03 Apr 2010

The ALFI-Microfinance conference 2010 (Luxembourg) : a very intensive and successfull meeting between all the players of the industry

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The Microfinance Conference that took place on 25th March, was organised by the ALFI – Association of Luxembourg Fund Industry. It has been the second event in Luxembourg dedicated in priority to the financial players since the first one hold in 2005.
One attraction of this conference was the large spectrum of speakers, going from the practitioner in the field (Entrepreneurs du Monde) to the banker (the EIB), and passing through the lawyers in charge of setting up the MIV (microfinance investment vehicule), the rating and labelling agencies (MicroRate, LuxFlag), the management companies who select the assets, etc … without forgetting the academic world.

Microfinance today displays many faces, ranging from the most human to the most financial one. In this very large context, it might be sometimes difficult to recognise in some microfinance initiatives the virtuous tool as initially imagined and implemented by Muhammad Yunus in the 70’s.

Too much money is chasing too few MFIs

We are in danger in getting off balance, off message”, said Damian von Stauffenberg, founder of MicroRate (Washington, USA), a prominent rating agency.
We observe indeed that high financial return is generally at the disadvantage of the social impact in the field. In order to woo investors, many MFIs (Microfinance Institutions) have clearly put the priority on the financial performance, losing by the way their initial commitment in term of poverty alleviation. They are then moving their target to wealthier people with a higher borrowing capacity.
I particularly appreciated a remark from Ms. Hon. Soukeyna Ndiaye Ba, Executive Director of INAFI (International Foundation of Alternative Financial Institutions), Senegal : “People must not be used as a product to make money”. “[Poor clients need] technical capacity to access money”.
It results from this general trend that “much, too much money is chasing too few MFIs [the most profitable ones]”. Through this phenomenon of concentration, lending rates are decreasing at an alarming degree.”Lending rates of MFIs are [becoming] far below the country risk”, said Damian von Stauffenberg. In this climate of competition between the funders, MFIs borrow at lower and lower prices, which could turn into a huge and sudden correction of the market, if one or some MFIs collapse for any reason.
Damian von Stauffenberg to remind that : “Microfinance has to be linked to the creation of wealth. It is an essential condition. Poor have few security mechanism [that’s why microfinance actors must] help them building assets”.

Due to the growing focus on the biggest MFIs, there are “limited investment opportunities leading to high level of liquidities [in the market]”.
Damian von Stauffenberg wonders whether “the [current] growth is healthy”and “[whether] MFIs are equipped to manage [such] a growth ?
As a consequence of concentration, the industry is moving now over risk management and ESG performance.

Donations vs. loans

Franck Renaudin, founder and director of Entrepreneurs du Monde, a French NGO specialised in microfinance, explained that the microfinance industry is dictated by the donors … which is not healthy :

  • in 1995, the donor agencies requested more productivity with microfinance operators and better professional way of working. They were focussed on operational performance. The viability of the MFI was implicitly set as a priority vs. the beneficiaries.
  • in 2005 (microfinance summit, Hallifax), attendees came up to the conclusion that the target of microfinance was not reached (poverty alleviation). Halifax has launched the concept of social performance, which is again a donors request … not an initiative from the actors in the field.
  • since 2007 around, many new investors have entered in the market, as a result of a global raising of awareness in human development. Foreign money represents now 20 % of total funding worldwide in microfinance.

According to Franck Renaudin, 2 steps are to be considered regarding the development of microfinance :

  1. donations : in their start-up phase, microfinance programs require cost-free fresh capital. Without any donations, they will not be able to develop a social policy and implement it properly. They will not keep their goal of targeting the poorest.
  2. Investments / loans : this kind of funding should be the main source of money on the long term to support further growth.

Ms. Ndiaye stressed on the fact that “rural microfinance needs more long-term loans than in urban environment”, because the process of economic value is much longer.

