#tbt: Top 10 Reasons That Fewer Loans Are Going to the Poorest

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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.

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We are pleased to bring you this #ThursdayThrowback blog post, which was originally published in Vulnerability: The State of the Microcredit Summit Campaign Report, 2013. For two years in a row, we have reported a decrease in the total number of extreme poor (those living on less than $1.25 a day) that had received a loan. Our “Top 10 Reasons” chapter in the 2013 Report are still very relevant.


What has caused a 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 overlending, 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.

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.[1]

Villager in Nangolkot, Noakhali, Bangladesh
Photo credit: Shamimur Rahman and Giorgia Bonaga

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.

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.

2. Misaligned incentives — he 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.

Farmers (credit - Andrés Quinche)_comp

Photo credit: Andrés Quinche


[1] Symbiotics, 2012, “2012 Symbiotics MIV Survey: Market Data & Peer Group Analysis,” (Geneva, Switzerland: Symbiotics), http://bit.ly/MIV_survey.

One thought on “#tbt: Top 10 Reasons That Fewer Loans Are Going to the Poorest

  1. All very true and very well stated. Except for densely populated Bangladesh, there is little evidence that microfinance can reach more than 20% of the population and when it aggressively goes downmarket to extend outreach the poorest get into debt they often cannot repay as the MFIs that made the loans harass them. So let’s focus lending on those whose businesses could actually move ahead with a loan and for the rest encourage savings. Since financial institutions cannot profitably manage tiny savings accounts (most who have savings accounts don’t use them anyway) let’s go to where the action is, saving and borrowing in small groups. The 20,000 Saving for Change groups with 450,000 women members annually track 24 million transactions with not a single staff person (or silicon chip) involved. That’s why it would require a full time staff of 1,500 to manage this program where all this was accomplished with a staff of 200 for three years who have since (hopefully) gone onto other jobs. Anyway the latest Finscope clearly shows that most of the saving (and borrowing) action is informal. We should visualize financial inclusion through institutions and mobile money as one half of the puzzle while put some resources into the other half of the puzzle – the informal and semi formal ways that the poorest take banking into their own hands. Why not catalyze the capacity of the poor to solve their own problems. Anyway back in the USA I learning that in immigrant communities a vast invisible ROSCA system is thriving as the formal banking system has turned its back on them. A no interest payout from a ROSCA to buy a functioning used car – looks pretty good compared to a PayDay loan. see http://www.intheirownhands.com.

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