Three Key Sessions from Three Days of Discussion at European Microfinance Week
European Microfinance Week is always a whirlwind of activity and insights, and this year has been no exception. As a media partner at the event, NextBillion covered some of the key sessions – here we highlight three of them, one from each day of the event.
Let’s start with Friday’s must-see plenary, which was streamed live – we’ve embedded the recorded video below. With the provocative topic of “Responsible Client Choices in Finance: Whose Responsibility Is It?” the panel included five of the most insightful (and often opinionated) voices in microfinance. (Disclaimer: The participants adopted opposing viewpoints for the purposes of a debate – they may or may not actually agree with the positions they’re arguing):
- Daniel Rozas, European Microfinance Platform (e-MFP), Moderator
- Mayada El-Zoghbi, CFI at Accion
- Gerhard Coetzee, CGAP
- Timothy Ogden, Financial Access Initiative
Watch the video below – or if you prefer, check out our Twitter feed, where we live-tweeted from the event. And scroll down for insights from two other key sessions at the conference, highlights from Wednesday and Thursday.
Responsible client choices in finance: Whose responsibility is it?
Digital Finance: Friend or Foe of the Poor?
The conference got off to a rather alarming start on its first day, with the panel on “Making Digital Credit Truly Responsible: Lessons from Kenya.” It’s clear – if it wasn’t already – that the current trajectory of digital credit is deeply concerning to many people in the microfinance sector. Check out this laundry list of concerns shared by moderator Laura Foose, director of the Social Performance Task Force:
- Inability to convey info to illiterate/innumerate customers
- High prices
- High tolerance for loan defaults
- Clients taking loans without understanding consequences of default
- Clients taking loans because of aggressive marketing
- Aggressive use of data
- Exclusion, including lack of understanding/access of tech
- Blacklisting or bad experiences leading to lack of future use of financial services
- Large risk of discrimination in loan algorithms
- Uniform products
- Lack of clarity about who is responsible for addressing issues
- Loans being used for nonproductive or unnecessary purposes, like gambling
- No system or ability to monitor changes in clients’ lives
But as Foose pointed out, an initial step in deciding how to do digital finance right is exploring what’s currently going wrong, and the panel proceeded to do so, using Kenya’s burgeoning market as an example.
Panelist Anup Singh, an analyst at MSC, pointed out that it took just 11 months for Safaricom’s MShwari loan product to reach 1 million customers in the country. Yet it charges 6-12% interest per month, and though initial loan sizes are small, if clients don’t pay in one month, the loan rolls over. And as Singh mentioned, with some dismay: After MShwari’s success, other lenders are now following the same template. What’s more, nobody seems to know much about the different credit scoring models these lenders are using – but they’re gathering a great deal of data without clients’ knowledge, and using it without compensating them. Some digital lenders have even used clients’ family members and other personal contacts as loan guarantors, going so far as to threaten them with “negative listing” for future loans if the client fails to pay on time. (It’s a heavy-handed, but likely effective, attempt to leverage social pressure to maximize repayment.)
Meanwhile, some 2.2 million individual digital credit borrowers in Kenya have non-performing loans, and have been negatively listed between 2016-2018 – and about half of these borrowers have outstanding balances of less than USD $10, according to Singh. What’s more, many don’t even know they have an unpaid digital loan.
And despite the greater efficiencies of digital delivery of credit, interest rates remain high across the industry: A 150%+ annual interest rate is common among the major providers. And some seem to be pushing quick, easy loans with minimal friction – often the only requirement is for clients to type their ID number into their phones. This easy money, combined with the growing popularity of sports betting in Kenya, is creating a volatile mix of risk factors, Singh said.
Foose gave a warning to digital finance providers, perhaps informed by the hard experience of the microfinance sector: Making a bunch of loans right now to everyone, and not caring about defaults as long as you’re still profitable, is not a long-term strategy.
“This is the Wild West right now.”
But there are a significant number of guidelines that can be used to help regulators approach #digitalfinance – check @MicroSave‘s website, says Foose @SPTaskForce at #EMW2019:https://t.co/ryBQqZuQ4u #financialinclusion #microfinance
— NextBillionFH (@NextBillionFH) November 20, 2019
Isabelle Barres at the Smart Campaign seconded that concern, pointing out that decisions on when and whether to offer clients digital loans are being made based on providers’ – not clients’ – point of view, a recipe for over-indebtedness. To avoid this, the sector needs to do more than just check a box saying they sent clients information on terms and conditions:
(nobody raises hand)
You can’t understand it and don’t read it. It’s the same for loan info sent to #digitalfinance clients.
— NextBillionFH (@NextBillionFH) November 20, 2019
But despite these concerns, as Foose pointed out, there’s no turning back: Digital technology has arrived in microcredit, and the sector will need to find a way to make it both useful – and safe – for clients.
Taking Stock of the Sector: How to Move Past Those Fateful RCTs?
In an unexpectedly intense session on Thursday, microfinance leaders took stock of a sector that’s in “probably unprecedented flux,” according to moderator Sam Mendelson at European Microfinance Platform. Using the e-MFP’s Financial Inclusion Compass survey and Convergences’ Microfinance Barometer report as a jumping-off point, the panel explored what Mendelson referred to as “a real sense of concern about ‘where do we go from here?’” As he put it, the industry isn’t quite sure if it’s trying to align with the SDGs, to access new markets, to “put poverty in a museum,” as microfinance godfather Muhammad Yunus once (in)famously put it – or something else entirely.
