The Microfinance Industry Needs an Infrastructure Fix

The Microcredit Summit Campaign:

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.”

Originally posted on Center for Financial Inclusion blog:

> 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…

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One thought on “The Microfinance Industry Needs an Infrastructure Fix

  1. 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.

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