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This is part I of a two-part blog, summarizing some of the key findings of an edited volume that has just been released (Guérin I. Morvant-Roux S. Villarreal M. (eds) (2013) Microfinance, debt and over-indebtedness: Juggling with money, London: Routledge). More details about the book can be found here. Other project publications may be found at microfinance-in-crisis.org. Although microcredit programmes have long been considered as efficient development tools, many forms of debt-induced distress such as suicide, repayment arrears or defaults have emerged in their wake. This has brought to light the problem of over-indebtedness, a topic that has been previously underexplored in academic literature. Our book explores the manifestations, scale, and economic and social implications of household over-indebtedness in areas conventionally considered as financially excluded. This book approaches debt not only as a financial transaction but also as a form of social bond, and offers a socioeconomic analysis of over-indebtedness. It also raises the question as to whether microfinance policies (which represent only a small part of households' financial practices) are part of the solution, or in fact part of the problem. Empirically, this book examines economic relations and financial practices with a particular focus on debt and over-indebtedness in a diverse set of countries around the globe, including India, Mexico, Madagascar, Kenya, Bangladesh, France and the United States. Its comparative perspective helps to highlight both disparities and strong similarities across cases. Beyond the specificity of each case study, the book makes four main arguments, which are developed in the introduction of the volume. The first two are summarized in this post, and the last two will be covered in the new post. 1) Over-indebtedness and financialisation Over-indebtedness has surged during the current financial crisis. While debt is not new in poor areas, increasing financialisation and global recession have brought new dangers. On the one hand, aspirations for a middle-class life have seen rising consumption, including by borrowing from formal and semi-formal sources. On the other hand, real incomes have been stagnant or declined, and social protection remains inadequate or entirely absent. There is no doubt that microcredit delinquency crises vividly highlight how portfolio growth has been prioritised over social outcomes and the quality of financial services provided. Nevertheless, the true origin of these crises lies somewhere deeper. These crises are only the tip of the iceberg. How can we explain the mass acceptance by the poor of a service that cannot deliver on its promises? Whether in terms of job creation or women's empowerment, the effects of microcredit are not what was expected, as evidenced by many studies available today. Yet demand for microcredit remains very strong. As shown throughout our book, microcredit responds to the need and desire to increase debt, whether to make ends meet, to climb social ladders or to free oneself from oppressive social bonds that come with informal debt. In some cases, such aspirations far exceed client incomes and creditworthiness. Cross debt (or multiple borrowing), debt rescheduling, juggling formal and informal loans, and migration may maintain an illusion of creditworthiness for some time. But sooner or later, the illusion is shattered. In other words, while some microfinance institutions take some active responsibility, our case studies show that household over-indebtedness stems not only from aggressive microcredit policies, but also from the broader context of the evolution of modern societies and economies. We present in-depth descriptions of microfinance as a social process embedded in savings and multiple debt relationships. We also analyse the social and institutional processes through which microcredit intersects with a local cultural context of neoliberal political economics. Present-day societies are facing a widening gap between needs and cash incomes, due to increasing informal labour, growing urbanization and rising aspirations and consumer needs, including among the poor. This widening gap leads to an increase in household debt and new forms of exploitation. These do not arise from face-to-face relations as is typical with capital/labour relationships, but rather arise from the growing financial sector extracting added-value from the labour sector. Microcredit practices both reflect and reinforce these conflicts. 2) How to define over-indebtedness? In this book, we do not seek to quantify over-indebtedness, but rather to understand its underlying processes. We define over-indebtedness as a process of impoverishment through debt, which significantly and continuously erodes one's assets or standard of living. However, over-indebtedness is not limited to material losses. When excessive debt results in tarnishing the debtor's social network, status and reputation, the resulting downward social mobility, extreme dependency, shame and humiliation experienced by the borrower can prove just as damaging. Social and economic impoverishment through debt can develop in mutual contradiction. Some debts demand intolerable repayment sacrifices but can ultimately allow the debtor to "get by" with a socially and/or materially improved position once the debt is paid. Given rising social aspirations, including among marginalized and vulnerable populations, and the efforts and sacrifices that some families are willing to make to improve their homes and pay for their children's education or marriages, this is probably not an unusual situation. In contrast, some debt situations may bring about impoverishment and the deterioration of living conditions simply because the person is unable to pay his/her debt. It is not the payment of the debt which is a source of sacrifice, but its non-payment, exposing debtors to the risk of seizure, expulsion, moral or physical harassment, social exclusion or extreme dependence. Rather than restricting over-indebtedness to financial and accounting matters (e.g. delayed payments, income-debt ratios, number of loans contracted), we argue that it should also be approached as a social process involving social and power relationships as well as issues of well-being, status and dignity. The social meaning of debt, which is defined here as the process by which debt sets debtors and creditors into local systems of hierarchies, may be as important as its financial criteria. The local meanings of over-indebtedness reveal the extent to which accounting definitions