where severe poverty has been mostly eliminated and microfinance will be credited as the principle engine that catalyzed this result.
Microfinance Focus: What role do you see FINCA playing in the future?
John Hatch: We will be demonstrating excellence in program management. First, we are a model of that. Secondly, FINCA has come out with its very unique holding company and I think it will be widely imitated. This Holding company and FINCA’s Board of Directors have created new committee know as the Social Performance Audit Committee.
Thirdly, in my quarter century of work in microfinance, I have never heard of Board of Directors of a microfinance institution having a Social Performance Audit Committee that focuses exclusively on the social impact of the program. It comes from the Board itself. This means that we cannot have a meeting of the Board of Directors without at least 1-2 hours of discussion on social performance issues.
That to me is an incredible breakthrough and an easy one. Any other program can imitate that and I think it is going to give a whole new way of monitoring microfinance from top down.
There is a chain of command of supervision. If the country Director does not have a really strong interest in social mission, people below him will not have an interest in social mission either. But if it is borne at the level of Board of Directors then all the way down the chain of command, social mission will be implemented. I think FINCA is going to be the leader in showing how commitment to social mission must begin at the Board Level and work itself down to the lowest level field officer.
Microfinance Focus: Your words of advice for the development leaders?
John Hatch: The microfinance movement has been so successful because it has not been government led; it was led by the private sector. For almost thirty years now we have been lending to women mainly. Being the least political elements of the society, nobody cares or worries if you organize them. I call it the Harry Potter cloak of invisibility.
By having focussed on women, we were able to achieve a high degree of freedom from governments to do whatever we wanted to do. I think this has served us well to the point that we have found way to mobilize masses in a way that is non political. Politicians cannot take credit for it.
We have finally demonstrated a model of bottom up economic development that is powerful, pervasive and almost universal. I like to call it globalization from the bottom up. It starts from the poor and builds up from there. If governments want to have this powerful process continue, they should try to facilitate it, not regulate, over tax, manipulate or constraint it.
(This interview was first published in the Microfinance Focus special print magazine which was distributed at the Global Microcredit Summit 2011 in Spain.)
