> 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
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March 11, 2014 at 11:04 am
Chuck Waterfield
Thanks, Beth, for bringing this important topic out for broader discussion.
We organizations referred to in Beth’s article have been immersed in discussions on this topic for a couple of years. We have regular meetings to dialogue on how we can ensure the continuation of the valuable services we offer and how we can integrate areas where we have overlap so as to be more efficient and require less reporting from industry stakeholders. We have made good progress in these areas, but the elephant in the room is still very present – we are all under expectations from the industry that we cover our costs through earned income.
In other words, we are to transform our roles as “providers of public goods” into “sustainable businesses”. Microfinance has been successful in turning project orientation into business approaches in the past, but the dilemma with public goods is that the benefit is very wide spread. To get users of publicly available, free data to willingly pay for that data is nigh impossible. It asks the business-minded to be charity-minded so that we organizations that currently depend on donations can then say we are “businesses”. The alternative of locking up that formerly public data and selling it to a private client base converts our core missions and our audience.
Beth floats the idea of the industry broadly paying into a pool to support these public good services. It truly would be a modest amount relative to the scale of many MFIs, but the challenge is how to get widespread agreement when it is voluntary. We’ve had a lot of internal discussions on the challenges of achieving that, and now is a good time to open that up to everyone on how we might achieve this. We look forward to hearing your thoughts.
March 11, 2014 at 12:40 pm
The Microcredit Summit Campaign
Reblogged this on 100 Million Ideas and commented:
Is financial and social performance reporting important for the microfinance industry? Is the data resulting from that reporting useful to you for making micro- and meta-level decisions?
“Everyone benefits from “core facilities” such as these, says Beth Rhyne in this article. They are part of the commons, and no one should be a free rider. “We all need to chip in to fund the information infrastructure.
“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.”
March 11, 2014 at 12:52 pm
Hugh Sinclair
An interesting article, although it still remains nebulous what Truelift actually does. Examining the details of the various initiatives suggests the problems are more serious than presented here. MFTransparency is a great service, but relies on MFIs volunteering their information. Argentina and South Africa declined to participate, and within individual countries many MFIs fail to participate. One might speculate that those most prone to decline are those with the most to hide. And how does transparent pricing information reach the most important target audience – the consumers acquiring the loans?
Smart is deeply flawed. The so-called Client Protection Principles (CPPs) are nebuously defined, and it is not clear how an MFI charging extortionate interest rates would be rated. Chuck Waterfield (of MFTransparency) is an outspoken critic of the Mexican Banco Compartamos IPO, in which Accion made vast profit. Beth Rhyne, author of this article, is employed by Accion. Mexico is widely known to be one of the countries suffering most from extortionate interest rates (and over-indebtedness, another stated CPP that meas little in practice), and yet MFTransparency has not reviewed Mexico, nor has Compartamos obtained Smart Certification. Perhaps Accion could fund both such ventures from its IPO profits? After all, neither costs much according to this article.
The rating agencies do a good job, but are now employed to implement the Smart certifications, which may undermine their otherwise good work. I would suggest keeping these distinct from one another. If Smart want to encourage their certification onto MFIs, why not do it themselves, and leave the rating agencies to their own devices? Of course, the rating agencies are lured by the revenue and cross-selling opportunities of working with Smart, which is, in my opinion, a short-term solution with long-term damage to their own integrity.
And of course, despite the rhetoric about the benefits of indebting poor people, and protecting the rights of clients, none of these initiatives address the rather awkward topic of the legality of the underlying micro-enterprises funded, particularly with regards their use of child labour, a topic Smart have gone to lengths to avoid discussing for some reason. Is it not strange that there is not one initiative that actually suggests microfinance should be used to fund only legal activities? Hardly an onerous expectataion, unless, of course, microfinance knowingly finances illegal activities. But even if this is the case, should we not at least try to limit the extent of just one illegal activity; child labour?
Some microfinance networks boast not only client numbers, but “people reached”, including the dependents of the clients. Despite academic evidence that child labour is a real threat in microfinance, it is not deemed worthy of a CPP. Even the SPTF had a policy on MFIs not using child labour, but the enterprises they finance (i.e. microfinance clients) are exempt from this, despite almost every country on earth having child labour laws.
I understand that Ms. Rhyne would like more money for these ventures, but I would suggest she ought to tidy them up first, and a good place to start would be to design a sensible list of CPPs; clarify what Truelift actually does; define extortionate interest rates; and address why their own investment, Compartamos, remains one of the most criticised MFIs in the sector. Secondly, perhaps she could explain the situation in Peru recently, including the firesale of the #1 MFI in the country (MiBanco), a former Accion investment, in a country plagued with over-indebtedness – one of Smart’s main concerns apparently. Thirdly, if she believes Smart certification is worth the paper it is written on, why don’t Smart do this themselves rather than rely on rating agencies searching for additional revenue sources? And if she wants to get some real price transparency into the sector, why not fund Chuck Waterfield to check out Mexico? Or would that be a little uncomfortable for Accion, perhaps?
And a final point – conflicts of interest are rampant in this sector, and the fact that Smart is funded by Accion, staffed by Accion, in the same building as Accion, and is not even a legally seperate subsidiary to Accion is a little strange. If the relationship between the SEC and Goldman Sachs were as close people might ask questions, but in microfinance such a blatant conflict of interest is acceptable, apparently.
The wolf is guarding the sheep.
To suggest that Smart is not facing an existential challenge is true. It’s challenge is not existential at all, it is blindingly obvious for everyone to see.
March 11, 2014 at 9:00 pm
Alex Counts
Beth, Once again you have hit on an important and neglected industry issue and framed it effectively. What’s next? I think CFI should convene or co-convene a half-day meeting to extend this analysis and attempt to outline an effective and collective response. Perhaps it can be taken up with a larger issue of what is the optimal use of grants/subsidy in microfinance today, given that grantmaking seems to be declining but investment into microfinance continues to grow. The Responsible Inclusive Finance group could be one among many potential co-sponsors. -Alex
March 12, 2014 at 1:03 pm
Truelift Team
Thank you, Beth, for including Truelift in this important conversation. Where the other initiatives are doing important work to establish standards of transparency and good performance, Truelift attempts to define a road map through these standards for one particular social mission, that of reaching and being responsive to the needs of poor clients. Truelift pushes for accountability in pro-poor development that leads to learning and improved practice.
We are glad to collaborate with the Responsible Inclusive Finance Working Group to align these efforts under one seamless umbrella.
It is an important distinction to note, as well, that while the Microcredit Summit Campaign is the administrative home of Truelift, the initiative was actually launched by a Steering Committee consisting of Grameen Foundation, Freedom from Hunger, Kiva, and others. The Steering Committee is currently made up of senior leaders from a broad array of stakeholders, including Oikocredit, Deutsche Bank, the Ford Foundation, CARE USA, Small Enterprise Foundation of South Africa, Komaza, the Blum Center at the University of California at Berkeley, Red Financiera Rural, and the Smart Campaign.
