Global Partnerships in Microfinance University of Greenwich September 6 th 2010

Microfinance: A partnership with whom? With the poor, to help to alleviate poverty ? With profiteers, to help them make even more money ? OR, maybe: With both, to do well by doing good

What IS microfinance ? Mainly credit (micro-debt) Small loans, <$100 Short terms, <1 year Group-based, mainly women High cost For the un-banked For ‘micro-enterprise’ (in theory)

LOTS OF WEASEL WORDS ‘Sustainability’ ‘Reasonable’ ‘Fair’ ‘Social enterprise’ ‘The double bottom line’ ‘The market at the BoP’ ‘CSR’

Some figures: SKS vs. GRAMEEN BANK » Grameen SKS Year started: Borrowers: 3.5 mn. 6 mn. Ave loan o/s: $100 $ 80 Depositors: Zero 8 mn. Return on assets: 0.43% 5 % Yield on portfolio: 19.6% 39% Return on equity: 4.5% 21.5%

What’s the same, and what’s different ? Both: lend mainly to women (98% and 100%) Lend small amounts Charge much higher interest than ‘we’ pay ‘Do good’ Grameen: Takes savings (they have to !) Grows slowly Makes modest profits ‘Do well’ SKS, does the opposite

‘Credit’ vs ‘Social’ Rating What do we measure ? Credit ratings: Capital adequacy, Recoveries, financial margins, funding, Audit and control systems, growth…. Social ratings: Mission, outreach to the poor, transparency, dropouts, social responsibility to staff, community and clients, client feedback, … Both: Governance and ‘sustainability’

Ratings – which sell best ? Four times more Credit Ratings were completed in than Social Ratings A new product, less familiar, our main market is lenders and banks, but does this say something about what is believed to matter ?

Arguments for ‘doing well’ High profits attract equity to raise debt to lend to the un-reached millions Capitalism forces competition, financial services are no different from bread or groceries High quality services demand skilled people who require high salaries – margins must be high MF is risky – entrepreneurs and risk capital will only be attracted by potential IPOs and $$ mns. High interest rates don’t matter for petty trade

Arguments for ‘doing good’ High interest rates discourage investment in anything except petty trade MFIs were started with donated and public interest funding, and still get subsidy The Bangladesh success, Grameen, BRAC etc, massive growth with no IPOs Profit motive leads to mission drift and neglect of the poorest.

FIVE FALLACIES OF MICROFINANCE 1. The poorest all wish to be self-employed 2. Credit is the main financial service needed by the poor. 3. Credit can automatically translate into successful micro-enterprises 4. Those above the poverty line do not need micro- credit, and giving it to them amounts to mis- targeting 5.Microcredit institutions can all become financially self-sustaining (Basix Founders, 1996)

What’s going to happen The ‘new sub-prime’ – the bubble will burst Competition is already forcing down RoI Social investors are (maybe) waking up to what is happening with their money Pressure for transparency may moderate behaviour Governments are stepping in

What are the remedies ? NOT donors, they have done their job Co-operatives, credit unions, community- owned institutions, VSLAs, may come back, as Germany etc. Banks may ‘down-scale’, get directly involved, with savings, reasonable RoI and ‘graduation’

What can WE do ? Stop thinking that main-stream MF is a social endeavour; treat it as a business. Think and act local: get involved in 21 st century Raiffeisen, credit unions etc. Stop thinking that financial services alone, good or bad, can eliminate poverty Focus on things that matter more: primary education and health care, governance….