How to calm the charging bull – An agenda for CGAP in the decade of the “teenies”
- Tuesday, June 15, 2010, 23:36
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6 Comments on “How to calm the charging bull – An agenda for CGAP in the decade of the “teenies””
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Just this week we could read an article from the Indian Central Bank Governor expressing his doubts on the national MFIs, that they would probably not be able to serve as a tool to build an inclusive financial sector. Furthermore, a global debate on MF found that in India, MF is nearly exclusively viewed as lending to the poor, with only lip-service to other financial services that seem to be more important for poor people, namely safe and accessible deposit, savings and transfer services.
Furthermore, the author gives little attention to the fact that mainly government and foreign sociopolitical funds drove the tremendous growth of MFIs. Government and “social responsible investors” (that CGAP identified as mainly non-commercial socially motivated funders) pushed a trend stating that Microfinance is Highly Profitable and a prudent choice for investors (who now are searching for alternative choices to put their money). Now the author and other critical minds of the sociopolitical (not financial sector development) movement want donors to accept that interest rates (and return on investment rates) should come down and that donors should help transform MFIs into community development organisations, helping poor people probably with a range of services – maybe akin to some large Microlending institutions in Bangladesh (where well-known researchers last year demystified the impact of microlenders in poverty alleviation, concluding that most at least do no harm!).
If this criticism takes root and becomes a new global trend then the dependency of poor people from “Robin Hood” lenders will become stronger. And when the myth of financial sustainability and investment opportunities for the wealthy nations, their banks and individuals also strengthens, then we can wait for the next Subprime crisis to strike. But this time the crisis will directly hit poor people in countries with hardly any social safety net to speak off, and there is a chance of exploding Microfinance as an effective tool in sustained poverty reduction (by training poor people in prudent money management and integrating them into the formal financial sector).
Regards, Peter
Absolutely brilliant overview that I can share with my students. Both CGAP and MIX provide very important resources and undoubtedly the sharing of these resources has encouraged many social entrepreneurs to start new MFIs and many researchers to undertake research in the field. However, questions remain if the importance being given by the author to CGAP and MIX is not exaggerated. As the charging bull encourages new entrepreneurs, importance would shift even more to bottom-up particpation and federating initiatives rather than top-down control. Another question remains on the ability of private sector rating agencies to share information and even in the desirability of their standardizing their reports for this purpose. One of the benefits MFIs get from rating is to get an outside opinion. In fact by changing rating agencies over time, they can get different outside opinions based on different methodologies. Of course, perhaps I misunderstood the author.
Finally, on the livelihood question, credit could perhaps be given to BASIX just as well deserved credit is being acknowldged for Grameen 2. In any case kudos to both the author and to Microfinance Focus for this paper.
This is an excellent overview of the microfinance kaleidoscope. It is truly a charging bull which needs to be calmed.
There are only two areas where I depart from the author.
1. I would from experience discourage restructuring of microfinance credits. I still believe that once a credit facility has been classified as non-performing its restructuring should not change its status unless substantial repayments have been made. Credit officers in a number of MFIs restructure credits which are already non-performing for the sole purpose of converting them into performing. Credits do not change status by a stroke of a pen! This is fraudulent and in practice has proved to be just delaying the provisioning and eventual write off of those restructured credits.
2. PAR(30) – I still believe that this is a good indicator and should not be adjusted upwards whether the credit period is for four months or one year. The behavior of microfinance credits necessitates detecting the credit risk at an early stage to be able to make the necessary interventions. A good number of credits are not serviced from cash flows generated from investments for which the credits were granted. They are serviced from the total cash flows of the respective households. The earlier the risk is detected the better as this will force the households in question to look elsewhere other than relying solely on the cash flows of an investment.
I thoroughly enjoyed this article; however, I’m not sure if Mr. Sinha places all the blame for the problems that recently emerged in the sector, on CGAP, because at the end of the day, these are merely principles that are meant to be adopted as philosophies. If Grameen Bank escaped relatively unharmed, others could have too, on their own.
As for restructuring, in my humble opinion, the evil is in manipulative accounting practices and not in restructuring of loans itself.
Along with you I have some moot points .for ensuring the qualitative perspectives in the next decade micro finance activities.
First, for healthy business practice, strong governance, development of products and services matching the needs of the poor clients etc., are vital. but establishing these ideals at grass root levels calls for ethical and moral responsibilities among the players in both supply and demand sides .In the presence of ‘non ethical character of modern economics’ (Amartya Sen) how to address these challenges in the modified agenda and what are the strategies for ushering in quality performance with ethical parameters be it in pro poor product development or financial inclusion or healthy business practices in the next decade?
Second, success of financial inclusion or expansion or access largely hinges on basically on adequate access to physical capital in terms of road, bridges, canals, warehouses, transport, and market yards besides electrical power and telecommunication. Here mere insistence on financial access or inclusion therefore will not deliver well qualitatively. Evidently as is the case in India , poor physical infrastructural facilities as referred to above, explains why the ‘credit deposit’ ratio in some of the eastern states remain low over several decades. This kind of situation prevails invariably in many under developed and developing countries as well in the world. Hence how to sequence the development priorities avoiding ‘putting the last (credit) first’ approach particularly in the context of poverty reduction through micro finance.