can depart from the realities they seek to measure. Financial issues do matter, but debtors are also very sensitive to what can be labeled as degrading debts and which relate to issues of well-being, honour, reputation, independence and dignity. In the microfinance industry, high default rates are often associated with over-indebtedness. It is now widely acknowledged that excellent repayment rates may result from pressure placed on borrowers as much as client satisfaction or well-being. Conversely, field realities indicate that late payment is not necessarily a sign of over-indebtedness. It may reflect local frameworks in which the debt is viewed as something that can be repaid in multiple ways over extended timeframes. This is consistent with common practice within the informal economy, where debt is often flexible and negotiable. Such negotiability is not financially or socially cost-free, but the fact remains that there are often no strict repayment deadlines. In some cases, defaults to MFIs may also indicate a reduced incentive to repay, whether due to increased borrowing opportunities from among competing lenders, client dissatisfaction, or willingness to punish lenders who are seen as unfair. Cross-debt may also be used as an indicator of over-indebtedness. It is true that in Northern countries, where mono-banking is more the rule than the exception, relationships with several creditors may be considered a sign of financial fragility. But cross-debt can simply mean that credit providers are offering insufficient loan amounts or unsuitable loan terms. Moreover, in the contexts studied here, cross-debt is an integral part of households' cash flow management strategies. Other common indicators have used fixed thresholds for debt service to income ratio. Static analyses using ratios at a particular point in time can offer indications, but also may mislead, as they say little about households' vulnerability and the nature of their relationship with creditors. In cases where debt is primarily a matter of networking, interpersonal skills, trust and reputation, a high outstanding debt can be indicative of a large social network and the ability to mobilize and activate it. Debt service indicators may also be misleading, as they hide what is owed to the borrowers. More often than not, even the poorest borrowers are also lenders. While households are often the primary unit of analysis, debt and over-indebtedness are clearly not gender neutral. Several chapters highlight the paradoxes women face. Many are not just fully responsible for managing their household budget, they also have no control over their income. As they are forced into financial dependency while having to make ends meet, they have no choice but to deploy a variety of strategies for saving, borrowing, lending and creating their own financial networks. Women must also choose their creditors carefully to avoid any suspicion over their 'morality'. The social control of women's debt is closely linked to the control of their bodies and sexuality. In our next post, we address two other key findings: dealing with local decision frameworks and juggling practices, and the ambiguous role of microcredit. author: Isabelle Guérin

It’s a question that comes up at nearly dinner discussion of microfinance: why are the interest rates so high, and how can poor clients afford them? So, you have the answer – interest rates are high because operating in difficult environments is costly, and because those costs have to be recouped from small loans. After a few examples (it costs the same $10 to make a $100 and a $1000 loan…), you eventually set your questioner at ease that most MFIs might not be ripping off the poor after all. But after all that, you’ve largely forgotten then main point of the question – how can the poor afford it? After reading yet another article questioning the affordability of microfinance loans, it occurred to me: microfinance clients face the same economics as the MFIs. Consider your typical market trader. She buys stock to resell. The cost of the stock, together with some fixed assets, constitutes her investment capital. What are her returns? I propose that they must be high as a matter of principle. Consider the context of her operations – security is a never ending concern, and her stock is often at risk of being stolen or damaged. Moreover, the larger the investment, the greater the risk of theft. As a risk-averse entrepreneur, she would prefer to invest only the amount needed to stock her shelves. And even if she were more willing to take risks, where would she get the capital needed to buy excess stock and afford measures sufficient to secure her investment? So, the stock she buys is small. But her sales are smaller still – how many times have you seen small vendors open up a pack of cigarettes to sell a single one at a time? The economics for her follow the same formulae as the economics for MFIs – the smaller the item, the higher the markup rate, even if in absolute terms, the amount remains affordable to her clients. The markup on those individual cigarettes must be very high indeed! Combined with the advantage of being located in the client's own neighborhood, this business model allows microentrepreneurs to compete with larger retailers that are unable to sell in such tiny quantities and still cover their costs. There are a handful of studies showing very high returns (anywhere from 50% to over 300% annually) for microentrepeneurs. However, it helps to place them in the context of microenterprise economics – as with MFIs, the smaller the enterprise, the higher the returns it requires to sustain itself. And for those entrepreneurs who succeed in growing into something larger, those returns will shrink accordingly. So next time you are asked how the poor can afford such high-priced loans, you may want to mention that returns for poor microenterpreneurs can and do far exceed those of larger retailers, as well as the seemingly high interest rates they pay on their loans. But it also helps to recall that such high returns are a sign of poverty, not a path out of it. author: Daniel Rozas

