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Interview with Chuck Waterfield of MicroFinance Transparency

Published on November 15, 2010

Chuck Waterfield discusses current issues in the Indian microfinance industry while at the 2010 annual Microfinance India Summit.

Click here to read the Microfinance Insights interview

Interview with Chuck Waterfield of MicroFinance Transparency

Chuck Waterfield founded MicroFinance Transparency in 2008. He is on the panel for the Responsible Finance: How Committed is the Sector session at 4:15pm tomorrow.

How do you think Indian MFIs do on issues of transparency and governance compared to those in some other countries? Are there some lessons to be learned from other countries?
In terms of willingness to become transparent, we have had an overwhelmingly positive experience with the Indian microfinance industry. The MFIs and other industry stakeholders we have worked with on the Transparent Pricing Initiative in India have shown a strong commitment to pursuing responsible finance and implementing the transparent pricing practices that we promote.
There are some practices that we have seen in other countries that the Indian microfinance industry could benefit from. For example, in Cambodia charging flat interest rates is prohibited, in favor of the more transparent declining balance method. Standardizing interest rate disclosure practices would also benefit the Indian microfinance market, for example if MFIs were required to tell clients the APRs, or effective interest rates, of their loans. We found many cases where insurance and cash deposit requirements were communicated to clients in very complicated ways, making it difficult to recognize them as fees. Standardizing communication of terms such as these would also help promote transparency.

Do you think the coming of commercial capital could have helped to reduce interest rates more than it has?
It is difficult for market forces to operate as they do in theory in a market that is distorted by a lack of transparency. Non-transparent pricing is a market imperfection, inhibiting other market forces to work properly. I think the combination of transparent pricing with the entrance of commercial capital would work to reduce interest rates.

What role do you think investor education could have played in averting the current crisis in Andhra Pradesh?
In the current situation in Andhra Pradesh it is difficult to know what is happening on the ground versus what is reported by the media or politicians or MFIs themselves. If there were more transparency, and all stakeholders had access to accurate information, there would a) be more opportunities for stakeholders to work together to strengthen systems in the microfinance market so that crises like this do not take place, and b) in the event of a crisis like this all stakeholders would have the information they need to take appropriate measures going forward. Without transparency there is room for exploitation between many stakeholder groups.

There is a growing debate on tighter regulation of the microfinance sector here. Do you think self-regulation can work?

I think that the best approach is one that combines self regulation and external regulation. Successful regulatory frameworks are based on a two-way flow of information. Regulatory bodies must have accurate and thorough knowledge of the market they are supervising in order to develop constructive policies, and regulated institutions must understand the policies they are required to follow in terms of their purpose, how to implement and maintain them and how they will affect their core business.

Do you see a difference between non profit and for profit MFIs in terms of achieving a social purpose?
Viewed with the lens of social purpose, I’ve seen great for-profits and great non-profits. And I’ve seen abusive for-profits and abusive non-profits. There are many more factors to consider when evaluating the strength of an MFI’s social performance than whether they are for-profit or non-profit. Any institution focusing on either social returns or financial returns to the exclusion of the other will not be successful in achieving a social mission. There is a range of middle ground where MFIs can achieve a social purpose and also be sustainable, and the most successful institutions we have seen are those that have found their own best balance between the two.

What role, if any, do you think the race to IPO has played in the AP situation?
I think the “race to IPO” has increased the severity of headline risk in India, helping to create an environment in which a series of issues coming to light can produce hysteria where they might otherwise have been addressed in more constructive ways. In an industry with a social mission, the first IPOs are inevitably loaded events with strong feelings on many sides. Had there been a more cautious progression to this phase we might not being seeing a crisis in Andhra Pradesh, but who knows, the first microfinance IPO in the country might have been a tumultuous event no matter how it was handled. What is important now is to focus on the lessons coming out of this on how to create a more responsible microfinance industry going forward. I think the importance of clear, consistent communication of prices, starkly illustrated by this situation, cannot be underestimated in the recovery of the sector from this difficult period.

Do you think the giddy growth the sector saw led to a sidestepping of governance issues? How can the sector now address this?
I think growth may have led to a lapse in sound practices in some cases but certainly not all. If for reputational reasons alone, the Indian microfinance sector will now not have much choice but to take some time to evaluate their practices. Again I think one of the best ways to strengthen the sector going forward is to improve the flow of information between different stakeholder groups; each has their role to play in the microfinance ecosystem and will only be able to do so with through communication, dedication to transparency and information-based decision making processes.

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