March 12, 2014 at 5:45 pm
Truelift Team
Reblogged this on Truelift and commented:
Truelift plays an important role in the emerging infrastructure for microfinance: that of providing a road map through the many standards for organizations with a particular social mission, that of poverty alleviation.
March 12, 2014 at 7:12 pm
Daniel Rozas
An excellent posting, and I think Chuck’s comment best nails the issue — these are public goods, and such goods never function well without some level of governmental support (unless they’re extraordinarily cheap relative to the user-base — see, for example, Wikipedia). I’m deeply surprised that the development agencies that started up these key pillars of the industry insist on them becoming self-sustainable in the first place. Why should they be?
In the financial sector, most public goods exist because of regulatory requirements. Would publicly-traded stock companies continue to publish standard disclosures without regulatory requirements to do so (as with SEC in the US)? And how many credit bureaus succeed only because of government mandates to financial institutions — projects often supported by development agencies. But there is no such thing as an international regulator for microfinance, which means the public good provided by these infrastructure providers is all the more critical.
DFIs continue to focus on building up the microfinance sector, including providing the majority of its international funding (as per CGAP funder survey). Shouldn’t they also support the majority of its global infrastructure cost?
March 13, 2014 at 5:40 am
John Gitau
Beth, the statement that has captured my attention is this one: ” 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 clients data(SPTF and Truelift) depend on yet another infrastructure element, the Progress out of poverty index, promoted by Grameen Foundation”
Beth, can you allow me to insinuate what you mean? You mean “this is too cumbersome!”. Even the entire global financial system is not as complex and cumbersome as the microfinance sub-sector(if indeed it is a sub-sector). And your frustration is summed up in one word: INITIATIVES. You see, no expert in the microfinance industry wants to be out done. There is a quiet competition within the industry and even when some initiatives are duplications, there is peer to peer camaraderie as no one wants to be labeled jealous. Everyone in the industry want to show off what they are made of and what intervention they have come up with since the last time they spoke. The machismo and bravado that characterize the industry calls for a total overhaul. It is like the industry suffers from an inferiority complex that it has to fortify its body with the Roman age iron armor in this war against poverty.
The globe, in the 80’s witnessed the era of rationalization when corporates, after years of bloody and expensive competition came to their senses and said what the heck! And that begun the era of mergers, acquisitions, spin offs, consolidations and that ushered in the era of efficiency. It is time that global microfinance and development institutions merge and collapse themselves under one umbrella body that will manage all affairs( like SEC in US). A lot of resources have so far gone to waste in duplicating interventions as the poor go unattended.
My observation is that when a great post such as this one comes on, experts from all segments of the industry join the conversation which comments in the line of ” In fact, your post is very good, we at—— are doing this, this and that, and our results are—- and we even got an award because of—-.” Nothing is mentioned about the content of the main post being commented on. The writer might as well be talking to him/herself. So, instead of the blogspere being a good platform to discuss ways of tackling the common problem within the industry, it becomes an open air market where everybody comes with their latest toys and “inventions” and each market day gets new patrons as new interventions mushroom. And the new trend is REBLOGGING( read marketing).
March 13, 2014 at 10:36 am
erhyne
John — Thanks for picking up on what I think is one of the biggest messages here — the interconnection of the initiatives, and especially the reliance of the second generation initiatives on the health of the first generation initiatives (MIX and the rating agencies). Right now, there’s a lot of focus on the newer initiatives, because, well,,, because they’re new and exticing. The first generation provide the backbone of information gathering and onsite assessment capability that many facets of the newer initiatives rely on. I’m especially concerned that these elements get the active support they need.
Beth
PS. Thanks to all of you who have commented, and I look forward to continuing the conversation.
March 16, 2014 at 8:36 am
Aldo Moauro
I am extremely glad that a serious discussion about this topic could get started and could trigger effective new initiatives and actions. Thank you Beth for getting this process started!
What we are currently seeing, from our perspective, is a negative impact on the bottom line, rather than on quality – a decrease in quality is very much against our interest, being the reputation our biggest asset-. This negative trend is of course not sustainable for any private sector entity, including specialized rating agencies.
Indeed the evident solution, as you say Beth, is having all the users of transparent information (the infrastructure) pay for they small share –no free riders- within an efficient market framework.
I particularly like the comments from Chuck and Daniel: I agree that if these initiatives are hybrid public/private services (even if we have to make some distinctions between the raters, whose revenues are currently mainly private, and the MIX, mainly publicly funded) , there must be a sort of international regulator for microfinance dedicated to supervise on the responsibility of the investment flows through some prudential requirements such as contributing to the generation of transparent information (the infrastructure). Indeed this regulator should also strictly regulate and supervise the quality of the information and of the providers (raters, MIX, MFT, SPTF, SMART C., Truelift, etc,….”the infrastructure”). A global supervisory body for microfinance (like a Supervisory Commission for Transparency in Microfinance) could be set and supported by those public development organizations that created the foundations of the infrastructure.
I sincerely hope that this conversation could be fed by further valuable contributions and that the following step is the organization, in the short run, of structured meetings of the “G20 of microfinance”, for an effective and concrete evolution towards serious decisions to be taken on this matter.
March 17, 2014 at 9:46 am
John Gitau
Ido, your wishes are good though we do not know who will bell the cat after all of us have such good suggestions. Shaping trees when they are grown is hard and every parent will tell you that when children are grown adults, it becomes difficult to dictate to them which doctor they should see when sick or which school to take their children. The most difficult bit could be convincing them to come and live in the same neighborhood.
Microfinance organizations with similar interests, orientations and serving a common niche can merge and work with raters that provide what they need. Raters and standard providers can also merge in line with the microfinance sub-sectors they serve. Those who find themselves underutilized will fall out. But it is important to bear in mind that even in mergers, power struggle can present another challenge. Imagine ACCION merging with Grameen, and realize the likely leadership structure(struggle)
In the event that crafting a consolidation within the microfinance industry becomes complicated and untenable, status quo can be maintained with tweaks in operations. Rather than raters and standard watchdogs doing the work, microfinance institutions can compete through service delivery with the best one getting the biggest chunk of customers by virtue of their services. The customers become the judges and raters. Customers are not complicated as they will opt for the organizations that serve their needs best.
Currently, the microfinance industry is fashioned after beauty pageants where design houses showcase their latest cloth lines to fashion enthusiast and not to the final customers. My take is that raters and standard watchdogs are are like pageant judges and the investors are the fashionistas. And the fund raising from investors doesn’t appear like capital to serve customers but profits to be taken. This insidious perception is slowly seeping into the industry, and coming from insiders doesn’t help the sanctity course of the industry.
Obviously, if we adopt the structure where customers are the raters and judges, the show will move from conference halls to the BOP terrains. Here, it will be easy to tell the winner or the one with best standards as that will be the one with most satisfied customers. Satisfied by whose standards? Customers standards.
