This blog post is written to celebrate the Month of Microfinance. The Month of Microfinance is a low-budget grassroots movement of student organizations with a passion for microfinance and an intense commitment to learning. Join their community and the conversation about whether microfinance should be value driven or profit driven and whether microfinance is an industry or a movement. Learn more at http://monthofmicrofinance.org.
The Microcredit Summit Campaign has tracked the total number of client served by microcredit and the number of those who were among the world’s poorest every year since 1998. And every year those numbers have increased, often by 20% to 40%—until last year. When we collected the numbers last year, we found that 13 million fewer of the world’s poorest families had received loans in 2011 than the previous year.
Total Microfinance Borrowers Worldwide
We asked ourselves in the analysis, what could have caused this reduction in microfinance clients worldwide? And why have all of those reductions been from the poorest clients? Here are our top 10 reasons:
- 10. Andhra Pradesh crisis in India—Our reports show that India accounts for almost all of the reduction in clients worldwide. Most of these reductions come from Andhra Pradesh, where fast growth led to over lending, cases of harsh collection practices, and heavy regulation from the state government. Many MFIs and banks stopped lending to microfinance clients and self-help groups as a result. Learn more.
- 9. Maturing markets—Some of the fastest growing markets in the world, including Bangladesh and parts of Latin America, have reached a point where a large proportion of the people most easily reached have become clients, and MFIs’ growth is slowing as they seek ways to lower costs and reach more remote and more difficult markets.
- 8. Global economic crisis—Microentrepreneurs and the financial institutions that serve them could not remain insulated from the worldwide economic crisis. Less economic activity in the developed world meant less tax revenue and greater focus on domestic spending by Western governments. It also led to a drop in donations to international charities. Remittance flows dwindled, which negatively affected economic activities in towns and villages dependent on income from family members in other countries.
- 7. Investor wariness—Banks and other investors in India and other countries curtailed their investments in microfinance, while international microfinance investment vehicles continued to invest almost three-quarters of their funds in Eastern Europe and Latin America, regions with less outreach to the poorest.
- 6. Donor fatigue—Many bilateral donors have reacted to growing commercialization and negative press by reducing their support for microfinance. This means less funding is coming in for groups that may need subsidies to build sustainable programs to reach poorer and more remote clients.
- 5. Herd mentality—MFIs find it easier to operate in locations where other MFIs have already developed the market. Investors find it easier to invest in MFIs where other investors have already done the due diligence. The result is a piling-on effect that eventually leads to bad debts and a retreat from the microfinance market. Learn more.
- 4. Patchy information—Global reporting on microfinance activity (including our own in this report) shows data by country. This disguises the fact that, within a country, some locations may have more than enough microfinance services available while others have very little. Without accurate and timely maps that localize activity, it can be hard to see which markets are overheating until it is too late.
- 3. Better measurement—In the past few years, many MFIs have more widely adapted poverty measurement tools, such as the Progress out of Poverty Index®, Poverty Assessment Tool, and the Food Security Survey. The MFIs that employ these tools often find that the number of the poorest that they are serving is less than they originally estimated. This means that some of the reduction in numbers of the poorest being served reported to us is due to more accurate reporting on the number of poorest clients. Learn more.
- 2. Misaligned incentives—The market provides few rewards to those MFIs that reach poorer and more remote clients because reaching these clients usually entails higher costs and smaller margins. Without ways of recognizing those that reach the poorest, MFIs will have few incentives to extend to this market and will find it difficult to attract funding to do so.
- 1. Myopic focus—For many years, the indicators used to measure microfinance performance have focused on numbers of clients and the sustainability or profitability of the institutions that reach them. These indicators tell us little about whether we are achieving the real aim of microfinance—helping people lift themselves out of poverty. Without tools to measure our ultimate ends, we satisfy ourselves by measuring our means instead.
Microfinance providers, investors, donors, and other supporters have come together in a variety of industry initiatives to address the challenges facing microfinance. These include:
- The Smart Campaign—A set of fair practice guidelines endorsed by more than 2,000 organizations and individuals that set standards of practice for client protection.
- Universal Standards for Social Performance Management—Principles for managing financial service providers who strive to meet a double bottom line.
- MicroFinance Transparency—Standards for reporting interest rates in a common format that covers all costs paid by the client.
- Seal of Excellence in Poverty Outreach and Transformation—Recognition for those microfinance providers who can demonstrate that they are reaching people living in poverty and fostering positive and enduring change in their lives.
Lessons for Social Business
The experience of the microfinance industry over the last 20 years provides lessons appropriate for many other social enterprises. On the positive side, we have shown that:
- Harnessing the energy and tenacity of those living in poverty can lead to the sustainable (and profitable) provision of products and services.
- Social business conducted well can attract social investors that can help fuel rapid growth.
- When social entrepreneurs come together and freely share best practices, they can build a global industry in a short period of time.
On the other hand, we have also provided some negative examples that other social enterprises should seek to avoid:
- Focusing solely on growth can lead to a breakdown of discipline and economic bubbles that can destroy lives and markets when they burst.
- Social enterprise frequently involves serving marginalized people, which often means that there will be a large power imbalance between the provider of the products and services and those that use them.
- IPOs (initial public offerings) and other ways of providing immense short term gains to owners can destroy the discipline needed to build a social business to last.
Social enterprises need to carefully consider how they shape their incentive structure, set in place measures to control for quality of growth, and create an early warning system that will alert them to disasters in the making—disasters like the collapse of the microfinance industry in Andhra Pradesh. These businesses need to set for themselves performance standards and feedback mechanisms to make sure that they are not abusing the power that they have over their clients.
We spoke to Vijayalakshmi Das, managing director of Ananya Finance for Inclusive Growth in India, as part of our research for the 2013 State of the Campaign Report. She summarized the lessons from India this way: “…we need to recognize that we are as vulnerable as our clients. [We should] invest more time in understanding our clients and their needs and respond accordingly.” (Watch the video interview.)
Ultimately, social business must be about making clients’ lives better. That requires that we know what is happening in our clients’ lives and what holds them back and then designing with their input the products and services that allow them to improve their future. In the microfinance field, we see many organizations that have worked with their clients to find ways to help them address the challenges they face with health, education, housing nutrition, and markets, so that one by one, clients can remove the barriers that have kept them trapped in poverty.
 Symbiotics, 2012, “2012 Symbiotics MIV Survey: Market Data & Peer Group Analysis,” (Geneva, Switzerland: Symbiotics), http://bit.ly/MIV_survey.