From the Roundtable: Reflections on Improving Microfinance
Last month, Citi Foundation hosted a very interesting day-long roundtable that focused on the Center for Financial Inclusion’s (CFI) report on “Opportunities and Obstacles to Financial Inclusion.” Citi Foundation’s Graham MacMillan posted on the report when it was issued in July.
This is an important report because it raises significant issues for the microfinance sector, and I strongly recommend that anyone interested in microfinance, poverty reduction, or “development through enterprise,” read through it (download free pdf version here). Co-authors Elisabeth Rhyne, managing director of CFI, and Anita Gardeva, CFI senior analyst, conducted a comprehensive survey of industry participants to get their views on “how to make full financial participation a reality.”
The center reached out to a wide variety of sector participants and gave them a list of 30 “opportunities” for and 30 “obstacles” to full financial inclusion. Each participant identified the 10 opportunities and 10 obstacles they felt were most important for achieving full financial inclusion. The report is based on 301 completed surveys and provides a new take on the microfinance sector and lays out a very manageable agenda for action.
The roundtable brought together 45 participants to discuss the findings in the report and their implications for the sector. In addition to the report’s co-authors, speakers included:
- Pamela Flaherty – CEO of the Citi Foundation
- Lew Kaden – Vice Chairman of Citigroup
- Diana Taylor – Chair of the board of ACCION
- Michael Schlein – CEO of ACCION
- Elisabeth Rhyne – Managing Director of the CFI
- Larry Reed – Independent consultant
- Ann Miles – Director of Microfinance at the Mastercard Foundation, and
- Bob Annibale – Global Director of Microfinance at Citigroup
The discussion was wide ranging. After introductions and some context setting, Rhyne presented the survey results to the group and generated a vigorous discussion about the results, tradeoffs among priorities, and possible ways forward.
Participants then joined small-group breakout sessions to discuss/formulate action steps for the sector. I participated in the “client protection” breakout group. We had a spirited discussion. While we started with the typical “regulators should protect vulnerable clients from dishonest institutions” framing of the issue, we quickly moved on to grappling with more subtle issues. For example:
- How to protect borrowers from their own bad decisions (via financial education, some – perhaps paternalistic – limits to borrowing, etc.)
- How to prevent opportunistic borrowers from gaming the system, lobbying for debt forgiveness and ruining the sector for potential future borrowers?
While we didn’t reach clear conclusions, the consensus was that the simplistic “lenders bad, borrowers vulnerable” framing hindered rather than nurtured the development of the sector. “Client protection” should focus on nurturing the sector for responsible participants, not focus on a few anecdotes from unfortunate borrowers.
The groups then reconvened to discuss implications and next steps at three levels – the client level, the provider level, and the enabling environment level (market and regulatory issues).
Key takeaways from the day included recommendations to:
1. Broaden the conversation to a broader and more diverse circle of stakeholders, as the sector often spends too much time talking with itself.
2. Foster strategic partnerships to bring greater product range and new technologies to the sector.
3. Develop an improved understanding of our clients.
4. Better employ technology to better collect information and move toward automating some functions.
5. Improve product design, connecting it more closely to actual behaviors and product usage.
6. Recognize that product diversification is difficult, and that full financial inclusion will likely involve a variety of organizations – some broad line and some very specialized. That is, no one approach can meet all needs.
7. Recognize that regulation can help, but can’t solve all issues. Regulation can shape the market, but it can’t create a market if the economics don’t make sense.
I found the discussions of better employing technology to collect information (#4) and the difficulty of product diversification (#6) to be the most thought provoking. Microfinance has been a hugely successful sector over the past 20 years. But the sector has evolved rapidly, and few firms have managed to evolve their business models as quickly.
On the technology side, we see that mobile technologies now allow forward-thinking organizations to transform their value chains and the way they interact with clients. Most readers will be familiar with M-Pesa, the mobile-phone based money transfer service offered by Safaricom in East Africa. ANDE’s Capacity Development Fund (CDF) recently funded another interesting mobile technology project. Entitled “Direct Beneficiary Social Metrics Capture Using Mobile Technology,” the project (pdf link, 7th project down at the top of page 3) is aimed at creating an IRIS compliant survey platform to transform data collection in support of social enterprises.
These types of innovations allow firms to dramatically reduce costs, reach more people, and generate the types of impact data that will mobilize more commercial and philanthropic capital investment.
The discussion of product diversification was less focused, but I believe just as important. For most of the past 20 years, microfinance business models have evolved around two basic approaches – (1) solidarity group or asset-based lending, and (2) savings groups. (See the BancoSol Bolivia case I wrote back in 2002 for an overview). Both approaches are powerfully transformative for the unbanked, but not particularly flexible. As clients succeed, their financial needs evolve rapidly. When just entering the system, a solidarity group structure is often crucial, but requires a very particular set of organizational capabilities.
As incomes increase, clients need larger, individual loans, savings products, trade and money transfer products, and an ever-increasing array of financial products. Many pioneering organizations in the sector have struggled with this evolution – not because they are poorly run, but because these new services require very different organizational capabilities and processes. The discussion at the roundtable focused on how to great alliances across different types of organizations, and to encourage policymakers to recognize the value of organizational diversity.
As Graham noted in his July NextBillion post, the CFI report provides many important insights. The roundtable discussion added two additional layers to our understanding:
- A vigorous back and forth about the sectors shortcomings to date (the “obstacles”), and
- Concrete suggestions for next steps (how best to seize the “opportunities”)