Kiva’s Weekly Microfinance Notes – 24 February 2011

JD Bergeron
Director, Seal of Excellence for Poverty Outreach, United States

 

by JD Bergeron, Senior Director of Social Performance, Kiva.org

This week in the Kiva Chronicles we are going to try something new: sharing our thoughts on important conversations in microfinance. Below are links to recent blogs, articles and papers from many different sources. 

You’ll find context notes in green about why we think each article is important and why you should care. 

 

We love to hear your feedback so if you like this list, please let us know.

  1. Over-indebtedness:
    Over-indebtedness continues to be a main concern across the microfinance industry. While many have pointed to to problem related to over-supply of loans, the first blog post approaches the impact of loan product design on over-indebtedness. The second presents the viewpoint of a microfinance practitioner and shows a much more altruistic motivation behind rapid growth goals.

    A Way Out of High Growth and Multiple Lending Indebtedness Trap
    source: CGAP Microfinance Blog

    The global debate on over-indebtedness tends to focus on the role of high rates of growth as its cause.  The argument is that growth is sustained by the less responsible MFIs who target easy to reach clients – the low hanging fruit – encouraging them to borrow and inadvertently getting them into trouble as a result.  This defines over-indebtedness as a supply-driven problem. 

    While this phenomenon undoubtedly plays a significant part in creating over-indebtedness, it would be useful also to look at the problem from the product design and demand perspective. Is there something about the product design that inherently fails to fulfill demand and leads to microfinance clients actually chasing after loans, sometimes too successfully, thereby getting themselves into trouble? 

    Whatever our concerns about over-ambitious, even greedy, promoters no one actually forces people to take loans beyond their repayment capacity so there must also be something in the conditions under which the industry operates that leads to clients choosing to take more and more loans.

    Over-indebtedness: a practitioner’s perspective
    source: CGAP Microfinance Blog

    Milford Bateman in an earlier post  in this series seemed to suggest that it was the ‘commercialization’ of microfinance and alleged tendency of senior managers to enrich themselves that are to blame for borrower over-indebtedness. Maybe he is right with regard to some other countries, but this is not the case as far as Bangladesh is concerned. Sure, MFIs in Bangladesh have “commercialized” insofar as they have moved away from donor funded microfinance in the 1990s to a self-sustaining microfinance model in the 2000s. But almost all microfinance players here are non-profits that re-invest surpluses back into their portfolio and there is little or no evidence of abnormally high salaries or private enrichment of senior managers.

    Yet, though due to the absence of any credit profile I have no way to know the exact percentage of borrowers who fall in the over-indebted category,  I have a hunch that the percentage is high enough, particularly in certain regions of the country, for us to be concerned about it. While I don’t agree with Mr. Bateman that it is commercialization that is solely to blame, I do agree that almost all the microfinance players bought into the idea propagated by some advocates that microcredit is the silver bullet to eradicate poverty and all that the poor people need is more and more microcredit.

    This belief prompted MFIs to seek fantastic growth in the numbers of borrowers and sizes of portfolio over a 15 year period in which they, or we, did not stop to assess whether more and more credit was causing some people to become over-indebted. (I strongly believe though that the vast majority of microfinance borrowers in Bangladesh have economically benefitted from having access to institutional financial services.)

  2. Islamic Microfinance:
    Developing appropriate products for specific client segments is in line with best practices in responsible microfinance. Kiva works in many countries with large Muslim populations and will need to plan for inclusion of Shariah-compliant lending on our website.

    Taking Islamic Microfinance to Scale
    source: CGAP Microfinance Blog

    IFC commissioned market studies reveal that in Algeria and Jordan, approximately 20% of the poor cite religious reasons for not seeking conventional microfinance, while in Yemen and Syria, this percentage rises to 40%. In a 2008 CGAP survey, local practitioners and key informants suggested similar demand trends in Indonesia, Afghanistan, Pakistan, and the Palestinian territories, and also in Muslim majority areas of India, Sri Lanka, Brunei, Cambodia, and the Philippines.

    Broadly speaking, the market for microfinance in the Muslim world can be divided into three segments: 1) individuals who will accept conventional finance products; 2) individuals who state a clear preference for Shariah-compliant finance but—due to unavailability or price differentials—accept conventional finance, and finally, 3) individuals who only use Shariah-compliant products.  The ratios of these groups fluctuate by region. For example, individuals who would insist on Islamic financing (category 3) constitute far more than one third of the market in Yemen, and less than a third of the market in Bangladesh.  Overall, it is estimated that roughly 2/3 of the microfinance market in the Muslim world either insists on, or prefers Islamic financing.

  3. 5 Countries Where Microfinance Works: (pdf)
    source: Center for Financial Inclusion blog
    Five Kiva counties (and one Kiva Field Partner) are spotlighted in this blog post about where microfinance is working well. Country context is one of the many important factors Kiva considers in its investments.

    Andhra Pradesh’s shadow is long, and particularly dark where it falls across the media. But beyond the bleaker headlines are stories of a different kind, about countries where microfinance is working. The Center’s managing director, Beth Rhyne, this week published an article on this topic in     The China Daily. It may cast a new light on microfinance for the newspaper’s nearly 400,000 readers, many of whom hail from Asia’s business and investor community.

    Here are some excerpts from “Five Countries Where Microfinance Works”:

    • “Indian policymakers created a perfect storm for a microfinance shipwreck … MFIs, locked out of the ability to provide a range of services, had no other channel for growth than unbridled credit expansion.”
    • “Tiny Bolivia got many things right … competition between … strong institutions brought interest rates in Bolivia below 20 percent, among the lowest microfinance rates in the world.”
    • “Cambodia and Mongolia followed Bolivia’s example. Acleda Bank in Cambodia and XacBank in Mongolia … added savings and other services, offering a solid range of products.”
    • “Indonesia showed what a state-owned bank can do … Bank Rakyat Indonesia now serves tens of millions of clients, has been profitable since it began, and has never experienced a significant crisis of over-lending.”
    • “The government’s nurturing approach led the Economist Intelligence Unit to rank the Philippines second in the world in its “Global microscope on the microfinance business environment 2010.”
  4. Client Protection Research:
    Solid country research helps Kiva to function better within local contexts. Here are nine reports on Kiva countries regarding client protection.

