The Limits of Commercial Microfinance and the Role of Multi- and Bilateral Agencies

1. The Limits of Commercial Microfinance and the Role of Multi- and Bilateral Agencies Workshop: MicrofinanceatRisk? The case of Nicaragua Johan Bastiaensen CERES SUMMERSCHOOL / ANNUAL MEETING “Global Governance, The Crisis and Development” New directions in Development Cooperation

2. Introduction: • Claim: microfinance = successful & massive initiative of poverty reduction • social mission + private for-profit motives  new niche market for capitalist investment, generating inclusive growth ~ multi- & bilateral actors heavily involved in the establishment & promotion of commercial MFI-industry • Yet ~ issues and questions: • Tensions between commercialisation & development objectives? • Are mainstream policies & role of multi- and bilateral actors) adequate ? • Case-study Nicaragua = ‘investment darling’ & showcase of MFi-success • ... but today = life threatening crisis

3. Content 1. Mainstream policies in Nicaragua: commercialization and the role of multi- and bilateral actors 2. The crisis of microfinance in Nicaragua 3. Analysis of the crisis: some lessons and points of debate 4. Conclusion

4. 1. Mainstream policies in Nicaragua Financial system approach: sustainable MFIs  integration into mainstream financial systems (regularization & up scaling to MFI-banks + downscaling of some commercial banks) = savings + (inter)national capital  massive/cheaper funds & full range of financial products Nicaraguan Context: CGAP CLEAR-report (2005) -Critique of targeted donor subsidies for rural finance  fragmentation -‘Obsession with credit’ + lack of non-credit financial services (regulation?) -Horror = possible return of state development bank

5. coordinated donor commitment to financial systems approach (led by IFC/IADB) = induce mature NGOs  regulated MFI-banks of NBFIs ~ heralds GTZ/KfW/IFC/IADB pioneering role (Confia  Procredit-bank) substantial support for regulating/regulated NGO-MFIs ~ Procredit; Findesa-BANEX; Fama; … = equity, cheaper loans, subsidies (specialized multi- & bilateral sources) = discursive support: IFC certificate good governance Banex; Calpia-Procredit El Salvador ~ ‘best practice’ for rural microfinance = all MFIs: direct/indirect pressure to regulate (including some social investors linked with government co-funding) 5

6. Policies + institutional quality of MFIs (incl. Asomif)  very fast growth of portfolio (less in clients), especially regulated MFIs -Following CLEAR: public funds (i.c. specialized actors)  regulated MFIs, while social (& private) investors = non-regulated MFIs [‘Ligas Mayores- Ligas Menores’ ] -Government not active in MFI, except coops (limited) ~ MFI = neo-liberal policies

7. 2. Microfinance crisis in Nicaragua • Procredit, Banex, Fama, FDL = 69 % of the market • Asomif

8. Total problematic portfolio(restructed, deferred, arrears, judicial action & write-offs)

9. Total confiscated collateral (mortgages; 000 C$) 1 US$ ~ 20 C$

10. Profit/loss (mio US$) • Severe crisis: struggle for survival ... All MFIs = ‘red alert’ ~recuperate deliquent loans; Fama & FDL  core business; Procredit (> 2000 $); Quid Banex? • Paradox: non-regulated FDL outperforms regulated MFIs

11. The non-regulated segment: ASOMIF Source: CDR (2010) Non-regulated MFIs = similar dramatic situation, some MFIs = close to bankruptcy; others persist, some perform relatively well

12. 3. Analysis of the crisis: lessons and issues of debate * Over-indebtedness crisis = also international responsibility - uncoordinated overfunding ~ attracted by historical record only  excess liquidity & market saturation (‘careless lending’ !) - ‘Ligas Mayores-Ligas Menores’: unequal & excessive competition  promotion of aggressive commercial bank-model  deterioration of deontological values ( excessive competition = deficiency of ‘Sin Riesgos’; forcing loans on clients to meet disbursement targets + lack of financial education  impoverishment of clients + fuel for political backlash of ‘No Pago’ movement)

