Local Voice 4 Development: Overview of microfinance in India, Russia, South Africa, and Latin America
On October 4 I participated in an interesting webinar organized by Local Voice 4 Development on the subject of "Microfinance: Is there really a crisis?" This was a very educational discussion that brought together industry leaders from all over the world. Presenters had about 10 minutes to give an overview of the microfinance industry in their countries and then answer questions posted by the participants. Presenters included:
- Sanjay Sinha, Managing Director of Micro Credit Ratings International (India)
- Luis Derteano Marie, President of Grupo ACP (LAC)
- Zanele Mbeki, former First Lady of South Africa and chair of the Women's Development Bank Trust (South Africa)
- Mikhail Mamuta, Director of the Russian Microfinance Center (Russia)
- Damian von Stauffenberg, founder of MicroRate (USA)
Sanjay Sinha, India
Sanjay believes that microfinance in India is truly in the state of crisis and that the international community is not doing enough to mitigate these risks. Sanjay mentioned that microfinance providers in India are required to raise a certain percentage of equity. In order to attract equity investments, Indian MFIs often have to promise unreasonably high returns, which then shifts their focus from sound lending practices to profit maximization. In India the number of microloans is 40 percent higher than the amount of consumers, which means that over-indebtedness is very serious problem as each consumer, on average, has more than one microloan. Sanjay stated that investors need to take these consequences into consideration when they expect MFIs to report a certain rate of return. In addition, microfinance providers in India are faced with strong interference from the Indian government, which publicly encourages consumers not to repay their loans. Currently Sanjay runs a well-known rating agency in India called M-CRILL. When asked by the audience why rating agencies missed the microfinance crisis in India, he mentioned that very few agencies consider political risk to be an important indicator; therefore, such agencies were not able to provide more accurate reporting. Damien von Stauffenberg from MicroRate followed up on this question to add that MFIs are not required to report to rating agencies and when they face challenges, demand for rating decreases.
Luis Derteano Marie on microfinance in Latin America
Luis mentioned that the LAC region is very different from India and the microfinance industry in LAC is growing rapidly, despite isolated instances like the "No Pago" movement in Nicaragua where the government encouraged consumers not to repay their loans. The global financial crisis of 2008-2009 negatively affected the region much more than the microfinance crisis in India. At the same time, microfinance providers in LAC understand risks of over-indebtedness and market saturation, and they are looking at lessons learned in India in order to avoid similar problems in the future. Luis mentioned the importance of strong and flexible management, transparent pricing, and consumer protection in order to prevent predatory lending practices. Luis also mentioned that when working in LAC investors need to adapt to the local context, work with local MFIs and not apply "the same recipe for various regions." Luis also mentioned that the microfinance industry in LAC has been going through the process of commercialization and consolidation with commercial banks downscaling to provide microloans.
Zanele Mbeki, South Africa
Zanele presented on the state of the industry in South Africa, where microfinance has not been utilized very widely. Zanele mentioned strong interference from the government as one of the reasons why the microfinance sector has not been well developed. Damien supported this argument by mentioning that when MicroRate looked into South Africa, the government's "micromanaging" of the industry was viewed as a big barrier because the “entrepreneurial element" that is vital to successful microcredit programs was crowded due to government involvement. On the other hand, Zanele mentioned that South Africa has some well developed laws, such as the National Credit Act and the National Consumer Act. These laws are applied to protect both microfinance practitioners and consumers.
Mikhail Mamuta, Russia
Mikhail mentioned that the industry declined in 2008-2009 due to the global financial crisis, but it is currently growing rapidly and the demand exceeds the supply of microloans. It is also interesting to note that financial inclusion in Russia varies greatly based on geographic location. (To learn more about financial inclusion in Russia, please refer to my previous blog.) Currently, the non-financial sector, including credit unions, offered about $1 billion in microloans. About 50 percent of this sum was offered for consumer loans and the remaining 50 percent of the $1 billion was offered for business purposes. This portfolio is likely to increase due to government support and greater interest from larger commercial banks (for instance, Sberbank is looking to downscale to offer microloans). There are many unique opportunities in Russia for the international investors as well—700 MFIs are expected to be registered by the end of this year and most of them are interested in working with international investors. At the same time, these investors need to be aware that few Russian MFIs have worked with international investors and some of them do not have well developed governance, which can be a challenge for international investors.
Damian von Stauffenberg, USA
Damian von Stauffenberg, founder of MicroRate, the first rating agency in microfinance, concluded this discussion. Damian does not think that the industry is in crisis; it is growing but expectations need to be adjusted. Microfinance should not be viewed as a "silver bullet" but rather as one of the tools for economic growth. Damian listed localized crises (Morocco 2007, Bosnia 2008, Nicaragua 2009, and India 2010) that took place due to similar reasons: market saturation, over-indebtedness, and rapid growth. Damian mentioned that any industry would face problems if providers of financial services lost track of how much money they lent and the total debt outstanding. Once providers stop monitoring their lending, over-indebtedness is an inevitable problem that will contribute further to lower repayment rates and poor quality of portfolios. As a founder of a rating agency, Damien mentioned that in order to provide more accurate evaluations, rating agencies need to separate loans offered for consumption from those offered as microloans. Damian also mentioned that consumer loans should not be rated in the same way as microloans.