During European Microfinance Week Bart De Bruyne took the opportunity to interview Mila Bunker, MCPI (Microfinance Council of the Philippines Inc) Question: How are the population and your member MFIs affected by Typhoon Yolanda (Haiyan)? Answer: In the aftermath of Typhoon Yolanda , our member-MFIs in the Visayas and other nearby provinces, their clients and staff found themselves in the middle of massive loss—in terms of lives, enterprises and properties. The magnitude of the destruction that the typhoon wrought to our members is overwhelming; they badly need assistance and extra funds in order to help their clients persevere in these very difficult times. From an operational standpoint, MFIs have no other recourse but to become “flexible” and, at the same time, be more prudent in their lending policies, procedures and activities during the period of disaster—with due consideration to the welfare and well-being of their clients. Question: What are your strategies to cope with the aftermath of the Typhoon? Answer: • Document/monitor the extent of damage (in terms of life, livelihood and property) of microfinance clients per respective areas of operation. • Ascertain the specific needs and requirements of member-MFIs, in terms of financial/logistical resources for relief and rehabilitation. • Dialogue with international partner organizations/donors/funders regarding potential areas of cooperation for purposes of disaster recovery/rehabilitation. • Post-recovery: review the capacities and readiness of member-MFIs with respect to coping and responding to disasters. • Develop a network-wide/network-level Disaster Reduction and Management Strategy, including resource mobilization for such purposes. Question: How do you think that worldwide solidarity among MFIs can be organised to cope with such natural disasters? Answer: SPTF, SEEP Network, European Microfinance Platform and other international/regional microfinance networks and organizations should start concretizing plans/blueprints on how the microfinance sector—as a global community of development practitioners—can complement efforts of international humanitarian/relief agencies and organizations, with respect to disaster relief, rehabilitation, and recovery. Needless to say, we need to participate now in the discourse on Disaster Reduction and Management, especially on the aspect of disaster preparedness. It would also be good if we can develop and forge partnerships with other multilateral development finance institutions and come up with a model on how we can efficiently and transparently facilitate the flow of financial resources in times of massive humanitarian emergencies and disasters. author: e-MFP

Interview by B. De Bruyne with E. Javoy (Planet Rating) and D. Rozas. Full disclosure: in addition to being co-author of MIMOSA, Daniel Rozas is the editor of the e-MFP blog. QUESTION: Can you explain in a few words what the new Planet Rating index MIMOSA measures? ANSWER: MIMOSA estimates how much retail credit a given country can absorb, and compares that to the actual amount of credit reported. If the amount of reported credit is significantly greater than what MIMOSA estimates as optimal amount, the market is scored as being at risk of over-capacity (e.g. scores 4 & 5, or orange & red). If it's the reverse, the market is evaluated as being under-served (scores 1 & 2, or green and light green). QUESTION: How do you think MIMOSA can change the microfinance industry? ANSWER: MIMOSA is easy to understand and simple to use. Some investors have already incorporated it into their decision-making process. However, MIMOSA is also a prototype model. We're currently seeking to launch the next stage of the project, MIMOSA 2.0, which will fill many of the gaps, including providing a tool to evaluate a country at the regional, or even city level. We believe it can become the de-facto standard instrument for evaluating market capacity, and also a key component in investment decision-making, and orientation of grant funding and technical assistance to where they're most needed (e.g. emphasis on overindebtedness prevention in some markets, and institutional development in others). QUESTION: What role do you foresee for e-MFP in the future of MIMOSA? ANSWER: I think the key value is both to communicate MIMOSA and help members learn from each other (investors, DFIs, bilateral donors, and others) on how to adopt the tool in their everyday processes. For more information on MIMOSA, Microfinance Index of Market Outreach and Saturation, visit Planet Rating. author: e-MFP

During European Microfinance Week the e-MFP Rural Outreach & Innovation Action Group gathered. Afterwards Bart De Bruyne interviewed Antonique Koning (CGAP). QUESTION: Why is small holders farmers finance a concern for CGAP? ANSWER: The largest group of poor and unbanked people are smallholder farmers, estimated at 500 million households. Thus far, the offer of financial services has not always been well adapted to small holder farmers’ needs. Often even the realities and behavior of small holder farmers, and their demand and preferences for financial services is not well known. Did you for instance know that: - Close to a fifth of Tanzanian farmers and a quarter in Mali feel trapped in farming, see no hope in farming and do not want their children to become farmers (according to 2011 study by Dalberg)? - Zambian small holder farmers (with less than 3ha), got less than 24% of their household revenue from their agricultural production (study by Thomas Jayne)? The agricultural value chain is perhaps not the only way to engage smallholders in a broader spectrum of financial services with financial institutions. QUESTION: What would you recommend that the e-MFP Rural Outreach & Innovation Action Group can contribute? ANSWER: New ways in looking into and assessing the financial needs of smallholder farmers, can generate new innovations to serve them. Successful service models can be documented and spread in the learning communities. author: e-MFP

Question (Bart De Bruyne): Do MFIs start paying enough attention to ecological aspects and what can e-MFP do? Answer Geert Jan Schuite: Some practitioners are a bit puzzled about the role of microfinance in greening the economy. While financial and social sustainability are key priority areas, how to deal with the environmental dimension of finance? At this e-MFP conference already two workshops were held about the topic: one focused on practitioners and networks, and one around investors. It appears that clean energy solutions (solar power, energy efficiency, biogas, etc) become mainstream - products and services are tested and implemented, and successes were presented by MFIs in Latin America and Asia. At the same time, a more integrated strategic approach to a full triple bottom line model is still uncommon. Climate change and environmental degradation affect the poor, and most stakeholders agree that the microfinance sector has to deal with this reality. A green e-MFP working group works towards designing measures for a full-fledged approach. Green microfinance is here to stay and the working group to continue its efforts. author: e-MFP

