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Open Access 2013 | Open Access | Book

Microfinance 3.0

Reconciling Sustainability with Social Outreach and Responsible Delivery

Editor: Doris Köhn

Publisher: Springer Berlin Heidelberg

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

Table of Contents

About this book

This book focuses on the achievements, current trends and further potential of microfinance to scale-up and serve many more clients with financial services that enable them to improve their living conditions. The book asks what it takes to achieve sustainable impact: to know your clients and to understand their needs, to treat them in a fair and transparent way, and to safeguard the synthesis between the financial and social dimension of sustainable microfinance. The book also sheds light on the future funding landscape and what is necessary to bring more commercial funders on board while ensuring that these new funders will continue the commitment to responsible finance. While being forward looking, the book reflects the debate on core values of microfinance, triggered by recent criticisms of an approach that was hailed as a panacea in the beginning and which had proved over time as one of the most effective models of development finance. These criticisms emerged over signs of overheating in some markets, particularly the 2010 events in Andhra Pradesh, and turned into an assumption of a worldwide microfinance crisis, putting seriously at stake the good reputation microfinance had enjoyed so far.

Frontmatter

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Chapter 1. Microfinance in India: Lessons from the Andhra Crisis

Abstract

The Indian economy was able to witness high levels of economic growth following the economic reforms that were introduced in the 1990s. The GDP grew at the rate of 8.45 % per annum between the years 2004 till 2011. Despite this, India continued to see high degree of poverty and low human development.

Vijay Mahajan, T. Navin

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Chapter 2. Armageddon or Adolescence? Making Sense of Microfinance’s Recent Travails

Abstract

The pendulum of public perception is swinging against microfinance. That leaves the thoughtful observer, wary of extreme claims in any direction, with a puzzle. Is microfinance a bane or a boon or in between? This paper reviews the triumphs and troubles of the microfinance industry. It then sets forth a frame for assessing the impact of microfinance, one that helps put the recent challenges in perspective. And it offers some thoughts, in light of these difficulties, about key tasks going forward. It concludes that microcredit stimulates small-scale business activity, but that the best available evidence fails to show it reducing poverty. Its ability to empower people, especially women, is also ambiguous. Still, there is no question that all people need financial services. The main achievement of the microfinance movement has been the founding of businesses and businesslike non-profits that are delivering these services to millions of people on a sustainable basis.

The core problem facing the industry is that just as a stable banking system is more than a bunch of banks, a microfinance industry is more likely to be safe and resilient if it contains not just microfinance institutions, but credit bureaus, consumer protection laws, effective regulators, and more; and many of these other institutions are weak or absent in poor nations. It is hard (though not impossible) for donors and social investors to improve them. Yet the stronger they are, the higher is the safe speed limit for growth of microfinance institutions. The weaker they are, the more that microfinance institutions will need to internalize limits on their behavior and growth. Key steps may include giving those with an institutional commitment to the “social bottom line,” such as representatives of non-governmental organizations, public agencies or social investors, a formal role in microfinance institution governance; creating systems for defining and enforcing responsible lending behavior; and building collective arrangements such as an international credit bureau to monitor and modulate aggregate investment flows into microfinance markets.

David Roodman

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Chapter 3. Core Values of Microfinance Under Scrutiny: Back to Basics?

Abstract

During the past decade, what has for a long time been called microfinance (henceforth MF) has changed in a fundamental way. The reality of MF has changed, the terminology has changed, the discourse about microfinance has changed, the reputation of MF with the general public has changed, and last but certainly not least the ethical foundations of MF have also begun to change.

Reinhard H. Schmidt

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Chapter 4. Microcredit Interest Rates and Their Determinants: 2004–2011

Abstract

From the beginning of modern microcredit, its most controversial dimension has been the interest rates charged by microlenders—often referred to as microfinance institutions (MFIs). These rates are higher, often much higher, than normal bank rates, mainly because it inevitably costs more to lend and collect a given amount through thousands of tiny loans than to lend and collect the same amount in a few large loans.

Richard Rosenberg, Scott Gaul, William Ford, Olga Tomilova

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Chapter 5. Financial Services That Clients Need: The 3.0 Business Models, Reconciling Outreach with Sustainability

Abstract

Formal financial services hold the potential to improve the lives of the general population, including low-income families, as well as contribute to general economic progress. The development of the finance function in an economy is linked to overall economic growth. Countries with more private lending to private enterprises and liquid stock exchanges grow faster than countries with less developed banking systems. Well functioning financial systems ease financial constraints that hold back development of industries and productive sectors.

