SVMN Panel: “Microfinance: Poverty, Profits & Promises”
Featuring: Ananya Roy, Chris Dunford, Premal Shah,
Ayesha Wagle & Eric Weaver
October 24th, 2011
Panel Recap written by SVMN Volunteer Monica Oyarzun
As microfinance continues to gain popularity, the news headlines on the topic have gone from a positive view to one that is much more questionable. On October 24, five of the industry’s most prominent figures gathered at the Berkeley Blum Center for Developing Economies to discuss the validity of these headlines and the trends in microfinance today. “Microfinance: Poverty, Profits and Promises” was co-hosted by the Blum Center and the Silicon Valley Microfinance Network, and moderated by Ananya Roy, Education Director for the Blum Center, Professor in the Department of City and Regional Planning, and co-Director of Global Metropolitan Studies. The panelists included Ayesha Wagle, Senior Vice President of MicroCredit Enterprises, Eric Weaver, Founder and CEO of Opportunity Fund, Premal Shah, President of Kiva, and Chris Dunford, former President and Senior Research Fellow of Freedom from Hunger. The room was filled with professionals and students alike, eager to hear what these industry leaders had to say.
After the panelists introduced themselves and their prospective organizations, Ananya requested each panelist to start by commenting on the news headlines that have surfaced recently, which call out microfinance as a predatory lending practice and refer to the “super-profits” that may overpower social mission. Many of these headlines were in reference to the crisis in India, which Chris called “a perfect storm.”
Chris Dunford (Freedom From Hunger) referenced the strong commercial influence that microfinance has in India, speaking of influential investors that demanded a return. Previous supporters of self-help groups began to switch over to microfinance as the industry grew and offered greater profits. Investors accrued great wealth from the industry, further facilitating the belief that commercial funders didn’t care about the poor. A group of indebted farmers in Andhra Pradesh committed suicide, and when SKS, India’s largest and most lucrative lender to the poor, underwent an IPO, reporting millions of dollars in profits, the story became a journalist’s dream. “This is the disconnect,” stated Chris, “that such profit would stem from lending to the poor just doesn’t seem right”.
Chris concluded by saying that despite the turmoil over the last year, microfinance institutions in India are now doing well, to which Eric Weaver (Opportunity Fund) responded, “But how are the poor people doing?” Eric highlighted the importance of measuring impacts, and spoke to the fact that when Opportunity Fund’s loan officers are out in the field meeting with clients, they convince 90% of their customer base into taking a smaller loan. In some developing countries this is the opposite, with loan officers pushing larger loans without regard to the customer’s income or ability to pay.
Ayesha Wagle (MicroCredit Enterprises) and Premal Shah (Kiva) both took this opportunity to speak to the incentive structure by which a loan officer is compensated. If the sole evaluation criteria for a loan officer’s job performance is loan size, and MFIs are serving clients who are tempted to take on larger loans in an effort to support their families, one could understand how easily MFIs may (unknowingly) provide larger loans without regard to clients’ well-being.
When asked about the difference between microfinance and commercial banking, Ayesha, who previously worked at an investment bank on Wall Street, stated that microfinance is at an inflection point now. “For a long time it had a halo around it – microfinance could do no ill. And suddenly, it did. Now the industry is leveling out and we’re looking at a more normal distribution curve.” Ayesha stated that the most important aspect is to ensure that social mission remains the focal point in microfinance. She went on to explain that “any organization that is motivated by growth will see their employees pushing volume. This is characteristic of commercial banking, but one that shouldn’t necessarily be applied to a sector with a social mission.”
“For a long time it had a halo around it – microfinance could do no ill, then it did. Now the industry is leveling and we’re looking at a more normal distribution curve of the impacts generated by microfinance.” – Ayesha Wagle
Ananya then turned the conversation towards the session, “Balancing Act: Mission, Profit, and Impact in Microfinance” which took place at Microfinance USA this past May. Premal stated that he believes the need for regulation is more dire than ever, as some microfinance institutions are able to charge monopoly rates due to the fact that there is little to no competition in the regions in which they operate. Premal went on to site the SMART campaign (http://www.smartcampaign.org/), which focuses on achieving global standards for client protection through endorsement and implementation.
