Five countries where microfinance works
But Indian microfinance is hardly a template for all. There are many paths to a successful microfinance sector that serves the financial needs of low-income people well. Herewith, the view from five countries, starting with troubled India.
Indian policymakers created a perfect storm for a microfinance shipwreck. Policy toward microfinance in India could hardly have been more problematic. Possibly the biggest mistake: although large MFIs were allowed to convert from non-profits to commercial institutions, they were not licensed to take deposits. Most people need savings alongside credit. The balance helps clients become better financial managers, build their own assets, and avoid falling into debt traps. The MFIs, locked out of the ability to provide a range of services, had no other channel for growth than unbridled credit expansion. On top of this, the commercial banks were given “priority sector lending targets” – essentially a demand that they thrust money into the hands of the MFIs. With all that money flowing in, the market overheated. Cap it all off with lax oversight of governance when granting licenses to MFIs: there were few checks and balances to encourage restraint and responsible practices.
Tiny Bolivia got many things right. Bolivia developed a world class microfinance sector, starting with the conversion of the microfinance NGO Prodem into BancoSol in 1992. With support from the regulators, BancoSol became one of the world’s first private commercial banks dedicated to serving the poor. From then on, many microfinance institutions in Bolivia and around the world followed BancoSol’s example, and several countries copied the legal framework in Bolivia that made it possible. BancoSol now offers services from microenterprise loans to savings accounts, money transfers, home improvement loans and insurance. So do many of its competitors. And the competition between these 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 Xac Bank in Mongolia developed in much the same way as BancoSol. Starting as non-profit organizations, they converted into for-profits and eventually commercial banks. They added savings and other services, offering a solid range of products. As market leaders and innovators, they inspired other institutions to enter and spark competition. And this is very important: all these institutions are owned and governed by a carefully selected group of socially responsible shareholders who make explicit their intent to seek both social and financial returns.
Indonesia showed what a state-owned bank can do. Back in the 1980s, Indonesia’s government rural bank, Bank Rakyat Indonesia, was running a subsidized credit program called BIMAS to encourage farmers to grow more rice. BIMAS performed poorly and cost the government budget so much money that policymakers decided to scrap it and start over with a new model. That model, the BRI Unit Desa System, involved very simple branches offering savings and microenterprise credit – basic banking services – to the self-employed across the country. BRI’s Unit Desa System now serves tens of millions of clients, has been profitable since it began, and has never experienced a significant crisis of overlending. It succeeded because policymakers allowed it to run on sound banking principles, without political interference.
The Philippines took an eclectic approach. Appropriately for an archipelago nation, the Philippines encouraged many kinds of institutions to blossom, including small local banks, NGOs, and specialized microfinance banks. This has encouraged local initiatives, with social entrepreneurs and social groups from many walks of life making personal contributions to create a vibrant marketplace. The government has offered them a sound but supportive regulatory path, with attention to client protection. 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” which rates countries according to their microfinance regulatory and market infrastructure.
The lessons to draw from these examples are encouraging for the future of microfinance. The countries that have created microfinance “happiness” all recognized that savings needs to accompany credit, both to be truly beneficial to clients and to prevent aggressive growth by lenders. They created specialized regulatory frameworks that were empowering to institutions wishing to serve the low end of the market. It’s not that they went easy on MFIs; rather, they made sure that requirements to ensure safety and solvency were a good fit for institutions working with the tiny transactions of the poor.
Moreover, all the countries encouraged microfinance to develop as a commercial business, but not one where unbridled profit-seeking was the norm. They did this by placing the driving force into the hands of owners with social commitment alongside their requirements for financial returns.
Microfinance still holds enormous promise for increasing the access to financial services to the millions of people around the world who lack them. Good policies and supportive policymakers enable that promise to be realized.
Elisabeth Rhyne is managing director of the Center for Financial Inclusion at ACCION.
China Daily Asia Weekly on February 18, 2011, page 14
