Joana AFONSO introduced the session and the two panellists. She explained that this session was the first of its type organised by the e-MFP, to translate results from academic research on impact of microfinance to practitioners. The recent Financial Inclusion Compass report highlighted the need for more research on microfinance and its impact.
Timothy N OGDEN, the Managing Director from Financial Access Initiative, summarised the main results of a wide range of research papers on microfinance from the last 20 years, with a focus on what has been learned. Academic research, he said, has disproven many of the initial assumptions regarding microfinance, especially in terms of microfinance clients.
Ogden explained that most microfinance clients are not entrepreneurs but rather people who cannot find other employment. He described four main types of microenterprise borrowers: 1) Those borrowing out of necessity, only starting a business because they have no other economic opportunities; 2) Gung Ho borrowers, who have the knowledge, skills and interest to run and grow a business; 3) Exploratory borrowers, who still need to decide if they’re entrepreneurs or not; and 4) Labour Market Failure borrowers, who have the skills to run a business but would still rather be employees.
Often, microfinance focuses on women as borrowers. However, Ogden described how research does not convincingly support the premise that women spend more money on their family than men, or have higher payback rates. At the same time, research shows that men have a higher return on capital. Ogden shared how all these facts can be explained by culture rather than by anything intrinsic to men or women.
Ogden reviewed a wide range of studies that find that the overall impact from microfinance is limited. One of the reasons he identified was that microfinance institutions focus on products instead of their clients’ needs. Research has shown that managing liquidity is the main financial need of microfinance clients, according to Ogden, followed by managing investment or risk. Products can be used for multiple client needs. If a client’s need to manage liquidity is not met, they will use other microfinance products to meet that need, even if such a product is not intended to manage liquidity. This limits the overall impact. In addition, Ogden explained how the general equilibrium effects also limit the detectable impact of microfinance, by indirectly increasing the benefits of the control group as well.
Next, Ogden presented several innovations in products. A recent study in Bangladesh showed the positive impact of guaranteeing a loan in the case of a flood. As a result, borrowers were willing to invest more in their fields and technology. He also shared positive results from suppliers providing loans to small retailers to buy their inventory, instead of using microfinance loans. Moreover, an increase in flexibility, such as the opportunity to skip payments, has been shown to increase repayment rates and improve the profitability of the MFI.
Finally, Ogden quickly reviewed studies of microsavings and microinsurance. He noted that while there are many studies showing it is possible to boost savings among poor clients, these results hide the fact that very little is being saved and use of accounts is rarely sustained without incentives. That means, he argued, that the business model for microsavings is still very much in question. Even more
questions about microinsurance remain, according to Ogden. While there have been studies showing substantial positive benefits of insurance for low-income households, there is still little evidence that they can be convinced to buy insurance at an economically feasible price.
Marc LABIE from CERMi - Université de Mons presented an overview on using governance to avoid crises in microfinance organisations. He explained that microcredit crises are due to a combination of factors, which interact. Microcredit markets operate in uncertain and complicated contexts. Therefore, he stressed the importance of a systemic analysis to provide early warnings and to identify key features of past crises. He argued that this systemic vision should be linked to governance to prevent or overcome a potential crisis.
As shown in a research led in the context of a EIBURS project, Labie explained that Microcredit crises can occur at three different levels: at the level of country/region, MFI or client. Labie also explained that these interact and researched how these are linked. He shared ‘sparking items’ at all three levels that could lead to a crisis: 1) At the country/region level, sparking items include an over-concentration of supply, bad public policies, inadequate regulation and supervision, as well as political and external pressures; 2) At the MFI level, excessive growth of the MFI is the main cause of potential crises, especially if environment and inadequate competition leads to wrong behaviour by the MFI, such as a lack of professionalism and bad governance; 3) At the client level, exceeding a client’s absorbing capacity could spark a crisis, or if the client cannot repay loans.
Labie next presented a microcredit crises prevention dashboard. Practitioners can use this to identify red flags in their country, their own organisation and at their clients’ level, based on indicators for demand, supply and the environment they operate in. Using this dashboard can also help practitioners to prevent crises in the future.
As crises are often the result of a combination of factors, Labie stressed the importance of a systemic vision of governance, to help protect against crises. He divided governance mechanisms into two ranges: 1) Specific and non-specific; 2) Intentional and spontaneous. This allowed him to divide mechanisms into four categories: 1) Specific and intentional, such as a board of directors, which is traditionally seen as governance; 2) Non-specific and intentional, where mechanisms such as legal environment and auditors that were not created specifically for governance, have such an effect; 3) Non-specific and spontaneous, where the market an MFI operates in helps govern the MFI, for example with labour or political markets or the media environment; and 4) Spontaneous and specific mechanisms, such as informal networks, reputation and corporate culture.
This latter group is crucial in governance but often underestimated in microfinance. Labie warned that, as a result, when these mechanisms are jeopardised, their true impact may be underestimated as well. He urged MFIs to assess their governance mechanisms when the MFI is performing well, instead of waiting for a crisis. He also stressed that the relevant governance mechanisms to avoid crises may change over time, depending on an MFI’s environment and how the MFI develops.
The moderator opened the floor for questions after both presentations. One audience member asked Ogden what are the implications for microfinance providers when research does not support the strength of female borrowers. He argued that the reason to proactively extend services to women is not because of how they will use the loans, but because they deserve equal access to finance. He urged MFIs to include women for that reason, which will lead to more equality between men and women in the long term.
Another audience member asked the panel how best to get these lessons to the right practitioners. He stressed that at this session only a few practitioners were present. Labie suggested introducing microfinance in university programmes. This is the practice at his own university, where people graduating in microfinance courses are now working at banks. He also stressed that although such efforts need to be made, the microfinance sector is not as disconnected as people may think. At conferences such as the European Microfinance Week, practitioners and researchers are coming together to improve this connection and learn from each other.