Ayesha added that the recent increase in savings accounts being offered by microfinance institutions introduces a new need for regulation. In the past, the vast majority of microfinance products were credit related, but an increasing number of MFIs are offering savings products in addition to credit. Just as the FDIC offers protection to customers of commercial banks, regulation must exist to protect microfinance clients, requiring that the institutions maintain enough liquid assets so clients can gain access to their funds if so desired.
Ananya took advantage of this moment, and asked Eric to speak about Opportunity Fund’s Individual Development Account (IDA) savings program, California’s leading microsavings program. He indicated that while debt can be a useful tool for entrepreneurial individuals, it is not the ideal instrument for everyone. Eric went on to explain that “Here in the US, most people aren’t entrepreneurs, and thus may not benefit from the credit approach. Strong savings practices, on the other hand, can benefit anyone.” Eric also made the astute observation that America’s government system does not incentivize low-income or underserved individuals to save money in the way those in higher tax brackets are encouraged to save. Income tax breaks and capital gains adjustments are not available to low-income individuals. “Through tax breaks, we subsidize savings for middle and upper classes, but there are no such subsidies for the poor.”
Chris added that organizations and politicians often tell poor people how they have to use their money, creating accounts for them that can be used strictly for their children, or for housing, food, and other basic needs. Nobody, however, tells the wealthy how to spend their money.
Ananya’s final question before opening the session up to the audience was whether or not the global financial crisis will alter the future of microfinance, with specific emphasis on the ‘Occupy Movement’ that has materialized recently. Ayesha answered this on both the macro and micro level. Even if we don’t realize a correlation, microfinance is in fact linked to commercial finance on the macro level. She used the example of a fruit vendor at Angkor Wat in Cambodia, who relies on tourists to come visit and purchase her goods. “If suddenly tourism to the area decreases, our fruit vendor is affected just as the tourist who could no longer vacation in the first place. At the micro level, on the other hand, there will always be a need for microfinance so long as there is a population somewhere lacking access to financial services.”
Our first audience question was in respect to scale and organizational growth versus impact, and the panelists agreed that the best work combines advice and educational support with the financial services provided. Premal used recent debtor revolts in Bolivia as an example, and informed us that those institutions providing credit coupled with education didn’t experience any revolts. This goes to show that the impact is a result not just of the value of the loan, but also the client-lender relationship.
The role of gender in the industry came up, and Ayesha confirmed that the bulk of the MFIs they work with at MicroCredit Enterprises have portfolios predominantly comprised of women borrowers. Research has shown that women are more likely to put profits they make back into their families and communities as opposed to some luxury item. Eric stated that in the US, they haven’t found evidence that women pay any better than men, and thus doesn’t take gender into consideration when funding loans. He said he would base any gender consideration on the impact he hopes to make: to benefit children he would reach out women, to lower crime rates he would focus on men instead, and for job creation would not show preferential treatment to either.
Next, mobile banking was discussed; as a member in the audience asked what impact mobile banking will have on a predominantly “high-touch” industry. Both Chris and Premal agreed that “multiplex problems require multi-faceted solutions,” and that such innovations should be implemented, not only to deliver financial services, but also to address a wide range of social missions. Underserved populations are not just in need of financial access, but also health care, insurance and many other basic services we take for granted in developed countries. Premal also mentioned that an MFI in Kenya (that works strictly with mobile payments) conducts 60% of its business with borrowers after closing hours. This displays the need for 24/7 services so borrowers can bank online when they have time. Again, with any innovation, it is most important to understand client needs to best develop new products and services.
Finally, the panelists were asked to provide last words on what the future of microfinance entails, focusing this time on potential methods in which we can measure social impact. Premal explained that MFIs could better incentivize their loan officers to offer credit only to appropriate clients. Premal described a new innovation, a “poverty scorecard”, containing a list of simple ‘yes’ or ‘no’ questions, that is being used to help loan officers determine whether or not a particular client is living below the poverty level. By creating an incentive plan based on getting loans to the right people, and maintaining a high repayment rate, they are hopeful to avoid the problem of loan officers pushing loans based on quantity as opposed to quality. They hope to use this scorecard to track progress as well – using it on an ongoing basis can show differences in their clients’ level of poverty, and ultimately create a method to monitor and evaluate company performance. The panelists agreed that the measurement and management of social performance is in a much more preliminary phase than that of financial performance. It’s very difficult to manage what you can’t measure, but through the development of evaluation metrics and other social impact indices, we can ensure microfinance continues to fulfill its primary purpose.