NB Financial Innovation
The Eternal Struggle of Microfinance: The Microcredit Summit raised questions about the sector’s future – but does anyone have an answer?
It was a bold – perhaps even a risky – move to hold this year’s Microcredit Summit in Mexico. As over-indebtedness and high interest rates in the country’s microfinance industry cause increasing concern among analysts, some have even speculated that the sector could be heading for a devastating crash. I doubt I was alone in wondering how – or whether – the event would address these sensitive topics.
To their credit, the summit organizers decided to tackle the issue head-on. On Friday’s opening plenary, “Making Markets Safe for the Vulnerable,” the audience was treated to a riveting debate between Jorge Kleinberg, a representative of Mexican microfinance network ProDesarrollo, and MicroFinance Transparency CEO Chuck Waterfield, one of the sector’s most vocal critics.
After a preemptive plea for the panelists and audience to set aside any anger and strive for mutual understanding in the discussion, Microcredit Summit Campaign director Larry Reed turned the mic over to Waterfield, who launched into a blistering critique of Mexico’s microfinance practices.
“My organization has collected pricing data in 30 countries, with loans going to 50 million clients,” he said, as a series of charts were projected onto screens beside the stage, showing the average interest rates on loans of different sizes in a number of countries. “In India, you can see that no matter what loan size, the price is around 30 percent. In Bolivia, very large loans – thousands of dollars – have the low prices we hear about, 20 percent, while very small loans have higher prices. In Uganda, the prices are surprisingly high, perhaps – 50 percent is a cheap loan in Uganda, and loan prices go up to more than 100 percent. What prices do we have in Mexico?” He advanced to the next slide: “These are all prices for a 500 dollar loan, from seven MFIs. The lowest price is 95 percent, up to 154 percent.”
He paused a moment and looked around at the audience. “Why do so many people willingly pay these prices? It’s because financial prices are exceedingly difficult to understand. And a large percentage of the poor in Mexico are juggling multiple loans, each priced at over 100 percent. Let that sink in.”
The room was silent as he continued. “We as an industry must address the question: Are there ethical limits to profits? Perhaps the answer is no. If so, we must clearly state that as part of our definition of responsible practice. Compartamos [Mexico’s largest microfinance bank] made $275 million U.S. dollars in profit in 2013 – quite substantial relative to the global industry. Last year, Compartamos distributed $200 million U.S. dollars in dividends to the shareholders – and every penny of profit comes out of the pocket of a woman who’s struggling economically. How much is too much?”
Though some view voluntary self-regulation from initiatives like the Smart Campaign as a potential solution to these problems – and many of these initiatives were represented at the summit – Waterfield didn’t spare them in his critique. “The industry has moved forward in defining responsible practice and certifying the MFIs that meet the standards. But only 22 MFIs in the entire world have been certified [by the Smart Campaign]. The 22nd was given last month, and it was awarded to … Compartamos.”
He sighed theatrically. “The industry position right now is that there are no upper limits on how much profit you can make. … We don’t address how much the poor can really afford to pay and still be economically better off.” And since self-regulatory efforts define responsible pricing by what others in the market are charging, he said, practically any MFI can be certified if their peers also overcharge. What’s more, the most problematic MFIs aren’t willing to submit to voluntary certification campaigns – hence the need for obligatory, external regulations. “If participation is voluntary, we fail.”
Though two other panelists from Mexico’s financial industry added their views, it was Kleinberg who rose most vigorously to Waterfield’s challenge. “Mexico is one of the biggest countries in the world, geographically,” he began. “To put into perspective the complications that this implies, you can look at Cuahuila, the third largest state in the country. It has a little over 150,000 square kilometers, and close to 3 million inhabitants. In contrast, Bangladesh has a slightly smaller area, and almost 160 million inhabitants. So you can see that serving a client in Mexico is going to take a lot more work, and include a lot more cost.
“They say that Mexico is the country with the highest interest rates that’s making the most money. But we are the country that lends the lowest amounts per client in the entire continent – a little less than $500 per client. And Mexican MFIs are loaning to the poorest segment in the country – we’re serving clients that others won’t serve. So by far our largest cost in a loan is in operating costs, not profit.”
