Roy Mersland University of Agder, Norway In a rapidly changing microfinance landscape – what is the way forward for Danish Microfinance? Roy Mersland University of Agder, Norway

Major forces influencing the future Idea and picture from C-GAP Demographics New international funders Migration and urbanization Climate change Wireless technology Increase in commodity prices Schism debate revived in industry Activist governments BRICs Social activism

Theories behind microfinance Entrepreneurship theories Capital is an ingredient in enterprise development The theoretical origin of modern microfinance Consumption smoothening theories Variation in income is often more problematic than low average income (see chart) Financial intermediation theories Money out of mattresses Monitor borrowers on behalf of depositors

What’s the main problem: Low average or high variation?

A very heterogeneous market: 10% of loan portfolios in Ecuadorian commercial banks are classified MICROCREDIT NABARD in India 2,2 million groups reaching 33 million members (NABARD only) 500 million poor people have a savings account in postal banks, savings banks, public banks, SACCOs etc M-PESA 14 million users and now M-KESHO in cooperation with Equity Bank Equity Bank in Kenya 6.3 million accounts, accounting for over 57% of all bank accounts in Kenya Access Africa, an initiative by CARE Grow membership in Savings and Credit groups from 1,2 to 30 million ROSCAs Up to 95% of adult village population can be members (Bouman, 1995) Consumer loans and credit cards in Brazil 138 million credit cards (2008 figure) and less than 0,5 million microfinance customers

Size matters Economies of scale

The microfinance innovations in the 1970-1980ties The targeting of poor customers The targeting of women New lending technologies New organizational solutions New sources of funding What will be their future?

Is Mission Drift a problem in microfinance?

Why are MFIs drifting? Profits or costs?

The targeting of women Historically women have never before been targeted in pro-poor banking 25% in Irish loan funds an exception 3 arguments in favor of targeting women Gender equality (the empowerment argument) Poverty reduction (the “women are better than men” argument) MFI efficiency (the repayment argument) Additional argument: The female lobbies More than 70% of customers are still women. Will this continue?

Lending methodology (our data)

New organizational solutions NGOs in development Most of the initial NGO-MFIs came out of existing development NGOs Kind of similar to the 19th century savings banks But these did not come out of existing organizations New and more commercial ownership structures are taking over? NGOs are transforming into shareholder MFIs

New sources of funding International donations International loans Savings in developed countries are invested as loans in developing countries. A new paradigm. But around 80% of microfinance funding is today from local sources Excess liquidity in most developing countries today

Microfinance is not a recent phenomenon (Hollis and Sweetman, 1998)

Most important findings by Hollis and Sweetman, 1998 Organizations depending on charity were more fragile Organizations depending on depositors were more sustainable Ability to adjust interest rates to cover costs was important Depositor based institutions served more borrowers than those depending on donations or government funds. The key for long term sustainability is to get “the organizational structure right”. The amount of capital available was less important “A good institution can be successful in attracting local depositors, who in turn serve to protect the health of the organization.”

The history of savings banks The history of savings banks? Will it also be the evolution of microfinance? Growth Time Enthusiasm Criticism Pragmatism Integration

What about the fierce critique? Greedy investors High interest rates Over-indebtedness Multiple borrowing Lack of impact

High interest rates and high returns in microfinance?

Are the international promoters of microfinance about to be left behind?

Most MFIs do well without international partners

In what should we specialize? Microfinance industry development? Promotion of Savings and credit groups? Livelihood development for vulnerable groups?

What about savings and credit groups? Fits theory of consumption smoothening very well Continues to be very popular Grows very quickly Some markets are becoming crowed? More and more professionalized promoters More and more specialized and thus more difficult to combine with other social services Will eventually face competition from mobile based individual services

What about livelihood development? We now have tools to smooth income and make capital available The microfinance industry Savings and credit groups Back to basic – 1970ties – livelihood promotion Smoother consumption and access to capital do often not assure livelihood improvement

The main challenge now is to increase poor people’s non-capital resources Micro-entrepreneurs Access to non-capital resources HIGH LOW Access to micro-credit Exemplars Possibly in trouble Immediate Potentials Possible Future Potentials

Innovations needed in livelihood development – where are the Danish actors? Value chains Access to markets Fair trade International investments International trade Salaried jobs Match savings program (peer to peer?) Venture capital / equity capital Small and medium enterprises Agriculture Capacity building AND – still lot’s to do in Savings and Credit groups