You are currently browsing the monthly archive for November 2010.
> Posted by Siddhartha Chowdri
The current issues of microfinance in Andhra Pradesh have exposed the flaws of the Indian banking system, the current practices of some commercial MFIs, weaknesses in the self-help group movement, the inability of rating agencies to sufficiently scrutinize MFIs, and the political implications of providing services to the “base of the pyramid” in India. However, none of this is either new or unique to Andhra Pradesh. Commercial microfinance has had many setbacks. For example:
- Crisis in Bolivia in 1999
- Andhra Pradesh 2006
- Nicaragua in 2008
What should bother us is that governments, politicians, banks, MFIs, investors, journalists, bloggers, and clients repeatedly ignore the lessons of previous overheated microfinance markets. Instead of changing behavior, this nexus of irresponsibility leads politicians to blame MFIs, banks to blame rating agencies, clients to blame crop failures, MFIs to blame the media, and bloggers to blame everybody.
A lesson is only as lesson if we actually learn something and change our behavior. In this context, here’s what I wrote in June 2009 about the dangers of over-indebtedness in India’s microfinance sector:
At a financial literacy event I attended the other day, I had a long conversation with some of the senior management of Grameen Financial Services (Grameen Koota) about the delinquency issues facing ALL MFIs in the Indian state of Karnataka. Read more >
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> Posted by Michelle Romeu
…from all of us at the Center for Financial Inclusion! Have a warm and safe holiday.
Cupcake credit: Staff
> Posted by Veena Mankar
Veena Mankar is co-founder and managing director of Swadhaar FinServe. She has over 30 years of experience in development and commercial banking. Below is her response to Beth Rhyne’s Huffington Post blog article, “Who’s to blame for the Andhra Pradesh crisis?”
I would like to add a dimension to Beth Rhyne’s perspective on “Who’s to blame for the Andhra Pradesh crisis?”
The two main contentious issues in the crisis are unaffordable interest rates and collection practices, which have led to a comparison with the notorious moneylender. To my mind, both these issues, to a certain degree, trace their roots to the lack of comprehensive financial services for the poor.
MFIs have successfully extended loans to the poor, but not other financial services. It is accepted that the poor have entrepreneurial opportunities that provide returns of 20-30% per month, which can therefore absorb the very high interest rates on loans that arise from high transaction costs.
However, the interest rate becomes unaffordable when the loan is used not for income generation or cash-flow smoothing, but rather for other purposes. Low-income households with easy access to credit are using loans as substitutes for other financial products. For example, in a situation without life or accident insurance for the main income-earner, a loan could be taken out to cope with the financial “emergency” resulting from death or disability. This is also the case in a medical “emergency” requiring hospitalization of a family member.
In the absence of planning and saving for life-cycle events such as birth, marriage, and education, loans become surrogate savings and an alternative to insurance products that the middle class can access. Poor women in the slums of Mumbai have said to me again and again that they are often compelled to resort to borrowing to tide them over during “emergencies”.
The 98-99% repayment record of the MFIs has been celebrated as evidence of the creditworthiness of the poor. But has this made MFIs a victim of their own success? The acceptance of this repayment rate as the underlying premise led to restructuring and delinquency management being considered unnecessary. Having these in place would only increase operational costs, which in turn would further push up interest rates or affect sustainability.
In reality, when field officers are faced with non-payment and don’t know what to do, they may resort to whatever methods they think will work. The industry needs a period of serious introspection, since in the absence of proper direction, the village moneylender’s method has become the model for collection, even if only in a small minority of cases. In any lending business, dealing with non-payment has to be part of the policy and process, not left to the discretion of the person on the spot.
Had the loans not been used for emergencies, repayment would not have become a problem. The emergencies, however, were not caused by MFIs. They were caused by poverty, vulnerability, and a lack of other financial products. The MFI loans, coming as they did at a much lower rate than the moneylender’s, probably gave more staying power to the borrowing family.
To address the present crisis, the government and regulators need to demonstrate just as much introspection as the MFIs, if not more. What they need is to accept that MFIs can reach where others have failed. They need to create an enabling environment that permits MFIs to deliver, but to deliver responsibly, while providing more than just loans.
Flickr credit: Meanest Indian
> Posted by Beth Rhyne
If you’ve read any of the dozens of books analyzing the recent meltdown of some of the world’s most famous financial institutions, you already know that corporate governance failures enabled the collapse. The World Microfinance Forum Geneva has just released a paper aimed at helping the microfinance industry to learn from the missteps of the mainstream. The paper, “Same Game, Different League” by Maria Giovanna Pugliesi, lines up key lessons from the mainstream literally side by side with their implications for microfinance.