Third, I fully agree with Sanjay on ‘over charging bull concept’. Here I wish to share some more related points. Right from the tortoise phase to bull phase why ‘micro credit alone’ has been allowed as ‘be all’ and ‘end all’ in micro finance arena while the acknowledged fact reveals that MF is package of services including micro savings , micro insurance , remittance services and other pro poor financial services which are essentially needed for poverty reduction.. In fact every one in the field endorses the view that micro credit is not a ‘silver bullet’ and mere credit alone can not bring desired impact in the poverty sector unless it is integrated with other non financial inputs (physical, human etc.,) besides other MF service. But what happened in the field. Mere uncontrolled infusion of micro credit in the unethical market scenario (thanks to micro credit summit global show ) has over charged ‘the bull’ and the eventualities include over delinquency, multiple lending , multiple borrowing, debt trap, glittering recovery rate, high rate of drop out/push out/group mortality( in SHG/MF system) suicides, ultimately perils and crisis( although inherently) in this segment .
In this context, I feel that we have failed to work out a strategy for ‘single window’ concept for delivering all MF services coupled with other non financial services needed for the poor for a sustainable poverty reduction. Despite the presence of many institutions with different products, the target poor are not ensured with all these services collectively. Even the so called MFIs also confine to credit services only. (exceptions like BRAC) The policy makers, the proponents of MF and even rating agencies (CRIL) have more focused on the sustainability of functioning of supply side mechanism (financial &organizational) rather than social impact (benefit) sustainability at poor client household level. (In CGAP Blog posting also).
Even in the case of the new institution like MFI why should it confine to micro credit only knowing mere credit is not adequate for the said purpose – poverty reduction’ for which the whole MF concept emerged? However from the tortoise phase to present phase, what is visible is a clear the trajectory for MFIs indicating the institutional transformation from NGO to MFI and then NBFC and LAB (Local Area Bank) It may indicate a qualitative institutional growth with financial soundness as it drew global level policy makers’ attention .But the ‘means’ are taken care of in the process while the ‘end ‘at ultimate stage is sidelined if not neglected. Global debate (CGAP MF Blog posting) discusses on the question related to the positive impact of micro credit on poor! Further series of impact studies also failed to establish any direct causal link between better availability of financial (more particularly credit) services from MFIs and increasing client incomes as highlighted by Sanjay.. I agree with him that ‘over charging the bull’ has resulted market saturation in many places and eventually vulnerability in many places instead of removing or reducing vulnerability. This is irony.
. It is therefore suggested that there is an imperative need in the next decade of MF to focus more on demand side perspectives for ensuring integrated input services besides micro credit either by single or multi institutions in a coordinated manner to the same target groups. Gap’s ‘Graduation approach’ for the poorest is encouraging but again micro insurance is not adequately linked .There is much grass to water. The CGAP may reverse back to keep their acronym as CGA poorest from CGA poor for a stronger advocacy for the poorest in the mind set of MF practitioners( I have argued this in CGAP blog already)
Fourth, reg ‘MIX’, despite limitations in the area like accuracy, uniformity in concepts, ratios, and reporting etc there is some transparency. The fact on the coverage of ‘non poor’ also by MFIs as revealed in MIX is causing greater concern
Fifth, .Micro insurance (MI) still remains Cinderella over 3 decades. CGAP has not adequately focused MI as vital tool for reduction of vulnerability of the poorest in the bottom layer under MF concept. At least in next decade this MF input need to promote either individually or integrated with credit product. While many commercial banks in India have insurance linked credit product( livestock master policy , crop insurance) and are evincing interest for foraying into insurance sector there by providing integrated MF services -savings, credit insurance ) the MFI s need to be directed to ensure provision of integrated MF services in the next decade either singly or severally to their poor client
Sixth, the MF sector scenario with drifting from ‘mission driven sector’ to ‘equity valuation driven sector’ (Sanjay) really is causing great concern in the context of reaching millennium development goal. Further, in the process, many NGOs (social change agents) after turning to MFI (money lenders) have lost their credibility and confidence among the poor – a loss of socially minded human capital at grass root level. These kinds of negative impact also need to be watched and corrected in the next decade of Micro finance
6.In the last instead of having MFI with all its regulatory complexities in the unethical competitive market environ , why not we encourage and promote self Help Group Federation as a mini MFI rotating their own funds with their own rules self-reliantly without depending on external sources . Instead of financial rating agencies , participatory social audit may certainly facilitate for bringing a quality self management resulting candid reduction in poverty and at the same establishment grass root democracy. After all MF emerged as a panacea for the poor in poverty segment and not necessarily as a product to be sandwiched between the ‘bear’ and the ‘bull’ in the capital market