The academic view

Marc Labie, Professor at University of Mons (Belgium) and Co-Director of the Centre for European Research in Microfinance (CERMi) exposed a very good academic view of the industry by outlining that “MIVs and DFIs play a great role for microfinance alongside local funding”. Nevertheless, at least 4 issues should be tackled asap :

  1. there are too many fishers for too many little fishes” (same remark as Damian von Stauffenberg regarding the concentration of funding on a small number of MFIs)
  2. the use of [public] subsidises should be more strictly under control, in order to enhance the social impact of the MFIs
  3. the set “price / return / risk” is to be revisited, because at the time being it is not optimised : price and return are not adjusted properly, whereas the risk is not adjusted to country and microfinance volatility.
  4. The lack of consolidated data on the microfinance industry is considered as an obstacle for transparency and action at a global level.

Marc Labie ranked the first 3 issues as “extremely urgent”. The strengthening in management and governance should provide a (partial) answer to a microfinance sector that is mostly considered as too weak

Measure if the clients live better off

Marc Bichler, Director for Development Cooperation, Ministry of Foreign Affairs – Luxembourg, stated that the 2 pilars of microfinance are the “financial profitability” and the “poverty alleviation”. To ensure these goals, “additional money is needed to help MFIs strengthen their ESG criteria”. In return, this effort should increase the spreading out of foreign funding to a large population of MFIs.

On the social performance side, there is still much to do ! Loïc de Cannière, Managing Director at Incofin Investment Management (Belgium) said that “monitoring, MFIs perform well on social aspects comes up to ensure a transparent tarification for the beneficiaries and to ensure that the all process of credit (including the disboursemet) is made easy”.
But I was quite shocked when he outlined that no assessment is undertaken by INCOFIN to “measure if the clients live better off. We let it to the academic people” (!). It seems to me that it does fall under the duty of the investors if they wish to be consistent with their engagement towards the social impact of microfinance.

Conclusion and lessons learned

In this time of financial crisis, investors see microfinance as a safe haven, as if the sole soundness of the concept in itself would get it apart from the rest of the economy. But they forget (or ignore) the reality of this industry. As an example, consumer loans or small business lendings are not part of microfinance.
We have seen during this conference that speakers do not speak the same language and have quite difficulties to understand each other. Asset managers tend to see microfinance as a business as usual, with the same constraints in term of portfolio structuration or financial return. On the opposite side, operators in the field see the business as a social activity mainly, overlooking sometimes the financial sustainability.
I think there is not enough liaison, coordination between these actors, despite they work in the same industry !
A global and holistic approach shared by all stakeholders is strongly necessary if we want to promote responsibility in microfinance.

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2 Responses to The ALFI-Microfinance conference 2010 (Luxembourg) : a very intensive and successfull meeting between all the players of the industry
  1. While I am open to finding otherwise as The Evidence Project unfolds, I’ll share that I am fairly well convinced by evidence to date that microfinance indeed can play a measureable role in ending extreme poverty globally. The operative words are in italics. Measurable allows a lot of latitude, from statistically significant but not programmatically significant to being a major factor in moving the needle. And extreme refers to the absolute poverty that manifests as inability to meet the most basic human needs consistently through the year. We’ll always have relative poverty, but I’m convinced that absolute or extreme poverty can be dramatically reduced (but never eradicated as long as there are natural and man-made disasters and more subtle evils stalking the world we won’t have to go to a museum to find it, but theoretically it could be rare). Microfinance, even if it does nothing more than help the poor smooth consumption and achieve food security, is very likely to be an important, if not major, contributor. Right now, I’d bet a lot of money (I’ve already bet my career!) that the evidence will eventually show that it will be major. However, there is a lot that must be done to and with microfinance to make its role in poverty reduction major, not just barely measurable.- Chris

    • Good remarks. It is scarcely impossible to match complex situations with only one solution. Microfinance can be just a piece of the puzzle.


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