CHUCK WATERFIELD CEO, MF TRANSPARENCY Q: We were here a year ago talking about the Responsible Finance agenda, the growth in recognition of transparency in pricing etc. What’s changed in the last year for you? CW: MFT is celebrating its five year anniversary right now. As we look back, we can see there are three main stages. In the first stage – the first three years that we were operating – we were collecting pricing data by ourselves. We’d go into some countries as we had capacity too, but we were doing it alone. Stage two was the last couple of years, during which we were working with three partners (Planet, the Pakistani Microfinance Network, and MFIN) who were collecting MFI pricing data in different markets. This gave us enormously greater reach and has allowed a deeper and richer analysis of pricing in different markets by different financial institutions. But over these past five years, we now see so many other people working for organizations collecting pricing data. The Responsible Finance session today here at EMW shows the number of stakeholders involved – not to mention the various initiatives underway like the SPTF, Smart Campaign, MIX, UNPRI, and the social rating initiatives. And the long term research, headed up by the University of St Andrews looking at links between social performance/client protection and financial performance. So there are many people working to drive the RF agenda, and MFT’s focus remains on analyzing pricing transparency, but we need to have the data. So MFIs do collection work for networks or associations who are also doing the same. This has great potential of course, but we have to avoid duplication. Q: So what comes now? CW: What comes now is stage three, which is talking with all the investors in the various networks, to encourage and facilitate the pooling of all this data, to maximize efficiency. We can and need to broaden where we’re collecting data from beyond just the countries which MFT happens to be working in. We want to be able to look at any MFI and any market. This is how education about pricing is promoted, and is done in tandem with all the other aspects of RF, including client protection and SPM. Q: Obviously, the most widely known microfinance issue outside the industry is the AP crisis in 2010 onwards. And within the industry, debate has surrounded the response of the Indian government to the problems in the MF sector there. What has been the effect of that crisis in transparency of pricing? CW: Five years ago people were uninformed about the consequences of high interest rates, and the ways financial institutions hide real interest from vulnerable clients – overindebtedness being a common result of this. The AP crisis led to a lot of things, the most widely known being the price caps the RBI initiated there. Regardless of the merits of pricing caps, there is a lot of other, very good legislation, which resulted from the crisis there, including the banning of flat rate loans, the banning of compulsory deposits tied to loans. So now, the interest rates presented to clients in India pretty much honestly reflect the true price. Q: The RF session today looked at the multi-stakeholder research on the links between social and financial performance. And where there are clear correlations, and “virtual cycles”, as Microfinanza Rating described it, there is a lack of causal inferences which can be made. That is, we can’t say that social performance improves financial performance. Is this a problem? CW: This is premised from the perspective of “How can I maximize my profit? And should I be nice to people, so they’ll become and remain my clients and help my financial performance”. I prefer to think of it the other way round. “I should be respectful to my clients, and how much, if at all, will it hurt my bottom line to do so?” The results suggest it probably does no damage, and quite possible helps financial performance. I’m into protecting consumers, not being nice to them for PR reasons. But here’s the wrinkle: consumer protection movements in the developed world group consumers together to fight the businesses. Here, by contrast, we have businesses pushing consumer protection to protect ‘them’ (the clients) from ‘us’, the institution. This is an interesting phenomenon. I’m not for self-regulation. I believe consumer protection is better when it’s mandated. You level the playing field where everyone has to do it; when everyone has to avoid overindebting clients. Q: Are you optimistic about the RF space, then? CW: I’m optimistic about SPM and client protection yes. It’s gaining ground, but not fast enough. And it’s easy to be mislead by the people at a conference or a session like this; it’s self selected stakeholders who are interested in all this. It’s the ones who don’t set foot here, who don’t care about anything other than profit maximization at virtually any cost, who I worry about. But we’ve come a huge way in only a few years, and pooling data, more transparent reporting in more places with more institutions, will be a good thing to come. author: Sam Mendelson

I am not a regular blogger (does the noun exist ? It sounds slightly inappropriate) but I have succumbed to an invitation to share some hasty and ill-considered thoughts with a wider readership than myself. And, as is often the case, the subject is microfinance; I know quite a lot about it, if knowing means writing books about it, criticising it, directing and rating it, but like just about everyone who reads this note, I have never actually used it. There must be few other services whose suppliers and commentators actually know so little about it, because they have never had to use it. That in itself says something about microfinance, it is very much a ‘we’ and ‘they’ business, but the question I have been asked to discuss is whether it is really a business at all. Do people start and run and finance microfinance institutions, to do good, to help the poor, or to do well, to make money? And, regardless of what they actually do, what ought they do? There is a worldwide trend for just about every activity to be treated as a business, whose over-riding objective is to make a profit for its shareholders and to maximise the earnings of its senior management (and, in the case of sport, its players). Prisoners don’t pay to be in jail, but their jailers are now as likely to be employed by large for-profit international companies as they are by government departments. Sick people don’t pay to be cured, at least in more civilised nations, but clinics, hospitals and so on, and the institutions which manufacture and