March 21, 2014 at 7:59 pm
Aldo Moauro
Thanks John for your thoughts.
You know, as a rater you get used not be loved by everyone, and this is not only something common, but even something desirable, being a sign of the healthy and independent job that a rater may be doing: when your job is to express objective opinions on what organizations do very well and do less well, it is normal that some of your clients will be disappointed compared to their expectations. This is the reason why the quality of the service perceived by rating buyers (to a large extent MFIs as of now) is not a sufficient criterion and having regulators and other independent entities above the raters brings an important added value in ensuring that quality ratings are available in the market.
March 21, 2014 at 6:39 am
Andrew Mainhart
When I read the title of this piece, I became excited. Finally, someone — someone well respected — was going to say what needs to be said about infrastructure in financial inclusion.
Sadly, my excitement was short-lived.
The “infrastructure” in question was not truly infrastructure at all. None —no hyperbole here— none of these initiatives, organizations, not-for-profits can function without appropriate and accurate data. Sure they can and do exist but the data they operate with is suspect at best, useless at worst. No amount of investment in these organizations will change that fact.
The infrastructure this industry must concentrate on before worrying about transparency and ratings etc is data, both collection, transformation, and transmission.
I entered this sector more than 16 years ago, astounded at how badly information technology was used throughout the sector. A decade and half later, little has changed. Sure there are pockets, here and there of light, but for the most part this industry operates in the dark when it comes to information – even just basic data collection.
With the exception of a few lackadaisical and/or misguided investments into information technology, the donors, apex organizations, affiliations, and MIVs have ignored this problem. It’s not sexy, it’s not academic and unless your investments are under some competitive pressure, there’s really no need to worry about it. Worse, until very recently there haven’t been many people with any real expertise in information technology working in the field. So talent was hard to find.
But these are excuses and not solutions.
If we want to improve financial services to emerging markets globally, Beth is, of course, correct. We need to collect and monitor information in a coherent and sensible way about the industry. But just having collectors of data and then analyzers of data (transforming data into potential information) is not enough. The old saying in software engineering is “Garbage in, Garbage out.” And right now, at this moment in 2014, most of the data being collected is garbage.
Sometimes the data is garbage for nefarious reasons. Sometimes for competitive reasons. But mostly, it’s garbage because the systems being used are garbage.
In this industry, the much-touted MIX (something I was involved with early on, I should note) is perhaps the best sort of data provider around. Yet we’ve stopped using the MIX because the data is more often wrong than right. Which isn’t surprising since it is self-report with huge time lags by institutions using information solutions producing mediocre data at best.
At the moment, the only technology innovations that seem to be gaining investment from the industry are those related to mobile payments. Like everyone, I believe mobile technology is the future for delivering the most cost-effective financial products and services worldwide. However, these are consumer facing, essentially front-end services that rely heavily on an information technology backbone.
That backbone is currently rotten. That backbone is the first layer of infrastructure that this sector should’ve and needs to invest in immediately.
We, and our competitors, have all heard the same mantra from the different social/impact investors in this sector: “You’re not sexy. Mobile is more interesting.” When we’ve approached the donors and the MIVs, we’ve all heard, “We don’t like to force a particular IT solution on our investees. That would distort the market.” (Yet in every other way, these same donors and investors distort markets like crazy. They avoid IT because it’s not in their wheelhouse.)
There is no sexy, high-touch solution. There is no real rating or transparency mechanism. There is no market without appropriate, modern, cost-effective information technology solutions.
Until this industry realizes that the infrastructure that must be addressed first and foremost is the most basic understanding of how to manage, manipulate, and transmit data, microfinance will continue to suffer from unreasonably high-cost lending, poor customer service, high-cost investment, and low-transparency.
March 21, 2014 at 12:01 pm
John Gitau
Andrew, forgive my ignorance but I am thinking we can only understand suspect and useless data when we understand what reliable and useful data looks like at its best. Who will judge it as best? I am wondering what data is missing. I suppose we wouldn’t wait until we have enough data( whatever that amount is) to start measuring or rating it, rather, we are better of rating whatever little we have as we gather more, better and more reliable data. Useful and reliable are result words of measurement, aren’t they?
I am lost in my naivety perhaps when you say that the industry operates in the dark when it comes to information. At first I thought you are on a hyperbole, but quickly realized you couldn’t be joking on such a serious matter. It could be due to my lower level of knowledge but I find the already available information overwhelming. Financial inclusion if inundated with information than we can hardly handle. Or what information are we talking about? I need help here.
You lose me even more when you describe the backbone as rotten. First, I am not sure which backbone and the nature of rot you refer to. Since you have been around such long and have observed the industry closely, I am sure you have a lot to share with us. So, please take us step by step. Take us through data quality and backbone quality so that we can start contributing our views as this is a knowledge exchange platform.
March 21, 2014 at 5:34 pm
Andrew Mainhart
John, Your ignorance is forgiven! I was trying to be provocative and it appears I struck a chord with you. Excellent. Now you’ve struck a chord with me — and so we have exchange of ideas.
Ultimately the value of information is determined by the consumers of said information. Of course, you are correct that we need ways to determine the reliability and usefulness of data. And for this task, rating agencies, data aggregators, watchdog groups, etc are ideally placed–though I am not sure how well they are currently performing this task (partially due to lack of resources). All hyperbole aside, I was not suggesting that we discontinue their work. Quite the contrary. These initiatives must and should continue to operate as independent validators of the available data in the industry as well as providers of information to the industry as a whole.
I think it is important to point out that there is a difference between “data” and “information”. “Data” are the raw values collected at the source, usually not of a particular value in-and-of themselves. “Information” is the result of some transformation on data that provides higher-level understanding of a particular set of data. Information is data turned into something useful, something upon which consumers can base opinions or make decisions.
I am more concerned with data here. As the basis for all the information currently floating around in this space (and every other space these days), it is important to understand the quality of these foundational values. Additionally, the amount of data available is in no way consistent with the quality of that data or the information derived thereof.
The rotten backbone is the raw data coming out of the individual financial institutions. The quality of information systems (whether formal software or spreadsheet or paper-based ledgers) in this industry is appalling. As a result, the data derived from these systems are more often than not incorrect. Moreover, these issues are as much human as systemic. Quite often the problems are not in the software or the spreadsheet or even the ledgers, they are a result of human error: human error in data entry, human error in calculation, human error in understanding.
As an anecdotal example: when my partners and I started our software firm, we decided to use the information from the MIX to do our market analysis. We studied several countries (with large microfinance operations) and used that information to make business decisions. However, when we got on the ground and began working with some of the largest MFIs in the country (and on the continent) we quickly discovered that the numbers on MIX were sometimes an order of magnitude off–often for “vetted” institutions!
In this case, MIX did what it does. Take in data from institutions. Collate and analyze that data. Turn that data into useful information for the industry. Great service. But if they get bad or out-dated or incorrect or even maliciously tampered with data, the information the MIX provides will be wrong. And there is very little they can do.
