‘Independence from Credit’: Pro Mujer co-founder Carmen Velasco discusses self-help groups, and how much profit is too much in microfinance
As a pioneer of microfinance in Latin America, Pro Mujer co-founder* Carmen Velasco has had a front-row seat for the sector’s tumultuous evolution over the past two decades. She has served as both a director and ambassador for the organization, which provides financial services, business training, health care and other services to women in several Latin American countries.
So when we spoke at the recent Microcredit Summit, I asked her how that evolution has led so many MFIs to focus (arguably) more on profit than on clients’ well-being. “I think that the institutions were [initially] putting the clients at the center, but they had a horrible time trying to be sustainable, and trying to make sure that they stayed in business and made enough income to cover their costs,” she said. “Now, it’s clear that that’s possible if you’re an efficient institution and if you run the institution at minimum cost.”
However, she emphasized that MFIs can’t let their need for sustainability blind them to the impact their loans – and interest rates – are having on clients. “If they are not able to save, if they can’t assure that a portion of their income is put into savings, and to use that to … begin their independence from credit, we’re not going to achieve an end to poverty.”
When discussing how microfinance can encourage people to build savings, Velasco mentioned self-help groups as an emerging solution that has become popular in India, Bangladesh and other countries. In these groups, she explained, people save money together, gradually increasing the pot of money available to the group. Once there’s enough, the group can start lending portions of the money back to individual group members – at interest. “They charge high interest rates, but [group members] don’t care, because they realize that the interest goes back to them,” she explained. “So their money begins to grow. I think that is a model that is going to prove that they can do it themselves, for their own benefit.”
But being able to “do it themselves” suggests that self-help group members will no longer need the services of MFIs – and Velasco mentioned that as a distinct possibility. “Of course, the disintermediation of credit is going to be seen [by MFIs] as competition,” she said. “And we have to be very wise, because they’re learning very fast that they don’t need to pay those outrageous interest rates – that they could get the funding among themselves. But if it’s something positive for the clients, we should go for it.”
In light of heated discussion at the conference around profit taking, I asked Velasco for her views on the issue. “One worry that I do have is that a lot of institutions are seeing microfinance as a big money maker for investors,” she replied. “I think that whenever you distribute a dividend, or you end the day or year with X amount of surplus, you have to … realize that that surplus could represent extra bread or clothing for a kid, or a bed to sleep in.”
But doesn’t that imply that microfinance shouldn’t be provided through for-profit businesses? Velasco vehemently disagreed with that suggestion, and gave a common-sense explanation of how MFIs can determine how much profit is too much. You can view her response to this and other questions in the video below, Part Two of our series on The Future of Microfinance.
*Note: Velasco is not currently working for or representing Pro Mujer, and the views expressed in this interview are her own.
You can view the other videos in the series here:
James Militzer is the editor of NextBillion Financial Innovation.