Microfinance industry still has a long way to go

By Cassandra Mascarenhas

The third and final conference day of the Asia Microfinance Forum 2010 that came to an end up last week wrapped up all that was discussed over the previous days about the industry’s current tentative positioning on a global platform, coming to the conclusion that there was much to be done on many different levels.

Moderated by the Executive Director, FDC, Australia Craig Wilson, the final plenary session titled ‘Financial Conclusion – What are the Core Priorities?’ consisted of the Managing Director of M-CRIL India, Sanjay Sinha and the Deputy General Manager (Marketing and Retail Banking), HNB Sri Lanka and Chairman, BWTP Network Chandula Abeywickrema.

Future of the microfinance industry

In his quick wrap up of all that had been discussed during the three day conference, Sinha pondered upon the idea of whether the microfinance industry had got to the stage that it was now overachieving and therefore had to deal with the problems that come along with that. He then expanded on his perspective on these issues and offered key takeaways and thoughts for future.

Drawing upon the topic of microfinance growth and how it contributes to financial inclusion, he noticed that responsible lending had now become the centrepiece of conferences and discussions on microfinance, although reaching out to the bottom of the pyramid in terms of clients was also important.

“I think we are all aware that microfinance growth is running way beyond the level that it perhaps ought to be at. If looking at microfinance indices in India, the industry is doubling almost every year; however performance, if judging it by return on address and portfolio address, show that the early years from 2003 to around 2005 show a significant improvement but then there is a huge dip in the middle associated with delinquency crisis that took place in certain regions in huge decline in the return of assets although this is followed by quite a significant improvement in performance once again,” Sinha said.

Looking at the microfinance industry in the rest of Asia excluding Bangladesh judging by the performances of the 25 leading microfinance institutions in the particular country, it can be deduced that the industry is now more than five time the size it was six years ago.

Another topic discussed heavily at the conference was the significant upsurge in problems with internal control.  Quite often managements are not even aware of what is happening in their institutions and this is a problem that has affected the industries in all countries and although it affects huge monolithic organisations more it is a pressing issue that should be kept in mind.

“Microfinance growth has been great but has it necessarily lead to financial inclusion? Are we designing the right products, offering the right products in order to reach out to the bottom of the pyramid?” questioned Sinha.

Offering loans that are too small is another problem.  When a family is given a loan for working capital and it is not sufficient for their needs, they keep getting more loans. When competition leads to more microfinance institutions coming in, they keep getting loans from the newcomers and face repayment problems which lead to the delinquency crisis and other such issues.

Currently the staff at most microfinance institutions cannot handle giving larger loans however if this had been implemented from the start, the over-indebtedness seen today wouldn’t have occurred.

Significant areas in Asia which require micro-financing have not been reached because of the difficulty associated with commencing operations in remote leading to most institutions choosing instead to go to where it is easy to operate leading to competition and over saturation of the market.

Good governance and regulation

Governance and independent directors, another heavily discussed topic over the three days of the forum was then addressed by the Managing Director of M-CRIL. The industry lacks good directors who know about microfinance and are able to make the right decisions for the institutions that they head.

“Organisations like CGAP now need to concentrate more on developing and training people to understand their role as director, functions they should be performing etc., as well as looking into client protection and financial literacy,” Sinha stressed.

Another issue that led to this exponential growth is because the microfinance institutions went after commercial capital when what they should have been doing going after the regulators instead. This would have enabled the microfinance sector to grow in a much more moderate way so that it could have served their clients’ needs better and reach out to more people.

Chairman of the BWTP Network Chandula Abeywickrema was next who in quickly summed up in a couple of points what he felt microfinance institutions and the industry as a whole should focus on.

The first was the breaking the customer base into segments – with the youth and households being identified as the more important segments. In addition to the core microfinance initiatives, proactive regulation was a topic that was the cause for much discussion during the forum, an issue that should be dealt with.

Another point raised was the importance of benchmarking and adopting more suitable transparency and management practices that would in turn bring about accountability.