market the medicines they use, are most certainly for-profit businesses. So, why should not financial inclusion, or microcredit (that is, microdebt), or financial services for the poor, or ‘lower income market segments’ as they are more likely to be known by the companies which set out to serve them, also be provided by companies which have been set up and are run to make money ? Health service and incarceration providers are paid by governments and are subject to strictly enforced rules as to the standards they are to maintain; there is now a wide range of social performance indicators for microfinance, so perhaps there is no reason for this welfare service to be treated any differently. But, is microfinance a welfare or a social or public service, like health care or prisons, which can be provided by a for-profit provider but needs to be supported by the state or by donors, because its clients cannot afford to pay full cost, and which needs therefore to be carefully monitored to ensure that it achieves its social objectives ? Or, is it like Wal-Mart, which serves millions of low income people by providing low cost clothing and other necessities, and which also directly and indirectly employs many millions more at wages which they at any rate are willing to accept for want of anything better, but which would be most unlikely to attract government or donor support? Or is microfinance a rare example of what so many donors are anxious to achieve; a profitable and socially beneficial business which had initially to be subsidised but has now ‘grown up’ and can stand on its own and attract and pay for the staff and finance it needs in order to serve the millions who need it? Is it, to use somewhat unlikely examples, like a soup kitchen or night shelter which had initially to be subsidised but has now grown to a level where its needy clients can afford to pay for it at a rate which enables it to cover all its costs? There is little doubt that microfinance has generally become a for-profit business, regardless of what its pioneers originally intended, and its recent and likely future growth is almost certain to come mainly from the larger for profit institutions. Impact evaluation of microfinance has itself become a significant and quite profitable industry, and there does not seem to be any definitive evidence that for profit MFIs do any less good, or more harm, that their charitable or government sponsored competitors. The trend, as in all things, is towards a for-profit approach. There are some notable exceptions, including just about all the MFIs in Bangladesh, which is in a sense the home of microfinance, and the relatively small number of cooperative and community owned institutions which have survived governments’ and NGOs’ efforts to perpetuate their dependency, but microfinance has on the whole been ‘Wal-Martised’, whether we like it or not. Many of us do not like it, but perhaps we should look at it in the context of the global trend towards commercialisation, which is not altogether a bad thing. We must also recognise that the growth and success of microfinance as it exists today is a function of the perpetuation of poverty, which is a global tragedy. If there were no poor people, there would be no need for microfinance. Its impact, for good and for ill, has been grossly exaggerated, but we should all see it for what it is, a temporary and regrettable expedient, and should look forward to day when microfinance should itself shrink and effectively disappear as we now know it. author: Malcolm Harper

Since the microfinance sector broadened its focus from loans to financial inclusion, savings have become a major focus. And rightly so – the argument for providing poor customers with a safe and reliable place is backed by both robust research and common sense. Meanwhile, MFIs are already delivering on the promise: in 2011, MIX Market reported nearly 80 million depositors world-wide, with an average balance of $994. It's a great story. Unfortunately, it’s at least somewhat misleading. Simply put, when it comes to microsavings, objects in mirror may be larger than they appear. [<{"type":"media","view_mode":"media_original","fid":"721","attributes":{"alt":"","class":"media-image","height":"270","style":"float: right;","typeof":"foaf:image","width":"340"}}>]Recently, I have been working on a project with the Financial Access Initiative to map different business models of collecting deposits: do MFIs focus on managing large numbers of small accounts, a small number of large ones, or some hybrid of both? And what are the implications of these different approaches? This paper is forthcoming and has yielded some interesting insights. But one of the unexpected findings has been the issue of empty or near-empty accounts. Consider the stratification of deposits of Bolivian MFIs included in a 2006 paper exploring how MFIs can fund themselves, including via deposits. Back then, Bolivian MFIs had 185,000 savings accounts, with an average balance of $1,186. But that average obscured an important detail – the vast majority of accounts (86%) were well below $500, averaging $43. What to make of this figure? In Bolivia in 2003, $43 was far less than most microfinance loans – that year, the lowest average loan balance ($146) was reported by Pro Mujer. BancoSol, the leading MFI in the country had an average loan balance of $2,126. Still, comparing loans and savings does not say very much. One can certainly imagine that a poor family that was able to save $43 at their MFI was deriving some benefit from the opportunity. But that’s not the whole story. That figure –$43 – is an average of loans that range in size from $0 to $500. And because it’s so far removed from the midpoint of the range, it implies that the vast majority of those accounts were below $43, in fact, far below. Compare, for example, the next two segments: $501-$1,000 and $1,001-$5,000. Distribution in both those cases is reasonably close to the midpoint. Yet this is not at all the case for the lowest segment (Figure 1). There is only one plausible explanation for such a distribution: the MFIs held on their books a large number of empty or near-empty accounts. [<{"type":"media","view_mode":"media_original","fid":"722","attributes":{"alt":"","class":"media-image","height":"316","style":"float: left;","typeof":"foaf:image","width":"220"}}>]That’s not a good thing for financial inclusion. Of course, some accounts may simply have a low balance at the time MFIs report their data. However, the large number of such accounts suggests that many of them are probably underused or not used at all, and they shouldn’t be counted as part of financial inclusion outreach. So how many of the 80+ million deposit accounts reported by MFIs to the MIX are actually being used by clients? 60 million? 50 million? Given how MFIs report their deposits, we cannot know with any certainty, though one can make reasonable estimates. Here at e-MFP, we are currently exploring mechanisms to do just that, and we expect to publish the results of this research in the near future. However, that is only a tool for understanding the issue. Financial inclusion is a worthy and appropriate goal for the microfinance sector. But if we are to deliver on our promises, we cannot build up another story that cannot be backed up with facts. We must develop and implement better tools for reporting data on savings outreach. Otherwise, what we show will still be seen through that mirror, where savings are larger than they appear and real outreach is beyond reach. author: Daniel Rozas

