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> Posted by Nadia van de Walle, Senior Africa Specialist, the Smart Campaign

Serve clients with suitable products. Prevent over-indebtedness. Be transparent and price products reasonably. Treat clients respectfully, listen to their grievances, and protect their privacy.

The seven client protection principles make undisputedly good sense on paper. It’s hard to argue against any one of these practices, either normatively or from the perspective of the financial bottom line. We assume that well-treated, well-understood clients using appropriate products through the right delivery channels are more loyal, satisfied, and likely to refer their friends and family, provide useful feedback, and repay loans. Right?

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This post was originally posted on the Grameen Foundation blog by Alex Counts, President and CEO of Grameen Foundation and a member of CFI’s Advisory Council.

Alok PrasadAs a result of a complex combination of unwarranted attacks and self-inflicted wounds, the microfinance sector in India experienced a crisis starting in late 2010 after many years of strong growth and recognition for its contribution to poverty alleviation and financial inclusion.  When I was asked to give a keynote address at a microfinance conference in India in 2012, I said that it was important to leverage the sector’s strengths and accomplishments, while also addressing its failures and shortcomings.

I visited India in May and July and found that these things were finally happening and leading to on-the-ground progress as well as tangible support from both the outgoing and the newly elected Indian governments.  And as this blog went to press, there was another promising development: the government published draft guidelines on creating a pathway for NBFC-MFIs to become specialized or “differentiated” banks, which would enable them to take deposits directly for the first time legally.  (Though not all NBFC-MFIs would likely be eligible unless the “stringent norms” proposed are made more flexible.)  

My May visit to Mumbai was centered around Grameen Foundation’s workshop “Designing for Adoption and Scale” (click here for highlights and here for my closing address).  

One of the highlights of the second trip was speaking with Alok Prasad, the CEO of theMicrofinance Institutions Network (MFIN), a respected microfinance industry association.  He spoke eloquently about the progress the industry has made recently and the reasons behind it.  Below are excerpts from our conversation. 

Alex Counts (AC): I sense a new optimism related to Indian microfinance after some difficult years.  Would you agree?  How would you characterize the last 12 months in terms of how the Indian microfinance sector has developed? What were some of the key contributions of MFIN?

Alok Prasad (AP): Clearly the mood is buoyant, but not in an irrational way! Looking at the last fiscal year (April 1, 2013 to March 31, 2014), much has gone well for the industry. Growth, both in terms of gross loan portfolio and clients, has been strong. Portfolio performance stays at levels which commercial banks can only dream of (for unsecured lending). Branch networks have expanded, and new geographies have been covered. Funding (both debt and equity) has improved markedly. The regulatory environment remains broadly positive, notwithstanding the Microfinance Bill falling by the wayside.

In specific terms, the aggregate gross loan portfolio of MFIN’s member institutions (Non Banking Financial Company-Microfinance Institutions or NBFC-MFIs) stood at Rs. 279.31 billion (US$4.63 billion), an increase of 35%, over the prior fiscal year. Clients covered stood at 28 million, representing growth of 20% over the previous year. Debt funding grew by 46%, along with a definite revival of investor interest.

MFIN, I believe, has played a key role in bringing stability to the sector. Deep and sustained dialogue with the government and the Reserve Bank of India (RBI) has resulted in regulatory changes that are conducive to growth; a much greater appreciation of our industry’s role in promoting financial inclusion; and, the recognition that the industry is an essential component of the national financial architecture. From a systemic standpoint, the development of the credit bureau ecosystem had been a big win. As of this date, more than 150 million client records are present on the databases of two national bureaus. These records are updated on a weekly cycle; and, all lending is only after a bureau check. This has given remarkable results in controlling multiple lending and over-borrowing by clients. Our recognition by the RBI as the self-regulatory organization (SRO) for NBFC-MFIs is a sign of both a certain maturing of the industry and the regulator’s acceptance of that reality. A nice ‘new normal’ for an industry which just 18 months ago appeared deep in the throes of a crisis!

AC: MFIs outside of Andhra Pradesh have begun growing again.  Can you give us a sense of this growth and how it compared to other parts of the financial sector?  What are the main reasons?  Are there risks?