Walk into 10 MFIs anywhere in the world and you will find huge problems with the core values being stored and used at the most basic level in 7 of them–and I think I am being generous.
That is the rotten backbone. That is the infrastructure that needs as much or more fixing than funding a bunch of watchdog organizations. Donors and investors need to push their partner financial institutions to improve their operations and implement appropriate, accurate, and efficient information systems.
March 22, 2014 at 11:36 am
John Gitau
Andrew, I now give you credit for your didactic response. Your explanation is clear and your MIX example was helpful in my understanding. I see why you used GIGO example in your first comment.
So, a consumer makes wrong decisions because he has relied on erroneous information arrived at through wrong analysis resulting from incorrect data, which is incorrect by virtue of being intrinsically wrong or correct but keyed into the information system wrongly, correct? And you are saying that the work end results of the coterie comprising rating agencies, data aggregators, validators and watchdog groups is only useful if the backbone( raw data) is reliable, right? And you are proposing that more attention and resources should be devoted to ensuring correct data is gathered and captured accurately into the information systems so that processors of such data can produce accurate information, d’acord?
I suppose our concern should be understanding why data would be incorrect in the first place. Is it carelessness in collection and handling from source? Is it apathy based data cooking? Is it poor quality data collection tools? or could it even be deliberate data misrepresentation? Then at the next level of data handling, the human error bit, is it purely human error associated with attitude towards the information system or just a poor interface between man and machine? Of course as you indicated, there could be poor understanding of the importance of data and thus laxity in ensuring its correctness.
From your analysis, I wouldn’t then trust data coming from a microfinance institution, especially those for-profit. Knowing how the whole system works, wouldn’t an owner of an MFI have all the freedom to collect data that is relevant to what he wants to achieve? So, if he knows that data about more customers with more needs, helps in getting funding, then he will gather data that builds that case, including getting names of relatives and friends who have nothing to do with microfinance business. If we assume that to be possible, MIX or whoever else will be naive to use data without thinking through the likely motive for the data presented.
I read in another blog, of a popular cloud financing microfinance institution which picks money from lenders and passes it on to other MFIs for on-lending. The on-lending MFIs determine the interest rates to offer the microloans to their customers at. The issue was that some of the on-lending MFIs were reporting stellar loans repayment performance higher than the industry. It was being implied that they do use their own money to repay back defaulted loans to cover up non performance so that their performance in the books of the cloud financier is good for further funding. You can imagine if MIX for example, used performance data of such a deceiving MFI. It would be terrible information. That’s is why data motivation should always be a concern. And let me ask you Andrew, how raw is raw data? Is it primary until it is secondary and who determines its level? Let me tell you why I am asking that in the next paragaraph.
As you are aware, in Kenya we have Mpesa. The Mpesa MNO company partnered with a bank to create a digital mobile based savings and short term credit product called M-Shwari. Today, I was reading about the M-Shwari performance since its inception two years ago. It has handled $ 279M in savings, has issued $90m worth of loans and has $ 2.8m worth of loans in defaults. It issues on average 30,000 loans a day. It has blacklisted 140,000 defaulters. Now, that is the MNO and Bank data. It also comes as information. If MIX picks that data and draws a conclusion as information, and a consultant picks that information to create a similar product for another MNO in another country, and it doesn’t work and she doubts the primary data, how would she ever verify the data? Or let me ask you Andrew, was what I read information or data? Of course I am aware that the MNO and Bank were using transactional data in their digital information system but only they can tell if the data is correct or cooked depending on the purpose of the data. If it is as a marketing gimmick, they would want to show it with a tilt. There could be the regulator who verifies the data, I am not sure. And also I am not sure if , in the event MIX picks such data they would verify it further with the regulator before adopting it as reliable for information processing. What do you think?
Andrew is asking us to go back to basics, camp at the backbone level, clean the rot, re-energize the step until we are absolutely certain that we are good to go upwards. Got you right Andrew? How do we start? Might we have to overhaul the entire system?
March 23, 2014 at 2:01 am
Hugh Sinclair
John, I think you might have been referring to Kiva above. There are some points to clarify here. If you look at Brac Pakistan, for example, on the MixMarket and on Kiva, you see two quite different scenarios:
http://www.mixmarket.org/node/26365/report
2012 data (last full year available): PAR30 8.31%, PAR90 6.85%, write-off ratio 3.85%. Data is provided only for some data points for the fourth quarter of 2013 where PAR30 improved slightly to 5.51%. In short, this is not a well-performing bank according to these metrics.
http://www.kiva.org/partners/247
very limited data: delinquency rate 0.00%, loans at risk rate 0.06%, i.e. very impressive.
But these are the same bank. There are two things happening here. First, the data presented to Mix is self-reported and unverified. So, GIGO as you and Andrew point out. I tried to cross-reference the data for this bank on MFTransparency, but alas BRAC Pakistan was one of the Pakistan MFIs that declined to participate in the transparent pricing initiative (many did participate).
http://www.mftransparency.org/non-participating-institutions-pakistan/
What is likely happening, and I am not the first to suspect this, is that BRAC Pakistan gets interest-free capital from Kiva, but in order to ensure this flow of cheap credit it needs to demonstrate “performance”, measured principally by repayment rates. So, if a client defaults occasionally, as they appear to be doing in abundance according to the Mix data, BRAC may cover such losses and refund the money to Kiva regardless. Covering such losses may still be cheaper for BRAC than losing access to interest-free capital and having to obtain interest-bearing capital. Or, perhaps, BRAC only posts the very most reliable clients on Kiva, and they do in fact repay almost 100%, and the less reliable clients BRAC finances itself. There is simply no way to know, because the data is unavailable to cross-reference. All we know is that Kiva and Mix seem to disagree with one another. Mix is self-reported, but it is unlikely that BRAC would artificially RAISE their reported PAR levels!
Interestingly, Kiva reports the portfolio yield (their flawed proxy for interest rates) as 38.5%. This is almost identical to the portfolio yield reported on the Mix for BRAC, in 2011. This could be a coincidence, or it could be that Kiva take this specific data point from the Mix, and fail to update it regularly. However, you can see how this can become a circular problem – people use Mix as a source of data (including many academics for their research), and in order to confirm their results people compare it to the Mix. If the Mix does not maintain very good data quality (and the comments above are correct, it is pretty poor but the best we’ve got) it is not just Mix that is flawed, but all research using Mix.
Now, before you despair, and trying to link this to Andrew’s broader point, there are potential solutions to this problem. If a bank is simply badly run and doesn’t bother capturing data in the first place, there is not a lot we can do. But assuming it is capturing the data and storing it in some meaningful way, then the problem is rather one of understanding this data, getting access to it, and knowing how to interpret it and make decisions based on it. In practice there is a massive obstacle between the MFI (and the data contained within it), and the end investors/donors – mainly physical distance, but also expertise, and the fact that every MFI has a slightly different way of doing things. But even when a rating agency visits an MFI (and I am generally impressed with rating agencies), they do not go through all the data, verify every calculation etc., to do so would be vastly time-consuming and expensive.