This summer marked an important milestone in microfinance. David Roodman announced his move from the Center for Global Development to the Gates Foundation. In the process, David also stepped down from his role as the blogger of record for the sector. As we launch the new e-MFP blog, we look back and celebrate the most influential blog in microfinance. My own journey into microfinance began at just about the time that David started his experiment of writing a book in the form of a blog, what he called the Open Book Blog. I have learned much from it, and I daresay few in microfinance can claim not to have been influenced by it. Even if you were not a reader, you likely have been exposed to ideas that were first broadly aired in David’s blog. Consider what microfinance looked like back in 2009, when David started his Open Book Blog. For one, questioning the impact of microfinance on clients’ well-being, a key topic of his blog, was the domain of a handful of academics. For the vast majority of industry participants, and certainly nearly all those outside it, the ability of microcredit to help reduce poverty was an unquestioned assumption. It also had many corollaries – high repayment rates were a prima facie demonstration of the beneficial value of credit to the poor; competition among MFIs helped reduce interest rates and improve efficiency; connecting capital markets with microfinance was a goal worthy of being pursued as a core institutional mission; and finally, that credit was the obvious missing financial service that the world’s poor were missing in the first place. In the four years since, these ideas have changed profoundly. Microfinance – and certainly microcredit – is nowadays only rarely viewed as an unalloyed benefit. High repayment rates can still be explained through customer satisfaction, but also through aggressive collection practices, client desperation, and even overheated markets where clients can borrow from one MFI to repay another. The role of competition is now viewed more often in the context of market saturation rather than its downward influence on interest rates. And as for the role of capital markets in the sector, one of the most visible of such efforts has been disappointing, while another ended in disgrace. Meanwhile, credit is now viewed as a part of broader financial services to the poor, and often of secondary importance to savings. So what does all this have to do with David Roodman and his blog? Certainly, not all of these ideas were his own – he was an aggregator and transmitter as much as an idea generator. It wasn’t David, but Esther Duflo, Abhijit Banerjee, and a host of other researchers and their RCT studies that killed off the notion that microcredit is an inherent good. But it was David’s blogs on the subject that spoke to the world, translating academic lingo for those with no patience for econometric formulas. And David himself also had a major hand in this, using his joint study with Jonathan Morduch to publicly dismantle a key study that purported to show positive impact of Grameen loans on their borrowers. Likewise with other issues. The blog helped undermine the use of high repayment rates as a sign of borrower satisfaction. On competition, the blog served as the primary source of reporting on the goings-on in Andhra Pradesh, though drawing extensively on the work of Ramesh Arunachalam, N. Srinivasan, and many others. On capital markets, David was among the earliest analysts to suggest that the flow of foreign capital to microfinance had major downsides, though there too his case was strengthened by the work of Hugh Sinclair. And on savings, David went back centuries, dusting off the writings of forgotten heroes of financial services for the poor, such as Priscilla Wakefield, to remind us that it was through savings, not credit, that the working poor of the Industrial Revolution came to participate in the financial sector. But there again, David was retracing the footsteps of Hans Dieter Seibel, who had been arguing much the same thing at least a decade earlier. So what, in the end, was David’s contribution? I believe it was his rare gift to weave a multi-threaded story into a clear narrative, to make inscrutable econometrics understandable even to the statistically-challenged, and to distill complex arguments down to their most relevant parts. David once cited a quote that the world needs both playwrights and critics, even if more of the former and less of the latter. David was the rare critic who could stand shoulder-to-shoulder with the best playwrights of the microfinance world and help them (and the rest of us) see the true state of things. Finally, there is the question of the Open Book Blog. It has been silent for some months now, even before David’s official departure from CGD. This is a great loss to the microfinance community. Many have praised David’s seminal book, Due Diligence, but I believe that the blog that incubated the book was a far more important contribution. Since David signed off, the level of exploration, interaction, and engagement he provided to the sector has yet to be replaced. Many other blogs have emerged as important vehicles for transmitting and sharing ideas, with the CGAP blog arguably leading the pack. But they are almost exclusively institutional blogs – important and useful, but without the independent, single voice that made the Open Book Blog such a fantastic vehicle that made learning fun. For four years, David’s blog was the first thing I read each morning. I miss those days. Good luck David in your new job, but do come back for a virtual visit and blog post once in a while! author: Daniel Rozas