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> Posted by Hema Bansal, India Director, the Smart Campaign

As a child growing up in India, I was always intrigued by stories from Myanmar, but disturbed by conflicts that it had witnessed. Not knowing much about the country, as an adult I still had an innate desire to visit. On May 7th and 8th, I attended the Responsible Finance Seminar, organized by Entrepreneurs du Monde (EDM), held in Myanmar’s city of Yangon. I was completely awed by the mystical peace of the city, I was also impressed by the demonstrations of support at the seminar for instilling client protection in Myanmar’s microfinance industry. It’s a great opportunity for a young market to secure responsible practices from its outset.

Myanmar, the second-largest country in Southeast Asia, remains one of its poorest. Decades of isolation have severely affected its development. In terms of financial inclusion, a large proportion of the population in Myanmar relies on informal lenders. The formal sector only serves about 20 percent of the population, largely because of the existing financial institutions’ limited capability.

In May 2011, President Thein Sein publicly recognized microfinance as a means of development by enabling local and foreign investors to establish fully privately-owned MFIs. Since the rationalization of licensing in Myanmar, around 110 MFIs have been registered. Deposit-taking institutions have been allowed to set-up shop rather easily due to low minimum capital requirements and the absence of separate prudential regulations from non-deposit-taking institutions, such as rules pertaining to reporting standards and portfolio quality management.

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> 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.

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> Posted by Amanda Lotz, Financial Inclusion 2020 Consultant, CFI

Tomorrow, people around the world will celebrate International Women’s Day. In honor of the day, and the tremendous impact that financial services can have for women, we’d like to highlight some of the top resources from the past year that focus on financial inclusion of women. Though there are many great resources out there, below are a few that have caught our attention.

1. Findex Notes: Women and Financial Inclusion

Drawing from the Global Findex Database, the World Bank and the Bill and Melinda Gates Foundation created a briefing on the state of women’s access to and use of financial services globally. It’s a concise snapshot of financial inclusion data on women. It highlights gaps that persist for women, as compared to men, globally and across regions. It looks at variations in account ownership for savings and credit, as well as barriers to usage identified by women. And if you’re looking for more, I suggest exploring the Findex database or the CFI Data Explorer and conducting your own analyses!

2. Promoting Women’s Financial Inclusion: A Toolkit

DFID and GIZ on behalf of the German Federal Ministry for Economic Cooperation and Development prepared a toolkit aimed at policymakers, donors, and NGOs who want to learn how to design and implement programs to enhance the financial inclusion of women. It provides insight into factors that contribute to financial exclusion of women and offers recommendations to address access barriers. In addition, the toolkit provides methods for client segmentation as well as several illustrative case studies. Rather than suggesting focusing on women exclusively, the toolkit also recommends understanding the distinct needs of men.

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> Posted by Jaclyn Berfond, Senior Associate, Network Engagement, Women’s World Banking

Women have long been the face of microfinance, a fact reflected by the mission and goals of the institutions that serve them. According to the Microfinance Information Exchange (MIX), most microfinance institutions (MFIs) claim to target women (74 percent) and just over half declare women’s empowerment or gender equality as an objective.

Big commitments are all well and good, but if we are going to espouse the importance of serving low-income women, we must be able to hold ourselves accountable. How do we do that?

For many years now, the microfinance industry has focused on financial performance, with sustainability and later profitability driving outreach. In the wake of crisis – often the consequence of rapid growth – the industry has re-focused on social performance, getting back to the basics of ensuring that financial institutions adhere to their mission of serving low-income clients. We strongly believe that there must be a balance between financial and social performance, and that in order to achieve either, the industry must take a good look at their clients – still predominantly women. By truly analyzing this client base, MFIs can both build the business case for serving women, and ensure that they are serving these women well. This is gender performance.

In 2011, Women’s World Banking launched the Gender Performance Initiative (GPI) to develop a framework that defines what it means to serve women and measures how effectively MFIs do so. We wanted to establish a set of indicators that would enable MFIs to consider not only how many women they serve, but how they can enhance their understanding of customers to tailor products, marketing strategies and delivery channels to meet women’s needs. The initiative also set out to demonstrate the benefits of financial inclusion for women and their households, as well as the benefits of gender diversity among staff, management, and board.

