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3rd ALFI microfinance conference
17 March 2011
The Association of the Luxembourg Fund Industry (ALFI), in association with LuxFLAG, organised a Microfinance conference in Luxembourg on 17 March 2011. Considering that it was just the second year of this event, the response received from the participants was extremely positive. More than 150 delegates from 12 countries participated. The event was attended by the HRH Prince Guillaume of Luxembourg and H. E. Minister Marie-Jose Jacobs, Minister for Development Cooperation and Humanitarian Affairs, delivered the Keynote speech at the opening session. Panels consisting of 24 industry experts representing Development Finance Institutions (DFIs), Rating Agencies, Investment Funds and Microfinance practitioners discussed a wide range of topics ranging from the current state of the sector to the possible ways of securing a better future for the industry.
It was noted that Microfinance is growing around the world. Even though the trend is slowing down from the exponential growth of a few years ago, it is still resolutely positive. However, whereas the size of the industry has reached a high point, we must also face the fact that its reputation, particularly in the popular media, has reached a low point.
Recent events in India, Bangladesh, Bosnia, Morocco, and Nicaragua have had a negative impact on the reputation of the industry. That controversy should arise is not surprising when one looks at the historical context: providing credit to the poor is one of the most sensitive issues in both Judeo-Christian and Islamic culture and has been debated throughout modern civilization. On top of this, as the microfinance industry is very fragmented, located across several continents without a single institutional defender, it is difficult to manage its global reputation effectively.
However, despite the negative image of the industry in todays press and a series of unfortunate - we hope isolated - events, the industry maintains that microfinance is good for the planet. Speakers underlined that concrete steps need to be taken by the stakeholders to rectify industry shortcomings and get back on a more positive trend. By being more transparent and giving the first priority to the end client, the industry should overcome the current crisis.
The initiative of International Financial Institutions to provide technical assistance to microfinance institutions is contributing to the fostering of a healthy and professional sector. While tier 1 MFIs might not need the technical assistance any more as they are self-sufficient, other MFIs need further help. Moreover, additional detailed academic research on regulatory matters, competition, social performance and the impact of microfinance loans would certainly benefit the industry. Large financial institutions, investment funds and industry associations should play a leading role, along with the Universities, in organising and financing such research.
Luxembourg has played an important role in the development of the sector by providing a suitable environment for microfinance investment funds. Impact finance and Islamic microfinance are two further areas where Luxembourg should explore opportunities in the near future. Moreover, upcoming changes in the fund industry such as AIFMD will certainly have an impact on MIVs and the industry needs to be prepared for it.
Excellent speeches during the day and an appreciative response from the participants have certainly motivated us. I have no doubt that this will be an annual event in Luxembourg. I take this opportunity to thank the speakers, moderators, panelists and participants for their contribution and look forward to welcoming all of you at next years ALFI & LuxFLAG Microfinance conference.
Thomas Seale Chairman
Luxembourg, 15 June 2011
09:00 Chairmans introduction
Thomas Seale, Vice Chairman, ALFI and CEO, European Fund
Microfinance (MF) is an industry that continues to expand rapidly. Due to its decentralised and often semi-regulated nature it is difficult to obtain accurate figures.
According to Mix Market database shows:
-1929 microfinance institutions
-62 billion USD in MF loans
-92 million borrowers
Microfinance has reached a low point as regards its reputation.
Why is the industry, so heralded just 5 years ago, suffering so much today?
Thomas Seale suggested three factors that contribute to microfinances negative image today:
1) providing credit to the poor is one of societys most sensitive issues: as a philosophical problem it has been around for several thousand years;
2) the decentralised nature of the MF industry makes it susceptible to criticism. With no strong unifying institutional defender, MF suffers in the media because of a lack of voice;
3) the debate ishighly politicised and mediatised.
MF needs to :
become more transparent; become more focused on putting client needs first; focus on entrepreneurial activity, avoid consumer loans and over-indebting individuals; manage expectations: state more clearly what MF can and cannot do.
The purpose of this conference is to shine a light on these issues and craft solutions and actions for improvement.
09:15 Microfinance as a development tool?
Mme Marie-Jose Jacobs, Minister for Development Cooperation and Humanitarian Affairs, Luxembourg
Luxembourg has been a pioneer in the field of microfinance.
With international recognition comes the need for a heightened sense of responsibility.
Hence the importance of close coaching and follow up of clients by MFIs. These clients are often illiterate and we cannot expect financial literacy.
There is no one size fits allin microfinance. Different communities require different products.
MFIs must set themselves high quality standards with regard to their structure, accounting, the transparency of their management, the interest rates charged to their clients and the behavior of their staff.
Microfinance, like traditional finance, is a money business. Financial transactions are based on trust. When this trust is betrayed the mutually expected benefits evaporate, which immediately hits the poor client in a harsher manner than the MFI.
The precondition for microfinance to be considered as a development tool is that MFIs should know their clients, and know to what extend they are able to invest a loan in a revenue generating activity.
An MFI must believe and act on the principle that responsible management is to its own advantage, as is responsible growth.
Adequate financial regulation in general and more specifically for microfinance is another prerequisite for microfinance to be a useful development tool.
The damage that can result at a social level from inconsiderate microfinance activities warrants a serious and well adapted legal, regulatory and supervisory framework.
Overly strict regulation might prevent cases of malpractice, but it may also block honest microfinance schemes from developing in the informal sector.
MFIs need and deserve regulation that is adapted to the real risk of financial transactions with the poor.
In contrast to Andhra Pradesh, India, the Western African Economic and Monetary Union is one step ahead. A law adopted at the level of the regional organisation aims to create a homogenous legal framework in all eight member states; for instance, the subject of saving deposits with MFIs has been addressed.