Some solutions to this problem are emerging. First, the WWB Toolkit on portfolio analysis (which I co-authored, so entirely biased here!) enables someone with access to the raw database to analyse it in extreme detail without using sophisticated software, specifically with the goal of aiding in decision-making, and one of the first steps is checking data integrity. I have done these analyses dozens of times, and one of the most interesting early outputs is simply advising the MFI on their own data quality. The problems with this approach are a) it is still quite a technical and time-consuming process, b) it cannot be standardized across MFIs because they all have different databases and calculation methods etc. and c) most analyses tend to be paid-for, unpublished internal documents, so of little use in broader industry.
However, if you look at countries such as Ecuador, and to an extent Peru, the regulator enforces and checks the back-offices of banks and obliges them to report to a centrally hosted and independent body. The degree of information you can find, accurate and public, in these two countries, is quite astonishing. But this is accomplished by legal measures. However, pro-active regulatory bodies are growing, and this is a good sign in my opinion, although many in the sector fear regulation, as it often translates to increased transparency, increased costs and reduced profits.
A third development which could potentially transform the sector is the emergence of cloud-based MIS. I am not referring to cloud-based platforms like Kiva, but the MFIs entire back-office is in the cloud. MFIs would access their data in real time through an internet connection, available in most of the planet nowadays, but with the adecuate security features and privacy controls, other people could analyse this data remotely and up-to-date. As more MFIs start using such systems slowly a database will emerge that is essentially comparable to the Mix, but it comes “directly fro the horses mouth”. Sure, frauds can still be done, but the added scrutiny will limit this. And such solutions could actually be quite cheap for the MFIs – no need for lots of IT staff on-site and expensive hardware, and a cloud-solution is far more scalable than a traditional software package. So, as I mentioned towards the end of my book, this is a field I am watching closely.
Andrew – a tangential question here. Do you think there could possibly be conflicts of interest having so-called self-regulatory bodies that purport to support client welfare and transparency etc. such as Smart so closely associated to a body such as Accion? Smart is merely a division of Accion, not even a seperate legal entity, or subsidiary (last time I checked). Given Accion’s reputation in the sector, isn’t there something rather awkward about this cosy relationship? Is it not slightly like Godman Sachs running the SEC? Or a wolf guarding the sheep? The rating agencies are generally pretty independent (Planet Rating less so, as part of the Planet Finance group), MFTransparency is completely independent. But it seems ironic to me that Smart is staffed by Accion folk, in the Accion building, basically owned by Accion. What do you think of that? If you were to propose a genuinely independent regulator, or watchdog, in particular one that other MFIs would trust, particularly with their data, how would you propose this should be structured?
March 23, 2014 at 10:24 am
John Gitau
Hugh, critical and hard hitting as I find your comment to be, one thing I find motivating about it is your forcefulness in challenging omission than commission. Accusations of commission provokes defensiveness, fight backs, justification and positioning hardening all which are not helpful to those seeking better ways of improving our industry. Accusations of omission calls for soul searching, improvement and expansion of the responsibility dragnet.
You say MFTransparency depending on microfinance volunteering information is not good and that those with something to hide would most likely not want anything to do with them. You add that even if MFTransparency has great pricing information that can benefit consumers, they (consumers) may not get it, raising the question of the usefulness of such information. What do you proposed should be done to rectify the two anomalies?
Andrew, in his comment is cautious about the accuracy of data presented by some MFIs. So, there seems to be a lot of flaws around MFIs and the rating agencies work will be flawed if the accuracy of their output is contingent upon MFIs voluntary indulgence. What’s the way forward to rectify this shortcoming?
Hugh, would you please clarify how Smart is deeply flawed? We would want information so that we judge who is to blame between them and their clients- MFIs. Since they cannot judge themselves, perhaps they may want to know observers views about their work for self correction.
If what Andrew is saying is true that rating can only be accurate if it is based on information derived from accurate data, then how would you say rating agencies do a good job, or what are you referring to as good about them? I am disturbed by your giving credit to rating agencies as “doing a good job” yet in the same breath you indict them of rapacity, making them look like red light harlots easily lured by the smell of money. On your uneasiness on raters going to bed with Smart, am not sure if your concern is the incest or adultery with a “pariah” or it’s your advocacy for Chinese walls. But I wouldn’t agree with you more that perhaps Smart should carry its initiative all the way, alone, while keeping some MFI white sepulchres at arms length lest they soil its good name.
Over to you Hugh.
March 23, 2014 at 11:13 am
Hugh Sinclair
John, a lot to answer here! Let me provide brief responses, pressure me for more where appropriate. MFTransparency provides a useful function given it’s remit. But it does not have the budget or legal backing to be obligatory, and nor does it have the distribution channel for its output, but those are not reasons to scrap the initiative but to seek ways to improve it. In some countries, including even Mexico, the regulator obliges transparent pricing information in all contracts, websites etc. which I applaud, and ironically such practices might actually reduce the need for MFTransparency, in the long-run. In the short-run the regulators could insist that all players participate, for example. In Argentina no one agreed to submit data, so the entire country assessment was a waste of time. It is a pity the regulator didn’t push this further. Also, investors pay lip-service to transparency, but perhaps if they made MFTransparency compliance a condition for obtaining capital that would help. How to distribute the information is probably a local issue that would vary from country to country. For example, the media could publish such rates, it is useful information for any newspaper to publish periodically – I don’t know the answer to this question, other than to make the observation that one aspect beyond the practicality of MFT appears to be outstanding. Perhaps MFTransparency could make a suggestion? But, as internet enabled phones become prolific, perhaps some marketing alone could raise awareness to clients that they have this data at their fingertips, and if they go to a bank that for some reason declined to participate, this would alert them to check further. This debatably falls under the broader category of “financial literacy training”, which I am pleased to say is also improving in some regions.
Rating agencies: no rating is perfect, less so perhaps in the microfinance sector. But, they are better than nothing, far better than nothing. Sure, they are constrained by limited data quality, they are on-site for only a week or so. But, they generally are well-trained and experienced people with countless MFI visits under their belts, their due diligence is far superior to that done by most MIVs, some of whom might not even do a site visit before investing in an MFI. I think they could do with a little specific training on how to assess an MIS, as this is where the data is stored, and perhaps they could offer this as a “value-added” feature, but MFIs probably don’t want their MIS investigated in too much detail and the results published in a publicly available document, so this will face resistence. But actually rating agencies do fairly well pick up on problems at MFIs with a high degree of accuracy, and higher than the MIVs. They are independent (for the most part) and their incentives are more healthily aligned. They do not rely fundamentally on MixMarket, but use the accounts on-site, audited. Sure, these could be manipulated, but at some point you have to say “this is as good as we can reasonably get for $10.000” or whatever a rating costs nowadays. I am not suggesting they are perfect, but rather they are one of the best tools we have in an imperfect sector. I can only comment from 12 years’s of experience where I have read ratings of MFIs that I personally known in detail, which is a decent sample size, and my opinion (subjective) is that they get to the heart of most of the strengths and weaknesses of the institutions, and that this information is fairly publicly available. Do MIVs/investors/P2Ps use these ratings? That is another question. How do they interpret a rating of a bank that is very profitable but has very poor social performance? That is another question. See my blogs on Tujijenge for one worrying case of this.
