MICROFINANCE – PRINCIPLES AND APPROACHES

(Ten commandments for responsible financing to the poor )

MICROFINANCE – PRINCIPLES AND APPROACHES

(Ten commandments for responsible financing to the poor )

Dr.V.Rengarajan

To

My Father Late Sri. C. Varadarajan

and

School Teacher Sri A. Pasupathy

MESSAGE from Prof. Jacob Kurien

The Johns hopkins UniversiTy— nanJing UniversiTy

CenTer for Chinese and ameriCan sTUdies

Nanjing University, Nanjing 210093 People’s Republic of China Tel: (86)(25) 8359-2435 Fax: (86)(25) 8330-1102

Poverty presents both a moral and intellectual challenge and mainstream economists have been grappling with this issue ever since the dawn of the 18th century. Adam Smith (1776) mentions that “No society can surely be flourishing and happy, of which by far the greater part of the numbers are poor and miserable” The real tragedy of the poor lies in the poverty of their aspirations, capabilities and entitlements. Dr.Rengarajan’s pioneering book is incisive, compelling and hence an outstanding work of a visionary in the specialized field of Microfinance. The book provides a radical rethinking about global poverty and inequality from an ethical perspective. In a highly integrated world of the 21st century, ethics and economics should complement each other. This scholarly work deserves to be listed among other great books on Microfinance. Dr.Rengarajan has focused on the intricate relationship between economics, ethics and the nature of human behavior. Based on evidences gathered from empirical studies, the author strongly advocates an holistic and “People Centered” approach to poverty alleviation. This scholarly work will not only benefit Microfinance institutions in their endeavor towards alleviating poverty but also laymen, academicians and advocates of global peace and harmony.

Jacob Kurien

Professor of International Economics

Nanjing, China

MESSAGE

N.SrinivasanMicro finance Sector Expert & Author of Microfinance India SOS reportsMumbai, India

Dr Rengarajan has been an avid development banker with a social conscience. He has been seen and read all over the web for his writings on microfinance and rural finance. He has a firm conviction that financing of vulnerable people has to be done with a soul, and a mission to stabilize their livelihoods- not just provide them with emergent liquidity. He has brought together all his experience of working in a public sector bank and subsequently as a consultant to pen this book. The focus on ethics, morality and financing with a soul is unique for its topicality and relevance to the current context when the microfinance sector is recovering from a bad phase. His position that customer protection and responsible finance is not just a set of processes and products, but a philosophy underlying business is well held. His commandments deal with not only principles of responsible finance but also approaches to business and customers. I am sure that the book would be widely read by the institutions, practitioners, regulator and funders of all types. This book would be a good addition to the literature on social performance in microfinance.

N. Srinivasan

MESSAGE

Dr.S.Santhanam

Ex. General Manager –NABARD &

Consultant Development Finance

Pune

India

In the field of micro-finance, a large amount of literature so far created would have consumed many forests by experts, researchers, practitioners, policy makers and those associated with the subject. But most of them have talked about the supply side, the micro-finance institutions (MFIs) and a very few of them have touched the demand side, the users of micro-finance. Again, almost all of them have offered solutions through various financial models, statiscal analysis, econo-metric models etc. But, year after year, we hear of more crisis, more sorrows, more suicides of users of micro-finance. Perhaps, the answer lies inside each one of those who are associated with it. That is the ‘ethical’ part of running micro-finance to bring smiles on the face of the poor for whom the micro-finance is meant for. Dr V. Rengarajan, an international expert in micro-finance for over three decades has understood the missing link of micro-finance– the need to follow ethical means to achieve ends and placed them in lucid style in his book. If every one of those associated with micro-finance follow the ten commandments as enunciated by Dr Rengarajan, it will bring more cheer and smile on the faces of the poor. The book has use and application across the world as micro-finance is not confined to only one country or a few countries. It is a global issue.

