Laura HEMRIKA opened the session by promptly clarifying its context: both a review of the past of microfinance and a look into the future. She also introduced the speakers, and emphasised their different backgrounds and experiences in microfinance.
Sam MENDELSON, Financial Inclusion Specialist at e-MFP and lead author of the Financial Inclusion Compass, launched the publication’s 2019 edition and spoke about its main highlights. Mendelson elaborated that the results of the Compass were based on 165 complete responses from investors, practitioners, consultants, researchers, regulators and raters, which increased from 77 responses in 2018.
Regarding the top trends in financial inclusion, Mendelson brought attention to: 1) Client protection; 2) Regulatory environment; 3) Governance; 4) Outreach to low-income segments, 5) Technology and new delivery channels. Among the top areas of focus, he noted agri-finance, SME finance, climate change adaptation and mitigation.
Mendelson detailed the trends per region and type of respondent: Client Protection was ranked anomalously low by respondents in Latin America, while Governance was ranked lowest in South and Central Asia. Maintaining/Deepening Outreach of the Very Poor had the lowest rate in the MENA, where Expanding to New Client Segments had an interestingly high rate. He also noted that, among the new areas of focus, Agri-Finance was rated high in all regions, but low among researchers. Climate Change Adaptation/Mitigation had a very high rating among global respondents, especially funders and infrastructure organisations, but a low rating among respondents in Asia and FSPs.
Mendelson concluded that the sector is currently in an unprecedented flux, consisting of new providers, new frameworks and innovations. Nonetheless, he also emphasised the remaining external factors (politics, financing, climate change and regulation) and internal challenges (product development, mission drift, client education, over-indebtedness, digital transformation and sustainability of business models) mentioned by respondents.
Renée CHAO-BEROFF, from PAMIGA, spoke about the Microfinance Barometer, published by Convergences every year in the last decade. Chao-Beroff explained that the Barometer uses data from the Microfinance Information Exchange (MIX) to monitor trends, helping explain past developments and deriving lessons to improve future practice.
Concerning long-term developments, Chao-Beroff highlighted the slowdown of the sector’s outreach in the last ten years when compared to the previous decade, halved from 20% to 10%. She pointed out that, while the number of clients is slowing down, the loan portfolio is still growing fast, at 11.5% in the last 5 years. This is possibly due to the growth of clients’ enterprises and loan uptake by existing clients. She indicated that portfolio at risk is also growing, at 8% to 10% in some regions, up from 3% to 5% a decade ago.
Chao-Beroff also shared some of the sector’s challenges. In addition to differences on demonstrated impact, she acknowledged that many of the crises and scandals we have seen in microfinance were related to its aggressive growth, which left markets saturated and clients over-indebted. Chao-Beroff also called attention to the new competitors, namely technology providers that offer simple and confidential services to clients. The consolidation of the sector, resulting from tighter regulation on capital adequacy and prudential ratios, was also mentioned by Chao-Beroff as a threat to smaller MFIs that cannot meet all requirements.
Chao-Beroff advocated that the sector needs an ecosystem approach rather than a microfinance-centric approach. She elaborated that poverty is a complex situation, thus microfinance needs to engage with other sectors such as agriculture, renewable energy and access to water so as to bring services together in overcoming poverty. Chao-Beroff also mentioned that we need to go back to the basics and earn the confidence of clients back, and that digital technologies can be an important ally in bringing microfinance closer to clients.
Rupert SCOFIELD, Co-founder, President and CEO of FINCA International, shared his scepticism about over-reliance on Randomised Control Trials (RCTs) to fully measure the impact of microfinance, advocating for the continued inclusion of traditional methodologies of talking to clients directly. Scofield elaborated that poverty is caused by a myriad of factors that cannot be purely explained by statistics.
He also shared his first experiences with microfinance in the early 70s, working as an extension officer for an agricultural cooperative in Guatemala. He detailed that the political and natural challenges of this cooperative were enormous, having affected generations of farmers. Once these farmers were exposed to a USD 50 loan, used to purchase fertilizers and other agricultural inputs, the transformational impact was evident and self-fulling. He emphasised that most of the farmers paid back the loan, understanding that early payment meant a lower interest.
Scofield explained that microfinance inspired other credit providers, resulting in a flooded sector with thin margins and over-indebted clients. He explained that the impact of capital alone is now muted, which is why his organisation launched an impact investing initiative, called FINCA Ventures, to start working in other sectors such as healthcare, sanitation, education, agriculture and renewable energy. He highlighted that there are several new social enterprises looking for disruptive solutions to end poverty, and which have been FINCA’s allies in the past years in projects such as using meteorological data in Sub-Saharan Africa to help farmers to plan production, teaching farmers how to grow high-value and drought-resistant legumes, among others.
The first discussion point addressed the role of RCTs in transforming our knowledge about clients and in developing products for them. Mendelson reminded the audience that, 20 years ago, microfinance impact measurement was based on stories and soft data. He added that RCTs belong to a wider trend towards rigor in reporting impact, and are doing a valuable service to the industry. Emphasis was placed on the transition to speaking about microfinance and financial inclusion as a means to an end, not the silver bullet.
Another point highlighted the importance of partnerships in moving microfinance forward. Chao-Beroff noted that creating partnerships is not simple, and illustrated that digital technologies require scale and HR capacity. She noted that mobile banking in Africa has either led organisations to collaborate with large banks, or had TELCOs create their own banks. She emphasised that MFIs should not be pushed out, since they have a lot to offer in the understanding of clients. Scofield complemented that partnerships with TELCOs are an early phenomenon, and need to work equally for all parties involved. Mendelson added that TELCOs have the potential to scale up if social media giants are entering this sector.
Scofield was also asked about his work in war zones and politically-unstable areas. He pointed out that poverty and inequality give rise to conflict, and the work of FINCA in post-09/11 Afghanistan, where access to working capital was essential for people to survive and make a livelihood. Chao-Beroff added that, even in heavily-affected countries like Mali and Burkina Faso, community-owned and community-based MFIs are very resilient. She mentioned that people still repay their loans and save. Mendelson further noted that this also applies to states which are more susceptible to climate change, an issue which will define the sector from now on.
Hemrika then questioned the panellists on when the sector will finally be able to crack the code of agriculture microfinance. Scofield explained that we have experienced many breakthroughs in technology and agricultural sciences, but need to take risks in countries that require interventions. Chao-Beroff added that digital technologies allow us to create ecosystem platforms where all actors can share data, which can address the perception of risk in agriculture finance.
The panellists also commented on the main blind spots of microfinance. Scofield mentioned the autocratic risk in emerging markets, and suggested the creation of specific standards at the UN level. He identified another blind spot in nano-loans with high interests, which could lead to a second wave of over-indebtedness. Chao-Beroff highlighted that lessons from financial inclusion must be integrated into impact investment, enabling investors to avoid blind spots. According to Mendelson, overdrafts remain a major blind spot in microfinance, revealing a lack of flexibility in financial products. He also revealed that he sees inclusive insurance as a major future opportunity.