I want to give a shout-out to five of these governance lessons because the Center for Financial Inclusion has been advocating them in its work on Investing in Inclusive Finance and support to the Council of Microfinance Equity Funds (CMEF).
1. Duty of Care. The European Commission is floating the idea that for financial institutions, board member duties extend beyond the standard “maximize shareholder value” to a range of stakeholders including depositors and borrowers. They want to create a formal “duty of care.” Given that the stakeholders of MFIs include many of the world’s vulnerable people, this is an excellent principle to enshrine in MFI governance.
2. Avoiding Management Capture. There’s nothing new in the idea that accountability demands that CEOs and Board Chairs be different people. So why has this dictum been neglected so often? For MFIs, strengthening the board with people who are both knowledgeable and independent is necessary to counterbalance the dominance of management, as CMEF’s governance guidelines emphasize.
3. Active Risk Management. Apparently, many banks created risk management departments and promptly ignored them because the risk managers lacked the stature of the “real” decision makers. For MFIs, whose risk environment is rapidly getting more complex, risk management needs to appear at the board level. Providing guidance on how to do this is the goal of the CFI’s Running with Risk project, now getting underway.
4. Compensation. Enormous pay packets for CEOs at leading banks outraged the public. Recommendations emerging from the crisis advise linking bonuses more explicitly to long term performance and increasing transparency about executive compensation and the process for setting it. The microfinance industry is only beginning to contemplate such steps, as CFI discovered through its “Aligning Interests” project. The industry needs to hurry up, because rumblings over executive compensation at MFIs, once very muffled, are getting louder.
5. External Auditors and Rating Agencies. Shoring up the third party observers of banks is a good and probably necessary idea, but increasingly complex. This is true as well in microfinance: external auditors may soon be asked to do more in depth portfolio quality analyses, and rating agencies seem to get a new mandate – social performance, governance, client protection, environmental practices – every month.
As I think about all of this, I just can’t get over how hard governance is. And it’s getting harder and harder. I sometimes worry that all the steps we take to improve governance may make it more complicated without making it better. Ultimately, along with improved practices, what makes governance better is some brisk fresh air (disclosure?) that wakes everyone up and forces them to pay attention to the important things that are right before their eyes.
> Posted by Jon Pattee
Why do so many capable people put their lives into building the microfinance industry? What do they hope to accomplish? What motivates them? Why do they think microfinance is a solution? Are they pleased with the results? The Center for Financial Inclusion is interviewing founders, pioneers, and entrepreneurs in order to answer these questions and capture the scale and impact of microfinance in today’s world.
Over the course of 2011, we will bring you a score of such interviews from microfinance leaders around the globe. These authentic voices will speak about what is most meaningful to them in their work. We begin with a Tunisian trailblazer…
Essma Ben Hamida
Opening Minds and Empowering Women with Microfinance
In the early 1990s, after returning from Europe to her native Tunisia, Essma Ben Hamida felt it a revelation to notice something that had always been part of her world: When she walked through the poor neighborhoods of Tunis, there were very few women who had a business.
As the co-founder of Enda Inter-Arabe, a non-governmental organization promoting vocational training for school drop-outs and health orientation for women, Essma met regularly with small groups of women to learn their views and see how best to serve them. In one of these Enda discussion circles, Essma asked the women if they were busy. In unison, they said no. They explained that they were occupied caring for their families, but could not work because they had no capital. The women’s response carried Essma back to scenes of her family home. Growing up in Kairouan, Essma observed how non-working women like her mother didn’t have access to money.
“The women were always dependent on their fathers or husbands to give them money for housekeeping. This situation struck me as almost a form of begging,” she remembers.
To read more of the interview with Essma Ben Hamida, click here.
> Posted by Beth Rhyne
In opening the Bill and Melinda Gates Foundation’s Global Savings Forum in Seattle yesterday, Melinda Gates announced that the Foundation will focus its entire Financial Services for the Poor program on savings – with $500 million in giving over the next few years.
Among the many reasons behind the Foundation’s strategy is the growing evidence of the benefits for savers. I’ve been pondering how best to describe why the news about the impact of savings is better than the news about the impact of credit, and I believe it comes down to this. A loan is a gamble: it gives the borrower an opportunity to increase her wealth. But when someone has saved, she is already better off. Loans pay off for those who can leverage them, but savings pays off for everyone.