Developing the indicators. There is no easy place to start when it comes to measuring performance, and we wanted to be sure that the metrics we chose would truly tell us whether an institution was serving women well. First and foremost, we needed to start with the right questions, in the areas that matter most to women. Beyond outreach, we looked at product design and diversity, service quality, and client protection, as women have specific life-cycle needs and goals that must be considered. For example, women may need a convenient and confidential way to save for children’s education expenses, or an insurance product that offers cash benefits for hospitalization to cover lost income from time away from their business (and includes maternal health coverage). We also looked at the diversity of staff and management, because we believe that in order to be the best place for women customers, a microfinance institution should be a place that welcomes women employees and women leaders. Finally, we wanted to understand how serving women clients contributes to institutional financial sustainability, as well as outcomes for clients.

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> Posted by Anne H. Hastings, Manager, Microfinance CEO Working Group 

Global Forum Venue: The London Lancaster

Global Forum Venue: The Lancaster London

As I traveled to London to attend the FI2020 Global Forum, my mind was filled with many thoughts. First was excitement that I had been invited to attend when I was still very much a microfinance practitioner. I was still in the process of adjusting after 17 years living in Haiti struggling to build an institution that would be a model of a client-centric, double bottom line microfinance institution (MFI) committed first and foremost to reaching the very poorest people in Haiti and providing them a pathway to a better life. For me, this meant providing them with a full range of financial and social services. My commitment to these clients had been solidified through my years in Haiti but also by my service on the Smart Campaign Steering Committee and the Board of the Social Performance Task Force and more recently by my role as a practitioner advisor to Truelift.

But now that I was in the plane and on my way, I had taken on a new role: Manager of the Microfinance CEO Working Group, a collaborative effort of the CEOs of eight pioneering global microfinance networks – Accion, FINCA, Freedom From Hunger, Grameen Foundation, Opportunity International, Pro Mujer, VisionFund International, and Women’s World Banking – all dedicated to advocating for more responsible microfinance practices and to instituting the highest standards of performance within their own MFIs. These eight CEOs represent 250 MFIs in 70 countries, serving some 40 million families. Suddenly I had been boosted from deep concerns about the future of poverty in one tiny country of 9.5 million to a preoccupation with the future of MFIs worldwide.

The Forum was a beautiful reflection of the often chaotic financial services marketplace of today where traditional banks, telecoms, retail stores, donors, investors, policymakers, regulators, and MFIs often collide in seeking to capture new markets. In attendance were the CEOs of institutions like Citi and MasterCard, along with several former Governors of Central Banks, technology innovators like the CEO of bKash, executives of insurance companies like MetLife and Swiss Re, Managing Directors of investment companies like Wolfensohn Fund Management, experts in alternative data systems like Cignifi. There were times when I thought maybe I had actually entered the wrong conference! Who were all these people, and what did they have to do with the future of microfinance?

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> Posted by Alex Counts, President and CEO, Grameen Foundation

The Financial Inclusion 2020 Global Forum was a remarkable and historic convening. I was honored to have been invited to attend and co-facilitate an “ideas to action” roundtable about one of the five parts of the Roadmap to Financial Inclusion .

Immediately after the event I reached out to Elisabeth Rhyne to understand how I could help build on the groundwork laid at the conference. She suggested I write a blog post about my experience. My immediate reaction was that commenting on such a wide-ranging and successful effort was a bit daunting. But I felt it was worth a try.

Dissecting the Term “Financial Inclusion”

I will admit that I have warmed slowly to the language of financial inclusion and financial capability. Are these just new buzzwords for time-tested concepts? (And if so, why use them?) Let’s assume they are new concepts. If so, financial inclusion feels like more of a means than an end. For me, the end is the reduction of poverty and the empowerment of low-income women – so why not focus on those? If having a poor or even middle-class person simply open their first “no frills” bank account is considered a step towards financial inclusion, regardless of how useful or helpful that bank account is, is this banner a lackluster one to rally under? Further, it is not clear to me that the provision of quality financial services through informal financial institutions (however defined) is being properly valued in the financial inclusion agenda. Finally, does making “financial capability” something of a prerequisite for people accessing formal financial services effectively let financial institutions off the hook for meeting clients where they are and designing appropriate products for them?

