Regardless of our profession, most of us like to think we know what we’re talking about - especially during this Financial Inclusion Week. But how much do we know, really? Assumptions and heuristics (‘rules of thumb’) dominate more than most of us would readily admit. And why not? Usually they’re good enough. Before Galileo upended astronomy, existing models, regardless of how wrongheaded, were still good enough to maintain calendars, predict agricultural seasons, and support navigation. Since the beginnings of modern microfinance in the 1970s, we have likewise relied on similar orthodoxies: that take-up of microcredit was a demonstration of its inherent value to the clients; that on-time repayments were evidence that clients were not over-indebted; that competition would inevitably lead to lower interest rates. And, perhaps most importantly, that targeting specific groups of clients would inherently create social benefits: lending to the poor would alleviate their poverty, lending to women would strengthen their roles in society, lending to farmers would improve their yields, etc., etc.
Today, as our friends and colleagues across the continent mark European Microfinance Day, we would like to offer a view from the South. After all, e-MFP occupies a distinct place – we’re a platform for Europe-based microfinance actors who are specifically focused on working in the South as their core objective. Like an astronomer atop a lonely mountaintop, we find ourselves in the heart of Europe, yet our minds are focused on the world beyond. So what does European microfinance look like when seen from the South? Well, it is a bit like looking at the stars – the light shines bright yet comes from a distant past. Microfinance institutions (MFIs) in Europe look remarkably similar to the global MFIs of the 80s and 90s -- small, local organizations with a deep focus on lending to micro-enterprises while maintaining basic financial sustainability. They're treading the paths laid by MFIs in countries like Bangladesh and Peru. MFI clients in Europe and in the South share one key thing in common: these are people to whom banks aren’t interested to lend.
Veronica Herrera co-founded MiCrédito in 2004 with the support of the Canada-based development association MEDA (Mennonite Economic Development Associates). “Empowering youth is vital to see the change in Nicaragua that we seek” Mrs Herrera says. “I believe education, in addition to microfinance, is a powerful tool to […] empower youth” she adds. MiCrédito is one of few MFIs today in the country to provide student loans at very low interest rates, enabled through Kiva – the San Francisco-based not for profit. While the Sandinista government managed to reduce the illiteracy rate in the country dramatically in 1980 (from 50.3% to 12.9% within only five months), which earned it the UNESCO Literacy Award, today’s education level in the country is relatively low compared to the rest of Latin America, with around 45% of the population attending secondary education, versus an average net enrolment rate of 74% in 2011 across Latin America. In what could be her motto, Mrs Herrera adds: “How does one get out of poverty? It is through education”.
A few weeks ago, headlines covered former U.S. President Jimmy Carter’s health while building Habitat for Humanity Homes in Canada. For the 34th year, Jimmy and Rosalyn Carter brought hundreds of volunteers to construction sites where donated materials and contributions from donors were used to build homes for low-income households.That image of volunteers coming together to build a home is what people expect from Habitat for Humanity. But some are surprised when they find out we also sponsor a US$100 million investment fund for housing microfinance that finances work around the globe. Why do we do that? Some of Habitat’s history with microfinance and markets traces back to an accidental discovery. Typically a Habitat for Humanity house comes with a zero percent home loan to the family. Nonetheless, regulations on non-profits in Egypt prevented Habitat from lending out any funds; and a microfinance institution (MFI) offered to help. So a partnership formed whereby our funding was lent to households via an MFI partnership. Soon after, the MFI began lending its own money for housing. At first Habitat did not pay much attention to this – it wasn’t our program nor was it being done with our funding, after all. But eventually we realized how powerful this was. The MFI went on to lend much more for housing than our program ever could, and competing financial institutions responded with similar products. This was the beginning of a change in the market that would result in much more widespread access to housing finance than any of our non-profit programs could have on their own. And, indeed, unmet demand for finance for housing is massive.
In 2010, Omtrix, a microfinance fund manager based in Costa Rica, saw that the greatest barriers to higher education for low-income youths was lack of access to financing. Omtrix wondered if this need could be met by microfinance institutions. Serving this sector would certainly meet their mandates, and MFIs already knew how to reach and serve low-income people. Omtrix hypothesized that under the right conditions, and with the right approach, student loans could be a viable product for MFIs. They decided to create a new fund to promote higher education. The new fund, called The Higher Education Finance Fund (HEFF), would lend to MFIs so that they could in turn on-lend to bright young people whose aspirations lay beyond their financial reach. HEFF’s funding would be accompanied by a technical assistance program to train MFI staff in how to appraise, monitor, and collect on student loans, as well as offer other tools to launch a new product. Additionally, HEFF would serve as a pilot program to be replicated by other MFIs or funds in the future and across the globe. Over the past six years, HEFF’s original assumptions have been tested, and the innovative program has experienced some growing pains. Omtrix has begun the process of capturing lessons learned and best practices to disseminate those lessons to anyone who may want to replicate or build on HEFF’s model.
