Three Secrets of Safe Microfinance

Beth,

excellent post. I’m completely with you on underwriting and quality staff. And I’ve been as frustrated as anyone about the erosion of these two key areas. My concern is with your 2nd point (savings). Savings is certainly useful for many other reasons, not the least of which is that it’s the most important service financial intermediaries can provide at the retail level. But in terms of protection against risky lending, I can respond in just three letters: S&M… er… I mean… S&L.

Ok, so maybe a bit more than three letters.

Roodman has written about Grameen’s 12% interest rate on deposits that creates an incentive to seek out assets with high-returns (e.g. microloans). In this respect, the pressure to find more borrowers can become similar to what we’ve seen in Andhra and elsewhere. This notion of high deposit surpluses as a risk is not new. In Nigeria, MFIs flush with deposits bought real estate and even stocks. There have been many cases of bad investments by Japan’s postal bank and other government-affiliated savings institutions around the world. And the S&Ls in US are perhaps the best example. In their original form, S&Ls were community banks whose managers knew clients by name. Then the early 80s brought deregulation, allowing S&L managers to indulge in temptation, and the rest is history…

Savings come with their own risks, and as much as I’m very much in favor of promoting savings, I think we need to be careful about approaching their risks with even more care than microcredit, given that the funds are those of the poor themselves. Given the rapid rollout of savings that seems on the horizon these days, I’m a bit worried that the sector might once again make careless mistakes, which a few years down the line will lead to new regrets.

I wonder if in the end, the biggest risk of all is speed. After all, one can’t expect everyone to be skilled enough to qualify for the Indy 500.

I am standing with the views of Ms. Rhyne. Those are the basics of the client focussed microfinance operations. It can be observed from the genesis of the MFIs that they start their operations with all these phillosophies with wholehearted social endeavor however which they forget microfinance is not only a pure social endeavor its socio economic endeavor with business proposition. This segment of the development attracts external influences as well. The other way to spectacle it is the shift of the MFIs from the basic objective of microfinance, this issue is also very subjective.

Bringing back the focus on the external influence much spoken Andhra Crisis can be referred. It is a fact that the return to the investors from the investment in microfinance is couple of folds more than the booming real estate sector resonating into flooding of private lenders into the sector.

As the for profit segment (NBFCs) are directly governed by Central Bank of India so the private investors are comfortable to invest funds into this entities and infused funds as well. Unfortunately these funds are expensive and comes up with certain stringent norms of repayment.

Here comes the dangerous mix the -
- Need of more resources to service the poor
- Aiming high speed scalability by the MFIs
- Presure of the deal with the private investors on repayment
- The shift of the MFIs (some) from basic objectives

These dangerous mix has played havoc in the field and spoilt the culture of Mf sector. To bring to notice that mainly the NBFCs are are the worst hit in Andhra case and the clients revolt are mainly against them.

So in order to analyse and resurrect the situation apart from the opreational issues we need to understand the external and macro issues. I think in order to avoid the same problem in Philipins we need to be bit careful on the external influences as well.

Dr. Saibal Paul