Don’t Get Bigger Unless You Get Better: Lessons From Micro-credit

Microfinance has become the poster child for troubling growth and questionable nonprofit/for-profit cross-overs. Is it the rapid growth or too much emphasis on investor returns or not enough government regulation that has led to suicides by borrowers and a request for Nobel Laureate Mohammed Yunus, founder of the movement, to step down from Grameen Bank.

microfinance, scaling nonprofitsMany of the answers – and cautionary tales for any nonprofit trying to grow – can be found in the meaty and highly readable report, The State of Micro Credit Summit Campaign Report 2011. The research for the report is thorough and was underway before the credibility of Yunus was questioned although not before the suicides in Andhra Pradesh.

The report examines the achievements and the failures of micro-finance, lessons that all nonprofits aiming for growth and public/private partnerships should take to heart.


Mistakes

Growing too fast:

  • Investors wanted growth so micro-finance companies grew faster than they could train staff to evaluate, educate, and collect from borrowers. Infrastructure and staff were insufficient to support new clients.
  • To facilitate growth, micro-finance companies all wanted to locate in high-density areas which resulted in market saturation and what the report calls “dog-eat-dog competition” and “pushing money on people.”
  • No regulation in place before growth began. A credit registry would have prevented multiple loans to people who could not pay them back or who were using them for consumer goods rather than business.

Silo-thinking
Micro-finance companies focused on giving loans and earning interest. When borrowers defaulted, they did not investigate why. It turns out that most of those defaults were due to medical problems. When you are poor, uninsured, and self-employed, illness is devastating. To relieve poverty, one has to look at the entirety of the society in which the borrower lives. A whole-person approach is needed.

Losing client focus
Clients did best when involved in local community lending/saving organizations and had a personal relationship with their lender. But new micro-finance companies didn’t provide that relationship nor did they provide the support individuals needed to survive setbacks.


Solutions

Create and use the village-based infrastructure
A solid network of community lending groups creates an infrastructure on which other critical services can be based – get out of the silo! – such as health education, insurance, medical care, financial education, savings accounts. Some of these micro-finance organizations can provide themselves; for others, such as health education, they will have to form partnerships with agencies experienced in that area.

Focus on clients, not investors
Pay attention to client needs from cash flow to cultural priorities. What do people do with the money they’re loaned? How do they deal with problems? Make client success the focus, not investor return.

Keep it personal and local
Technology can be used to facilitate service so that remote areas can be served. This eliminates the saturation of easily served markets but it only works well if accompanied by regular personal visits to the rural areas by trained representatives of the micro-finance group. Keeping it local provides peer support and pressure to pay back the loan as well as ideas for new services needed to keep the community thriving.

Set standards
Micro-finance is taking two tacks to achieve this. As of March 1, the  Microfinance Institutions Network (MFIN) announced the creation of a credit bureau with the goal of preventing over-lending and of allowing micro-borrowers to establish a credit history that will make them eligible for lower interest rates.

A Seal of Excellence is being developed that would be awarded to micro-finance companies based on third-party evaluation of how much the organization improved the lives of clients. The assessment would include adherence to consumer rights standards.

The report is an excellent example of learning from mistakes, finding solutions, and improving social impact as a result. Because the cost of those mistakes has been high – the rash of suicides in Andhra Pradesh, for example – other nonprofits looking to scale should study the report carefully and avoid those costs.

Do you think micro-finance has found its way out of trouble? Do investor-driven micro-finance companies make more money available to the poor or do they make a profit off poverty?

growing too fast in microfinance

Thanks for the post and the link to the report, Geri. This is a very important and revealing document and I'm eager to read it closely. What strikes me from a quick glance is that the "whole person" approach is critical for poverty reduction. Microfinance can increase credit opportunities and help micro-businesses, but poverty reduction requires addressing health, education, and other factors (I think that's the point of Odell's studies, which were conducted for the Grameen Foundation, if I recall correctly). What I continue to see arising in the debates around the microfinance industry is the question not just of regulation, but transparency, especially since 60 percent of the microfinance institutions are commercial banks or other for-profit financial institutions while only 35 percent are NGOs. Sometimes in the process of growth, transparency gets left by the wayside. Thanks again for the provocative posting.

You're right

I was also struck by the data on the need for the "whole person" approach for poverty reduction. And I think that this report has some very important lessons just because microfinance has so much for-profit involvement. It shows why transparency is essential to mission. I'm glad you found the report useful.

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