Smart – my concerns with Smart are discussed at length on my blog, check them out. This is probably a good starting point:
http://blog.microfinancetransparency.com/the-mouse-that-roared-a-response-to-the-smart-campaign/
Tell me where you would like more explanation.
March 24, 2014 at 12:04 pm
John Gitau
Thank you Hugh for making it simpler for me to understand your points. Your referred material was quite an eye opener. There is so much information at your wing for people those who seek both sides of a story to make an opinion.
What I have picked from your response is:
1. Regulators appear to be the best custodians of consumer protection if only they get more committed to its creation and enforcement. I have watched over the last 20 years in my country, the financial sector regulator( Central Bank of Kenya) getting more strict in banking regulation enforcement and most banks now tow the line. But some are using the digital money platforms to exploit naive customers by playing around with terms. So, facility fee has become a tool to overcharge. What would you say about a 30 day credit at 10% per month offered by a bank while official lending rates are capped at 20% pa? Yet, that is being done under the nose of the regulator. Though we have a new Microfinance Act in operation since 2010, MFIs are still living large with overpriced loans using all manners of justification. Deposit taking MFIs are finding it rougher as they feel the heat of regulation with some regretting as they are no longer able to get the run away profits of previous years. I agree that regulators would provide a long term solution. But then, who tells regulators what to do?
2. You don’t seem to think so highly about investors’ commitment to transparency, yet, when you think about it, as payers of the piper, they should call the tunes and their beneficiaries would have no choice but to comply. But it seems their interpretation of transparency is quite different from what we desire as advocates of the poor. Perhaps we should think through what they stand to gain in transparency. Who can get them to be more serious? Or what should happen for them to be more serious? They carry a lot of clout if they agree to be on the consumer’s side.
3. You do give quite a chunk of credit to raters when you say ” raters pick up on problem at MFI with a high degree of accuracy”. You suggest that if better equipped with how to access an MIS, they could do a stellar job especially if data would be more reliable. You can perhaps explain what you mean by “their incentives being more healthily aligned”. You mention how some MFIs don’t want their MIS accessed. I agree with your sentiment that the reason must be their having skeletons to hide. What other reason would they give, given that microfinance is straightforward lending business with no chance of hiding behind the excuse of competitors getting to know business secret. Or am I missing something here?
4. You mention a very important functionary within the infrastructure almost as a by the way- Auditor. Audited accounts by reputable firms represent a higher mark of integrity because they use primary data in their work. Andrew should be happy to read this. The data you have used in your various analyses I have read, Hugh, is extracted from the subject MFIs’ audited accounts. An MFI evaluated on its very financial audited accounts is a numb sitting duck. What about regulators accrediting only the very serious auditors? Might that help improve reporting and most importantly data handling within the industry? The signal will be sent that “you cook data, you get caught”. And this might serve as a deterrence?
5. On your last point on balancing between financial and social parameters, I think we need to be clear about parameters hierarchy of importance. What is that parameter that if handled well would sort out the other issues, or would have wider benefits all round? If our focus now is low cost financial services offered transparently to customers, what is the most important component which, done well, would bring the desired results most effectively?
Perhaps, raters and data aggregators’ opinion would come in handy here especially highlighting the challenges that they face,and suggestions of how things can be improved. We get a chance to ask questions and that way, we are thinking together. No need to be so busy as an infrastructure functionary and what you are doing will be a waste of time and money. This is the time to think infrastructure and resolve issues around it.
March 25, 2014 at 9:23 am
John Gitau
As the debate gathers momentum, it is possible to lose focus on the original post being commented on. Here is a summary of Beth’s thoughts for ease of reference:
1. There came a time when the microfinance Industry needed order. There was a need to set STANDARDS and PROVIDE INFORMATION
2. Two sets of organizations came up. They took up the role of enhancing financial transparency and standards. They are the first generation organizations which are:
a) Market Information Exchange(MIX)
b) Rating Agencies( Microrate, Planet Rating,Microfinanza Rating and M-CRIL)
Their declared purposes were:
i) To provide standards against which MFIs could assess their progress
ii) To provide standards that investors could use to identify well performing institutions to invest in.
The two sets of organizations had to do hard work trying to convince MFIs why they needed to report their performance, get rated, and maintain high degree of data quality. Most of them did not buy the need and that is why many are neither listed nor rated. That includes the big ones.
The results these two sets of first generation organizations envisioned were:
a) Spreading standards throughout the industry.
b)Promoting transparency
c) Improvement of MFIs financial performance
d) Encouragement of private social investors to fund MFIs
This first generation organizations have provided the information and standards we have today.
Then came new thinkers who observed that the social component of microfinance had been ignored. They thought there was a need for social standards since financial standards are not enough. They came up with new organizations. These became the second generation organizations which are:
1. Social Protection Task Force( SPTF)
2. Smart Campaign
3. Microfinance Transparency(MFT)
4. Microcredit Summit Campaign.
These organizations’ self declared purpose is to create social transparency and standards. They do it through specific initiatives. For example, Smart Campaign has Consumer Protection Principles(CPP) it is promoting, leading to a certification program for the MFIs who practise them to the letter. Microcredit Summit Campaign on the other hand has an initiative called Truelift that concentrates on client data.
Here is the problem. Out of the seven organizations( Rating agencies considered as one though they are many), only two, Social Protection Task Force(SPTF) and Smart Campaign are financially capable, perhaps because they have good financial backers( Beth has not indicated whether Microcredit Summit Campaign is self sustaining).
The five who are finding survival difficult are important as their services are needed. In fact, the two financially strong ones can’t survive without some of the services offered by the five. Beth demonstrates that Smart Campaign and SPTF indeed depend on MIX and Raters.
The question is, how will these important but struggling organizations keep themselves afloat? Suggestions are flowing and some of them are:
i) Chuck Waterfield thinks it is necessary that some of these organizations which provide a social good be funded socially especially by respective governments.
ii) Microcredit Summmit believe all the industry stakeholders including MFIs and social investors should chip in in sustaining these organizations. The argument is that investors as stakeholders need to appreciate their services even more because they are beneficiaries when the industry is transparent, information accurate and standards high.
Well said but the questions that come up are:
a) Why should the investors pay for services that are supposed to be met by those soliciting for their investment monies? Investors would argue ” If you want our money, keep your organizations neat. If you want our money, meet the costs of attracting us”.
b) MFIs will tell the various organizations, “leave us alone to do our businesses the way we know how. Don’t disturb us with data, information requests”. And these seven organizations respond ” Don’t be foolish MFIs. We just want you to keep your records and information neat so that we can market you. What we are asking you is just to pay a small fee so that we are able to position you to investors to invest with you”.