While my apprehension about these concepts has not entirely dissipated, I emerged from the Global Forum feeling that this campaign for full financial inclusion, at least as defined by CFI, is evolving as a powerful rallying point for a diverse coalition of providers, regulators, technologists, researchers, and activists. The notion of full inclusion is essential. I now see financial capability as a concept that defines the end state when financial education (through whatever means) is done effectively. The Forum probably had a similar impact on many others – helping them travel from a place of confusion or even wariness towards strong alignment and shared purpose.

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> Posted by Meghan Greene, Manager, Microfinance CEO Working Group

Last June, at the annual Social Performance Task Force meeting in Jordan, the members of the Microfinance CEO Working Group and their lead social performance directors announced their plan to conduct the first large-scale analysis of the Universal Standards for Social Performance Management (USSPM) in practice, a process we called “beta testing.” You may recall our blog post about the plan last summer.

After a year of work, we’re ready to share our results, as detailed in the new working paper, “Insights from ‘Beta Testing’ the Universal Standards for Social Performance Management.”

As many of you know, the Universal Standards for Social Performance Management are a set of 99 “Essential Practices,” organized into six sections:

  • Section 1: Define and Monitor Social Goals
  • Section 2: Ensure Board, Management, and Employee Commitment to Social Goals
  • Section 3: Treat Clients Responsibly (Essentially tracking the Smart Campaign)
  • Section 4: Design Products, Services, Delivery Models, and Channels that Meet Clients’ Needs and Preferences
  • Section 5: Treat Employees Responsibly
  • Section 6: Balance Financial and Social Performance

The Universal Standards are considered applicable to all double bottom line microfinance institutions, and meeting the Standards signifies that an institution has strong social performance management practices. Clearly, implementing all 99 Essential Practices requires careful thought, planning, and execution, but we wanted to learn more about the process of translating the Standards into action. We partnered with more than 20 MFIs to work to answer a number of questions, including: Read the rest of this entry »

> Posted by Center Staff

“The old ideas have become akin to the sixteenth century assertion that the world was flat; yet it did gradually became established that the earth was round after all. Microfinance needs to be rounded too.” – Sanjay Sinha

Sanjay Sinha, founder of Micro-Credit Ratings International Limited (M-CRIL), recently released a candid wake-up call for the industry to move beyond the now outdated microfinance principles initially propagated in the 1990s and employ a more diverse and client-friendly approach. In his note, A Challenge to Flat-Earth Thinking in Microfinance, Sinha cites four tenets he finds especially problematic, contextualizing their adoption and negative implications, and positing how the industry can better move forward in meeting the needs of the poor. Sinha’s note follows:

The intensive promotion of microfinance worldwide as a palliative if not a panacea for poverty started in the mid‐1990s with initiatives like the establishment of CGAP, the Microcredit Summit Campaign, and various national-level apex agencies often sponsored by multilateral or bilateral development agencies like the World Bank and the regional development banks. Led by CGAP, as the main international technical agency for the support of microfinance, a strong message on the principles of good microfinance practice was propagated worldwide. These principles included (but were not limited to) the following:

  • MFIs must adopt the principle of “zero tolerance of delinquency” in order to minimize default.
  • There must be a continuous effort to limit operating costs in order to deliver microfinance at the lowest possible price to low income clients.
  • Microfinance services must be offered by specialist MFIs in order to ensure that there are no conflicts of interest that confuse MFI managements, staff or borrowers.
  • MFIs should focus on growth in order to maximize outreach to the vast numbers of financially excluded families across the globe.

This note argues that while these principles may have been appropriate at the time when they were formulated (in the mid‐1990s) their time passed a few years ago and the entrenchment of these principles as microfinance orthodoxy is now damaging the development objective – financial inclusion to serve the needs of poor and low income people, and facilitating income enhancement – for which the microfinance movement was propagated. Therefore, the time has come for a concerted effort to swing the pendulum back to equilibrium.

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