> Posted by Elisabeth Rhyne, Managing Director, CFI

Nearly every industry requires infrastructure to thrive, and this goes for the microfinance industry too. But the infrastructure that the global microfinance industry has constructed over the past two decades is looking a bit shaky today. Infrastructure investments are urgently needed to keep the industry sound and prepare it for the future.

One could argue what exactly constitutes the microfinance industry’s infrastructure, and there are a range of organizations to choose from, but for this conversation, let’s look at several key organizations dedicated to setting standards and providing information for microfinance globally: the Microfinance Information Exchange (MIX), the four specialized microfinance rating agencies, the Social Performance Task Force (SPTF), Smart Campaign, and Microfinance Transparency (MFT). These organizations, which perform vital functions for the industry, arose during two different phases of microfinance industry development.

The first generation of organizations – MIX and the rating agencies – were created to provide financial transparency and standards, primarily so that investors could identify well-performing institutions, and also so microfinance institutions could evaluate their own performance against common standards. It took a lot of work to create these organizations. MIX had to find ways to incentivize MFIs to report and to devise a system for data quality assurance. The founders of the rating agencies – Microrate, Planet Rating, Microfinanza Ratings, and M-CRIL – took substantial personal risk in devoting their careers to promoting financial transparency in microfinance.  Together, these organizations have helped spread financial standards throughout the microfinance industry and contributed to improving the financial performance of MFIs, enabling the entry of private social investors who now contribute very importantly to the funding of microfinance. We sometimes now take financial transparency for granted, but if these organizations were to stop playing their role in upholding it, adherence to standards across the industry would undoubtedly drop, with consequences for investor interest, which up to now has remained strong.

The second generation of organizations – SPTF, the Smart Campaign, and MFT – were created to provide social transparency and standards. In addition, the Microcredit Summit Campaign has launched the Truelift initiative. These initiatives are still young and struggling to nail down their systems. The Smart Campaign and its client protection principles are widely endorsed, but the real test is certification, which was introduced in 2013 and is growing slowly. The SPTF is attempting to be the umbrella group for all of these initiatives, with a focus on reporting under the “Universal Standards for Social Performance Management.” Microfinance Transparency received kudos for making detailed pricing data public and comparable, but it has struggled with the challenge of sustained, global information collection. This second generation infrastructure depends on the first. For example, Smart uses the specialized raters for certification and SPTF works with MIX on social performance reporting.  And the initiatives focused on client data (SPTF and Truelift) depend on yet another infrastructure element, the Progress out of Poverty Index, promoted by the Grameen Foundation.

Today, with the possible exception of the Smart Campaign and the SPTF, these organizations are facing existential challenges. To the extent that Smart and SPTF rely on MIX and the raters, either their ongoing viability is also at stake or they will have to construct alternative pathways that avoid such reliance. In general, all these organizations struggle for revenue and funding. As a result, they operate below capacity and below the level that would allow them to offer truly robust and valuable services that keep pace with technology and industry developments. With scarce funding, they also face challenges in retaining the talented staff they – and the industry – need.

Initial funding for many of these activities came from the public sector donors and development banks who  saw the need to jump-start for tiny microfinance the same kinds of standard-setting and information provision services that keep the larger financial system going. The idea was that the funding would transition to the private sector, such that start-up subsidies would gradually end. While a handful of private foundations have stepped in (such as the MasterCard and Ford Foundations), the investors in microfinance have not contributed as paying users of the information in the way that was initially envisioned. Neither have microfinance institutions themselves been willing to foot enough of the bill.  At some point a negative spiral could kick in: lack of revenue keeps service quality low, which reduces use, which reduces revenue. These organizations also have a need to coordinate to make their standards and services more seamless for the MFIs who supply the data, but the need for organizational survival can get in the way.

Some may argue that these functions belong at the national level, among the regulators and industry associations that operate there, and there is a strong element of truth in that. However, the pace is very slow and uneven. Moreover, even as local solutions grow and become more relevant, a need will continue for global microfinance infrastructure, tools, and standards. Why? Because international investors are putting money into microfinance at an unflagging rate; because global bodies are important for keeping standards high everywhere and pointing the way for national initiatives. Finally, these bodies are important because they shape a global identity for microfinance which is essential for preserving the social character of the industry that enables it to play a unique role in the global financial system.

What is to be done?

The infrastructure organizations and their key supporters, together with MFIs, networks and investors, must be willing to take a fresh look at these needs and search without preconceptions for the most economical and efficient ways for information to flow, for standards to develop, for viable business models to emerge for data collection, on-site evaluations and other core functions. Participants in such a dialogue will need to be open to the possibility that the organizational structures that exist today may have to evolve. These conversations need to begin now.

And those conversations will have to address revenues. Everyone in the industry – public and private sector donors, investors, networks and MFIs – must step up to pay for the infrastructure of microfinance, whether as donors or as users. Everyone benefits from “core facilities” such as these. They are part of the commons, and no one should be a free rider. The cost is not enormous. The combined annual revenue stream these organizations need to be financially secure would be a tiny fraction of the total assets of the microfinance industry. Meeting those needs is a do-able challenge in an industry with billions in total assets and a critical role to play in broad-based economic growth and poverty reduction.

Image credit: Va. Dept. of Conservation

Have you read?

How Client Protection Certification and Ratings Work Together

The Universal Standards, One Year Later

Opportunity International Engages MicroFinanza Rating to Promote Client Protection