JUDGEMENT
After listening to facts brought by Dr. Elisabeth Rhyne( prosecuting the case) and after listening and reading the witness statements, I hereby deliver the following verdict:
1.Social Performance Task Force merge with Smart Campaign and form one organization, adopt one name or come up with a new name. Before the merger, decide which unnecessary fat to cut. It is not the multitude of initiatives that bring results. Focus and do one or two things thoroughly Choose an initiative with triple bottomline. CPP and its Certification may have to be a casualty.
2. MIcrofinance Transparency and MIX, merge and form a formidable market information and standards organization. Their mandates will be both financial and social, information and standards.
3. The four rating agencies should merge and form one rating organization with three departments: Financial, Social and Data/MIS.
4. An umbrella organization should be formed to act as the Global Microfinance Regulator. It will have a President, two Vice presidents and six board members as follows:
a) One board member from the merged organization of SPTF and Smart Campaign
b) One Board member to represent the new organization the merger between MIX and MFT
c) One board member from the new organization of Raters.
d) A nominated members representing Investors
e) A nominated member representing Microfinance Institutions.
f) A nominated member representing the poor.
5. Don’t expect money from MFIs or investors to fund the infrastructure. It is a public social good which should be funded by well wishers, the foundations, development organizations and governments. They are committed, as they claim, to the course of alleviating poverty. This new infrastructure is a tool for that goal. So, fund it, until a point where the new Regulator will be able to come up with global rules to govern microfinance and levy fees to all players. And the players to meet the bill will be MFIs because it is them who will be in the money making business while serving the poor. But this time, they will play the game of volumes, the more poor people they serve at low cost, the more customers they will get and they will still make money for their shareholders.
6. To all of you, let us remember a biblical story. When Jesus met a demented man and asked his name he replied, “my name is Legion, because we are many”. It is madness to have so many initiatives with none seeming to work. Another thing, when you find yourself in a hole, stop digging. Grameen Foundation, do not just send feelers from a distance. It’s either you join the party or carry on your initiatives as a lone ranger.
March 25, 2014 at 11:20 pm
Hugh Sinclair
A radical idea, but not a silly one! Some healthy competition between the rating agencies is not necessarily a bad thing. MFT and Mix could well combine forces. And you forgot to mention Truelift. But SPTF and Smart? I am not so sure.
Stand back a moment. There are two issues to consider. Firstly, independence. None of these entities, however merged or re-packaged, will earn credibility if they are intimately related to those they seek to monitor, regulate or assess. The first thing to do here is get Smart out of Accion. It is so close to Accion currently (staff, location, legal structure, finance) that it is beyond repair. Scrap Smart and start again, with a decent set of principles. The problem is that Smart is self-protecting and seeks ultimately to protect the interest of the microfinance industry, not its clients. This cannot be remedied in the current framework. Smart uses the rating agencies to do its actual work. The rating agencies are, for the most part, pretty independent. Get the rating agencies to agree on a genuine set of client protection principles, offer social ratings in the same way they pioneered performance ratings, and scrap Smart all together. Resistence will come from Smart, very few other people. Then at least you have the ratings relatively isolated from the investors.
Secondly – locality. You assume we need global regulators, but the best regulators (in my humble opinon) tend to be national. The EIU is constantly banging on about how wonderful the Peruvian regulator is, I am not sure I entirely agree with them in the circumstances, but it is far better than Smart and the likes. If Uganda had as decent a regulator as, say, Ecuador, it wouldn’t need Smart/Truelift/MFT etc. Local regulators, if acting correctly, can have a far greater impact potentially. you want transparent pricing – many countries oblige banks to do this as standard. It’s not that hard.
Let me throw out another radical solution. How about instead of all this money spend on these 7 initiatives, we created an independent, professionally staffed body to advise local regulators on how best to tailor regulations in their own countries, to balance the needs of the poor, the MFIs, and maintain the interest of investors. The sector generally worries about “interference” from the regulator, or “regulatory risk”. How about if we designed a means to empower, train and professionalise regulators, to train their staff, to equip them to understand the dangers of over- and under-regulation? Who is training the regulators here? A common criticism I hear is “the US was regulated by the SEC and they didn’t do a good job in the financial crisis, so you have faith in the regulator of country xxxxx?”. It’s a valid point, but I would argue the alternative is not to dismiss local regulators and rely on some Boston-based bunch of novices, but to empower local regulators to do better. All games need rules in order to attract players. And those that set the rules, and train the regulators, need to be genuine independent, not insiders as they currently are.
The topic is often portrayed as free-market liberals believing in a zero rules, or some standard-setting NGO intermediaries, versus communist style dictatorial centrally-planned bureacracies. Perhaps there is a happy balance between these two? I work a fair bit in Peru, Ecuador and Bolivia, and between these three countries you can see aspects of all both extremes. Before we rely on a bunch of foreigners advising global investors on how they should invest in such a variety of countries perhaps we should consider empowering those same countries to regulate themselves? An over-regulated country will be penalised by a lack of investment, an under-regulated country will suffer crises, and we embark on a learning process. Instead, we have decided on a bunch of mainly US-based institutions closely related to US and European investment funds to dictate the rules of the game. I acknowledge there exists corruption and incompetence in some countries, but let’s try to address that directly rather than skirt around it with pretty websites designed ultimately to keep an industry alive rather than have much actual impact, which is the current situation.
Those that control the flow of funds in any sector have a vested interest in controlling the flow of information and the state or regulation. This is why independence is critical. And the variety and complexity of the countries in question is so immense that I fundamentally question whether one size fits all. Decent, sophisitcated, qualified, empowered local regulation is a serious alternative to all these measures.
March 26, 2014 at 5:10 am
John Gitau
Raters seem to be getting a good rating. Their role seems important and their independence endears them even more. They are helpful to investors. Regulators are a one stop shop and if professionalized and empowered, most of the infrastructural functionaries we have today would become superfluous. The so much resources wasted in so many initiatives can now be channeled to capacity building the supportive arms of the regulators. We can then have one outfit for information, performance and standards. Yes, localized regulatory focus better as continents and countries have diverse dynamics that are better understood and handled locally. It is a bottom up approach.
Assuming these are good workable ideas, who will take them up for implementation? Of course we shall be lying to ourselves to imagine that some organizations will declare themselves redundant.
I usually have my fears while using thought fora. I compare them to a soccer pitch. Players come, do their game, declare winners and then they and spectators leave, until the next time another set of teams come. Apart from the rough patch that is evidence of playing, the pitch has nothing else to show. Of course bets will have gone on behind the scenes, sponsorships monies will have exchanged hands and so forth. We have talked. Another post will come. And we shall talk.
In my opinion, If this financial inclusion court doesn’t have a bailiff to enforce judgements, then it will not be any different from a cathartic centre or a talk shop.
