SPECIAL REPORT: “Trend Toward Rigor,” Microfinance Barometer, Financial Inclusion Compass Offer Views of the Past, Future at European Microfinance Week

At this week’s session titled “Looking Back / Looking Ahead” at European Microfinance Week, the European Microfinance Platform (e-MFP) officially launched the second Financial Inclusion Compass, a survey indicating the top trends in financial inclusion are: (1) digital transformation (institutional-side); (2) client protection; (3) digital innovation (client-side); (4) regulatory environments; and (5) social performance / impact measurement. Meanwhile, the document identifies the following as top “areas of focus:” (1) agri-finance; (2) climate change; (3) finance for small and medium-sized enterprises (SMEs); (4) finance for displaced populations; and (5) finance for youth.

Sam Mendelson of e-MFP notes that financial services providers (FSPs) responding to the Compass are more interested in human resources and industry reputation than are funders, consultants and other participants. There are also some mixed signals, indicating we are in a period of flux, with technology changing rapidly, reputational risks rising and reporting frameworks evolving. The respondents felt there has been improvement in terms of client protection by long-term microfinance providers, but concerns remain about a lack of client protection by some digital providers. There was also ambiguity about the purpose of the industry: Is it to boost the number of people with financial accounts, to make money, to work toward the UN Sustainable Development Goals?

Renée Chao-Beroff of the Participatory Microfinance Group for Africa (PAMIGA) spoke as a representative of Convergences, which has published the Microfinance Barometer each year for the past ten years. Using data from the Microfinance Information Exchange (MIX), the Barometer shows that the annual growth in total number of clients slowed to 10 percent during the past decade, half the rate during the previous decade. In just the last five years, the growth rate fell to an average of about 7 percent, while total loan portfolio grew at a rate of 11.5 percent. “Is this because enterprises are growing?”, Ms Chao-Beroff asks. Or are enterprises simply becoming more highly leveraged? One clue is that the total portfolio-at-risk ratio, which had been at 4 percent, a rate generally considered safe, has doubled. Regarding future editions of the Barometer, Ms Chao-Beroff noted that changes at MIX mean Convergences will need to find a new data partner.

On the topic of credit risk, Ms Chao-Beroff cited over-indebtedness as one of the top challenges in the sector, particularly in saturated markets. She also mentioned competition from the simple, discrete services offered by financial technology (fintech) firms. As threats, she noted the potential for overly tight regulation as well as consolidation in the industry. Ms Chao-Beroff also argued that FSPs need to boost client confidence by listening to clients to find ways to improve products and delivery channels. Regarding digital finance, she promoted the increasingly popular idea of “high-tech/high-touch” services that combine technological products with significant one-on-one support from staff to educate the client about the product and its use, as well as encouraging both uptake and long-term usage.

Rupert Scofield of FINCA International argued that the rise of microfinance has diluted its effects over recent decades: “Back then, capital was so scarce for poor people, especially women, that loans really unleashed their productive power.” However, now that many more people have access to finance, Mr Scofield stated, the marginal return on additional lending is less. Much worse, he said, is that, “Microfinance has been an enormous success, so much so that we have a new problem, over-indebtedness.”

Given that “loans alone do not have the power to get people out of poverty,” Mr Scofield cited the FINCA Plus product line, which addresses non-financial needs, such as health care, sanitation and energy. FINCA also has invested in eight social enterprises, including one that is using 7-day rain forecasts to help African farmers determine when is best to plant their seed.

Regarding concerns that randomized controlled trials (RCT) are showing that microfinance is not helping people escape poverty, Mr Scofield argued that, “The complexity of what’s going on with a low-income family in Bangladesh or Afghanistan [involves] so many external factors” that it is extremely difficult for an RCT to capture this. From the audience, Mayada El-Zoghbi of Accion’s Center for Financial Inclusion said that RCTs are helping to manage expectations around microfinance. She says they are showing that payments services are helpful for poor people in general and that microcredit is helpful for microenterprises. Mr Mendelson said, “RCTs are part of a broader trend toward rigor that is the best thing happening in microfinance over the past 10 years.”

Ms Chao-Beroff also cited a trend she has observed regarding FSPs partnering with mobile network operators (MNO). A few years ago, MNOs were often interested in partnering with microfinance institutions to reach clients in remote areas. Now she says, they have become more interested in partnering with large banks. However, she argues that, “This is really what the market needs players like us for; we can bring knowledge of clients” to organizations that do not focus on serving poor people. As an example, she cited the experience of PAMIGA’s PAMIGA Finance investing in India-based Orb Energy, a provider of solar panels to rural SMEs. Normally a smaller equity investor like PAMIGA would be denied preferred shares, but Orb was interested in PAMIGA’s expertise in the target client group. Thus, despite a peer investing eight times more money, PAMIGA Finance’s investment of USD 500,000 was met with an offer of preferred shares.

Regarding predictions for the future, Ms Chao-Beroff said, “I believe digital can be an enabler for agriculture and finance organizations to come together” to increase productivity. To support this, she advocates for all value chain players to use the same platform for sharing financial and non-financial data. Among other benefits, this can help lenders get more confident in lending to farmers by allowing buyers to give lenders documentation of farmers’ production histories.

Mr Scofield predicted that traditional microfinance institutions will get blamed for the over-indebtedness that some fintech providers are enabling. He proposes developing a strategy to minimize this risk.

Mr Mendelson predicted that, “In one way or another, climate change is going to dominate the sector in the 21st century.” Along those lines, he says, “It feels that we are on the cusp of a lot of things coming together for inclusive insurance to make a big impact.”

Ms Chao-Beroff also sees an opportunity for microfinance stakeholders to help the growing impact investing wave to avoid some of the mistakes that were made in microfinance. “We should not let impact investing follow the same path. We should bring some of the lessons learned to impact investing. What can we do to help the very big investors that are interested in impact investing to use that money well?”

This feature is part of a sponsored series on European Microfinance Week, which took place from November 20 through November 22, 2019. The event is held each year by e-MFP, and MicroCapital has been engaged to promote and document the event on-site each year since 2012.

Sources and Additional Resources

European Microfinance Week 2019
https://registration.european-microfinance-week.eu/emw2019

MicroCapital coverage of this year’s European Microfinance Week and since 2012
https://www.microcapital.org/category/european-microfinance-week/

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