    The Center’s Best-Kept Secret: The Country-by-Country Client Protection Library
    source: Center for Financial Inclusion blog

    The Center for Financial Inclusion’s Client Protection Library includes country profiles on a number of Kiva countries. They’re  pulled together from documents in other languages and diverse sources including law, public policy, banking, and microfinance.

  5. BRAC’s Efforts with Community Health Care:
    Kiva has a lot in common with BRAC’s methodology: pro-poor, rural focus and good client protection. We are currently partnered with five affiliates: BRAC South Sudan, BRAC Uganda, BRAC Sri Lanka, BRAC Sierra Leone and BRAC Liberia; with another on its way for consideration by the Kiva Investment Committee.

    What Makes Community Health Care Work?

    Source: article published on The New York TImes by Tina Rosenberg about BRAC’s community health workers

    A different, ingenious approach is taken by BRAC in Bangladesh. Nearly 30 years old, BRAC is a poverty-fighting organization, and a giant one — health care is only one of the things its 28,000 employees do. It also has more than 80,000 community health workers, which it calls volunteers, who cover more than 100 million people.

    The volunteers work on basic maternal and child health, but their biggest job is curing tuberculosis, a very labor-intensive enterprise. The hard part of curing TB is ensuring that patients keep taking all their medicines for six months. So BRAC’s village health workers watch their patients swallow their pills every day. This is a proven health intervention called DOTS, for Directly Observed Treatment, Short-course, that has greatly improved TB cure rates around the world.

    Mushtaque Chowdhury , who was deputy executive director of BRAC and oversaw its health programs, said that compensation for health workers was critical for success. But BRAC can’t pay 80,000 salaries. So, like Jamkhed, BRAC offers its health volunteers income opportunities. Unlike Jamkhed — where health workers make money in non-health businesses — BRAC’s plan encourages the volunteers to spend their time on health care.

  6. A Case for Microinsurance?:
    Unbanked and poor borrowers need security against economic shocks. Many Kiva Field Partners offer insurance products in addition to loans, contributing to the well-being of borrower’s families and livelihoods.

    How do Women Weather Economic Shocks?
    source: Financial Access Initiative

    A new paper from the World Bank explores what we know about how women weather economic shocks. Here’s the main result:

    In the past, women from low-income households have typically entered the labor force, while women from high-income households have often exited the labor market in response to economic crises. Evidence also suggests that women defer fertility during economic crises and that child schooling and child survival are adversely affected, mainly in low-income countries, with girls suffering more adverse health effects than boys.

    Papers like this can go a long way toward providing the foundation for the case for insurance. It has nothing to do with insurance per see—just about the inability to cope with risk and the consequence of that. The paper is about economic shocks—which may NOT be insurable. But to the extent they are, this is worth a look. Here is the paper’s bottom line, and it makes sense:

    "These impacts underscore the need for providing income to women in poor countries to help households better cope with the effects of economic shocks."

    The question is whether you can substitute the word “insurance” for “income”?

  7. Investment in Latin America:
    Despite global concerns about microfinance, investment remains strong in solid MFIs. A recent investment in Latin America to well-scaled, rural and women-focused institutions includes references to two Kiva Field Partners.

    GP invests $4.5 million in six microfinance institutions of Latin America
    source: Microfinance Focus

    Global Partnerships (GP), a 16-year-old nonprofit organization supporting microfinance and other sustainable solutions to poverty, recently announced investment of $4.5 million of its new $20 million social investment fund in six outstanding microfinance institutions (MFIs) in Latin America. Three of the partners are new to GP.

    The Global Partnerships fund, Social Investment Fund 2010 (SIF 2010) is a five-year debt fund that provides affordable loans to a select portfolio of MFIs that have met GP’s rigorous financial and social criteria. The MFIs being funded range in size and business model, but are similar in their focus on reaching people in underserved markets in Latin America and combining loans with ‘microfinance-plus’ services such as business education, health services and agricultural training.

    Other microfinance organizations that have received loans from SIF 10 as of December 31, 2010, include D-MIRO in Ecuador, FONDECO in Bolivia (another new partner), FONDESURCO in Peru, and FRAC in Mexico (GP’s second loan to Mexico). Together, these MFIs serve 94,000 borrowers, 72 percent of whom live in rural areas and 63 percent of whom are women.

  8. Customer Service and Social Performance Management:
    Responsible microfinance requires a solid understanding of who the borrower is and what they need. A focus on solid customer service can go a long way in preventing some of the big concerns in the industry today.

    The Overlap between Customer Service and Social Performance Management (pdf)
    Source: Aug 2010, Veena Yamini A.

    Enhancing customer service through social performance management. MicroSave has worked with a variety of banks and MFIs across Africa and Asia to implement customer service programs that have made significant impact on the organizations’ social performance. MicroSave’s customers focus interventions involve the following activities:

    • Understanding client needs to develop tailored products and services;
    • Studying client drop outs to prevent the same in the future;
    • Collecting client feedback to design suitable client protection strategies;
    • Client reach-out strategies for better beneficiary-targeting;
    • Studying staff motivation for better service to the clients;
    • Crafting client-delight strategies to offer them services far in excess of their expectations;
    • Aligning systems and processes towards the objective of client delight articulated clearly in the mission statement.