INTRODUCTION

Driving force for the book

Apart from my four decades of exposure in micro finance arena both in formal and non formal sectors system and personal passion on the subject, two major driving forces for writing the book on the subject are the sordid events, happened evidently in Micro finance industry in the recent past and the positive responses to my discussion topic ‘Ten commandments for the use of MF arsenals in the battle against the poverty” from international MF professional communities and academia as well in various LinkedIn net work groups such as CGAP, Micro finance focus and Micro financial professionals

Sordid events in MF realm

What are the unpalatable events happened in MF industry that have provoked me to delve in this academic venture. In the first, over confidence on meek financial capability of sequestered micro credit for the given task in poverty sector, has led to sordid events such as moral deterioration of the actors and unethical market environ shaken by some recent micro finance crisis in many developing countries despite warning signals in the supply front. At the same time the fact that persistence vulnerability and deprivation which are inequitably distributed even in poverty pyramid on the other in the demand side, is evidently remaining neglected.. Both these factors primarily have caused a major ‘inclusive’ development concern at global level.. Consequently, MDG is also evidently becoming an elusive one despite some quantitative achievement here and there. It is in this context, the purpose of this exercise is to discuss broadly on the principles of MF and initiate strategically a new approach withright logical frame work for sustainable outcome of MF intervention with an ethical investment in the behavior economics and prudent functioning of micro finance to be followed by the human sources. Accordingly this new approach with structured framework has emerged in the form of ethically oriented ‘Ten Commandments’ for the use of MF arsenals serving as covenant to motivate the microfinance community for adapting ethical codes while performing various tasks right from the planning towards the ultimate goal and effectively to

xiv Microfinance - Principles and Approaches

harness the hidden development potential of micro finance for the welfare of the marginalized people.

Positive responses from MF community

Secondly, while it is admitted that there is a distance between ‘hope’ and ‘realities’, but even a inch forward in human behavioral change, matters as I have received positive responses on the above philosophy from international MF professional communities and academia as well during my interaction in the network discussions. Presented below are some of the responses. (CGAP-Consultative Group to Assist the poor –linkedin group)

1. Dr. Ahmed Tufeiru • Manager at Quantitative Management Associates (Greater New York City Area)

“Great intellectual discourse. I enjoyed reading the dialogue as a new joiner. Thanks all for sharing your wisdom. After 13 years on Wall Street maximizing investors’ value for billions of dollars and still counting, I have decided to change my career path from investment banking to development banking; including microfinance for the sake of the poor. There are so many economically poor people out there are looking for a dignified path out of poverty, and I want to be part of the crusade to this course. I have signed up to follow you and I hope to continue receiving for rich wisdom as I begin my journey as a social change agent. Thanks again Dr. V. I look forward to reading your ppt presentation to further decipher the core meaning of your ten commandments. I hope you will one day write a book about them”. (Micro finance Focus linked in group)

2. Prof.SubramanianSankaranarayanan•

“I never had had any doubt about the scholarly wisdom and impeccable credentials of Dr.Rengarajan, whom I chanced to know since 1990-91. A tireless visionary and passionate person of extraordinary merits, who delves deeper and deeper into rural credit on the one hand and microcredit on the other with great aplomb, Dr.Rengarajan is far from being miserly in sharing of his priceless knowledge with all at large without any hesitation. I am proud to declare that I ‘know’ him, which itself lends great honour to me. I salute this master of a guru. May his tribes increase to bolster the sagging morale of MF globally. I have no comments to offer, except to add that the Deliverance Day for poor is not far off. Ten Commandments of Dr.Rengarajan need to be practiced for salvation of the sector. With Love, only Love and Love Ever Prof.Subramanian

Introductiom xv

3. Jone Sovalawa • Student at Victoria University, Melbourne Area, Australia Very informative-Thanks Dr.(Micro finance professional linked in group)

4. MikeMakwani• CEO and Co-Founder Looking Glass Networks|Obuntu International Limited Nairobi Lottery Company (NLC)|Yankees LTD Kenya

Thank you Dr. Rengarajan. “I have read your postings four times, first 3 times am sorry to say i did not grasp what you were driving at, now hopefully, maybe i grasp. CURE FOR POVERTY and the ethical mindset that is needed to bring that about as embodied in the ten commandment. Very rare gemstones this, your commandments and the ethical mindsets needed to deploy the cure. I hope a critical number will raise to the calling”. “With your ten tenets and this discussion, good doctor, the foundation for formulating the requisite dosage composition (requisite ingredients) to cure and inoculate against poverty is and will emerge.”