Bob Christen, the head of the Foundation’s Financial Services for the Poor team, explained that he and his colleagues were convinced that there is “a historic opportunity” to affect the transactions costs that have been a barrier to small savings. Regulators and technology providers are poised to enable banks to manage payments through infrastructure that is not their own – mobile phones, banking agents, and retailers. The new infrastructure gets close to the customer at a fraction of the cost of bank branches. Bob’s goal is to cut the cost of a transaction to something less than 10 cents. And of course it is the mobile phone that offers the greatest potential. This turns the Kenyans, with their runaway success through M-Pesa, into the conference celebrities.
It is not clear where microfinance institutions, credit unions and other small financial institutions fit into this brave new savings-led world. Most of the examples highlighted here are big bank, big corporation success stories like Vodafone, Equity Bank of Kenya, and Banco Bradesco of Brazil. Those who have studied clients most closely, like Stuart Rutherford, believe that the value of savings and credit is multiplied when they are offered together. I worry a bit that we may be heading toward a situation in which massive institutions offer savings services while specialized institutions offer credit. Smaller financial institutions may need to organize open-source networks in which many institutions can participate.
What is clear is that governments are going to play a big role, not only in creating regulatory frameworks but also in using their own infrastructure as platforms. G2P, the distribution of government benefits through the new channels, is a big trend. The CFI’s work with the Financial Access at Birth campaign fits in nicely here.
The conference continues today, featuring Bill Gates himself on a panel entitled “New Partnerships for Technology-Enabled Inclusion.”
Flickr credit: alancleaver_2000
> Posted by Michelle Romeu
In September, the Central Bank of Nigeria (CBN) revoked the licenses of 224 microfinance banks (MFBs) in the country—and we in the microfinance industry want to know what went wrong.
The CBN’s deputy governor, Dr. Kingsley Chiedu Moghalu, said that “a significant number of microfinance banks were deficient in their understanding of the microfinance concept and the methodology for delivery of microfinance services to target groups.” He cited a “loss of focus,” and pointed out that although regulatory authorities tried to put them back on track, failure was inevitable.
What caused this loss of focus in the first place? In Februrary 2010, the CBN and the Nigeria Deposit Insurance Corporation (NDIC) began an examination of all MFBs in Nigeria as a response to MFB failures and complaints from customers. Some of the issues this examination raised were:
- Several years ago, the CBN licensed many weak, failing community banks as microfinance banks, without addressing their original problems — proving that rebranding does not turn an incompetent or unprofitable financial institution into a strong microfinance bank.
- Too many microfinance banks were licensed at the same time; the number of MFBs in Nigeria jumped from less than 20 to over 900. This growth was difficult to supervise.
- Customers’ deposits in many of these so-called Nigerian MFBs were not insured, which negatively affected customer confidence.
- The microfinance sector in Nigeria suffers from inadequate transparency, and must strive to improve in both its financial reporting and product offering.
What is being done to improve the situation? One significant change is that the NDIC is now insuring customers’ deposits in Nigerian MFBs for up to N100,000 (US $670), and they will pay insured depositors within the next 90 days. Additionally, managers of the closed banks who had abused their positions were handed over to law enforcement agencies for investigation.
How could the situation have been handled differently? On reflection, perhaps the regulator could have revoked these licenses in a manner that was less harmful to the industry as a whole. For example, the “not-so-bad” banks could have been given time for a chance to recapitalize, merge, or find better management. Some of these banks could have found a way forward through consolidation/acquisition of the banks by other, more competent operators.
While it is clearly necessary to reform the microfinance industry and remove weak players, the customers who are affected by these revocations are no less important than the customers of the bigger banks. As such, more care should have been taken by the regulators in this reform.
Indeed, the CBN later admitted that they had made mistakes in revoking the licenses of about 33 of the affected institutions, and that they had quietly reversed the revocations in those cases.
While central banks are charged with maintaining the financial stability of the system, they should also be cognizant of the implications of their decisions and how those affect the credibility of the system as a whole and the clients who depend on them.
Flickr credit: Yodod
> Posted by Michelle Romeu
Everyone’s talking about the microfinance crisis in Andhra Pradesh, and the blogosphere is no exception. Be sure to check out these noteworthy posts from the last couple of weeks.
- A good place to start making sense of the recent happenings in Andhra Pradesh is with David Roodman’s detailed backgrounder that provides context and poses important questions.