A note of impatience entered his voice. “They say we charge high interest rates because we’re inefficient. But in fact, we’re one of the most efficient countries in costs per borrower in the whole continent. It’s logical that a non-profit would charge the lowest interest rates. And we’re serving the exact same clients as NGOs, the ones that other institutions don’t want to serve – the most remote, the most expensive to serve. Yet in general we’re charging the same interest rates, there isn’t any difference. We are working with tight margins – in Mexico, the profit margins are the lowest in the whole continent. More or less 1/3 of the MFIs in Mexico have losses, another 1/3 are struggling, and only 1/3 are making better profit margins. There aren’t exorbitant profits in this country. And the investors who invest in MFIs in Mexico aren’t making that much money, on average, compared to other countries in the region.”
Waterfield shot back: “The logic of the Mexican data is, ‘Our cost of delivery is very high, that’s why our prices need to be very high.’ I agree with that, but therefore, profits should be either nonexistent or very low. If it’s very expensive for you to make a product, how do you make higher profits than all the other countries? Not all the institutions in Mexico are making profits that I would say are too much, but many are. I showed you the figures! Just one institution, Compartamos, makes $1 million a day in PROFIT. Sure, their prices can’t be as low as India. But they could, and I believe they should, lower their prices!
“I appreciate your mentioning efficiencies, but the products should be improved,” he continued. “Women who want a larger loan have to take two, three or five small loans with a higher delivery price. That could be replaced with ONE LOAN at HALF THE PRICE, and that institution would still be profitable. Instead, five institutions deliver inefficient products, and that woman pays five prices of over 100 percent. When you make 50 percent ROE (return on equity) and are the most profitable bank in Mexico, which is what Compartamos is, and those profits are coming out of the pockets of poor women – it’s hard to say there’s nothing wrong with that.”
As the audience erupted into applause, Kleinberg responded heatedly. “I’ll explain again: we don’t have higher prices than other countries. I showed you the numbers. We give smaller loans to more people. Of course if you lend 1 million to one person, you can charge less than if you’re loaning to many.”
He turned to Waterfield with barely concealed impatience: “We’re an industry without barriers to entry – anyone can come here and start to work. Why doesn’t Chuck, or whoever – why don’t the big players in the world, who can lend anywhere, come and lend here? They have a lot of money to lend, why don’t they come here and lend more cheaply than us, remove the inefficiencies, and show us how it’s done? This is what we’re doing every day!”
The moderator shifted to other topics, and the discussion continued in a calmer tone. But the themes – and tension – from the session continued to spark conversation throughout the remainder of the day, and reverberated in the final plenary.
As the Summit’s Reed took the stage, the screens showed a mural from the famous Yucatan painter Fernando Castro Pacheco called “The Eternal Struggle of Mexico” (above). Reed described it as an image that uses elements from the Mexican flag to depict the struggle between good and evil. “Both the eagle and the serpent are the same size,” he said, implying equal power. “We find the same thing in financial services: they produce good results, and harmful results. So for good to vanquish evil, we have to continue the fight.”
After three days full of impressive innovation and intense conversation, many things remained unclear. Can self-regulation and improved data and tactics tame the abusive practices that have plagued the sector and harmed the poor? Are these practices just the result of bad actors that can be stigmatized or reformed, or a lack of knowledge or technology that can be overcome? Or are they caused by something more fundamental – a human selfishness that will inevitably lead to excessive profit taking, in spite of the best efforts of more ethical institutions?
The sector clearly doesn’t have answers to those questions yet. But though it’s easy to question whether microfinance will ever fulfill the lofty goals of its founder, one thing is beyond doubt: its most dedicated practitioners show no sign of giving up.
You can view the plenary, “Making Markets Safe for the Vulnerable,” below (note: much of it is spoken and/or interpreted in Spanish). Click here for more videos from the conference.
James Militzer is the editor of NextBillion Financial Innovation.