Microfinance delivering results How microfinance can deliver results

Microfinance – delivering results How microfinance can deliver results after all! Sanjay Sinha Micro-Credit Ratings International Limited

Microfinance – delivering results “Recently, microfinance’s reputation has come under pressure, mainly due to misinterpretations as well as the increasing focus on some (alleged) malpractices by MF actors and the microfinance sector has some problems to show that it is achieving good results for the clients in the field” European Microfinance Week organisers

How could we show this to the public? Public perception lurches from one extreme to the other We need to show a more balanced approach We all made the mistake initially of presenting microfinance as a panacea for poverty… …the real utility of microfinance is as a means of financial inclusion

Is Microfinance delivering results for clients? “Inclusive financial systems allowing broad access to financial services…are especially likely to benefit poor people and other disadvantaged groups. Without inclusive financial systems, poor people must rely on their own limited savings to invest in an education or become entrepreneurs and small enterprises must rely on their limited earnings to pursue promising growth opportunities. This can contribute to persistent income inequality and slower economic growth. ” World Bank Policy Research Working Paper, 6025

Is Microfinance delivering results for clients? Adults with bank accounts Developed economies Developing countries India South Asia East Asia Pacific Sub-Saharan Africa 89% 41% [men, 46% women, 35%] 35% 33% 45% 24% Account use levels are very low in developing economies with only 20 -25% reporting regular transactions compared to over 80% in developed economies India: 139 mn “no frills” accounts, total balance Rs 120 bn Average balance, $17

Is Microfinance delivering results for clients? We all know the socio-cultural factors that result in limited account use So what is the alternative? – trade credit, ROSCAS, friends/relatives, moneylenders and pyramid schemes run by dodgy operators …or microfinance ideally providing savings as well as credit services but, if not, at least credit so that low income families can “save down” if not save up

How could we show this to the public? Micro-value (<$500) accounts in India numbers in million accounts, March 2012 70 MFI = 30% of 60 all credit accounts in 50 the formal system 60. 0 41. 2 40 SHGs = number of 30 members; tiny credits 20 held as group accounts with 10 banks 20. 0 9. 9 0 SHGs MFIs RRBs Other banks' micro-a/cs

How could results be improved Abandon the mantra of growth 9, 000 estimated Sep 2010 – moderate growth is good for inclusion – rampant growth is an invitation to disaster 8, 005 7, 474 6, 290 Temper the egos of promoters of MFIs Dampen the expectations of investors 4, 589 2, 370 876 100 181 1, 219 444 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

How could results be improved Design appropriate products: The single product traditional offering of MFIs – particularly in Asia – does not fit the needs of all low income families – identify 3 -4 key activities that mf clients need to borrow – design products to fit those needs The idea that microfinance can be delivered at ever lower costs is a middle class myth – even in South Asia it cannot be delivered for less than 24% per annum – do not try to push it to unrealistically low levels of cost

Issues of pricing Average cost per borrower in India 1, 100 Rs/borrower 1, 084 1, 000 L-10 900 All MFIs 800 at 2002 prices 700 956 716 668 620 600 504 536 500 473 400 378 300 298 2000 2003 2005 2007 2010 2011 2012

Issues of pricing OERs and Yields of Indian MFIs 27. 0 25. 2 28. 9 28. 3 24. 8 26. 8 25. 8 18. 8 22. 1 19. 9 15. 6 11. 6 15. 9 11. 5 8. 6 2002 2004 OER % 2006 Yield % 2008 -9 Yield non-AP 2009 -10 16. 0 12. 0 11. 7 10. 3 2010 -11 OER, non-AP 2011 -12 Yield AP

How could results be improved Ensure regular consumer feedback/client satisfaction surveys to enable products to improve Promote other services: deposit/savings services and other financial services like insurance and payments/remittances (domestic) Undertake periodic, simple code of conduct/client protection assessments European supporters of microfinance would do well to follow these basic principles; work patiently and wait for the situation to improve. There is no alternative.