> Posted by Elisabeth Rhyne, Managing Director, CFI
Embed from Getty ImagesI recently attended the annual meeting of the Microfinance Network (MFN), which was hosted by the Alexandria Business Association in Alexandria, Egypt. MFN is a global network of some of the largest and leading microfinance institutions, and its annual meeting has long been known for candid and in-depth sharing of experience among the leaders of these institutions, as this post demonstrates.
Ask a microfinance CEO what’s making his or her life hard these days, and the answer is likely to be politics.
That’s hardly surprising when the speaker is Motaz Tabaa, CEO of the Alexandria Business Association (ABA), one of the largest microfinance institutions (MFIs) in Egypt. On January 28, 2011, when the occupation of Tahrir Square in Cairo held the world’s attention and led to the resignation of then-President Mubarak, it became impossible for ABA to operate. But before the week was over, staff were back on the streets, collecting and disbursing loans, and sleeping at the office to guard the cash that couldn’t be deposited in banks, which remained still closed.
Nearly every MFI in the group had a similar encounter with crisis – consider the political violence (and/or natural disaster) that has touched Uganda, Nigeria, Armenia, Mexico, Haiti, and Bangladesh in recent years. Today, Al Majmoua in Lebanon and Tamweelcom in Jordan are overwhelmed with the attempt to serve the Syrian refugees that have crossed their borders. The CEOs who have experienced such upheaval agreed about the role of MFIs in responding quickly to help clients obtain cash, keep their businesses open, and then rebuild. Given how prevalent political and natural crises are, organizations have developed protocols for responding quickly. Even while we met, Enrique Majos of Compartamos received news of a tornado in Mexico, and sent the Compartamos natural disaster team into action.
There was another kind of political issue worrying many of the MFN member CEOs – political actions directed specifically at the microfinance sector. As they see it, politicians seeking votes from the poor too often see advantages in demonstrating their engagement with or control over microfinance. They over-regulate, compete unfairly through state-subsidized lending, give preference to more mainstream banks, or all of the above.
In Egypt, for example, a new law is being introduced to regulate MFIs. Although the sector has advocated for a regulatory framework for microfinance for a long time, this new law does not appear to recognize microfinance as part of financial inclusion for low income families. It fails to provide a path for MFIs to qualify to take savings, while it pigeonholes microfinance into a restrictive lending range. For example, DBACD, which works in the Nile Delta, has recently introduced a home improvement portfolio. But the new law defines housing as outside the bounds of microfinance, so DBACD will have to drop the product. New regulation is also coming in Jordan, and there are signals that it, too, will be overly restrictive. Similar concerns were shared by representatives from Lebanon and Armenia.
Responses to political risk depend on a reading of the situation and the players involved. In one country it may be important to engage directly (though not publicly) with an antagonistic political figure, but in another case that would backfire. For Sogesol in Haiti, it has been important to cultivate a public image that emphasizes its leadership as a provider of important services for the poor. However, the group warned against counting too much on support from the public. Clients, even relatively satisfied ones, are unlikely to organize energetically to protect an institution.
For Compartamos, the non-political, technocratic approach of Mexican and Peruvian banking regulators has been a bulwark for stable and predictable policy in the face of popularity-seeking actions by various politicians, and so Compartamos seeks to maintain frequent contact and exchanges of views and information with regulators. By contrast, for BRAC in Bangladesh, where the political scene is dominated by two warring political parties, regulators are under a large degree of political control. BRAC’s response, which has served it well for many years, is to stay resolutely unaligned and maintain a low-key public posture.
The members agreed that while global best practices and international experts can be helpful in providing a counterweight to populist proposals, the international card must be played with great discretion so as not to provoke a hardening of the stance of the very people the MFI would most like to influence.
Finally, members agreed that maintaining institutional health is an essential political risk mitigation strategy, including adequate capital cushions, to enable an institution to weather the turns of political fortune sure to come its way.
Have you read?
The Risk Management Initiative in Microfinance (RIM): Mapping the Road to Risk Management
How Can MFI Boards Be Explicit about Risk Strategy and Appetite?
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June 30, 2015 at 12:55 pm
Zubyr Soomro
This is an insightful analysis of several key issues facing MFPs today and I would like to comment on each of them:
1. Responding to crisis or events whether resulting from political violence or natural disasters: In such situations MFPs inevitably have to move very quickly while still ensuring accuracy of payments ie money going where its needed. Additionally this usually happens under considerable attention from the media and few institutions are equipped to deal with such fallout. For the former there are products and processes that can be transferred and shared though this is not often done. For the latter MFP seniors and boards will have to develop the skills to deal with media related issues.
2. Political interference: This will increase as we succeed in growing financial inclusion and politicians see opportunities to build vote banks. There are enough examples to learn from on how to handle such developments but the key point is that there are usually early warning signals that can facilitate preparation of responses. Seniors and board members should be assisted in building such skills both to spot problems early on and in how to address them.
3. The evolution of regulatory frameworks: Individual MFPs will rarely be able to influence and guide the development of applicable laws and rules. What is needed are strong industry associations that can develop and articulate views and concerns across the sector. It is easier for regulators to respond to industry wide concerns rather than those raised by any single institution. The MENA region in particular has need of such associations and donors should look to actively support the growth of such institutions that can contribute by raising issues on proposed new laws including in Egypt and Jordan.
July 1, 2015 at 9:41 am
erhyne
Thank you, Zubyr for these comments. They helpfully extend the blog post — and the conversation that was held among MFN members. The MFN has been one of the few places for microfinance leaders to talk frankly about these issues and compare notes on each other’s experience.