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Pursuing a Balanced View of Microfinance

Published on February 25, 2015

Pursuing a Balanced View of Microfinance

 

Geneva, Switzerland, January, 11 2011 – Responding to the coverage of the Indian microfinance crisis. A press release from the Sangham, a group of the world’s largest private microfinance investment fund managers, including: BlueOrchard, Deutsche Bank, Developing World Markets, Grassroots Capital, Incofin, MicroVest, Oikocredit, responsAbility, Symbiotics, Triodos Bank, and Triple Jump.

 

In the last 10 years, microfinance entered the world’s consciousness and has become a revolutionary force, changing the way that we view international economic development and the poor’s ability to improve their own lives. Microfinance offers a business method to achieve development ends. No serious practitioner has claimed that microfinance is a panacea given the multidimensional nature of poverty.

 

Access to capital is critical for the economic growth of any community. Microfinance institutions serve this need in communities of the poor – and at an impressive scale for an industry seeded just 30 years ago. In India for example, microfinance institutions serve 50% more clients in rural regions than banks. In Bangladesh, microfinance serves more clients than the mainstream banking system. In fact, in most developing countries, mainstream banks only serve the top 15-20% of the total population. Globally, microfinance serves at least 92 million people and is injecting over $65 billion into local economies around the developing world. The industry has weathered the worst economic crisis in recent history without systemic failures and continues to expand at an exciting pace. It is growing not just in the number of clients served, but also in the scope of services it offers to meet the poor’s financial needs including savings and insurance.

 

Microfinance is a powerful tool for the poor that helps them navigate life’s opportunities and challenges, but if misapplied can deal significant harm to a borrower’s life. Microcredit can over-indebt clients when too many service providers expand aggressively in a saturated market. Interest rates, typically higher than regular commercial rates to cover high operating expenses, can become unethical if an institution holds rates steady even as efficiency rises in the interest of profit maximization. As we have seen in the state of Andhra Pradesh in India, aggressive commercialization can foster rash political intervention, threatening the development of viable financial services for the bottom of the economic pyramid. It would be unwise though to interpret instances of excessive commercialization as a fundamental failure of the microfinance model. Microfinance is not just business as usual; it is an innovation that combines the pursuit of commercial and social objectives, interlinked like strands of DNA. Success cannot be achieved by ignoring either of these elements.

 

This global industry is still in its adolescence and as it matures we must address its challenges in a balanced manner. As microfinance becomes integrated into mainstream financial systems, it also faces problems found in the finance industry in general. But we have not shut down mainstream banks en masse; we increase capital levels, introduce regulation, and promulgate consumer protection rules, dealing with problems as they crop up. Similarly, we must have an honest discussion about the problems in microfinance and work to improve the industry. The international microfinance industry is striving to accomplish this by creating client protection principles (www.smartcampaign.org), encouraging transparency in loan pricing (https://mftransparency.org/), and using our influence to encourage microfinance institutions to lower their rates when feasible. Efforts are underway to differentiate more responsible microfinance institutions by certifying those that use ethical practices, good governance and transparency in operations to better serve their poor clients.

 

Microfinance has quickly emerged as one of the most promising tools available to assist the poor relative to traditional poverty alleviation interventions. If microfinance has enjoyed a decade of encouraging, if not perfect, success, it makes sense to give the poor’s finance industry the same dignity of treatment as the developed world’s: with balanced perspectives, public discourse and rational regulation. As with any other financial institution or product, microfinance can be improved but the current public discourse disregards the important role that microfinance plays in enlisting private capital to address global poverty. A more balanced assessment of microfinance’s strengths and flaws is needed or we risk losing an instrument serving an essential and positive role in the lives of the poor.

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