Civilizing the ’Wild West’ of Microfinance
As the cat continues to emerge from the bag in the Andhra Pradesh microcredit implosion, if there’s anything that is clear it has to be this: microlenders can no longer bury their heads in the sand about engaging broadly in governance.
It’s an open secret that microlending collection practices can exploit local customs and traditions to a jarring degree; check out anthropologist Lamia Karim’s scathing indictment of microloan collection practices in Bangladesh. Recently headlines in Western media started to shed light on this gruesome underlying story. In what some see as a calculated political move considering the August IPO of SKS Microfinance, India’s largest microlender, as a response to reports of intimidation and ruthless debt collection tactics, the Andhra Pradesh provincial government put forth an ordinance essentially urging debtors to stop repaying their loans.
Down went SKS’ share price. Up went speculation about the future of microfinance.
Passionate yet very reasonable defenders of microfinance, like the Center for Financial Inclusion’s Beth Rhyne, rose up to make the case that microfinance remains a pillar of progress for the world’s poor. If that is true, then microlenders now have great incentive to reach out private sector organizations that exist to represent businesses, including microlenders, as a community in governance: independent, membership-driven chambers of commerce or business associations.
There are three specific areas in particular where independent private sector organizations could facilitate open and productive policy dialogue between MFIs and those tasked with regulating them: adopting industry-recognized standards for MFI regulation and licensing; liquidation procedures and deposit insurance; and the rights to receive and mobilize microsavings.
Adopt industry-recognized standards for MFI licensing
Here’s an area with the most direct fallout from the continuing Andhra Pradesh saga. Rather than the risk of future blanket ordinances to cease all repayments and collections until further notice, there could be a system in place where local officials monitor complaints and provide a safe outlet to gather evidence of collection malpractice, with powers to revoke licenses and cease operations for individual agents found in violation of collection standards. CFI’s SMART Campaign proposes a leading industry-recognized set of voluntary client-protection principles that could also serve as a basis for licensing individual MFI agents. Licensing standards, properly enforced, would vitally restore damaged reputations and investor confidence. Some form of new lending regulation is pretty much guaranteed; microlenders must join with other businesses to make sure that it doesn’t impede honest, meaningful business activity.
Liquidation procedures and deposit insurance
Clients of MFI agents in violation of licensing standards must not be left off the hook. Just as the U.S. has a government agency that liquidates banks that have made too many bad loans and puts accounts in good standing into the hands of a competing healthy bank, local officials in Andhra Pradesh and elsewhere could perform the same task for MFI agents and their clients. Liquidation for microloans is a tremendously complex task, since microloan portfolios are sandcastles, but MFI liquidation is a question worth exploring. If it is possible, and certainly a government agency would have to be involved somehow as either a regulator or performing the liquidation itself, it would also be vital for microdeposit insurance. (Hat tip to David Roodman’s blog for some key discussions on liquidation and microdeposit insurance).
The right to receive and mobilize deposits
When the dust settles from the ongoing Andhra Pradesh saga, microfinance sectors in India and elsewhere must revisit this issue as full-fledged members of the business community. By now the ripples from Portfolios of the Poor have made their way across most of the microfinance space, and recently Financial Promise for the Poor has added to the shifting tide in microfinance from lending to savings as a priority. Yet it is very well known that MFIs in India remain banned from offering savings accounts of their own. One organization, EKO India Financial Services, managed to negotiate a business correspondent relationship with the State Bank of India to mediate funds for SBI microsavings accounts. In India and elsewhere, MFIs remain woefully deprived of legally-sanctioned options for offering savings accounts and mobilizing savings locally as capital for microloans.
Engaging in governance is about reigning in what you might call the “wild west” period of microfinance, and bringing forth a truly fair and open competition, one based upon the rule of law rather than the rule of whatever works, to provide the highest quality services at an affordable price to the most people. Every emerging industry that has survived to transform the world has had to emerge from its wild west phase, a sort of testing period where ideas are thrown to the wall to see what sticks and what ends up bouncing right back in its face. After a few decades, perhaps microfinance has reached that moment.
But why engage in governance though representative private sector organizations? Why not lobby government as individual firms or as an industry? Well, for one thing, the process builds relationships across sectors and between business and government that reinforce rather than undermine accountability-which would limit questionable lending practices and knee-jerk reactions like the Andhra Pradesh Ordinance that harm microlenders, their customers and their investors.
Even more important for the future of microfinance, broad-based representative organizations can provide more credible support for those reforms that are good for business in general, not just for microlenders. After the events in Andhra Pradesh, that credibility will be vital to restoring some of the damage done to microfinance’s reputation among the poor and among investors.