23 Mar 2010

Beyond microfinance (1)


Some prospective thoughts about the future in microfinance…

I would dare to say that microfinance is almost over … The concept of granting microcredits and installing some facilities in getting basic financial operations such as cash deposit or payment via mobile phone accessible to the poorest has proven to be widely “implementable” everywhere. And now, what is the next step ?

After nearly 40 years of existence, microfinance is without any doubt technically viable. Taking on a loan and paying it back is not a challenge, even with the poorest. They honour their debts very well and if they meet some sporadic difficulties in finding the money for the next instalment, they take on a new loan with another MFI. Indeed, more and more MFIs are wooing them. It can be seen as the side effect of the (soft) pressure a few of them are subjected from very generous donors from the North, who are looking for good conscientiousness in supporting the indigent populations on the planet.
It results in an overflow of fresh money flooding the South.

But has sufficient attention been put on the real – economic / social / environmental – impact of this financial stream ? Social performance has emerged as a new focus area for some years in the microfinance industry, specifically because the latter is challenged over its actual results in the field.
Even if some progress in assessing social performance has been made, we still have got probably a long run in front of us.
Alongside with microfinance, the question of the TBL (triple bottom line) effect is looming growingly. Southern countries will be the first ones to suffer the climate change. To make a comparison with telecommunications, like these countries have skipped the step of the fixed line and gone directly to the mobile phone, they will also have to invest straightaway in clean technologies without having the right to failure (dirty industrial processes will be no longer admitted).
Whatever the activity, farming or manufacturing, everyone in the Southern countries will face the challenge by law, by pressure of the international community or simply by local competition to reconsider his way of working, maybe the way of investing also.
How is microfinance dealing with this next trend ? What adequate financial solutions will the beneficiaries be offered ? How does microfinance prepare its beneficiaries for this economic shift ?
So many opened questions ….

2 Responses to Beyond microfinance (1)
  1. Having worked in the MF seotcr for some years, including in Nigeria, I can confirm the NYT article is largely correct. The rates are as stated. The bank does continue to operate without a legal banking license and intermediates savings. The drop-out rate is chronic. It is highly profitable.The investors/donors to LAPO recently established a taskforce to address these issues, resulting in an independent rating by Planet Rating (www.planetrating.com). The rating resulted in a 3-point downgrage of LAPO from B+ to C+, one of the largest downgrades in MF history. MicroRate, who did the previous rating in 2007, withdrew the rating in a press release in August last year after discovering anomalies in the data provided to them by LAPO (www.microrate.com).The recent rating highlights a number of deeply concerning new discoveries. A lack of governance and internal control; the external auditor is a brother of a board member; there is no functioning back-office IT system; they provide a specific warning as to the integrity of data; high profitability with low productivity fuelled by high interest rates . the list continues. The rating is very sobering reading for anyone remotely involved with this bank.In the meantime LAPO decided to increase the interest rates. The creditor taskforce is now considering its actions.Perhaps the more disturbing aspect to this is that all this information was well known many years ago. It was published on the front page of rating reports, it was widely known by practitioners, it is not actually news at all. However, the intermediaries somehow managed to miss this data in their due diligence and reporting to their investors. Kiva recently updated its website to reflect the actual cost of capital, and yet this was known perhaps a year ago. ASN Bank were directly questioned about this in their AGM last year in Amsterdam, when a shareholder directly asked the board about evidence using the Deutsche Bank interest rate calculator suggested the interest rates charged by their client LAPO were well over 100%. They denied this flatly and published an article in their next newsletter stating rates could reach as high as 30% . The NYT, Microfinance Transparency, Planet Rating and many practitioners know this to be entirely false.Calvert Foundation and MicroPlace (SEC regulated) quickly removed LAPO from their websites. Grameen Foundation is yet to comment on how they are able to reconcile these discoveries, but particularly the discovery of interest rates of 126%, with Muhammed Yunus’s usual stance on exploitatitve interest rates. We await a formal comment from Yunus.There is little need to comment on the wisdom of investing or donating funds to LAPO. What is more concerning is whether we, the general public, can trust the intermediaries, such as Kiva, Calvert Foundation, ASN Bank etc. to invest our funds according to our goals in the best interests of the poor and report transparently. The call for formal regulation of the microfinance seotcr in developed as well as developing countries is growing louder and more credible. I applaud the recent Congressional hearing in DC on microfinance, and hope the next hearing will result in tangible improvements in this regard.

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