January 1

James Militzer

Microfinance Looks Toward the Future – But Will Fintech Revive the Controversies of Its Past?

Microfinance conferences have offered a unique experience in recent years. In the world outside the events, the industry has been wracked by extraordinary upheaval. It has lurched from development sector darling to punching bag, as client over-indebtedness grabbed headlines, research cast doubt upon its anti-poverty impact, and skeptics gleefully used these events to call the entire industry into question.

But in the midst of all this turmoil – and in reaction to it – practitioners at industry events were diligently reimagining their sector. Conversations shifted from the value of loans to boost microenterprises, to the diverse ways that credit and other financial services can benefit the poor. At their best, these events have provided a front-row seat to this transition, as an entire industry rebranded itself on the fly. Listening in on these conversations, it has become clear that many of microfinance’s most innovative practitioners have shifted their gaze far beyond the enterprise-focused microcredit model originally imagined by Muhammad Yunus, as well as the (overly) optimistic anti-poverty narrative he helped inspire.

Case in point: the recently concluded European Microfinance Week. The conference, which took place this month in Luxembourg, featured a broad array of sessions that highlighted the diverse uses to which microfinance is being applied in countries around the world. Take a quick scan of these topics (which are listed, along with downloadable presentation slides, at this link), and you’ll see discussions ranging from insuring smallholders’ harvests and boosting financial capability, to financing housing, education and off-grid energy options. You can get a sense of the conversation at these panels on the conference’s Twitter feed, the extensive coverage provided by media partners (especially MicroCapital’s excellent daily blogs), and the comprehensive roundup from the European Microfinance Platform, which organized the event.

But ironically, the one topic among all this discussion that generated the most excitement also provoked the strongest concerns: fintech (aka: financial technology). The tension first emerged at the session on “Financial inclusion 2.0: How MFIs can adapt to the fintech age.” Panelists from tech providers like Oradian, a cloud-based core-banking platform, and Stellar, an algorithm-powered payments platform, gave a tantalizing glimpse of how technology can reshape the sector, enabling everything from streamlined internal banking processes to instantaneous, free money transfers. Then fellow panelist Graham Wright, managing director of MicroSave, added a healthy dose of skepticism, making a compelling case that the emperor, so far, has very little clothing. To a large extent, he said, fintech is currently being leveraged to provide “rapacious consumer lending … and I’m tired of it, I’m fed up.” For instance, he cited Safaricom’s M-Shwari loan product, which charges an eye-popping 7.5 percent per month for small loans delivered via mobile phone. Yet in spite of these rates, he said, the financial inclusion world “celebrates M-Shwari like it was manna from heaven” simply because it has managed to serve poor clients at scale. Is inclusion the real goal here, or simply profit?

Wright expanded on these views in the conference’s final session, a plenary debate entitled “Digital finance: Full inclusion or empty promise?” He launched his argument with a provocative question: Is digital finance “just jumped up payments and automated loan sharking?” – then promptly answered it: “The answer is yes. Let’s look at the evidence … from the GSMA’s State of the Industry Report: Person to person (P2P) transfers represent 71.5 percent of all digital financial transaction right now, and the vast majority of the remaining 29 percent are bill payments or airtime top-ups. There’s nothing else. We’re not doing anything else with this infrastructure.”

Even the one exception to this trend is problematic, he said: “In Kenya there are now 24 digital credit providers. … Their effective annual interest rates, most conservatively calculated, are 49 to 641 percent per year. … The vast majority of those loans are one month in duration, and the shining star (M-Shwari) costs 7.5 percent per month. Had I stood before this audience five years ago and said ‘Microfinance guys, I’ve got this really great idea! We’re going to offer little loans at the rate of 7.5 percent per month!’ you would’ve been asking me to leave, and rightly so. But somehow, because it’s digital, it’s magic!” He added the caveat that many poor people do have legitimate needs for short-term finance, and these loans can provide a safety net for them. “But let’s not pretend that’s financial inclusion.”

What’s more, he said, in theory, digital tools should reduce the cost of these loans significantly. “So why on earth do they cost so much more?” The answer is that they’re dependent on “wafer thin data … because poor people don’t leave deep digital footprints. … If I try to make a loan decision on the basis of a poor person buying two scratch (airtime) cards for 10 shillings each, every month, I’m taking a very big risk. And that’s why these are so highly priced.” And what’s worse, he said, is what happens when poor clients pay off these monthly loans reliably and on time. “What do I get in return? Do I get a reduction in price? No. I just get the opportunity to borrow more – at the same interest rate.” Meanwhile, “On the blacklist of the Kenyan credit bureau there are 400,000 people blacklisted, unable to get credit again, for loans of less than $2 outstanding. This digital credit is creating financial exclusion, not financial inclusion.”

MyBucks CEO Dave Van Niekerk and Opportunity International CEO Vicki Escarra (whose organizations entered into their own controversial fintech/microfinance partnership last year) provided an able rebuttal to Wright’s critique, and their debate (in the video below) is definitely worth a watch. But however you come down on the question of fintech’s promise and risks, it’s striking how much the debate over microfinance’s future mirrors the one that has defined its past. The overly dominant role of credit, the impact of predatory lenders and high interest rates, the risk that these players and practices will influence socially focused MFIs, harming clients and compromising the broader sector – the parameters of discussion haven’t changed, and neither have the challenges of responsibly delivering financial services to the poor. Will digital tools make the benefits of financial access universal? Or will they simply turbocharge the industry’s worst tendencies? For all the excitement over the former possibility, it’s worth pausing to consider the latter. As Wright put it, “We have to be very careful. … The chances of this going seriously wrong, I think, are quite high.”



James Militzer is the senior editor of NextBillion.

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financial inclusion, fintech, microfinance, poverty alleviation