HBS Social Enterprise Conference: Panel 2

by Catherine Laine
March 8th, 2007

I have 1-2 more posts to come on the conference after this one.

11:40 am

The past, present, and future of microfinance

Moderator: Michael Chu, Senior Lecturer, HBS, founder Pegasus Capital, Foremer Prez & CEO of ACCION
Jeffrey Ashe: Manager of Community Finance, Oxfam America
Nancy Barry, Former Prez, Women’s World Banking
Carlos Castello, Executive VP ACCION

Nancy Barry stated that many conflate microcredit with microfinance. Microfinance is the provision of financial services to the poor, including but not limited to microcredit (small loans), microinsurance, microsavings, housing finance.

She also spoke of several ideas that were oversold as solutions from when they all started in the field to now.

Many believe that Grameen model of microcredit was the way to go. However, loans are not the only microfinance services that the poor are interested in. Many would prefer help saving rather than simply borrowing. Also not everyone takes the enterprise path the credit.
Many felt that microfinance NGOs should become regulated microfinance institutions (i.e. bank). I found a brief summary of an NGO’s experience with this transformation on the Microfinance Gateway: From NGO/ Project to Microfinance Institution: the Experience of ACLEDA Bank, Cambodia. Their conclusions (mirrored by Castello is his talk) were that the transformation is time consuming and difficult. There are a lot of hurdles to go through legal and otherwise. Shifting from an NGO culture/vision to a bank culture is no mean feat. It can be a little bloody, comments Castello. He also speaks of the problem of mission drift.
Many NGOs rely on equity and hard currency loans, but need to focus more on capitalization and local currency loans. This would keep the institution less vulnerable when currency markets go awry. Not being well versed in finance, I have no idea what this last one means.

She also mentions that some banks confuse consumer and transaction finance (using your credit card to buy a TV) with microcredit. Microcredit tends to refer to loans for enterprise and not just any small loan.

Jeff Ashe seconded the idea that the expansion of financial services for the poor were necessary as these other components would aid with their financial stability. All the panelists note in one way or the other that microfinance as currently envisioned has made a difference on a national scale only in a handful of countries, most notably India, Bangladesh and Bolivia. Over the 20 or so years that the idea has been around, penetration into rural areas far from urban centers has been slow.

Ashe spoke of the savings project model that Oxfam has pioneered, Saving for Change. The program takes the idea of the ROSCA (Revolving Credit and Savings Societies)/self-help savings groups in local communities and modernizes it. A really interesting thing about these savings groups is that they appear to grow far more quickly (i.e. serve more people in a shorter amount of time) than your typical microfinance project. For more info, read A Symposium on Savings-Led Microfinance and the Rural Poor

He notes that it doesn’t use hard currency. Let me take the time out for a quite definition. ‘The term “hard currency” is a carry-over from the days when sound currency was freely convertible into “hard” metal, ie gold. It is used today to describe a currency which is sufficiently sound so that it is generally accepted internationally at face value’ [ref]. I don’t know all the reasons why this is helpful, but somehow using local currency helps them survive hyperinflation (think the current Zimbabwean economy).

The video below show Jeff Ashe speaking about the Saving for Change program at Wellesley in August 2006 [51 minutes].

Carlos Castello spoke of how commercial banks are trying to get into the microfinance mix in Latin America. Competition is intensifying, resulting in decreased interest rates. Government regulation did not need to step in. He spoke of the different microfinance methologies at play in Latin America: village banking, traditional solidarity groups, pure individual banking. The important factor that increases the probability of success of all these ventures is good management.

He also mentioned the interest rate caps in Venezuela and how these will make microfinance for the poorest untenable. MFIs will have to go upmarket to be able to stay profitable.

In order to expand offerings and to reach more people, he mentioned that certain innovations would be necessary in the field. MFIs would need customized IT solutions and alternative delivery channels. These will likely allow loan officers to reach more people, resulting in decreased admin costs per loan.