Microfinance Focus, July 17, 2011: Calmeadow foundation is a Canadian non-profit organization that has been supporting innovative ideas in microfinance for over two decades. Managed by Financial Consulting Firm Omtrix, Calmeadow focuses on improving the microfinance industry by identifying and addressing industry bottlenecks and investing in funds which provide catalytic capital to help the industry grow.

The organization supports initiatives that seek to address key issues within the microfinance sector, such as investigating MFIs failure in an effort to produce practical lessons for the industry, the alignment of interests between stakeholders, the impact of the global crisis on the microfinance industry and mitigation of foreign currency exchange risk tied to funding in foreign currencies.

In an exclusive interview with Microfinance Focus, Alex Silva, Founding Partner of Omtrix, President, and Executive Director of Calmeadow reflected upon the causes of the microfinance failures in the Latin American region and the path forward.  Edited Excerpts

Microfinance Focus: Latin America and the Caribbean is one of the most dynamic microfinance markets in the world. Could you tell us where it has arrived and where it is heading to?

Alex Silva: Without quoting the numbers, I think the main accomplishment has been a good coverage. Level of coverage of Microentrepreneurs and the bottom of the pyramid in general is by no means adequate but certainly is much better than it used to be. They have access to many different products at low costs.

In Bolivia today, a street vendor has access not only to loans but also to savings, remittances, insurance and other financial products at very reasonable costs, provided by different providers. Cost of a microloan in Bolivia is around 20 percent that is an actual effective cost and that is very decent compared to what a personal loan will cost in Bolivia from a salary payroll or elsewhere.

There has been an interest by commercial players. Many are participating in the market. There is a segmentation where more commercial players are looking after the larger more sophisticated entrepreneurs and NGOs are deepening their outreach and taking up those clients where commercial players might not be interested. I think it is a positive development.

Microfinance Focus: The region has also witnessed major microfinance crises. Will you share with us your understanding of those failures?

Alex Silva: From what I understand, I think microfinance is a part of the financial industry and having failures and crisis is part of the normal processes of life. Off course we all would like to avoid it and learn from the mistakes of the past.
Beatriz Marulanda in the paper ‘Lessons learned from failed experiences in Latin America’ highlighted issues like organizations diverging from mission, trying to do too many things, growing too fast without using adequate controls. All these things basically boil down to one thing which is a need for improved Governance.

I think the failures were not created by the crisis but rather exacerbated by the crisis. The problems were already there.

Microfinance Focus: What in your opinion are the major vulnerabilities of the sector?

Alex Silva: One issue was over-selling or over purchasing. People somehow wanted to believe that microfinance is a super bullet and it will cure all the problems of poverty. This is simply not the case. There were unreasonable expectations by the public that microfinance is a miracle and on the other hand there was overselling to commercial investors about how good microfinance is in terms of being immune from failures and about its high yield. These were clearly not true.

When people have high expectations and they are not delivered then they tend to be frustrated and that may result in changes in the enabling environment which in the end might prove to be very negative for the development of microfinance.

If the expectations from what microfinance can be were more reasonable, expectations in terms of profitability that one can and should expect from microfinance if adhering to Smart Campaign procedures of expecting only a reasonable return. If one was transparent, or one would not have used bad collection practices, the problems could have been avoided.
The biggest risk for microfinance is the enabling environment. If the government tells you that it wants to control the interest rate, if it tells people not to repay loans, then that becomes the major risk we have. But having said that, most of those things I believe, the industry has brought upon itself by over promising and over leveraging. The politicians too were over buying.

Microfinance is not the panacea and we got to be more realistic about it. We could have done a better job in communicating things to others and maybe the backlash would have not occurred.

Microfinance Focus: How do you think the friction between industry stakeholders – MFIs, investors and regulators – is affecting the industry? How can that be reduced?

Alex Silva: That tension is normal. I used to work in a factory and there always used to be friction between production and sales. Sales want to sell very inexpensive cars that fly and swim and are perfect. Production wants to make only one model and make it very efficient and that is very costly. So there is always tension and in small amount it is healthy as it generates improvement. Both the sides need to be educated and somebody needs to intermediate. That is the role donors can play.

In order to reduce the friction, we need to be more transparent and more realistic about expectations. We need to put more importance not only on assets but also for example on the number of clients.

Microfinance Focus: Which microfinance markets in your opinion needs to be watchful of an approaching crisis?

Alex Silva: Looking at my region, I would say Mexico. We have commissioned a paper on the situation there. Mexico is a market I would be very watchful of. A lot of what was happening in India is happening in Mexico.

There is over leverage, there is one methodology only, there is government interference and government funding. The government somehow needs to change the way it is doing things.
There are other places in Latin America which are a matter of concern where government is thinking of tampering with the enabling environment. Nicaragua is a good example of such interference.