News & CommentaryArchive
Apr 15, 2011
Time for Microfinance to Reflect, But Not Too Much
One of the Day One sessions at the Global Philanthropy Forum was titled “Microfinance in Crisis?“ and featured David Roodman, Michael Schlein, President and CEO, of ACCION International, Reeta Roy of the MasterCard Foundation and Keely Stevenson, CEO of Bamboo Finance USA. Immediately the panel all agreed that this was an important time for the microfinance industry and an opportunity to reflect. Unfortunately the course of the conversation hinted that many in the industry are only willing to reflect if they don’t have to do it too deeply.
Schlein, for instance, pointed out that while there is a lot of capital that has flowed to microfinance, almost all of it is focused on the top 100 institutions—and those institutions arguably have too much capital or at least more than they can effectively use. On the other hand the other roughly 9900 microfinance institutions have very little if any access to capital from anything other than philanthropic grants. Of course, Schlein noted, that every one of the now largely self-sufficient 100 large MFIs also started out dependent on philanthropic grants. There was a strong, though unstated, implication that it was time to cut back investment in commercial microfinance funds because that institutional money doesn’t have anywhere to go. Another key point he made was that while the buzz in the industry is now around savings and insurance products, it is only credit that has any record of being sustainable. The other products in the microfinance suite still need heavy subsidies no matter who is providing them (note that Grameen Bank’s savings account returns are probably unsustainable without a rapidly growing loan portfolio, a situation that may be putting their balance sheet under significant pressure. For more detailed discussion of this issue see David Roodman’s blog.) [Update: Chatting with David Roodman at GPF he pointed out that Banco Sol’s savings operations appear to have been sustainable for quite some time, so there is at least one caveat to Schlein’s statement—and given that Schlein is certainly well-acquainted with Banco Sol perhaps I misinterpreted his comment.]
But when the question came about where to go from here and what lessons the industry should be taking on from the current crisis in Andhra Pradesh, the high quality research on impact of microcredit that is now available, and the insight from work such as Portfolios of the Poor, there was decidedly less willingness to engage in reflection. Jonathan Lewis, who has been writing some trenchant critiques of the industry recently, noted to me later that Schlein described ACCION as being “in the business of starting banks.“ Lewis pointed out how jarring that description would have sounded to many of the early pioneers of microfinance who definitely thought of themselves as being “in the business of doing something about poverty” in his words.
When I raised the idea that the lessons of the current crisis and stream of research is that we actually don’t know very much about how these products work and what clients need and pressed the panelists for how much they were spending on basic research the question was largely dodged (though not thankfully by Reeta Roy of MasterCard which to their credit is supporting David Roodman’s book and invests in basic research). Schlein talked about the industry’s ongoing attempts to create a social performance measure—which has been going on for years, has some obvious problems, and doesn’t really address the issues at hand about impact, product design and need. Stevenson said that all the research work they do has to fit into the 2.5 percent management fee that is built into their funds—there was no acknowledgment that perhaps 2.5 percent isn’t enough and needs to be raised for the good of the industry and its future, much less for the people it serves.
One of my great frustrations right now is that the current situation in Andhra Pradesh seems the perfect time to rapidly start-up a follow-up financial diary project similar to Portfolios of the Poor. Access to microcredit has suddenly shifted significantly for reasons having little to do with need. This is the perfect time to get some very useful insight into how microcredit clients are managing cash flows and the rest of their financial lives when they no longer have confidence in the availability of microcredit. If I was in the industry I would be investing heavily in that research but I can find no evidence that any one is—and as a result a tremendous opportunity is being lost by the day.
During the course of the panel, David Roodman raised the point that the crisis in Andhra Pradesh isn’t by any means the first time the industry has encountered such a situation. Based on the evidence from this panel it doesn’t seem to me that the industry is on its way to reflecting any deeper this time around than it has in the past.
I’ll have a few more thoughts next week on areas where I think the industry and philanthropists supporting it are missing an opportunity to reflect, rethink and learn.