Refocusing on Client Experiences and Their Struggles

Watching this year’s Global Microcredit Summit in Spain come to an end, I am glad to see that many in the industry are ready to face the challenges that have emerged in microfinance over the last years. A plenary session on Tuesday morning with Anton Simanowitz from IDS, Tilman Ehrbeck of CGAP, Rosheneh Zafar from Kashf Foundation and Fabiola Cespedes from FOROLACFR was titled “Challenges to the Field and Solutions: Over-Indebtedness, Client Drop-Outs, Unethical Collection Practices, Exorbitant Interest Rates, Mission Drift, Poor Governance Structures and More.”

In this session, Anton Simanowitz pointed out that we need to refocus attention on the vulnerability of borrowers – a strong point, that tells us that social impact requires as much or more of our attention as financial performance, and at the same time reminds us that measuring and managing impact is not just about upside but also about taking into account the possible negative effects of debt on borrowers’ lives. Along similar lines, Roshaneh Zafar promoted the client-centric over-indebtedness definition that Rich Rosenberg and I are suggesting in our recent CGAP Occasional Paper. She highlighted an immense need for research into client needs and the why and how of clients’ struggles with debt.

We are far from having all the answers but I would like to share with you today a first glimpse at what we are starting to know about clients’ experiences in repaying their loans. By means of interviews and an extensive survey among 531 microborrowers in urban Ghana, we have listened to the voices of clients and have just published our results in the publication series of the Center for Financial Inclusion at ACCION.

We find that 30% of borrowers are struggling with debt structurally. i.e, persistently over time, and to an unacceptable extent – to a level we define as over-indebted, even if many of them still repay. We find that the risk management mechanisms of microfinance institutions incite clients to go to great lengths to keep their repayments up; sometimes to greater lengths than is acceptable from a client protection perspective. We provide detailed data on the sacrifices that Ghanaian microborrowers make and on their subjective perception of these sacrifices. Most borrowers have to make some extra efforts at work or postpone other important expenses to be able to repay but they consider this totally acceptable. Sacrifices get harder to accept for example when borrowers have to go hungry, take children out of school, or sell household assets.

The implications of this research go beyond the scope of this post. But there is one important answer to the questions raised on the Summit that I want to highlight: By learning to better protect customers struggling with their debt, we will automatically improve the risk management and thus portfolio quality of MFIs. But focusing on portfolio quality alone is not enough to protect customers and the argument that good repayment rates prove the absence of over-indebtedness does not hold. For microlending to be responsible, we need to take the dangers of debt into account as much as its benefits. We need to learn to better tailor our products and our lending decisions to customers’ needs. This will result in better impact, better client satisfaction, and probably better economic sustainability at the same time.

For more details, refer to the research report by the Smart Campaign, the Independent Evaluation Unit of KfW Entwicklungsbank and the Centre for European Research in Microfinance (CERMi). I hope that much more research into the needs and experiences of microfinance clients will follow, and that in the long run this knowledge will contribute to strengthening the impact of microfinance and protecting its clients as much as possible.

A recent Financial Times article entitled, “Innovators don’t ignore customers” argued that the rapidly dropping share price of Netflix, a DVD rental and online film service could be explained by the fact that the company lost touch with what its customers wanted. Keeping a sharp eye on client demand is thus not only the responsible or developmental thing to do–it simply makes good business sense.