A Challenge to Flat-Earth Thinking in Microfinance

> Posted by Center Staff

“The old ideas have become akin to the sixteenth century assertion that the world was flat; yet it did gradually became established that the earth was round after all. Microfinance needs to be rounded too.” – Sanjay Sinha

Sanjay Sinha, founder of Micro-Credit Ratings International Limited (M-CRIL), recently released a candid wake-up call for the industry to move beyond the now outdated microfinance principles initially propagated in the 1990s and employ a more diverse and client-friendly approach. In his note, A Challenge to Flat-Earth Thinking in Microfinance, Sinha cites four tenets he finds especially problematic, contextualizing their adoption and negative implications, and positing how the industry can better move forward in meeting the needs of the poor. Sinha’s note follows:

The intensive promotion of microfinance worldwide as a palliative if not a panacea for poverty started in the mid‐1990s with initiatives like the establishment of CGAP, the Microcredit Summit Campaign, and various national-level apex agencies often sponsored by multilateral or bilateral development agencies like the World Bank and the regional development banks. Led by CGAP, as the main international technical agency for the support of microfinance, a strong message on the principles of good microfinance practice was propagated worldwide. These principles included (but were not limited to) the following:

  • MFIs must adopt the principle of “zero tolerance of delinquency” in order to minimize default.
  • There must be a continuous effort to limit operating costs in order to deliver microfinance at the lowest possible price to low income clients.
  • Microfinance services must be offered by specialist MFIs in order to ensure that there are no conflicts of interest that confuse MFI managements, staff or borrowers.
  • MFIs should focus on growth in order to maximize outreach to the vast numbers of financially excluded families across the globe.

This note argues that while these principles may have been appropriate at the time when they were formulated (in the mid‐1990s) their time passed a few years ago and the entrenchment of these principles as microfinance orthodoxy is now damaging the development objective – financial inclusion to serve the needs of poor and low income people, and facilitating income enhancement – for which the microfinance movement was propagated. Therefore, the time has come for a concerted effort to swing the pendulum back to equilibrium.

While considerable efforts have been made in this direction via the focus of the past few years on social performance this effort needs to be strengthened, and certainly needs to percolate down to some of the less celebrated organizations in many places in Asia; organizations that are not privy to the international conference circuit. Even by those MFIs that do participate in international conferences, the message of social performance is seen mainly as an overlay to the practice of microfinance but has not been adequately integrated in to microfinance practice. In any case the effort is still too limited to overthrow entrenched attitudes. MFIs need to be reminded that successful development activities need a rounded approach.

1. The tyranny of “zero delinquency”

The principle of zero tolerance of delinquency is one that was most successfully emphasized at the turn of this century. Within a few years, it became so entrenched in the minds of all with an interest in microfinance that, despite all the efforts of recent years to draw attention to the potentially damaging human consequences of the blind application of this principle, it continues to hold sway in many places. Operations Managers of many MFIs – from Pakistan to the Philippines – continue to report zero delinquency with satisfied smiles on their faces; when their attention is drawn to the possibility of clients being in genuine difficulty, their expression changes to bewilderment. Well may they wonder what these international experts want when they (the MFIs) have so faithfully applied zero delinquency as a cardinal principle of microfinance.

Yet, it is apparent how the Operations Managers’ principle can become tyranny for microfinance clients in genuine difficulty; many MFIs use loan officer delinquency rates as part of the formula for calculating staff incentives. While some delinquency crises and repayment revolts (Lahore, Pakistan 2008 & southern Karnataka, India 2009) were a direct consequence of the resulting tyranny, the political interventions of Andhra Pradesh and Nicaragua were also provoked by the perception, if not always attributable evidence, of such tyranny. The Social Performance standards developed by the SPTF and the Smart Campaign on Client Protection include principles that have indeed been devised to address precisely this issue. However, the message of humane interaction with clients has to be integrated widely in microfinance practice, so as to ensure that aggressive behavior towards, if not downright coercion of clients by loan officers does not continue. Too many MFIs – even in countries such as India directly affected by crisis – see the application of social performance standards more as routine obeisance necessary to gain access to funds rather than as integral principles of microfinance practice.

For the rest of Sinha’s note, click here.

*This post was modified from its original version on May 21, 2013. The original version incorrectly indicated in the introductory paragraph that this note is a wake-up call specifically for India’s microfinance industry.

Image credit: Adeel Halim/Bloomberg

Have you read?

Making the Case for the Universal Standards of Social Performance Management

How Client Protection Certifications and Ratings Work Together

Report Review: M-CRIL Assesses India’s Hard Year in Microfinance