5. Jitesh Kumar Panda • Independent Development Consultant Bhubaneshwar Area, India“All the ten commandments could be considered as ‘key strategies’ to strengthen or transform microfinance and make it more relevant for eradication of poverty. I think there is need for MFIs and MF programmes to ‘collaborate’ with field based NGOs to be able to strategize ‘commandments’ related to offering non financial services, integration of services & facilitating group actions (Commandments 4, 6, 7, 8 & 9)”.

6. Felix Ejindu Ohiagba •  Internal  control  at  MIC Microfinance  bank Nigeria.

Dear Dr. V. Rengarajan,

“Thank you for your insight and understanding in Micro finance business, your response to my query above, throw more light on how owners/operators of micro finance banks can ‘’enhance corporate governance and effective Internal Control in MFBs’’. I quite agreed with you, that if the micro finance banks adhere to its social mission, micro credit product, need based integrated products, client protection, micro savings insurance and quality risk assets management. Corporate governance and effective Internal control system, would help MFBs for facilitating reduction in poverty and inequality in the system, thereby creating savings and investments among the under banked. Your earlier post triggered my spirit and I appreciate your knowledge shared.”

These apart, many representing from micro finance community and academia, have expressed their likings on the discussion topic and my convincing replies made as well which all collectively motivated for doing the present task

Scope

In the given backdrop, the scope of the book is to critically probe in detail the gap between the MF concept and practice for developing principles and new approaches for responsible financing to the vulnerable poor..Further it broadly covers theoretical facts on financing the poor and critical events that acted as drivers leading to moral deterioration in this industry. An attempt has also been made to look at MF through Amartya Sen’s lens from development perspectives. In the applied side of Microfinance, as a way forward with a new approach, an attempt has been made to suggest ethically coded ‘Ten commandments’ for the MF industry personnel for rejuvenating this industry from moral crisis and sustaining the graduation of the bottom. The facts related to above subjects are descriptively perused more qualitatively rather using mere quantitative data which is felt inadequate for justification to the subject taken up. However the specific purposes of the book are as follows:

The specific Purposes include

1. To critically study on the driving forces that led to moral deficit in the functioning of the micro finance and its implications in the process of poverty cure.

2. To arguably focus the need for ethical investment in micro financing system for sustainable reduction in poverty and inequality to justifiably highlight the practical values of ‘Ten commandments’ as a panacea for salvation from the prevailing moral crisis in MF industry and to prudently suggest an ethically oriented logical frame work for MF community for the use of Micro financial arsenals (inputs) in their venture and for the conduct of result based designing, implementation monitoring and evaluation towards reduction in poverty and inequality.

With this backdrop, an attempt has been made in initial chapters to delve in detail on the fundamentals of micro finance from historical perspectives and sordid events followed as they have acted as driving forces for writing this ethical prone ‘Ten commandments” for the use of microfinance arsenals in the divine battle against poverty. As a corollary, in this process, it is fervently hoped certain fundamental principles on the functioning of micro financing for the attaining universally accepted social goal – poverty cure are better appreciated. Further, the emerging complexities associated, when it is institutionalized as a

means to achieve that said goal, would come to surface for greater awakening on the inherent ground realities in MF realm as it may provide a justification for this kind of literary exercise to show the right path for the MF industry to move towards ultimate goal –poverty reduction -in the future..

It is hoped that this book would be useful to MF community which includes investors, funding agencies, multinational institutions concerned with MF, policy makers, board members, training institutions and trainers, MFI, banks, credit unions, rating agencies, and their credit portfolio staff, SHG/Federation, Apex institutions for implementation and monitoring MF programmes, independent researchers and experts in the field, academia etc

Frame work of the book

For this exercise, the book is so designed sequentially with the subjects for discerning the intervention priorities in poverty sector, and the contents of the book have been presented in two parts.