13. * Regulation and dependence on outside funding High % of outside funding (Asomif)  vulnerability for ‘capital golondrina’ ? Emphasis on deposits/savings = OK, but lack of appropriate regulatory framework 2-3% cost increase  interest rate & loan size ‘problematic’ (rural) portfolio (Fama 6% portfolio; FDL: shift towards administered portfolio ~ > 25% of rural portfolio)  no legal space for much of rural/agricultural microfinance

14. * Commercial bank-model  fragility due to conventionalization of financial technology - Model Procredit & Banex =  ’European/US style’ of ‘professional’ banking  increasing reliance on contract & law  ‘proximity’ to clients & legitimacy generated in client-MFI social interfaces ~ origin of No Pago in Nueva Segovia = large loans to local ‘personalities’, connected to Sandinista networks  legal action ~ imprisonment + confiscation collateral; incapacity to negotiate rebellion & mobilization of P-C networks ~ No Pago -> ‘Banex = special case’; ‘a monster’ (slide 9) ~ performance FDL & some other non-regulated MFIs ? ~ more social embeddedness + intense discursive struggle for the ‘harts and minds’ of clients & non-clients (2002 study: keep away from ‘patron-client’ social fields; build upon appropriate values/social fields)  dangerous fragility of commercial MFI-bank model in the struggle for social legitimacy in an institutional environment with weak states & poor legal systems ~ linked to issues of mission drift ~ accusations of usury & capitalist usurpation of microfinance

15. * Commercial bankmodel: profit and social mission -Outreach & loan size • -Regulation = average loan size increases (Cull, et al., 2009) + average savings tend • to decrease, but little savings for the extreme poor •  banks for the (lower) middle class?

16. - ‘Finance only’ & simplistic impact model Key deficiency  too much ‘finance only’ ~ social impact: neglected - taken for granted - dealt with superficially (simple SPI- indicators; corporate social responsibility) note: Banex = pioneer of SPM; 15y mortgage loan = housing for the poor ~ discursive shift: ‘poor as micro-entrepreneurs’  ‘poor as vulnerable’  poverty alleviation rather than poverty reduction/inclusive development  related to emphasis on non-credit financial services & downplaying role of (micro)credit (~ evidence of little impact) ~ impact co-dependent on context and concomitant broader change  transformative ‘Finance Plus’ approach articulated to broader institutional & ‘political’ change

17.  crucial role of finance in asset and network-building for the capital-constrained small enterprises ~ mainstream  finance = a passive actor matching ‘demand’; not an active player in creating alternative pathways  risk of financing social exclusion & environmental destruction;  vulnerability of clients in value chains (i.c. cattle chains ~ -20% meat prices in slaugtherhouse, but -50% for life cattle of 1-2 years in the countryside) Transformative Finance Plus approach  need to articulate microfinance to participative market-network building(‘ciudania mercantil’’ – value chains – territorial governance structures) ~ ‘institutional externalities’ of MFIs: beyond mere contract design for finance = social interfaces that make innovative markets works for SMEs & contribute to changes in rural governance ~ some MFIs = perceived as political enemies by clientelistic politicians

18. 4. Conclusion and final observations Outcome of current mainstream multi- & bilateral policies in Nicaragua = - establishment of a commercial MFI-banking model ‘with little development’ ~ weak & endangered outreach to the poor – agricultural & rural economy ~ institutional fragility & little transformative institutional externalities ~ breeding ground for the return of state agricultural development bank (Produzcamos)  ‘Iron Law of Subsidized Credit’ = inefficiency + ineffective social targeting + fragile credit culture  connected to state VC-approach = squandering and capturing of public & cooperation resources & strengthening of vertical-authoritarian, clientelistic governance structures which (re)produce dominance & exploitation

19. We might end with ‘peaceful co-existence’ of capitalist and socialist banking (even with –albeit limited- multi/bilateral funding for state-segment) … but little political space for transformative microfinance  Development agenda = change in MFI-policies ~ regulatory framework; support for transformative ‘Finance Plus’ approach (incl. subsidies, link to social movements ~change)

20. THANK YOU 20