Does it all make sense? The need for clarity and coherence in microfinance

Peter van Dijk

By peter Van Dijk

Microfinance Focus, March 23, 2010: In the microfinance (MF) world many of us worried a lot when in 2007 the Financial Crisis arrived, maybe the worse ever, even compared with the “Great Depression” of the 1930ies. Some of those who depended on funding from North America and Western Europe confirmed that indeed their external funding had reduced.

But apart from stories on a MF crisis in Central Europe’s Bosnia, Afghanistan, Nicaragua and in Morocco we only heard some rumours  about internal troubles in PADME (Benin, West Africa), Equity Bank (Kenya) and last month a study on GrameenBank’s performance (published by David Roodman). The underlying issues causing these crises and rumours have no direct or indirect link with the global financial crisis. On the other hand, funders of MFI’s have been and are very active indeed. Grameen Foundation expands its activities internationally, its local competitor ASA equally, the Gates’ Foundation spends a lot in MF, and Elevar (that manages the Unitus Equity Fund), MercyCorps and Goodwell also. Maybe the world’s largest IPO (international public offering) of an MFI has just been announced by Indian SKS, hoping to attract some 200 million US$ (where its three largest shareholders, USA-based Sequoia, Sandstone and Kismet Capital with the SKS Trust will replace SKS founder Vikram Akula). And the development finance institutions (DFI) such as the World Bank Group, especially its “private sector arm” IFC, Dutch FMO (often in alliance with TriodosBank and OikoCredit), French AFD and German KfW (who also works with the famous IPC organisation) and the world’s largest MF Fund EFSE (European Fund for South East Europe) announced big deals in MF. This month French PlanetFinance reported that European social responsibility investment funds dedicated to Microfinance increased by 31% in 2008 and with 16% last year to total some 6 billion US$.

So all goes well with microfinance because people in wealthy nations continue to “invest” massively in it? Well, I dare say not. Many experts agree that MF still only provides anecdotal evidence about getting people out of poverty. Last year Professor Morduch of New York University demonstrated that earlier World Bank reports stating that MF World Champion GrameenBank (GB) did not use well-founded methodologies and that GB in fact had not helped poor Bangladeshi structurally out of poverty as it says it does. It makes sense to argue also that if, as GB said, it would have taken five percent of its over 7 million clients permanently out of poverty each year (for over thirty years now), in a country of 147 million with some 30 million households and many thousands of MF providers more, some macro-economist might have noticed some effect on the country and its population. In my simple view, if someone is less poor in Microfinance terms it would mean that s/he has more money in an account with a financial institution that is regulated effectively by a competent authority with adequate resources for supervision to ensure full compliance of regulations. Measuring the impact of Microfinance might simply be reading how many MF services providers transform into regulated financial institutions that are allowed to collect public deposits, to read the numbers of increasing current accounts, deposit accounts, fixed term savings accounts and branches to detect that more and more citizens have more money. We can all agree that measuring from the other end the number of loans provided, the number of borrowers, loan volumes, repayment and interest rates, that these data do not provide such a clear image.

My recent experience exacerbates my confusion. In North-West Africa authorities and managers told me that government and foreign funded social credit associations have great difficulties but do nothing to change. In Pakistan it is simple to conclude that Post and Finance Ministry mobilise more money in savings from poor and rural people than all MF services provides lend out together. But the regulatory framework ensuring effective supervision of the people’s savings is vague. And no one explains why the central bank does not supervise these mass savings, although it regulates and supervises banks and MFIs. When I accompanied central bank supervisors in Cambodia I was quite surprised to find MFIs displaying their international donor awards for the public but hiding their central bank licenses. In Nigeria and Indonesia government and public media agree that lending programs to small businesses, to farmers and to marginalised citizens (women, handicapped, unemployed, peasants, young graduates, “the poor” etcetera) have not worked in the past but happily continue to announce (huge) new lending programs.