Part - 1 Conceptual framework of Microfinance and demand side realities covered in 6 chapters and

Part - 2 An ethical covenant for a new approach in the applied side of Micro finance to micro finance community spread over 11 chapters each one delves with one of ten commandments

Part - 1 of the book probes on the various factors that led to moral deterioration in micro finance community blindly following economic calculus without Ethical values. For this following queries are addressed each one under separate head distinguishably in six chapters. For better understanding of demand side realties as it would help codifying some ethically based principles for responsible micro financing.

1. What are the conceptual facts on Micro finance and gap in practice? What is the ultimate goal for which the MF concept emerged? Who is a benign microfinance client? Is there any candid MFI in true sense of the term?

2. What are supply and demand side perspectives of micro finance and why the latter is more important in microfinance industry?

3. What do the insights on historical perspectives on the functions of money and the events happening in modern microfinance in poverty sector reveal in today’s context ?

4. What is the perception on Microfinance if we look through Amartya Sen’s lens in the context of persistence poverty and inequality?

5. What are the drivers for moral deficit in this industry that led to recent MF crisis and what are the lessons and directions for the future ?

6. Have we prudently handled the elements of nexus syndrome between ethics and economics in the functioning of micro finance for the welfare maximization to the poor community particularly in the environ with ‘leissez’ faire economy with unethical competitive market for the said social mission?

Part - 2 of this monograph covers the applied side of microfinance indicating a new approach for practicing in the field particularly in poverty segment. For this an attempt has been made to descriptively highlight the social and ethical values of each one of the tasks in the form of ten commandments in the MF intervention process of achieving the sustainable impact in poverty segment right from identification of target clients to their sustainable graduation through microfinance. Further, this book would facilitate moralsuation to the MF community and show a clear recovery pathways for their action towards salvation in terms of reduction in poverty and inequality in poverty sector. Illustration on some successful innovative models and suggested logical frame work for practical application in the micro credit planning field are also portrayed in respective chapters.

From monitoring and evaluation perspectives, this log frame, indicating systematically arranged MF activities in each chapter covering micro finance plan design, monitoring tools and significance of sequencing them to the needs of the varying needs of the clients in poverty pyramid, would be useful to make not only a ‘total change’ impacted by the MF intervention but also ‘intervention process’ itself. This apart, it would facilitate designing a Result based implementation and M&E frame work for further effective outcome of the MF project. The highlight of this log frame is the integration of multi disciplinary oriented input activities covering economic, social and ethical features for effecting desired outcome and sustainable long term impact in poverty segment due to MF intervention.

Appendix include ethical codes introduced in MF industry, some of the pilot projects for graduation of bottom pyramid and selected bibliography on the subject.

ACKNOWLEDGEMENT

I owe a debt of gratitude to many for bringing this monograph. In the first, my sincere thanks are due to Dr. Jacob Kurien, Professor, International Economics. The John’s Hopkins University-Nanjing University Centre for Chinese and American studies, China and Dr S.Santhanam Ex Chief General Manager, NABARD for their motivation, moral support and value addition for this exercise. But for their encouragement, this work is impossible. I thank Mr N.Srinivasan, Chairman of Transparency Microfinance International and MF sector expert, for his painstaking effort to go through the text suggesting valuable addition and writing message. Since the central focus of the book has emerged from the a prolonged intellectual discussion across many international experts, professionals, researchers and academia in three linked in groups of, CAGP, Micro finance focus and Microfinance professionals, on the discussion topic ”Ten Commandments for the use of MF arsenals in the battle against poverty”. I am grateful to all the moderators of the linked groups and the respondents with their comments and expression of ‘likes’ on the topic. I am also grateful to the publisher Notionpress.com for publication and distribution of the book. I owe the responsibility for all errors and omissions and shall be grateful if any such fact is pointed out for further correction and widening the horizon of knowledge on the subject.

Dr. V. Rengarajan

MICROFINANCE – PRINCIPLES AND APPROACHES

(Ten commandments for responsible financing to the poor )