The 2013 European Microfinance Week will open with a debate. Dr. Aris Alip, founder of the CARD group of companies in the Philippines and Dr. Michael Chu, Professor at Harvard Business School and former director of Accion will tackle the question: What is the goal of microfinance, lifting the poor out of poverty or financial access for all? As part of this initiative we are launching a blog series that asks longtime microfinance practitioners to share their perspective on this question. In this introductory post we lay out the underlying context for why this question is relevant. For the past half decade, there have been two major debates raging in the microfinance community. One is about the role of commercialization in the sector – are commercial MFIs, especially those that focus on maximizing profit, simply replacements for yesteryear’s loan sharks, as argued by Muhammad Yunus? Or are they vehicles for leveraging the scale of commercial markets to improve MFI outreach and efficiency? The second argument is on the value of microfinance itself – does it actually improve the lives of the poor, or is it at best a palliative, with downright harmful side-effects of overindebtedness and excessive support for low-productivity enterprises that hold back more productive job growth? By now, these two debates, if they haven’t been settled outright, have reached a state of equilibrium. With the vast majority of microfinance being provided by commercial MFIs, the question of commercialization is becoming increasingly moot. Meanwhile, recent research suggests that microfinance, or at least microcredit, has limited effect on raising the incomes of most borrowers, though it does help the poor smooth volatile incomes and deal with financial shocks. However, experience with repayment crises and overindebtendess problems in several countries has also clearly shown the negative side-effects of microcredit to be quite real and concerning. The sector is thus entering a new phase, and the previous arguments have evolved along a new fault-line. On one side, there are those who face head-on the central challenge that microfinance is not an effective anti-poverty tool by further focusing on their original mission to improve the lives of the poor, this time bringing along a host of social performance metrics to prove it. Others have taken the opposite tack, arguing that their task is to expand access to financial services, without suggesting that this will directly raise the incomes of the poor. This camp argues that so long as financial services are delivered in a professional manner, then the financial performance of the MFIs themselves and basic client outreach metrics will be sufficient measures of success. The two camps don’t necessarily follow the lines drawn by the earlier debates. Both sides feature commercial and non-profit MFIs. And unlike those earlier debates, this is not an argument about which side is right. Instead, it's about what each side finds important and why. What separates an MFI with a strong social orientation from one that pursues entirely financial objectives? Is there a common area of agreement? And how does the sector define itself when both sides lay claim to the term “microfinance” – is it just the provision of financial services to the poor, or is there more to it than that? Let the debate – and the online discussion – begin! author: e-MFP

Author: Sanjay Sinha. Introduction to the social investors’ “playground” Relatively light and supportive regulation of microfinance, systematic and graded requirements for deposit taking, and a positive approach to foreign private investors make Cambodia a very popular destination for international social investors.  Not surprisingly, over the past decade, Cambodian microfinance has gone from a largely NGO domain to a haven of commercial microfinance where international NGOs remain but mostly (now) as commercial investors gradually cashing in on their grant investments of the late 1990s and early 2000s.  International NGOs, international private investors and DFIs between them own 87% of the shares of the largest 15 MFIs (excluding ACLEDA which is a bank).  During the past decade, the size of the microfinance industry has grown more than four-fold and nearly 40 fold in terms of portfolio, largely enabled by this inflow of foreign capital.   The motivation for this international investment is undoubtedly mixed.  The liberal investment environment is, presumably, a reason in itself but Cambodia is also a country with great potential for financial inclusion: It is one of the poorest countries in Asia with Bangladesh and Nepal being the only significant countries that are poorer; yet, its average per capita GDP growth rate has been 8.5% per annum over the past five years providing significant possibilities for savvy investors. Financial inclusion through banks is so low it approaches negligible levels. According to the Global Findex survey, the poorest income quintile in Cambodia has virtually no financial inclusion compared to 25% for all developing economies.  Investing in Cambodian microfinance is, therefore, a logical step for social investors; it brings significant benefits to low income families at the same time as producing good returns on investment.  Thus, 19% of adults had originated a new loan from a “formal financial institution” (read MFI) during the period covered by Findex. Thus, by end-2012 credit outstanding from MFIs was a high 17.7% of the $4.75 billion of credit provided in Cambodia by the banking sector.  Including ACLEDA increases this contribution to an impressive 45.5%.  These figures are very high by the standards of other countries; even MFI-intensive Bangladesh has an equivalent contribution of just over 8% while Nepal and India have significantly lower levels.   In this context, the impact of the growth of the microfinance sector on financial inclusion bears examination.  In most countries, microfinance institutions have made a virtue of focusing on low income clients projecting themselves as purveyors of services to the poor, enabling both investment and consumption smoothening for families clustered just above and just below the poverty line.  However, this has resulted in the emergence of a “missing middle” where small entrepreneurs in the second quintile (from above) – often the largest providers of employment per unit of investment – have found themselves excluded from loan capital by the restrictive practices of the banking sector at one end of the spectrum and by those of the MFIs at the other.  