Today, the microfinance industry is much more than microloans. New products have been included in microfinance’s offering of financial products. Complementary products such as savings, remittances, and insurance, among others, are commonly offered by microfinance institutions (MFIs), and give them comparative advantages allowing them to differentiate themselves, in order to retain their clients and ensure their own growth. As part of that change in the international microfinance scenery, we have witnessed many MFIs around the world expanding beyond micro loans to include SME loans. Such decision, many times deemed as a “natural growth path”, is caused by more competitive markets that make it more difficult for MFIs to retain traditional clients, higher costs for regulated MFIs, and a natural pursuit of continued growth. Under those circumstances, many MFIs have considered the possibility of “crossing over,” offering loans in higher amounts to their own clients and seeking to enter a new market segment: small and medium enterprise loans (SME loans).
Earthquakes. Fire. Floods. Chemical spills. Conflict. Impacts of these disasters bring to mind loss of lives and livelihoods, disruption to communities and vulnerable populations struggling to recover and cope. The impact of disasters on financial inclusion and the role financial service providers play—or don’t play—in disaster risk reduction is not an immediate consideration when preparing for or responding to such emergencies. However, disaster preparedness and response is exceptionally important in the context of financial inclusion. Countries with higher concentrations of poverty, weak infrastructure and poor public services are more at risk. Experience has shown that financial institutions serving at-risk populations are as vulnerable as their clients to these disasters and crises. While the initial humanitarian and emergency response to crisis is crucial, there is a growing recognition of the value of disaster risk reduction (DRR) strategies in preparing for and thus reducing economic losses associated with disasters. In an effort to raise awareness around this important topic, the SEEP Network’s global Disaster Risk Reduction (DRR) Program, funded by the Citi Foundation, seeks to promote more resilient financial services markets in which financial service providers (FSPs) and their clients have the capacity to better anticipate, cope and recover from the negative impacts of disasters.
Portsmouth Business School was delighted to host the recent 5th European Research Conference on Microfinance from 12th to 14th June in England. Thankfully the weather gods obliged with over 130 delegates attending the event over each of the three days. A mix of established researchers with a number of leading practitioners infused the financial inclusion debate with insights and thought-provoking panel presentations. Topical themes across gender, Islamic microfinance, Fintech, research and the future of microfinance were probed in wide-ranging panel discussions. The event was opened by Andy Thorpe (Portsmouth Business School) and Christoph Pausch (e-MFP) and commenced by asking whether microfinance would live to the year 2030, a chilling prospect in itself. If so, under what guise would it do so – is there still the well-trodden ‘promise’ of microfinance? What are the challenges to its realisation? In the opening session chaired by Dirk Zetzsche (University of Luxembourg) perspectives were shared by Marek Hudon (Université Libre de Bruxelles and CERMi), Annette Krauss (University of Zurich), Sam Mendelson (Financial Inclusion Forum UK and Arc Finance) and Kimanthi Mutua (Sidian Bank Kenya). The panellists set the tone for the ensuing debate across increasing risks and regulation in the sector, the likelihood or not of possible downscaling by commercial banks and upscaling by microfinance institutions and the growing need for institutions to have appropriate strategies to survive. The panel arrived at a broad consensus as to the requirement to adjust to increasingly emerging technology-driven solutions in the context of growing levels of private capital and related product solutions offered by new market participants.
At BSHF we were very interested to learn about the European Microfinance Awards and really keen to hear more about some of the great practice being identified. We have been running the World Habitat Awards since 1985. In searching for and sharing the best examples, we have a lot in common with e-MFP. Our objective is to identify and highlight approaches to housing across the world which make outstanding contributions to people’s living conditions. As a minimum we believe everyone should be able to afford their home, have access to basic services, and be free from the threat of eviction or displacement. This might seem like stating the obvious, but it isn’t something that can be taken for granted. Over the years, a large range of excellent examples have been identified in the countries of the global North and the global South. From the very beginning, our focus has been not only on the identification of good housing practices but also in the sharing of knowledge and experience to others who can transfer them in their own situations. The first international peer exchange to a World Habitat Award project winner was in 1987 and the exchanges have continued ever since. Really great approaches recognise, provide and guarantee the right to safe and secure housing; treat people and the environment with dignity; and work collaboratively to get the best out of people and places. Contexts, actors and circumstances vary hugely, but everybody tackling housing faces three crucial ‘sustainability’ challenges – social, environmental and financial
Housing plays an important role in household asset building – providing both a place of protection from vulnerabilities as well as a base from which to be economically productive. Even low-income people prioritize investment in improving their living conditions. The base of the pyramid is estimated to spend over $330bn annually on shelter. The question is why we lack financing for housing? In Sub-Saharan Africa, the shortage of financing for housing is even more acute. As a result, poor and even middle-class households in pursuit of better shelter are often driven into the informal financial sector. Banks generally fail or ignore the financing of low-cost shelter, as the perceived risks and costs outweigh benefits. This problem is further accentuated by ambiguous property rights and legal precedents that constrain conventional ways of financing shelter. Thus, mortgage markets in the region remain small, providing access to only a small, elite segment of the population.