When a reader spots a title such as this book’s, it is easy to assume that the editors, working with contributions from several authorities in the field, will dwell on the virtues of the sector and how the future looks rosy. While the book does point to a good job done, it also tells you unequivocally how the sector has not lived up to its original intent of alleviating poverty; that gaps still exist; that profitability and investor interests have often been placed above other noble goals.
However, it also leaves the reader with hope that the sector has enough tools at its disposal to make a difference to its target clientele — a populace which has little access to any other means of financing.
More interestingly, as the preface points out, the book was written before the outbreak of the COVID-19 virus — which means the sector is confronted with both an opportunity and a challenge. In that, MFIs will be needed to bring already vulnerable sections back on their feet; but also that funding efforts by governments could well ignore the small firms that can actually help reach the last mile. It points out that this is the moment that the whole ecosystem, of networks, associations and investors, has waited for — to help rebuild such families and communities as have been devastated by the pandemic.
The book begins with a look at the background, quickly pointing out one of the problems that many MFIs have brought upon themselves — getting to scale meant village NGOs spread branches countrywide, rarely diversifying into other services such as housing and education loans and microinsurance which would have given them a larger canvas to paint on, and lesser risk of going under.
It fleshes out for the reader that commercialisation forced the shift in focus from poverty alleviation to operational performance and financial sustainability, especially with the influx of external investors. In the next breath, the background explanation also begs an existential question: “Has microfinance at all helped alleviate poverty?” It points to research that has established that while microfinance certainly helped ‘income smoothing’ and preventing a further descent into poverty, it truly helped make lives better for only a small part of its clientele.
Another perspective you get is how derisking has actually been abandoned by MFIs seeking to avoid risk — some of these institutions, wanting to stay safe, stayed in one geography or were confined to one set of borrowers. If a financial, geopolitical or payment strike (as happened in Nicaragua) crisis did hit, many MFIs tended to go under quickly. Then, the cream of the clientele — that the upstarts proved were creditworthy — was taken over by surviving financial institutions. The rest of the clientele was ignored and so, social exclusion happened all over again.
The book calls for innovation, without which, it warns, many MFIs globally could vanish. But the thirst for profit margins may not support experimentation, which is the basis for innovation. Raising interest rates for higher profit can be controversial. Social investors who can fund innovation attempts and who encourage iteration — attempts, failure, retrial and so on — are key, says the book. An ‘aha’ moment strikes the reader when the book calls upon redesign of the very core product of microfinance: often, MFIs want clients to quickly start repayments, maybe even within weeks of disbursement; giving clients some time to start repayments can actually help them survive as entrepreneurs and hence ensure that loans are actually repaid. It also highlights that consulting services, where MFIs help educate borrowers on running their business, can lower the risk of loans going bad.
The book highlights the importance of diversification beyond the core function, pointing to case studies of housing loans being offered by MFIs in Peru and El Salvador and student loans in another part of Latin America.
The experience of MFIs in different geographies gives the reader as many unique perspectives.
Financial reforms in China in the mid-1990s actually made large, commercial banks to focus more on urban centres and, with feedback from rural populations that felt excluded, the authorities allowed the development of pilot programmes for microcredit. The success of such programmes showed that the rural borrower was bankable, leading to more reforms and to more inclusive financial development.
What happened in India
A reader not familiar with the MFI context in India will learn about the 2010 crisis in Andhra Pradesh. Earlier, investors had flocked to Indian MFIs as the cost of lending was relatively low in the country. This resulted in too much money chasing too few institutions. Then came reports of the same set of borrowers taking loans from multiple MFIs and hence being unable to pay back loans. When news of suicides started to emerge, the State government passed an Act, effectively stopping MFI lending and loan recovery in the State. With rising defaults, investors and banks stopped lending to MFIs in the State and then gradually across the country as well.
Though today’s MFIs across the world owe a debt of gratitude to the Grameen Bank of Bangladesh that started work in the 1970s, the introduction points to Latin America’s Bolivia that blazed a trail in 1992 when a non-governmental organisation became a bank and demonstrated that microfinance could operate on a commercial basis without a need for donation. The chapter on LatAm, rightly placed at the end of the book, holds a lantern to the path ahead paved by the efforts of financial technology.
The Future of Microfinance ; Edited by Ira W. Lieberman, Paul DiLeo, Todd A. Watkins and Anna Kanze, The Brookings Institution, ₹2,791 (Kindle).