So this is my point. If Microfinance is about providing a tool to people to help to manage better the little money they do have and depend on for survival and structured advancement, then it only requires this definition. Lending to micro-enterprises, to “economically active people” is only a part of MF and not even the part that allows simply detecting whether clients have more money they own as assets. So why does the vague, inconclusive part of Microfinance dominate?

For Microfinance to contribute to poverty reduction it requires a clear definition by which results, and thus accountability, can be easily demonstrated. Microfinance is a tool to help so far unbanked people to manage money safely and prudently. Banks are institutions that are allowed to service everyone but meet challenges when integrating some people, particularly in countries with massive poverty and infrastructure challenges. MF can be of help to integrate all areas and all citizens, building an inclusive banking sector. MF services providers who do not want to be bankers can have an important role in preparing markets (areas, citizens) and to service citizens that will always be difficult to integrate. They do understand and accept that full integration by professional bankers who are rigorously supervised is the final aim. Once this definition and concept are clarified, achieving the final aim requires a national strategy that expresses the definition and holds all stakeholders responsible for success and for failure. This can only be done when performance is measured as I explained; more people with more money in more accounts in more branches of MF services providers, in whatever form, be they banks, regulated MFIs or other non-bank financial institutions (NBFI). That means that the strategy needs to be supervised by the highest executive authority with the relevant expertise, the Finance Ministry with the assistance of the highest autonomous financial sector expert the Central Bank. Ministries, NGOs and foreign donors with Micro-finance and credit components are accountable to the highest national executive for implementing the strategy and for results. What I call “Flanking Policies”, policies and programs having a direct and indirect influence on Microfinance and Building an Inclusive Financial Sector, such as agriculture, economic development, rural development, (M)SMEs, unemployment, women & youth & elderly affairs, and others, need to be integrated under the authority of the Finance Ministry when they undertake activities that have an impact on Microfinance and Financial Sector Development.

NGOs, civil society in general, academic institutions and foreign donors also have a huge role in creating awareness and educating the public about the importance of inclusive financial sectors. All citizens, and of course the so far unbanked people, need to understand the basics of financial services, of a regulated financial sector, so that they also can play a more effective role in the relevant processes, and in order to invoke their rights under law, as consumers.

Postponing or refusing to accept the above-mentioned priorities in Microfinance keeps the people that Microfinance champions say they are strongly committed to in the dark.

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About the Author

Peter van Dijk, Microfinance Consultant| Indonesia

Peter van Dijk is a lawyer by training who entered the financial sector in January 1994 working for five years with the World Savings Banks Institute responsible for promoting the interests of savings banks in Africa and Asia. Mr. van Dijk worked from 2000 to end 2002 with the Central Bank and the Finance Ministry in Uganda on one of the world’s first laws that supported the integration of Microfinance Institutions into the banking sector. From January 2003 to end 2004 he worked with the International Monetary Fund (IMF) in developing a Microfinance Policy and in its West African Technical Assistance Centre West Afritac, he advised 10 Francophone countries on Microfinance policy development, regulation and supervision. End 2004 Peter moved to South Africa on the invitation of its Microfinance regulator to provide advice and he undertook the first study on Financial Services for Poor Households on behalf of the Finance Ministry. In South Africa he was also a member of the organizing committee of the African Microfinance Conference in Cape Town end August 2005 and during that year he advised the United Nations on its “Year of Microcredit, Building Inclusive Financial Sectors”. Since January 2006, Peter is an independent consultant in Microfinance and Financial Sector Development and he has undertaken technical assistance projects in several African and Asian countries. In recent projects, he worked with several central banks (Cambodia, Laos, Madagascar, Nigeria, and Pakistan) on reviewing policies, regulations and on strengthening the capacities of Microfinance regulators, managers and trainers. He provided training on Legal Issues in Microfinance with the International Development Law Organisation (IDLO) and with the Frankfurt Bankakademie. Last year he published an article on Public Policy Issues to make Financial Sector Cooperatives Work.

Send your comments to the Author : petrusvandijk@yahoo.com

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