Financial inclusion to make more people aware – in which financial literacy plays the key role; Abeywickrema emphasised on the significance of financial literacy to make people responsible and accountable for their actions. The microfinance industry is an evolving one – create an enabling environment in order to promote continuous improvement is essential for this.

Finally risk management and client protection were also discussed in detail, to which the Chairman of the BWTP Network requested institutions to learn from history not repeat mistakes.

“What is significantly important here is that we are all representing nearly two million people in Asia who are at the bottom of the pyramid; we need to take all what we have learned and discussed here and put it to good use,” Abeywickrema said.

A couple of institutions need to go bust

When the time came for the open forum, the panellists were hit by a flurry of questions and thoughts by the audience.

An audience member from Bangladesh questioned Sanjay Sinha’s suggesting that the microfinance industry needs to slow down in order to avoid certain problems that it is currently facing.

“Are you suggesting that we simply slow down and that would solve the problems? We have similar problems in Bangladesh as in India so can you be clear on if slower is in fact better or how could we change our practices to get a better outcome in the future if not?” was the question posed.

Sinha confirmed that he was indeed suggesting that the industry go slower, which would in turn give institutions time to strategise and change them accordingly. Going so fast in the chase for commercial capital give very little time to engage with policy framework and the regulator, bringing up the point that wherever deposits have been allowed in micro-financing, the deposits exceed the credit those institutions are able to provide.

He also added that this was not just the case in India but in the industry as a whole, stating that institutions nowadays are so busy chasing money in order to grow faster, they do not have time to stop and think about financial inclusion.

Pakistan, on the other hand, is a country that was merely just not growing fast enough but may simply have a stagnant sector.

Another member of the audience suggested that the industry look into making interest rates more equal from country to country, as currently the poor have either interest rates that are too low and others have them too high.

Yet another delegate from Bangladesh pointed out that the country has not chased for commercial funding and savings from inceptions like other institutions located in other countries but still face similar problems as the rest of the countries that are growing much faster.

Sinha once again took this question, pointing out that the country does not have regulations and has unbalanced growth which could lead to the occurrence of similar situations generally caused by market saturation and growth.

“I think that in Bangladesh, the microfinance industry has settled into a comfort zone which is part of the problem; slowing down doesn’t mean that one should stop pushing boundaries”, stated the Managing Director of M-CRIL India.

There are many regions in which it is difficult to set up and work but the industry needs to work on developing new systems and services in order to cater to all those who require microfinance. Loan sizes need to change as stated at several occasions and there needs to be a fundamental change in the approach to financial inclusion.

Furthermore, initiatives need to be taken to educate regulators to create a suitable environment in order to attract debt capital. A Sri Lankan in the audience brought up the valid point that educating regulators can be somewhat of a challenge as although some are very proactive, others are more resistant.

Another delegate commented on the fact that it was in a way the many investors chasing microfinance institutions that instigated them to grow faster without taking care of the quality. What is more important, he felt was not slowing down but that all institutions should be aware of its own capacity and keep the quality of the portfolio intact instead of too much competition chasing each other’s clients and other such bad practices which will not help in reducing poverty.

“So far it has mostly been the supply side issues we have been discussing but the demand side is equally important. Talking about social management managing the money doesn’t necessarily mean that it will get them out of the poverty trap but it would help in the long run,” stated yet another member of the audience.

Sinha had the last word to say in the panel discussion saying that in perfect competition one would expect to see some institutions go bust and the lessons of multiple lending won’t be learned by the institutions until a couple do go bust.

“What is seen today is related, to the relatively young industry that we have got – this is after all the first real crisis that we are facing, maybe a few will collapse and maybe it is after that the institutions will learn lessons. Industries in the past have always said that it will be different this time around, in 1999-2000, people said that the internet will change the rules of economics, after that they said that the property prices in the US would never fall and I think that the microfinance is also at this same stage right now,” Sinha finished with a flourish, his candid closing remarks prompting an enthusiastic round of applause from the audience.

Pics by Upul Abayasekara