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The Three Witches of Microfinance
Submitted by mffocus on Mon, 07/25/2011 - 22:36
By Shakespeare Walla,
Microfinance Focus, July 25, 2011: MFIs have a right to do business and have the onus to generate returns for their shareholders. MFI’s have not been able to untangle themselves from the complex web of global microfinance ‘specialists’, ‘accelerators’ and their suspicion arousing campaigns, partnerships, illusionary terminologies, experimentation with use of unscientific, unproven, confusing social performance measurement tools which have all collectively built an appealing, politically correct theory of microfinance as ‘the final solution for empowering the poor’, which began as a harmless illusion but has now gradually morphed into to a dangerous delusion. This in turn heralded the current MFI (Microfinance Institution) witch-hunt.
“Fair is foul, and Foul is fair…”
It is not for the first time in history of commerce that corporations have produced low-cost, mass-market products to expand markets among an aspiring lower socio-economic class, what is usually referred to as the Bottom of the Pyramid.
Amongst others, this customer segment demands consumer goods (staples, soap to bottled cola), telecom (prepaid mobile services to m-wallets), utilities (water, gas and electricity), small home appliance (water purifiers, renewable energy goods), finance (gold loan, insurance, microcredit) which corporations sell.
Many of these are listed corporations, all have client base spread across geographies, all invariably create jobs, and all ensure they pay taxes, all make profits. However, none of these above corporations work to justify their existence, their role in the economy and none strive to prove the quantum of social impact they make on the consumers, something which only MFIs have super specialized.
Imagine if a bottled cola corporation argued and presented studies at every forum, how the consumer benefits by buying bottled cola drink. Think of a telecom corporation similarly driving sustained campaigns how productivity of mobile phone users goes up. Think of a gold loan company justifying and proving why its products are beneficial.
Seldom references are normal and we hear of them, but persistent campaigns to prove the utility of the product, how the product is priced, how productivity goes up post consumption of the product, how the consumption of the product leads to nation building etc. Imagine mobile phone producers come out with regular campaigns on why their products are not carcinogenic. Wouldn’t it all arouse suspicion? Someone once said, a guilty mind or conscience is always suspicious.
Historically MFIs ‘grew’ out of programs funded by development grants. Development grant meant ensuring, justifying, qualifying and quantifying the use of grant and hence the hundred percent legitimate uses of words like program outreach, members, social performance etc. These ‘programs’ had a mélange of names which meant either or of help, prosperity, empowerment, equality, better life and similar such.
Success of these non-profit programs led to the creation of for-profit MFIs. MFIs adopted these ‘harbinger of prosperity’ names. The international development non-profits quickly labeled the creation of an MFI as ‘transformation’. These programs morphed into venture capital attracting for-profit, MFI ‘owned’ by ‘certain members of the governing body of the grant based microcredit program’. While this defied logic, through a great mix of accounting wizardry and regulatory arbitrage, all was ‘deemed’ kosher. World applauded and the domestic central bank, the regulator and the taxman equally vigorously nodded, in helplessness, frustration and disagreement.
International development non-profits whose business model is to receive grants and station teams in developing countries to help these ‘causes’. They need to obviously very quickly come up with fancy programs and fancier partnerships and keep reinventing to ensure the grants don’t dry up, some examples are ‘accelerating programs’, ‘transforming programs’. Surprisingly most of these accelerators and transformers are evangelized, though in ‘letter and not spirit’ by MFIs without an iota of understanding the long term implications of the ‘illusionary’ mess they would land up later. MFIs have been basically used like guinea pigs, where success of the program is ‘ours’, and failure is ‘yours’.
Global ‘themed’ non-profits are real experts and masters when it comes to playing with words and forging alliances and partnerships for the ‘themes of the season’. These global ‘themed’ non-profits love to showcase Asian poverty and collect dollars on their behalf. A visionary Indian Prime Minister had once famously commented how only 10% of the Rupee spent reaches the ultimate beneficiary. It’s no different or maybe worse with global ‘themed’ non-profits.
A leading global microfinance accelerator decided to move out of microfinance once it realized the ability to raise funding was diminishing by the day. Similarly practitioners moved from terming themselves ‘microfinance practitioner’ to ‘Rural Finance practitioner’. Practitioners have the habit of stirring up issues and slinging mud. They find it convenient to write alarmist stories about issues such as corporate governance, executive compensation, interest rates, lack of innovation etc. Obviously if a banker joins an MFI leadership, he is bound to be paid market salaries, why should others cringe.
MFIs need to hope for good riddance from these seasonal and fair weather courtiers made of ‘Jholawallahs, global microfinance specialist accelerators and NGOs’.
The Latin phrase caveat emptor holds good for all industries and sectors as much for microfinance. Clients are much smart and savvier than we or the global microfinance NGOs estimate them to be. They understand the risks and benefits of availing a microcredit loan.
Sustained campaign for client protection, transparency of interest rates and similar such only attract the regulators eye and arouse suspicion.
Have you ever heard of a campaign by other corporations trying to justify their business? No they don’t as caveat emptor holds.
MFIs should consider getting miser when it comes to using words like outreach, members, partners and swap them with geographic presence, client and bankers. MFIs must get real and behave like mature corporations do.
MFIs also find themselves holed up in quarterly themed conferences organized by non-profits/conference organizers. Each conference needs a new theme to create scare and attract maximum paid delegates. These non-profits pick up issues like social performance (fancy, here we go again), leveraging, multiple borrowing, scaling up, mission drift (fancier, once again) etc. Representatives from the regulators and central banks invariably give these themed conferences a miss. Experts from these global microfinance non-profits offer solutions for the same. These issues are like Trojan Horses.
MFI should consider working more outside of quarterly themed conferences.
Some once said, in free markets, no surgical interventions usually help, markets help themselves.
Let’s pick up the commonly debated done to death case of over leveraging-multiple borrowing, loans for consumptive purposes etc. With the current liquidity crunch as a result of regulatory action in India and the resultant turning off the liquidity tap, client repayments from non-Andhra Pradesh states should have theoretically halted, surprisingly repayments are going strong as the total debt availed by the clients from multiple MFIs is still short of his requirements as a result of double digit inflation.
Yes, like with every industry and at every economic cycle issues exist, however the microfinance sector is strong and resilient. The demand for microcredit is large and growing. Plain economics: MFI is a seller, client is the buyer and the microcredit loan is a product at a certain price. MFIs are regulated and hence they need not justify their product, pricing, process, utility of microcredit loans. MFIs should focus on doing their business and generating returns for their shareholders where risk must equal return.
(Disclaimer: Shakespeare Walla is the author’s pen name. The opinions expressed are solely those of the author and do not necessarily represent opinion of Microfinance Focus. Microfinance Focus does not take any responsibility for correctness of the data presented by contributors.)
Author can be reached at firstname.lastname@example.org