This note examines the effect of the practice of microfinance in Cambodia on financial inclusion in the country. The average loan balance rises as a proportion of GDP – is the mission drifting? Figure 1 shows the trend in Cambodian microfinance over the past 9 years – the period since the microfinance sector became significant in that country.  The ratio of the average loan balance (at the end of each year) to the per capita GDP (at constant prices) has risen from 23% in 2003 to over 70% in 2012.  The 2012 proportion compares with average balances of 11% in India, 45% in Nepal and 11% in the Philippines at roughly the same time.  In Nepal this proportion has been broadly constant over the years while in India and in the Philippines it has fallen from 17% and 19% respectively in 2003.  The apparent implication of this is that while in other countries MFIs have focused on their traditional client base of families in the third to fourth income quintiles (from the top), in Cambodia much better off clients (with a need for larger loan sizes) are now being served. Developmentally this is an apparently negative result for a low income country. But more and more borrowers at the lower income levels are being served Figure 2 provides a more balanced picture of the shift in the distribution of Cambodian MFIs relative to the economic status of the population during the 2003-12 period.  In 2003, 9 of the 11 largest MFIs in Cambodia provided loans of a size that averaged less than 42% of per capita GDP.  By 2012, there had been a substantive shift with just 4 of 15 MFIs averaging loan size less than 42% of per capita GDP; the other 11 were spread up the spectrum to nearly twice the per capita income per person.  [In this analysis, $113 in 2003 is equivalent to $200 in 2012 at constant prices.  Other size classes have also been converted accordingly]. In terms of numbers of borrowers, this translates to virtually all the 256,000 MFI borrowers in 2003 being served by institutions with average loan size less than 21% of per capita GDP.  By 2012, most of the MFIs had moved above the lowest size class but 48% of borrowers were still served by MFIs with average loan sizes less than $400 (42% of per capita GDP).  By 2012 this number had increased to more than twice the 2003 level.  Far from abandoning borrowers at the lower end of the spectrum, Cambodian MFIs had actually increased the numbers covered at that level.   …while there is an effort by some MFIs to cover borrowers with larger loan requirements   The remaining 52% of borrowers in 2012 were covered by the 11 MFIs spread up the spectrum in terms of loan size as presented in Figure 2 .  The figures shows a relatively good spread of average loan sizes including those suited to small and micro-entrepreneurs in the second and third income quintiles.  The deposit service is becoming more important, increasing overall outreach of microfinance services to around one million families, and other financial services are also gradually being offered Of the 15 MFIs covered by this analysis, 7 are licensed microfinance deposit-taking institutions (MDIs) with the first two MFI deposit licences having been provided in 2009.   The total deposits of the MFIs amounted to $274 million, 33% of outstanding loans at end-December 2012 and 27% of total MFI funds on that date.  The 620,000 depositors at MFIs were 49% of the total number of borrowers and the average size of deposits ($441) was a significant 66% of the average outstanding loan of $660.  Observation at a couple of Cambodian MFIs indicates that many MFI depositors are not MFI borrowers.  More recently, these MFIs have also started to offer money transfer services  and to experiment with micro-insurance in collaboration with foreign insurance companies.  A number of MFIs are conducting micro-insurance pilots in Cambodia and have also recently introduced money transfer services.  The outreach of both these services is expected to grow strongly over the next few years. Based on this discussion, the outreach of Cambodian MFIs could far exceed the 1.25 million who are MFI borrowers and can be estimated at around 1.5 million adults.  Adding ACLEDA would take this number to nearly 2 million.  But, there is a significant degree of overlap of clients amongst MFIs in Cambodia.  Thus, the total number of families served by microfinance is probably closer to one million than 2 million.  Nevertheless, in a country of under 15 million people, a total of ~3 million households  (average household size, 5.1 persons in 2004), approximately 1 million households served by MFIs constitutes a substantial contribution to financial inclusion .  …and the geographical distribution of services is considerable The inclusive effect of microfinance could be limited if services were extraordinarily concentrated in the more populous parts of the country.  In practice, Cambodian MFIs started with a concentration of offices in central and southern Cambodia but quickly spread to the north and, in recent years, have taken criticism of geographical concentration to heart and started to work in the underdeveloped north-east as well.  Data from the 15 leading MFIs shows that they operate in all of the 24 provinces in Cambodia through 741 branch offices.  This distribution applies not only to MFIs offering loans at the top or bottom ends of the scale but broadly to all average loan size classes.  In addition ACLEDA Bank has 238 branches in the 24 provinces resulting in widespread availability of microfinance services in the country. To conclude , while international investors may have gone to Cambodia attracted by the liberal regulatory framework and approach of the government and the National Bank,  the net effect of the inflow of foreign capital into the microfinance sector has been a growing and already impressive contribution to financial inclusion .  With the expansion of financial services like money transfers and micro-insurance, this contribution is only likely to grow further.  Microfinance in Cambodia may be an investors’ playground, but it is a force for financial inclusion as well . About the author: Sanjay Sinha is Managing Director of M-CRIL, a company that undertakes financial and social ratings of microfinance institutions and provides research and other services designed to facilitate microfinance. He has knowledge and experience of over two dozen countries and over 35 years of economic and development research experience. He has specialized in the analysis of value chains of relevance to the livelihoods of low income families and micro-enterprise promotion in addition to microfinance. Sanjay has an M.Phil in Economics from Oxford University, UK. He was a UN Advisor on Inclusive Financial Sectors during the Advisor Group's tenure, 2006-2008.