April 4, 2014 at 12:18 pm
Cristian Shoemaker
Great insights provided in the post by Ms. Rhyne.
To share a few thoughts, simple yet potentially useful regarding the ‘how’ to take a fresh look at the needs, coordination and future funding of these tip of the spear, leading edge organizations, perhaps the respective teams could individually, and as a group:
1. Conduct SWOT of each organization, and organizational leadership teams, as they currently stand given their respective missions and stakeholders.
2. Compare and contrast what is gleaned from each SWOT with the current and anticipated future trends in financial inclusion and microfinance.
3. Consider where the most progress and value add if found for long-term industry development, without limitation based on current missions, structures, teams and funding needs.
4. Examine how potential reconfigurations of the organizations and/or leadership teams, standalone or with some or all of the parts of the others, could deliver the progress and value add for the industry, again without limitation based on current structures, teams and funding.
5. With insights gained from this look into the future, consider what strategies would be needed to reconfigure, what the realties of current organizational commitments are that would serve as constraints to reconfiguration, what elements are missing and what the reconfigurations could potentially cost.
Thanks for the interesting post and great work along the way.
April 7, 2014 at 6:47 am
John Gitau
There is one reason this subject was more important than perhaps all the others which have come after. This post was a call to all of us to suggest how the microfinance industry infrastructure can be fixed. Beth is not just anybody who woke up talking about microfinance being in bad shape. She has been there, has seen it and can read danger signs.
A few of us came to the table, nibbled at the food ( this topic) and left much of it half eaten. I thought we were poor people who cannot afford to waste food and should eat to the last morsel. At least not when there is a looming famine.
I am wondering whether we decided to drive on, even when out car dashboard has a red light indicating a mechanical fault. Aren’t we afraid of stalling on the road especially on a deserted section known for marauding highway robbers?.
Beth, when you wrote this piece and expected our contribution, what did you plan to do with the input? Do you think we gave you enough glue to fix the infrastructure or it was just too little for the gaping crack? Fair enough, now, with the little input you got, what are you doing with it? We need to know because you are our captain and you need to take us to our destination. We have paid the fare and we wouldn’t want the boat to capsize mid sea. You are too serious a captain to just have wanted us to have a good talk for the sake of it.
I suppose we are not hiding our heads in the sand. If we don’t fix the infrastructure, doom awaits us and we shall have no one else to blame but ourselves.
Let me share with you what I have found in my country about microfinance so that you can start to see the potential danger facing the industry.
We have a vibrant microfinance sector in Kenya. Banks are getting into the game as the sector appears lucrative. They are lending groups and individuals right left and centre, without and with shaky security. The point of contact or basis of microloans is the microbusinesses at the roadsides in the slum or lower middle class suburbs.
My work involves teaching practical financial literacy to the poor in the low income zones. From a mother of four selling peanuts on the roadside to a carpenter at the heart of the slum, I am in contact with them. I know what they do and how they do it. I understand those businesses pretty well from my experience as a teacher and microbusiness consulting judge engaged by a leading global development organization over the years. Let me share one thing: Those microbusinesses that microfinance officers visit, see and evaluate for loans and which hardly grow, are loan attraction decoys. Let me explain.
On average, a microbusiness owner has three loans from three different microfinance institutions. This is a known fact, if you ask any microfinance player in my country. Upon a microentrepreneur taking the first loan through a group guarantee and performing well, it becomes possible to get another loan from same MFI or a new one. With so many regulated and unregulated microfinance players roaming the market, getting a new loan is becoming easier and microentrepreneurs have mastered the art of applying for loans( this includes borrowing furniture from neighbors the day of security evaluation).
What is happening on the ground is that, out of the three loans, two are used for domestic consumption and one keeps the microbusiness open while also servicing the two other loans in a perfect example of juggling(it is not difficult to juggle weekly and monthly repayments in a game that promises more money, is it?). Having performed on the two loans, it becomes possible to get another loan. So, two loans are consumed and two are now better in servicing all the loans and keeping the business afloat to please the loan officers. Some of it is used to keep ROSCA going and with yet some saved for a rainy day, rainy day being when the microfinance debt collectors come knocking and it is time to relocate to a new slum. So, as MFIs get performance on their loans, they whistle all the way to the bank and with impressive annual financial results displayed in the media, more MFIs are formed and because of competition, they have to make acquiring loans easier. So, the MFI customers, who treat loans as income continue to improve their material lots with the “income”. Why would they start new businesses while they can easily get loans to consume?
If you thought the poor are daft, you have a problem. They usually know what they are doing even when they play victim. Some are thinking MFIs are fools giving them unsecured loans. They are playing MFIs one on the other in the game of robbing Peter to pay Paul. Why would they care if auctioneers from an MFI came for their home belongings? They have in the past witnessed their neighbors and fellow traders businesses and home items being carted away. So, knowing better, they keep their assets as savings so that when they get tired of playing the game, they shift and close business and go to other slum areas and start microbusinesses afresh. I have never understood why MFIs would assume the poor are tied to one slum. They can live in any other.
Please be warned. Microcredits is likely to be the biggest ponzi scheme that the poor will pull on the upper and middle class that run the microfinance sector in a classic revenge phenomenon. That is if we don’t bail the water now that it is ankle deep. And when they shall start defaulting, they will do that en-masse and since they have little to lose, the MFI sector will be left holding on to old mattresses and stools on paper as security. I recently overheard a group of market women, tired of being harassed by an MFI debt collector swearing that the next time the collector will come, they will beat him up and there will be nowhere he will take them. He should know, they said ” we have children like his”. Imagine such defiance. If word spread in the slums that borrows have refused to pay their loans, that will be the beginning of the fall. The time is near, dear colleagues. Pride comes before a fall. Ignore Beth’s call at your own risk.
Let’s us take the infrastructure discussion seriously. Reflect on the Arab springs and the US sub-prime debacle. Both started in just a normal day. In Kenya we have some MFIs getting notorious in locking women in their offices and sending strong men debt collectors to go “arrest” the defaulting members of the borrowing group who only get released upon written commitment by the defaulting member. There is bitterness.
Take heed. Let us support this call and suggest practical solutions. If the industry falls, we shall all sink in it. You all know that there are radicals already completely disgruntled by our industry. The fact that they are insiders doesn’t help our course. You know the Greek story of the Trojan horse. Let us read the signs on the wall. I am not being apocalyptic. I know what I am talking about and dread to be right.
June 23, 2014 at 10:56 am
Alana Heath
Grassroots Capital Management agrees with certain aspects of Rhyne’s blog post and has engaged in the conversation on its own blog. Grassroots is a fund manager that believes it is time to begin to choose which of the various SP and SPM tools are currently best able to serve the industry. The post shares Grassroots’ view of the current status of the SP management, metrics and ratings landscape and references Rhyne’s post.
http://grassrootscap.blogspot.com/2014/06/spm-management-and-metrics-time-to.html