Keeping it Organic: Lessons for Financial Inclusion from the Microcredit Boom

> Posted by Damian von Stauffenberg, Founder, MicroRate
This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For further questions about this series, write to Sonja E. Kelly, Fellow, Center for Financial Inclusion at Accion.
Why is it that microfinance has grown at such an explosive pace while other development initiatives, which originally looked just as promising, have languished? What’s different about microfinance?
In development, we too often see efforts that look good, but that lack life. Let me offer an analogy in which a tree symbolizes a development project. In this example, a development agency could decide to simply build the tree. To do so, it finds some leaves and pastes them on branches. It then pastes these branches onto a stump, and finally it drills holes for some roots into the stump. If it is skillfully done an impressive tree will result that can be inaugurated, photographed and featured in the agency’s newsletter.
The problem is of course that this tree, though beautiful to behold, is not alive. We have created something that will not grow. To the contrary, eventually it will disappear. All of us have seen such “trees” in the world of development.
I think that microcredit, by contrast, is alive. It was able to mobilize and set free powerful forces that have since driven its explosive growth. Most important among these forces is the capacity of the poor themselves to generate wealth if they have access to capital. For many (but by no means all), getting a loan means being able to increase their income significantly. This force drives demand.
Supply, on the other hand, is driven by a second force: if it is possible to make microcredit available profitably, then funding is no longer the constraint it is for nearly all other development initiatives. To the contrary, entrepreneurs will be eager to create the institutions that can satisfy the demand for microcredit.
When microcredit first appeared, nobody—not even Mohammad Yunus—saw those forces. We stumbled upon them more or less by chance. To their utter surprise, early promoters of microcredit—ACCION among them—discovered that this little tree they had planted was alive and able to grow by itself. With the benefit of hindsight, we can now see the forces that gave microfinance its life.
At this point I am going to say something that is downright uncouth post-Andhra Pradesh crisis: we don’t give microcredit enough credit. First, we know what makes it grow, and second we know that good microcredit allows a borrower to create wealth (as opposed to bad microcredit that increases liquidity but ultimately makes a borrower poorer).
The danger of setting a goal of reaching around one billion people with a full suite of financial services in only eight years is that it is difficult to identify the latent forces we need to reach that goal. In the financial inclusion industry we tend to look at the past to see what worked in order to identify where we need to go in the future.
Instead, we need to think about what we haven’t tried before.
I’m not saying I know exactly what these forces are—because if we knew what they are then we would already be engaging with them in order to reach organic, exponential growth.
I will try to offer some examples, however, to better illustrate my point.
Financial inclusion efforts currently suffer from high transaction costs. We tend to associate financial inclusion with credit, savings, insurance, and transfers, but not all services are created equal. The Financial Access Initiative just released data that revealed microsavings costs about three times the value of the capital contained therein. The data and information technology sector is growing quickly, though, and we could look into the strengths of this sector in order to figure out how we could use it to decrease these costs. It is possible that technology could increase our return on investment and help to dramatically increase financial inclusion rates.
Here is another example: we have a problem with over-indebtedness in the industry. But transparency, even in an informal way, could go a long way to decreasing this problem. It would be relatively cheap to introduce but would have a great effect, allowing us to decrease the cost of lending and reach a greater number of borrowers.
Neither of these may be our “magic ingredient” as water and sunlight are to plants. But as we consider the audacious goal of reaching full financial inclusion, we should also think big. We need to figure out what the latent forces we are not yet capturing are in order to grow financial inclusion organically without us having to paste it together ourselves.
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Damian von Stauffenberg founded MicroRate, the first rating agency to specialize in microfinance, in 1997 and served as its CEO until 2009. MicroRate was designed to provide transparency and in that way attract commercial funding sources to microfinance. Prior to starting MicroRate, Damian worked with the World Bank and its private sector affiliate, the International Finance Corporation, for 25 years. Damian is widely referred to as a pioneer of the microfinance industry and continues to develop new ideas for promoting its growth.
Have you read?
A New Business Model for Savings Mobilization?
You Are Here: Finding our Place on the Roadmap to Inclusion
Accessing the Future: Beyond the Traditional Microfinance Space