Robert Peck Christen

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Chapter 6. “Microfinance 3.0” – Perspectives for Sustainable Financial Service Delivery

Abstract

Over the last three decades, microfinance has matured into a sustainable and scalable development finance approach. By the end of the last decade, microfinance had developed towards full financial self-sufficiency, which was considered a breakthrough for mainly NGO-type institutions, serving millions of clients already at that time.

Matthias Adler, Sophie Waldschmidt

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Chapter 7. Microfinance Beyond the Standard? Evaluating Adequacy and Performance of Agricultural Microcredit

Abstract

crofinance was successful in increasing access to credit for micro, small and medium enterprises in developing countries, particularly in urban areas. The offer of installment loans as the standard credit product for new and very small customers has been indentified as one of the keys that enabled microfinance institutions to reach out to formerly unbanked entrepreneurs. However, these standard loans always were considered as inadequate for agricultural entrepreneurs with seasonal production cycles. For this reason, this paper investigates the effects of providing flexible agricultural microfinance loans (flex loans) to farmers as an alternative to standard installment loans. The study was carried out in cooperation with two banks of the AccessHolding Microfinance AG in Tanzania and Madagascar. A mixed-methods approach was applied relying on observations during field visits and in-depth portfolio analyses.

Our results reveal that the combination of standard and flex loans enables the investigated microfinance institution to address a wide range of agricultural producers. Based on our results it seems very unlikely that seasonal agricultural producers would have had credit access without flex loans. Standard loans are only adequate to address non-seasonal agricultural producers. We also find that nonseasonal agricultural producers repay their loans with delinquency rates similar or even better than those of non-farmers. For seasonal agricultural producers a redistribution of principal payments from periods with low agricultural returns (grace periods) to periods when agricultural returns are high is necessary to keep their delinquency rates at the level of non-farmers. Furthermore, we find that flex loans can be offered sustainably and that agricultural lending has become a strategic focus of the Access Bank in Madagascar.

Ron Weber

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Chapter 8. The Role of DFls in the Emerging 3.0 Responsible Funding Landscape – Responsible Corporate Governance and Beyond

Abstract

Development Finance Institutions (DFIs) have been a major funder in microfinance since the 1990s when they took over from donors and brought in a more commercial approach, coupled with much needed capacity building at all levels of the financial system. In their role as catalysts, DFIS have been successfully crowding in the private sector which has brought a fundamental change and diversity to the microfinance funding landscape. Most importantly, local deposits have emerged as the main source of funding which is encouraging as financial intermediation to a large extent replaces the channeling of cross-border funds.

In equity finance, private social investors, mostly in the form of Microfinance Investment Vehicles (MIVs), increasingly take the place of DFIs and their standard- setting role in the governance of MFIs. Governance is perceived as a key risk in microfinance, as shown in the Microfinance Banana Skins surveys, with weaknesses prevailing in main governance areas such as clear ownership structure, disclosure and transparency, and the role and responsibilities of the board. Equity investors are not fully capitalizing on the opportunity to strengthen MFI governance. They must more actively engage in and beyond the board room and ensure adequate qualifications, commitment and continuity of their board nominees.

Several trends visible today are likely to gain momentum and shape the microfinance funding landscape of tomorrow: (i) public funding and subsidies for microfinance will decline further, (ii) local funding and especially local deposits will become the dominant funding source, (iii) more investors will shift from debt towards equity finance (iv) the diversity of funders and their comparative advantages provide a fertile ground for complementarity, and finally (v) the DFIs will continue to play a role as catalysts and standard setters, albeit in a more indirect role from the back seat while MIVs and other intermediaries will be more in the driver seat.

Klaus Maurer

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Chapter 9. The Microfinance Approach: Does It Deliver on Its Promise?

Abstract

Microfinance, formerly celebrated as a most successful development tool, has been confronted with harsh criticism in recent years. It is claimed to have contributed to clients’ over-indebtedness while having failed to deliver on its promise of reducing poverty. By reviewing recent evidence, this paper aims for a more realistic assessment of the microfinance approach. It is argued that borrowing always goes along with risk. Accordingly, the danger of over-indebtedness can be ameliorated by responsible finance practices, but never eliminated. Nevertheless, microfinance deserves its place as a development tool. Even if positive impacts are much smaller than claimed in the past, the impact stream is able to flow for as long as the microfinance supplier survives. As there is proof that temporary support can build sustainable institutions, the cost-benefit ratio still seems to speak in favour of the microfinance approach.

Eva Terberger

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Backmatter

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Title: Microfinance 3.0
Editor: Doris Köhn
Publisher: Springer Berlin Heidelberg
Electronic ISBN: 978-3-642-41704-7
Print ISBN: 978-3-642-41703-0
DOI: https://doi.org/10.1007/978-3-642-41704-7