Five Lessons for the Microfinance Industry
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.
2. Don’t some people take out loans for consumption rather than entrepreneurial activities?
It’s a fact of life. If we kid ourselves that the poor are managing their incredibly complex financial lives differently we are being naive.
Microfinance’s traditional focus on really knowing the client is key because the loan might be used for consumption but there’s another source of cash that’s going to repay the loan.
In Pakistan, women were telling us that they have to give the first two loans to their husbands before they even trust them with the third loan.
More importantly, in most instances the first change is a move from a mud floor to a wood floor. The health impact of that alone is so enormous on a family and to dismiss this as a simple household improvement in an understatement.
The thing we see after the third cycle is that girls are allowed to stay in school rather than having to augment the family’s income.
3. How do you stop men putting pressure on women to take loans for them?
WWB is asking these questions but neither we nor the others asking the
questions have a lot of answers. It is that issue of “access versus control”. I’m proud that we have 80% women borrowers but I’m sure that some, probably a significant number, borrow the loan, go home and give the money to their husbands.
We have a network member in Bangalore that was working with a group of borrowers. Sixty per cent of the businesses that they had been funding were actually their husband’s businesses. However, I think there are two great opportunities here.
First, we see amazing things happen when you put a women’s name on the title to the property that they live in or being farmed. Even if you are not using that property as collateral there is an ownership aspect to it that makes the husband think twice about the use of the money and about his relationship with her to that money.
The other thing is loans and savings in her own name. Savings in her own name that the husband doesn’t know about can be a really effective counter-guarantee.
Yes the husband has the loan but she has the savings account—it’s all incredibly tense inter-household dynamics here but giving women more levers to play with can really change their stance in that dialogue.
If he does keep abusing her she’s far more likely to leave the situation if she has the property title.
4. Not everyone wants to be an entrepreneur?
The jobs versus entrepreneurship issue. Yes, not everyone wants to be an entrepreneur.
My vision of microfinance is more of financial inclusion than it is a mode of entrepreneurship. We’re finding that the combination of savings, education, lending and a little insurance makes a huge difference.
Insurance has a huge impact on how families think about planning. If they have crop insurance and they know they’re not going to lose everything if there’s a drought or flood—it’s quite remarkable what they feel they can do.
WWB is engaged in the health insurance sector because women bear the costs of health care disproportionately in the family. We were also seeing that it was the number one reason why women’s businesses were being liquidated—in order to cover the costs of unexpected health emergencies.
We’ve piloted a policy with Zurich Financial Services in Jordan which has had a surprisingly high level of take-up. We’ve sold 12,000 policies in little over a year. There have been 270 claims against those policies.
The most exciting aspect is that women wanted the product because it paid a per diem for a day away from the business, for example to look after a sick member of the family.
However, 40% of claims have been for complications in pregnancy. Maternal health is an enormous issue for women in developing countries. We found that families were saving 15-20% of monthly income for the purpose of health care. The premium we are charging is a day’s wage for the lowest end of their client base—little over $1 in Jordan—well below what they are saving.
5. Should women continue to be the focus of microfinance?
We have good proof that it’s very good business for financial institutions.
If deposit mobilization is something you are seeking, then consider that savings, even in the most traditional societies, is a respected gender role for women. They are the financial stewards for the household.
Organizations might well think about smart marketing—designing a product that addresses their needs and issues they face. Women interact with the financial sector at birth, marriage, buying a house and old age.
WWB is getting more into pensions because if women can survive the childbearing years they will likely outlive men.
We see it as very good business and it has that wonderful by-product that the things that women invest in when they have discretionary income are education of their children, health care for their families and they improve their housing.
Those tend to be long-term inter-generational things that have a profound effect on the quality of living standards.
Interview by Parminder Bahra
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