Along with this uncertainty, the sector is facing key external challenges like politics, climate change (the topic of this year’s European Microfinance Award), institutional challenges involving product development and mission drift, and business model challenges related to profitability and sustainability.
Nevertheless, microfinance is growing – if not quite as fast as before. According to Renée Chao-Beroff at Convergences, the Microfinance Barometer shows that 140 million borrowers benefited from MFIs’ services in 2018, compared to 98 million in 2009. However, growth has slowed to 7% since 2012, compared to nearly 20% in the previous decade. Meanwhile, MFIs’ global portfolio amounts to US $124 billion, compared to $76 billion in 2009.
Yet despite this growth, the industry seems to still be struggling to shake off the crisis of confidence that struck after a series of high-profile randomized controlled trials (RCTs) thoroughly undermined its image as an effective poverty alleviation and income generation tool in 2015. Just as the specter of climate change formed the backdrop to many of the conversations at the conference, those studies seemed to drive much of the conversation on this panel – perhaps to a surprising degree – in ways that were both subtle and obvious.
Starting with the subtle: As Renée Chao-Beroff at PAMIGA and Convergences put it, MFIs still need to regain the confidence of clients by listening to their needs and improving services – something the sector didn’t do in its early years, as it built a market for (predominantly credit) products around the world. She pointed out that this approach was driven by providers’ focusing on their own business needs, and that focus needed to shift back to the needs of the clients. (Though she raised this critique gently, a fellow audience member turned to me and said that was the first time he’d heard someone from within the MFI community make that point in a public forum.)
The realization of microcredit’s lack of measurable anti-poverty impact, as demonstrated by those pivotal RCTs, provided the context for Chao-Beroff’s words: Clients need more than credit – they always have. Indeed, they’ve generally used microcredit for liquidity rather than to start or grow a business – which helps explain the lack of impact these loans have had on their incomes. And as Tim Odgen put it in a different panel, most have no interest in becoming entrepreneurs anyway – and even if they did, short-term microloans that need to be paid off after a few months would be one of the worst possible lending products to support their businesses. In light of these realities, other microfinance products could serve their needs more effectively, if less profitably, than traditional microloans – something the sector is acutely aware of at this point (though it’s still struggling to find ways to offer these products sustainably.)
2006 Nobel Prize went to Yunus, who said #microfinance would eliminate poverty.
2019 Nobel goes to Duflo, who says “microfinance has no impact”
— NextBillionFH (@NextBillionFH) November 21, 2019
Other panelists addressed the RCTs more directly. Microfinance pioneer Rupert Scofield, co-founder of FINCA, shared the story of how he first fell in love with microfinance during a stint in the Peace Corp in Guatemala in the early 1970s. He emphasized how much of a revolutionary advancement it represented when compared to other sources of finance available to poor people in those days – namely, loan sharks who charged 10% interest per day.
But though RCTs have cast doubt upon the power of microcredit to lift people out of poverty that inspired the sector’s pioneers, Scofield said he still believes that “capital can release the productive power of low-income people that had been trapped for so long.” He expressed some skepticism about the ability of RCTs to truly capture the multiple impacts of microfinance, and pointed out that, if nothing else, microfinance has been an enormous success in scaling to the point where credit is now plentiful in markets that many people once felt were impossible for businesses to serve. He also raised the following point:
Returning to the RCTs: What’s the solution then? To stop giving poor people working capital?
Then how will they live? You can’t say #microfinance is having zero impact, without asking, “OK, what happens if we stop?”
— NextBillionFH (@NextBillionFH) November 21, 2019
Yet despite his belief in the continued relevance of the original microcredit model, Scofield showed a clear recognition that he and his organization see the need to branch out for greater impact. “I came to the conclusion that capital is not enough to get people out of poverty,” he said. So he asked, “What else can FINCA do to improve people’s lives?” The answer the organization came up with was to extend its work to other sectors, like health care, agriculture, WASH and renewable energy. FINCA now has investments, enterprises and partnerships in multiple sectors, aimed at tackling poverty from various angles: As Scofield put it, “I believe we’re on the cusp of a second revolution in these other sectors, which will ultimately be more powerful than microfinance in terms of improving poor people’s standard of living.”
Others on the panel agreed: As Chao-Beroff said, microfinance has a lot to bring to the table, in terms of helping other players profitably reach the poor. For instance, “our closeness to the clients, and our understanding of their challenges and constraints. That’s what the market needs us for – we can bring that knowledge to them.” One possible beneficiary of that knowledge could be the impact investing industry, which has arguably taken microfinance’s place in the development sector spotlight: We should not let impact investing follow the same path we did, she said – instead, we should bring the lessons we have learned to the investing field, so it can avoid some of the pitfalls microfinance has faced.
As issues like climate change make global development goals both more urgent and more challenging, the conversation pointed toward a path forward for microfinance. Perhaps the sector’s future will lie in refocusing on customers, expanding its product diversity and its partnerships with other sectors, and sharing its hard-won knowledge with those that hope to follow the trail it blazed as the first business sector to sustainably reach the poorest customers at scale.
James Militzer is senior editor at NextBillion.