How Responsible Are Microfinance Investors?
During the recent virtual conference on responsible finance several participants called on investors to reflect more on their growth expectations and insisted on proper assessments of governance, growth capacity of microfinance institutions, and debt saturation levels in the market. I agree. In my view, lending responsibly implies sticking to some of the basic principles of risk analysis and finance without letting competition for the best investment opportunities or fastest disbursements come in the way.
An overabundance of capital can trigger irresponsible actions or undue risk-taking on the part of investee companies. The experiences of countries like Morocco highlighted in a recent CGAP Focus Note tell the story. Investors were overeager to place funds in MFIs, which in turn grew too aggressively and were no longer able to manage their lending operations (i.e., they were less careful in the way that they placed loans). Disbursement pressure among investors comes from a large overhang of unplaced money sitting at microfinance investment funds. Beth Rhyne commented at the virtual conference that “this creates great pressure for investors to put money into MFIs that may not need it (or as much of it) or simply cannot manage it sustainably.” This does not mean that there is no need for investments in microfinance anymore. Rather, that investment funds are able to tap into new microfinance markets and investors are willing to take more risk to do so, as Blue Orchard commented in a recent post on this blog .
But the responsibility of investors goes beyond realistic growth expectations and accurate analysis. One other dimension that got attention in CGAP’s virtual conference, and rightly so, is the return expectations from investors.
Gil Lacson, of Womens World Banking, asked what a “reasonable” financial return would be for an investor, or an “acceptable” level of profit for the microfinance institution, given that the customers of microfinance are the poor and disadvantaged. This brings us to the realm of business ethics in microfinance: how much money should an investor and the MFI make?; what is obscene (or too much) and what is appropriate?; and who should pass that moral judgment?
Should others follow the example of the founder of India’s Equitas Microfinance institution that abides by a policy that voluntarily limits its annual Return on Equity? And if so, is Equitas’ voluntary limit of 25% a reasonable one?
As an example of how investors are addressing this question, KfW looks for a “risk constellation”, by examining the correlation of high average return on equity, high interest rates, high level (also in absolute terms) of nonperforming loans/losses, and a low level of loan loss reserves. KfW’s checklist for its investment officers suggests that a constellation with a return on equity greater than 25%, a portfolio at risk (30 days) greater than 10%, interest rates greater than 40%, and insignificant levels of loss reserves (occurring together) gives a first hint of irresponsible lending practices.
We are only at the beginning of this debate. The responsibilities and expectations of microfinance investors and managers are coming under increased scrutiny. What metrics to use to measure responsible investment and, more important, how to determine what standards are acceptable, will be key questions to address in the coming months. Watch this space.
Related Blogs
What did we Learn from the Moroccan Microcredit Crisis?
The Moroccan microcredit crisis of 2009 reveals several lessons for countries in similar situations.
Defaults Versus Over-indebtedness in Morocco
In Morocco, microcredit borrowers don't default only when they are unable to repay loans. Individual or collective defaults also result when credit providers lose legitimacy and borrowers are not willing to repay.
Comments
Dear Antonique,
Dear Antonique,
I would like your opinion on what I see are two risks that MF Investors might have difficulties with facing.
First is the fact that many MF Investors create and grow institutions, recruit people, attract a constant flow of donor funds and manage money as professional money managers. The institutional success thus explains a constant and increasing pressure to disburse funds, especially large sums. We can identify that challenge also in the large regional “development banks”.
Secondly, more and more people agree or discover that Microfinance really helps when poor people have increasingly more money that they manage with professionally managed (MF) institutions that can be held accountable for weaknesses, failures, losses and damages caused. If that is so then client deposits and the success of transforming these deposits into longer-term savings (contracts) become a success signal. However, depositors, especially poor so far unbanked people, are weary towards organisations that collect a lot of foreign socially oriented funds. MFIs that recently trasnformed into big local banks with large amounts of funds from development finance institutions and social investors, such as ACCLEDA (Cambodia), Equity Bank (Kenya, Uganda), Ecobank (West Africa) etceteras seem to defy such fears.
What is your opinion?
Kind regards, Peter
Microfinance emerged as an
Microfinance emerged as an alternative to mainstream finance with the focus on poverty reduction if not for poverty alleviation. Therefore, under microfinance concept, ‘business ethics’ demands first ‘ how much ‘ benefits realized by the poor client and then only ‘ how much ‘ for the investor. This philosophy makes certainly the microfinance investors more responsible for the said goal under MF concept
referring also to this
referring also to this article http://bit.ly/VFXz2,
in this matter it shouldn’t suck. Honestly.
CSR and social enterprise jive talk is nothing I give a heck. Local social programs of evil corps meanwhile deforesting hectars of land with forced migration of locals, and other numerous cases..
yet microfunding is an endeavour representing a different mentality.
of which ROI concerns of profit-driven investors or anyone are not a part. Someone must be at the wrong place.
I think it lies in the familiar tendency of the profit-driven to strip things of their essence and context.
Microfunding is not the main objective, nor is making money out of it. It is the means (to create lives for the impoverished via GIVING A CHANCE TO THEIR ENTREPRENEURIAL SPIRIT, REMEMBER?)
and Prof. Yunus didn’t imagine this to be boosted by bigwigs as a finance business by itself “against” the poor. it IS NOT a “business opportunity”, and it is something FOR the poor.
(or would you then think what the hell should I be in it for? well, then, don’t, and push your other, conventional business opportunities. there are plenty of donation sites receiving funds from donors who do not need to ask such questions to themselves, as they have a part still having certain social feelings.)
Leave something for once with its nobility. You might need that someday yourself, too.
Another way of occurence of this essence-stripping is giving way too too much emphasis on lenders. while it had to be on receivers and what they are doing with it.
Enter implementation.
It is the core. YOU as LENDER are UNIMPORTANT, whoever and wherever you are. it is way too bubbled up, echo-chambered, the increase, increase, increase of microfunding initiatives.
what are most of them doing? anyone knows?
It is the RECEIVER who MATTERS, and HOW -yes, once again- HOW he uses the money.
For that reason:
your LENDING HEAPS as LENDER do NOT MATTER.
you need to lend in DISCIPLINED way, that is, you need to hard follow and make sure
FOR WHAT you lend and TO WHOM. you need to make the LIVELIHOOD SUCCEED by SECURING PRIOR TANGIBLE GROUND WORK on this information.
so that anyone with other irrelevant intentions SEES that this is about creating real DIFFERENCE, having nothing to do with spawn and nurture yet another “CORRUPT BUSINESS/FINANCIAL SECTOR”.
you try to solve a social problem with so-called “a different kind of capitalism”, and even the symbolic “repayment” attribute is enough to return you back to conventional capitalist profit-drivenness, magnifying it to the level of a ROI talk?
seems some need a long way to get aware of what mentality is and has been detrimental to people and planet.
evildoing can only be banned from this terrain with determined joint right practices to publicly disable them.
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