How microfinance can deliver results after all! Sanjay Sinha

1. Microfinance – delivering results How microfinance can deliver results after all! Sanjay Sinha Micro-Credit Ratings International Limited

2. Microfinance – delivering results “Recently, microfinance’s reputation has come under pressure, mainly due to misinterpretations as well as the increasing focus on some (alleged) malpractices by MF actors and the microfinance sector has some problems to show that it is achieving good results for the clients in the field” European Microfinance Week organisers

3. How could we show this to the public? Public perception lurches from one extreme to the other We need to show a more balanced approach We all made the mistake initially of presenting microfinance as a panacea for poverty… …the real utility of microfinance is as a means of financial inclusion

4. Is Microfinance delivering results for clients? “Inclusive financial systems allowing broad access to financial services…are especially likely to benefit poor people and other disadvantaged groups. Without inclusive financial systems, poor people must rely on their own limited savings to invest in an education or become entrepreneurs and small enterprises must rely on their limited earnings to pursue promising growth opportunities. This can contribute to persistent income inequality and slower economic growth.” World Bank Policy Research Working Paper, 6025

5. Is Microfinance delivering results for clients? Adults with bank accounts Developed economies 89% Developing countries 41% [men, 46% women, 35%] India 35% South Asia 33% East Asia Pacific 45% Sub-Saharan Africa 24% Account use levels are very low in developing economies with only 20-25% reporting regular transactions compared to over 80% in developed economies India: 139 mn “no frills” accounts, total balance Rs120 bn Average balance, $17

6. Is Microfinance delivering results for clients? We all know the socio-cultural factors that result in limited account use So what is the alternative? – trade credit, ROSCAS, friends/relatives, moneylenders and pyramid schemes run by dodgy operators …or microfinance ideally providing savings as well as credit services but, if not, at least credit so that low income families can “save down” if not save up

7. How could we show this to the public? Micro-value (<$500) accounts in India numbers in million accounts, March 2012 MFI = 30% of all credit accounts in the formal system SHGs = number of members; tiny credits held as group accounts with banks

8. How could results be improved Abandon the mantra of growth – moderate growth is good for inclusion – rampant growth is an invitation to disaster Temper the egos of promoters of MFIs Dampen the expectations of investors 9,000 estimated Sep 2010

9. How could results be improved Design appropriate products:The single product traditional offering of MFIs – particularly in Asia – does not fit the needs of all low income families – identify 3-4 key activities that mf clients need to borrow – design products to fit those needs The idea that microfinance can be delivered at ever lower costs is a middle class myth – even in South Asia it cannot be delivered for less than 24% per annum – do not try to push it to unreal-istically low levels of cost

10. Issues of pricing Average cost per borrower in India

11. Issues of pricing OERs and Yields of Indian MFIs

12. How could results be improved Ensure regular consumer feedback/client satisfaction surveys to enable products to improve Promote other services: deposit/savings services and other financial services like insurance and payments/remittances (domestic) Undertake periodic, simple code of conduct/client protection assessments European supporters of microfinance would do well to follow these basic principles; work patiently and wait for the situation to improve. There is no alternative.