Political Risk Is Keeping Microfinance CEOs Up at Night

There is no panacea for political risk, so listening and understanding nuance is key

I recently attended the annual meeting of the Microfinance Network (MFN), which was hosted by the Alexandria Business Association in Alexandria, Egypt. MFN is a global network of some of the largest and leading microfinance institutions, and its annual meeting has long been known for candid and in-depth sharing of experience among the leaders of these institutions, as this post demonstrates.

Ask a microfinance CEO what’s making his or her life hard these days, and the answer is likely to be politics.

That’s hardly surprising when the speaker is Motaz Tabaa, CEO of the Alexandria Business Association (ABA), one of the largest microfinance institutions (MFIs) in Egypt. On January 28, 2011, when the occupation of Tahrir Square in Cairo held the world’s attention and led to the resignation of then-President Mubarak, it became impossible for ABA to operate. But before the week was over, staff were back on the streets, collecting and disbursing loans, and sleeping at the office to guard the cash that couldn’t be deposited in banks, which remained still closed.

Nearly every MFI in the group had a similar encounter with crisis – consider the political violence (and/or natural disaster) that has touched Uganda, Nigeria, Armenia, Mexico, Haiti, and Bangladesh in recent years. Today, Al Majmoua in Lebanon and Tamweelcom in Jordan are overwhelmed with the attempt to serve the Syrian refugees that have crossed their borders. The CEOs who have experienced such upheaval agreed about the role of MFIs in responding quickly to help clients obtain cash, keep their businesses open, and then rebuild. Given how prevalent political and natural crises are, organizations have developed protocols for responding quickly. Even while we met, Enrique Majos of Compartamos received news of a tornado in Mexico, and sent the Compartamos natural disaster team into action.

There was another kind of political issue worrying many of the MFN member CEOs – political actions directed specifically at the microfinance sector. As they see it, politicians seeking votes from the poor too often see advantages in demonstrating their engagement with or control over microfinance. They over-regulate, compete unfairly through state-subsidized lending, give preference to more mainstream banks, or all of the above.

In Egypt, for example, a new law is being introduced to regulate MFIs. Although the sector has advocated for a regulatory framework for microfinance for a long time, this new law does not appear to recognize microfinance as part of financial inclusion for low income families. It fails to provide a path for MFIs to qualify to take savings, while it pigeonholes microfinance into a restrictive lending range. For example, DBACD, which works in the Nile Delta, has recently introduced a home improvement portfolio. But the new law defines housing as outside the bounds of microfinance, so DBACD will have to drop the product. New regulation is also coming in Jordan, and there are signals that it, too, will be overly restrictive. Similar concerns were shared by representatives from Lebanon and Armenia.

Responses to political risk depend on a reading of the situation and the players involved. In one country it may be important to engage directly (though not publicly) with an antagonistic political figure, but in another case that would backfire. For Sogesol in Haiti, it has been important to cultivate a public image that emphasizes its leadership as a provider of important services for the poor. However, the group warned against counting too much on support from the public. Clients, even relatively satisfied ones, are unlikely to organize energetically to protect an institution.

For Compartamos, the non-political, technocratic approach of Mexican and Peruvian banking regulators has been a bulwark for stable and predictable policy in the face of popularity-seeking actions by various politicians, and so Compartamos seeks to maintain frequent contact and exchanges of views and information with regulators. By contrast, for BRAC in Bangladesh, where the political scene is dominated by two warring political parties, regulators are under a large degree of political control. BRAC’s response, which has served it well for many years, is to stay resolutely unaligned and maintain a low-key public posture.

The members agreed that while global best practices and international experts can be helpful in providing a counterweight to populist proposals, the international card must be played with great discretion so as not to provoke a hardening of the stance of the very people the MFI would most like to influence.

Finally, members agreed that maintaining institutional health is an essential political risk mitigation strategy, including adequate capital cushions, to enable an institution to weather the turns of political fortune sure to come its way.

Have you read?

The Risk Management Initiative in Microfinance (RIM): Mapping the Road to Risk Management

How Can MFI Boards Be Explicit about Risk Strategy and Appetite?

BRAC Microfinance Director Shameran Abed on Client Protection, Balancing Credit and Savings, and the Evolving Financial Inclusion Landscape

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