- In the wake of the crisis, Beth Rhyne’s Huffington Post piece analyzes the role played by Indian policymakers and explores how current policies aimed at supporting microfinance growth may lie at the heart of this crisis.
- Sanjay Sinha, Managing Director of M-CRIL, offers further analysis, via Microfinance Focus’s blog, on how allowing NBFCs to provide deposits can be the right solution for regulators seeking to avoid another Andhra Pradesh crisis.
- In the Harvard Business Review, Barbara Kiviat and Jonathan Morduch ask: Is microfinance the new subprime? Although they admit that there are similarities between today’s microfinance in India and the U.S.’s pre-crisis subprime mortgage market, they also argue that the most obvious comparisons are not always the best ones.
- On Candid Unheard Voice of Indian Microfinance, Ramesh S. Arunachalam’s post brings coercion in repayment to light. He provides a sampling of testimonies from clients who were affected by coercive repayment tactics, as well as several different coercive strategies that are commonly used.
- Finally, what do the numbers say about the culprit behind the trouble in Andhra Pradesh? Justin Oliver’s post on CGAP’s microfinance blog kicks off a series focusing on microfinance in India.
Flickr credit: G’s memories
Posted by Anita Gardeva
Cross-Selling – The practice of selling a new product to established clients who are currently using other products, (e.g. when a financial institution markets a loan to savings account holders).
When done correctly, cross-selling can offer advantages to both clients and providers; new products increase revenue lines and customer loyalty while customers receive access to a wider product range from a provider they know. Cross-selling can also decrease customer acquisition costs. Unlike product bundling, cross-selling does not require clients to purchase services they might deem unnecessary.
Spotlight Fact: Small savings services are arguably the most important financial service for the poor, yet they are costly to provide. A new CGAP study by Glenn Westley and Xavier Martín Palomas shows that cross-selling increases the viability of small savers. As the paper states, “If the MFI earns a profit on the [cross] sale of [other] products, this profit may partially, fully, or more than fully compensate for the high operating costs of small savings.” The study highlights ADOPEM, an MFI in the Dominican Republic, where cross-selling loans and insurance products to small savers earns the institution a total of US $1.34 million in profits. Without its small savers ADOPEM would lose 30 percent of its profits.
Suggested Resources:
For more details about how cross-selling can improve the business case for small savers, see: Glenn D. Westley and Xavier Martín Palomas, “Is there a Business Case for Small Savers?,” CGAP, Occasional Paper No. 18.
For more financial inclusion terms, please visit the Financial Inclusion Glossary.
Flickr credit: AndyRob
> Posted by Amit Gupta
The first Smart Certified Assessors Training could not have happened at a more critical time, as we in the Indian microfinance industry are experiencing our worst crisis in three decades.
The epicenter of the problem is in Andhra Pradesh, the state with the maximum concentration of microfinance, or about 35% of total portfolio outstanding in India.
The key allegations levied against MFIs by Andhra Pradesh’s government are that these institutions:
1) Charge usurious interest rates
2) Indulge in multiple lending that over-indebts its client
3) Use coercive practices to recover the money, leading clients, in some cases, to take measures as extreme as suicide
The Smart Certified Assessors Training organized in Bangalore this October 18th and 19th addressed all of these issues.
The primary objective of the training was to train participants in how to conduct a Client Protection (CP) assessment using The Smart Campaign principles and how to evaluate MFIs’ practice of these six principles through a detailed analysis of relevant policies, people, and practices.
Industry veteran Larry Reed, together with The Smart Campaign’s lead in India, Hema Bansal, conducted the training in a highly interactive manner. The training team engaged the participants with assessment-related role plays, puzzles, exercises, and discussions.
Participants also gained insights from the field, based on their previous assessment experiences (ratings or institutional assessment related).
The training was attended by 10 participants, most of them from networks and supporting institutions such as SIDBI, ACCESS-Assist, Maanaveeya Holdings, and EDA Rural Services.
With the successful completion of the training, participants have cleared the first stage of the certification process, making them eligible to accompany certified assessors in upcoming CP assessments.
Many participants spoke of the need for MFIs to conduct CP assessments to help MFIs overcome their current shortcomings in various CP areas, improve wherever possible, and in turn boost the Indian microfinance industry as a whole.
Ensuring that MFI concerns and relevant issues are addressed has been, and will remain, a central objective of the CP assessor trainings.
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