How microfinance can deliver results after all!

Sanjay SinhaMicro-Credit Ratings International Limited

Microfinance – delivering results

“Recently, microfinance’s reputation has come under pressure, mainly due to misinterpretations as well as the increasing focus on some (alleged) malpractices by MF actors and the microfinance sector has some problems to show that it is achieving good results for the clients in the field”

European Microfinance Week organisers

Microfinance – delivering results

How could we show this to the public?

Public perception lurches from one extreme to the other

We need to show a more balanced approach

We all made the mistake initially of presenting microfinance as a panacea for poverty…

…the real utility of microfinance is as a means of financial inclusion

Is Microfinance delivering results for clients?

“Inclusive financial systems allowing broad access to financial services…are especially likely to benefit poor people and other disadvantaged groups. Without inclusive financial systems, poor people must rely on their own limited savings to invest in an education or become entrepreneurs and small enterprises must rely on their limited earnings to pursue promising growth opportunities. This can contribute to persistent income inequality and slower economic growth.”

World Bank Policy Research Working Paper, 6025

Is Microfinance delivering results for clients?

Adults with bank accounts

Developed economies 89%Developing countries 41% [men, 46%

women, 35%]India 35%South Asia 33%East Asia Pacific 45%Sub-Saharan Africa 24%

Account use levels are very low in developing economies with only 20-25% reporting regular transactions compared to over 80% in developed economies

India: 139 mn “no frills” accounts, total balance Rs120 bnAverage balance, $17

Is Microfinance delivering results for clients?

We all know the socio-cultural factors that result in limited account use

So what is the alternative?– trade credit, ROSCAS, friends/relatives, moneylenders and pyramid schemes run by dodgy operators

…or microfinance ideally providing savings as well as credit services but, if not, at least credit so that low income families can “save down” if not save up

How could we show this to the public?

Micro-value (<$500) accounts in Indianumbers in million accounts, March 2012

MFI = 30% of all credit accounts in the formal system

SHGs = number of members; tiny credits held as group accounts with banks

How could results be improved

Abandon the mantra of growth

– moderate growth is good for inclusion – rampant growth is an invitation to disaster

Temper the egos of promoters of MFIs

Dampen the expectations of investors

9,000 estimated

Sep 2010

How could results be improved

Design appropriate products: The single product traditional offering of MFIs – particularly in Asia – does not fit the needs of all low income families

– identify 3-4 key activities that mf clients need to borrow – design products to fit those needs

The idea that microfinance can be delivered at ever lower costs is a middle class myth – even in South Asia it cannot be delivered for less than 24% per annum – do not try to push it to unreal-istically low levels of cost

Issues of pricing

Average cost per borrower in India

Issues of pricing

OERs and Yields of Indian MFIs

How could results be improved

Ensure regular consumer feedback/client satisfaction surveys to enable products to improve

Promote other services: deposit/savings services and other financial services like insurance and payments/remittances (domestic)

Undertake periodic, simple code of conduct/client protection assessments

European supporters of microfinance would do well to follow these basic principles; work patiently and wait for the situation to improve. There is no alternative.