Q: Is microfinance a development tool?
A:Yes MF may be considered as a toolbox for development, if:
1) the different microfinance tools are designed and put to use with the real needs of the client population in mind. There is no one size fits all;
2) MF, like other development tools, cannot be practiced in a vacuum. One has to take into account the social and cultural, as well as legal and regulatory environment if MF is to be effective in the fight against poverty;
3) only financially sustainable MF can be of service to sustainable development. Saving deposits with MFIs can work wonders in that respect, but are not always available or even authorised.
9.30 Microfinance: view from the European Investment Bank
Plutarchos Sakellaris, Vice president, EIB, Luxembourg
The EIB remains committed to making long term loans. It contributes more than USD 5m to Namibia, Tanzania and Tchad.
The EIB has direct investments in Africa, the Caribbean, and Asia. The EIB provides loans in the national currency. Plutarchos Sakellaris stressed the importance of transparency and a balanced approach. Responsible microfinance should be transparent with respect to the interest rate to be applied. The EIB has signed a set of Client Protection Principles and is working on a set of Social
Performance Standards. The EIB encourages MIVs to obtain labels such as LuxFLAGs microfinance label. A Banana Skin Survey in 2011 shows that threats to the reputation of the microfinance
industry are now considered a very important risk (it ranks in second place, up from 17th place a couple of years ago).
Reputational concerns need to be addressed. Microcredit should also be granted within the EU such as in Greece and Ireland.
9.45 Current trends, threats and opportunities
Damian von Stauffenberg, Founder, MicroRate, Washington
Where are we now? Damian von Stauffenberg opened his presentation by suggesting that the time of innocence was over. The microfinance industry has been precipitated into adolescence by the global financial crisis. In fact, the microfinance sector came through the crisis with pretty colours: growth contracted, but the industry continued to grow. The slow-down was a good thing, because growth rates prior to the financial crisis were unsustainable and would have led to a much larger crisis than we are facing now.Even so, portfolio at risk statistics did deteriorate during the period:
MFI PORTFOLIO GROWTH AND QUALITY
Y/E June 2007 2008 2009 2010
Loan portfolio 49% 47% 17% 23%
P@R and write offs 5.1% 4.7% 6.9% 7.7% est
Microfinance continued to grow throughout the financial crisis.
In 2008, MIVs started to hold back loans to MFIs but investors did not lose confidence and suddenly MIVs could not place the cash they received, resulting in large sums of cash on deposit.
MFI asset growth
MIV asset growth 2007 2008 2009 2010
AUM 97% 28% 22% -
MF assets 107% 25% 11% 10% est
Today, the main obstacle to investing is not foreign exchange issues, as it was 5 years ago. The limiting factor is the lack of demand by MFIs.
MFI growth vs MIV growth
2007 2008 2009 2010
MFIs (loan portfolio) 49% 47% 17% 23%
MIVs (MF portfolio) 107% 25% 11% 10% est
Efforts by some MFIs to place money at any cost, regardless of the needs of the end clients, have led to scandals. Other scandals occurred in countries where governments intervened with a badly thought-through plan to rescue debtors. For instance, in Nicaragua, the Government capped interest rates and encouraged borrowers not to pay back their loans. The result is the collapse of microfinance in that country. We are now running a high risk of alienating investors. People invest in microfinance because they wish to alleviate poverty; now they find that in some cases MF is increasing poverty. It is imperative that the industry not let go of the principle that MF is about commercially productive loans. This requires proper supervision and credit bureaus to check for indebtedness.
In India, for instance, much of MF lending is not real microfinance because the MFIs do not look at what the microloan is to be used for. There is no control. As a result, 50% of loans are used for consumption.
10:15 A critical view of microfinance: a multi-dimension approach
Moderator: Marc Elvinger, Partner, Elvinger, Hoss & Prussen,Luxembourg
Axel de Ville, ExecutiveDirector, ADA, Luxembourg,
Runa Khan, Founder and Executive Director, Friendship, Dhaka
Sara Vermeir, Private Equity Manager, Incofin Investment Management, Antwerp.
Sara Vermeir What is the driving force behind microfinance? It is to combine financial return with social impact. In recent years some parts of the industry lost sight of the social objective as everybody and anybody piled into the market
Runa Khan spoke of the responsibilities that fall to MFIs.
The same microfinance model cannot be replicated in every sector of the same market, let alone from country to country. We must ask: what are the right products for this community? What are their real needs?
There are too many layers between the investor and the end client, resulting in mission drift. It is wrong to take out a huge profit: the investors profit should not be linked to the profit of the
MFI. Profits generated by the end customer should be left in the system and used to make more loans or improve interest rates.
We should not use profits generated by end clients to build donor facilities, such as schools. The community should be allowed to develop its own projects and decide how it wishes to spend its money.
As an MFI, we have a duty to check out donors: what are their real goals and objectives?
Axel de Ville stressed the importance of putting the client first at all levels: social performance reporting is for the benefit of the client, not the investor.
We need to do market research, to segment the market: one size does not fit all. We need to study the failures and learn from them.
Investors should know their risk appetite and take risks that match this profile. We should do what we say and say what we do. Above all, we should not oversell the industry by using buzzwords; these have damaged the credibility of the sector.
If the industry does not react now, we risk very bad damage. All the actors in the chain have an important role to play.
Luis Viada of Microrate commented that people everywhere are motivated by the factors that affect their pay or their bonus. Until recently, the industry was focused entirely on loan volume: outreach, access and depth were the targets. It is not a good performance target for a loan officer to seek a 98% repayment rate in his loans. This will lead to abuse. Axel de Ville agreed, adding that the only way to create a virtuous circle and was to apply social impact...