Five Lessons for the Microfinance Industry

Monday, July 25, 2011

Microfinance is going through a crisis. The industry that gives small uncollateralized loans, often to women for entrepreneurial activities in developing countries, is booming but has been damaged by a slew of negative events.

Its most famous banker, Muhummad Yunus, has been made to step down from Grameen Bank which he founded in the 1970s.

In India in the state of Andhra Pradesh, laws were passed to curtail microfinance lending after a number of suicides were attributed to borrowers failing to repay microfinance loans. Questions have been raised about the morality of charging high rates of interest and making profits from the poor as some banks such as SKS have had IPOs and created shareholders whose interests may not mirror those who support the social benefits of microfinance.

Mary Ellen Iskenderian, president and CEO of Women’s World Banking (WWB), the world’s largest network of microfinance institutions and banks, explains where she thinks microfinance has gone wrong, why women should continue to be the focus of financial institutions in developing countries and where the sector should head next.

1. Where has microfinance gone wrong?

As the industry moves on it has become more commercial. That’s the crossroads that the industry is at.

What has happened in much of microfinance is that [the industry] growth rate [has been] extraordinary. You can cover a lot of bad behavior with 30-40 per cent compound annual growth.

We have also learned a lot. The SKS IPO taught us about who you bring into the tent and what the implications are about having different investors.

Keep your clients close to you-that’s expensive but maybe [local players] can afford that while a bank has to toe a tighter line on operating cost.

As for Andhra Pradesh, the women that took the decision to take their own lives was because of the counter guarantee. This is where money is loaned to individuals but the loans are guaranteed by the group.

Our microfinance network in India has done quite a bit of research on exploring this. The counter-guarantee responsibility tripped up a number of groups and the women very sadly chose to take their lives because of the shame of the pressure.

A lot of questions are being asked about the group lending methodology. It would have been a much safer situation if it had been just the loan in their name for which they were responsible. You have to do individual credit assessments and see the repayment ability of each borrower. At least in our network, that’s been the model.

The traditional image of the women buying a sewing machine is still the norm but it is exciting to see growth and a lot stems from this move away from the group loan that was popularized by Muhammud Yunus in his traditional methodology.

We are going to go in that direction and are not going to allow our members take out loans with joint responsibility.

Source: The Wall Street Journal (link opens in a new window)