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Gail Buyske, Advisory Committee, Microfinance Information Infrastructure Project
> Posted by Center Staff
Several weeks ago we learned that MFT has suspended its operations. Moody’s has discontinued its Social Performance Assessment Program. The MIX is trying to increase revenue through its MixGold program. Should we care about these developments? What are they telling us about the state of microfinance’s information infrastructure?
The Center for Financial Inclusion undertook an analysis of these issues to follow up on Elisabeth Rhyne’s provocative blog of March 11, 2014, in which she argued that the microfinance industry needs an “infrastructure fix.” Today’s blog summaries the key issues, which will be discussed at a stakeholder discussion in DC on April 14, followed by one at a later date in Europe.
Let’s start by thinking about why we should care about microfinance’s information infrastructure. Information and its natural outcome, transparency, have been guiding principles of the microfinance industry practically since its inception. These are not just feel-good concepts: they played a fundamental role in the development of microfinance. Information and transparency were critical in microfinance’s early days in enabling donors and investors to identify promising MFIs that they could support. Readily available information enabled MFIs to benchmark their performance and set goals to improve their performance. And we can never forget that a commitment to transparency is a pact between MFIs and their clients.
> 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.
> Posted by the Smart Campaign
The Smart Campaign recently launched the Client Protection Certification Program (CP2). In designing the certification program the Campaign worked with many stakeholders in microfinance, and especially with the four specialized microfinance rating agencies, M-CRIL, Planet Rating, MicroFinanza Rating, and MicroRate. These four have been licensed by the Smart Campaign as certifiers and are now welcoming calls from organizations that wish to become certified.
We urge organizations that are scheduling ratings in 2013 – and that have strong client protection practices – to consider requesting a client protection certification at the same time as a rating. Here’s why:
- Assurance about client protection standards. Client protection certification treats client protection in more depth than ratings and measures practices against specific, industry-wide standards. The certification provides greater assurance that client protection practices meet these standards.
- Use of certification as a public mark of achievement. Client protection certification carries a message about an issue of public concern that can be shared with a broad array of stakeholders, including investors, the media, and even clients. It can be used to convey a simple and powerful message.
- Costs less and is less disruptive. Client protection certification was designed to work in tandem with ratings. When a client protection certification visit is combined with a rating visit it adds a relatively small amount to the cost of the rating, a cost that is much less than a standalone certification. And because only one on-site visit is needed, combining ratings and certification is less burdensome for the organization.
- Upgrading practices. The process of preparing for and passing certification assists organizations to upgrade their client protection practices.
> Posted by Elisabeth Rhyne, Managing Director, CFI
The following post was originally published on the Huffington Post Business Blog.
The global microfinance industry realized a significant and long-awaited goal this week with the introduction of Client Protection Certification as promoted by the Smart Campaign. With certification, lenders and banks for low-income people will be able to demonstrate — on the basis of an on-site, third-party evaluation — that they take adequate care to protect their clients.
As one of the founders of the Smart Campaign, my high hopes are that Client Protection Certification will become a kind of Fair Trade mark for the microfinance industry. If established as we envision, donors, investors, regulators, and even clients will check the certification registry before they invest in or bank with microfinance institutions, choosing the ones that meet the standards. This in turn will create positive incentives for institutions to improve, ultimately leading to safer, more respectful services for the low income clients microfinance reaches.
> Posted by Danielle Piskadlo, Senior Program Specialist, CFI
After a couple of turbulent years in the microfinance sector, things are finally calming down and settling into a “new normal.” This new normal looks quite different from the old normal but may also be a more realistic and sustainable state. MicroRate’s recently released 7th annual survey and analysis on Microfinance Investment Vehicles (MIVs), The State of Microfinance Investment 2012, explores this new normal. Below are reactions to some of the report’s findings.
New Normal Growth. The growth rate of MIVs has settled into an average of 13 percent per year since 2009, versus an average of 74 percent during the preceding three years, according to the MicroRate survey. As MIV growth is less than the overall MFI growth reported on the MIX Market (approximately 20 percent) MIV funding appears to be decreasing as a share of overall MFI funding. Development Finance Institutions (DFIs) still make up the largest percentage of funding to MFIs but their level of support may be peaking and their funding, as a percent of total funds for microfinance, may reduce in the years to come.
Debt to Equity. The demand for equity and subordinated debt is huge and continuing to grow, mainly coming from mature MFIs. More MIVs are moving away from debt toward equity, being driven in part by a desire to be more involved in governance, to play a larger role in risk management, and because the regulators are requiring more capital. Also, fund investors increasingly want to know how much of a fund’s return is coming from debt versus equity. Some of the larger DFIs need to disburse large amount of funds, so they have to make debt investments, leaving an unmet demand for equity.
> Posted by Julie Shea
The microfinance rating agency MicroRate recently published “Role Reversal Revisited,” which charges that government-funded Development Finance Institutions (DFIs) continue to crowd-out private funding for microfinance.
The premise of “Role Reversal Revisited” is that DFIs should invest where private sources of funding don’t yet dare go because the risk is too high and the process too time-consuming; they should pave the way for private resources rather than competing with them. DFIs have historically been a major source of funding for global microfinance, but as the industry matures and proves itself as an investable asset, private lenders have displayed an increased willingness to channel funding into microfinance institutions (MFIs). The development community widely acknowledges that if microfinance is to continue to grow, there is no alternate to private funding, because public funding from DFIs is limited. DFIs’ main task should be to create conditions that will attract private funding to MFIs, for example by seeding the next generation of MFIs and promoting microfinance infrastructure.
“Role Reversal Revisited” is a follow-up to the controversial “Role Reversal” (MicroRate, 2007), which uncovered a pronounced tendency for DFIs to lend to the most creditworthy MFIs, forcing private microfinance investment vehicles (MIVs) to invest in smaller and riskier institutions. These claims caused considerable controversy and a consequent pledge from DFIs to change their behavior. “Role Reversal Revisited” finds that DFIs have in fact done the opposite of what they promised – they’ve increased their share of foreign loan financing to the largest MFIs and become even more risk averse than they were in 2007. DFIs are not crowding out potential investment dollars; rather they are pushing aside actual investment dollars, as evidenced by high levels of over-liquidity among MIVs during this period. Two notable patterns of behavior emerged in the study – subsidized pricing is being used to compete with private funders (i.e. DFIs offer loans at below-market prices which private funds can’t match) and there continue to be signs of “trophy lending” (lending motivated by a desire to show a microfinance portfolio on the balance sheet rather than by borrower need for funding). Read the rest of this entry »
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