Microfinance requires no donor money, says MicroRate chief Stauffenberg
- Tuesday, February 2, 2010, 14:52
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By Nagesh Narayana
Microfinance Focus, Feb. 2, 2010: In his testimony to the US Committee on House Financial Services, Damian von Stauffenberg, Chairman of MicroRate, has argued against the donor money into the sector and negated the theory of MFIs being perceived as a mechanism to transfer wealth to the poor, said a media report quoting his presentation before the panel.
According to Stauffenberg, microfinance is a success, but whether US aid for microfinance has been equally successful is not so obvious. His speech before the House panel was on US aid and its positive impact on poverty alleviation, said the report.
“In our ratings we have seen a fairly consistent link between the degree of dependence on donor support and a general lack of excellence of an MFI,” he said.
Citing an example of parked four-wheelers in front of an MFI, he said, “If there are plenty of expensive four-wheel drive vehicles – a sure sign of too much donor money – then chances are that we will find heavy, complicated procedures, a bloated staff and poor portfolio quality.” Often, the subsidy that was intended to help the poor “ended up creating jobs for middle class MFI employees and hurting those it was intended to help, he said.
However, donor support can do more good than harm when the MFI is blazing new paths, where nobody has dared to walk before, he noted. In the early days of microfinance, in the 80s and early 90s, much of donations that went in microfinance had served this purpose but in the last 10 years most donor support for MFIs would not pass the “no harm” test, he remarked.
“Since MFIs are financial intermediaries and they don’t transfer resources to their clients, to the contrary, borrowers have to pay back much more than they borrowed. If the resource transfer mentality creeps into microfinance, MFIs are doomed and many MFIs have shut their operations mainly owing to this mentality,” said the MicroRate chairman and founder.
“The acid test of microcredit is whether it enables the borrower to create wealth. This wealth-creating characteristic is at the heart of microfinance. Good MFIs can spot among the thousands of people asking for money those who will create enough wealth to be able to pay the loan back with interest and to have enough left over to better their lives,” he added.
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4 Comments on “Microfinance requires no donor money, says MicroRate chief Stauffenberg”
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As a for-profit investor in African microfinance, I believe that this approach is exactly correct. Donor funding directly to MFIs tends to skew the market, either by supporting dominant regional MFIs, making it more difficult for smaller institutions to thrive and thereby reducing the competitiveness of the market, or by propping up smaller institutions that lack the discipline to succeed without donor funding. Stauffenberg also mentioned that donor funding can negatively affect the mentality of an MFI, which should be lean, efficient, and focused on the bottom line.
The developing-world poor need a functioning banking system that can provide them all the necessary financial services that developed-world individuals take for granted. The microfinance industry is moving in that direction, and any efforts that retard this progress should be discouraged.
The idea that MFIs are money-transfer vehicles is absurd because they are well known for having very low default rates, owing to the group-lending concept. Another point that highlights the importance of less reliance on donor money is the fact that when employees/managers/directors are exposed to luxury, their perspective becomes skewed toward unethical practices during decision-making. This conclusion was released in a recent study conducted by Roy Y. J. Chua, of Harvard, and Xi Zou at London Business School, and it applies just as well to MFIs as it does to large public listed companies.
Micro finance is a wonderful tool to assist the poor to gain respact and dignity. The very imp. aspacts of life. For a mother nothing more rewarding to provide food and shelter to her family. This logic goes same no matter it is in a developed or underdeveloped society. Micro finance institutions need money but not charity. If a MFI can’t be proud of it’s efforts and capacity to sustain how can it teach to others to be self sustained.
Int. org. need to help MFIs to build the capacity not the dependency. MFIs devotion, interest and vision to link every hard working small enter.with global chains is the KEY of bringing hope for POOR.