The introduction of hard-nosed private sector investment and the age-old pressures of social norms mean microfinance institutions are at risk of losing their social conscience – and both clients and staff are paying the price. But microfinance could still be saved from moral bankruptcy.
With the close of the 17th annual microcredit summit in Mexico last month, a CEO working group has introduced microfinance certifications to protect the client; a move that couldn’t come at a more critical time for the microfinance sector. Research is increasing revealing that the reality for clients is far from ideal.
Let’s take a look at South Asia. Does microfinance work here? Well, if you are asking whether it covers its costs and/or is profitable, then the answer is increasingly moving towards “yes”. But if the question is whether microfinance achieves its declared social mission, then a growing body of evidence from fieldwork with clients living in poverty – in contrast to PR churned out by microfinance head offices, and parroted in the Western press – suggests the answer is “probably not”.
Abuse, threats, harassment
This conclusion is supported by our recent quantitative analyses and qualitative studies detailing the human realities behind the glowing repayment statistics. Reports gathered from women in villages across Bangladesh and India show that loan officers from microfinance institutions (MFIs) commonly exert pressure to repay through harassment, violent threats, coercion by neighbours, public humiliation, verbal abuse and insults as well as seizure of assets. Some villagers even reported individuals migrating to escape their debts.
Others aren’t lucky enough to have this escape route – many of the beneficiaries of microfinance are by definition poor women who are reliant on husbands and their community. Defaulting is simply not an option. One woman we interviewed in 2013 reported being forced to take out a loan by her abusive husband so he could spend it on drinking and betting. She showed the loan officer the bruises on her arms and legs and begged him to refuse her husband another loan. Instead, the loan officer suggested her husband physically reprimand her. If she leaves her husband she fears exclusion by her community, arrest and even starvation. If she stays, she faces more abuse and ever more pressure to pay back “her” debt.
It’s not just the recipients of microfinance who suffer from the relentless privileging of repayment over all other measures of success. The systems, structures and cultures of today’s MFIs – limited staff training, zero-delay and zero-default policies as well as demanding branch managers focused purely on financial performance – build chains of pressure, not only on clients but also on staff.
Many of the loan officers interviewed reported being ashamed of, or even depressed by, the ways in which they treat clients, explaining their behaviour in terms of fearing their branch managers. One female loan officer reported staying in the house of a late-paying client all night when she was pregnant in a bid to force the woman to hand over the money, afraid as she was of returning to the office empty-handed. During the night her waters broke and the client had to help her to hospital.
Why is the moral compass failing?
There is little doubt that the founders of these organisations were genuinely seeking to help poor and low-income people improve their economic and social prospects. Over time, however, organisational goals (growing bigger, having higher rates of repayment and higher levels of profitability, winning international awards) and closer links with mainstream finance have displaced the original mission.
In addition, the expansion of the microfinance industry since 2000 has been heavily dependent on the involvement of commercial banks, opening the industry to the corrupting influence of mainstream finance. Access to finance is crucial for the microfinance market to develop, while for mainstream banks a new, relatively untapped market experiencing 15 years of uninterrupted expansion is appealing. A recent CGAP study found that wholesale investors in microfinance funded $25 billion in 2011 and that overall microfinance funding continues to grow in absolute terms, despite consecutive crises and scandals.
And it’s a growth area, with some of the biggest potential markets showing small microfinance penetration rates in 2009 – 3% in India and just 2% in Brazil and Nigeria. In theory, the microfinance industry could expand until it reaches an estimated one billion un-banked poor households. If there was ever a time to fight the battle to save microfinance’s soul, it’s now.
Missing the mainstream pitfalls
One extreme response, as demonstrated when the Indian suicides came to light, would be to try to close formal microfinance down. But this would be unwise for two reasons. Firstly, research shows that well-designed microfinance (that meets client needs and pursues sustainability) can be useful for poor and low-income people. Secondly, moneylenders might recolonise the gap, rendering already vulnerable people more so.
A second option is more effective regulation of microfinance. This is desirable, but in most countries it is, at present, difficult to achieve. Central banks, when asked to improve regulation of MFIs, usually focus on administratively intensive reporting by MFIs (which raises their costs) or arbitrary interest rate caps, which may reduce MFI capacity to meet client needs.
Where central banks could be of greater use, then, is by pushing MFIs to be transparent. They could ensure they use simple loan terms written in local languages, read out at group meetings; they could highlight the message of “buyer beware”.
The third option is to challenge the founders and directors of leading MFIs. We can include here Shafiqul Haque Chowdhury, founder and president of ASA; Sir Fazle Abed of BRAC and his son Shameran Abed; Zakir Hossain, founder executive director of BURO Bangladesh; Professor Abu Nasser Muhammad Abduz Zaher, the chairman of Islami Bank Bangladesh among others.
They should be encouraged not to treat social performance as public relations and to reform the monitoring systems their organisations apply to branches and to staff. Systems for monitoring social performance have improved greatly over the last decade – but MFIs need leaders to genuinely demonstrate that social performance is as important as financial performance.
They should be visiting branches and clients unannounced, holding open meetings with clients and ex-clients and discussing the problems that credit officers face without their managers being present.
And so the leaders of microfinance in South Asia have a choice. Will they follow the lead of mainstream finance and drift into a world where profit alone is a measure of success? Or will they make a serious effort to chart a different path, where social performance is a genuine pursuit and not merely a public relations exercise?