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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 12 / May 2005 |
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Voices of Microfinance
Q. What is the most important innovation to come out of the microfinance sector in the last five years, and what was its impact on the industry? Editor's Note: Responses to this question ran the gamut. Several focused on product diversification, including savings and remittances, and extending outreach, particularly to rural areas. Various innovations in technology were named, including fingerprint technology and personal digital assistants. Others cited the trend towards formal financial institutions as the important innovation, as well as the evolving notion of microfinance as a profitable and sustainable business enterprise. In spite of the increasing recognition that microfinance must be commerically viable to reach mass scale, some respondents still raised concerns about reaching the poorest. Important impacts of innovation included giving clients "a level of self confidence to grow according to their own plan", and a "growing commitment of the financial sector to those traditionally excluded". In terms of further innovation, managing foreign exchange risk and developing investment funds for microfinance were called for. One participant also pointed out that there must be a "shift from product orientation to market orientation," which was echoed by others who felt that a better understanding of client impact is needed, and that data mining, resulting in better evaluation of loan applicants, "mass customization" of products and services, and greater customer loyalty are the crucial developments in the industry. While these responses implicitly emphasize the importance of innovations to the evolution of the microfinance industry, one participant wisely cautioned that "sometimes innovation is not the solution." *Thank you to all those who contributed their expertise to provide valuable insight into this question. Developing innovative tools to manage foreign exchange risk is of increasing concern to the microfinance industry. MFIs should be able to access loan currency funding and not carry the foreign exchange risk resulting from hard currency loans or transfer the risk to their small low-income clients, who sell their produce in local currency.
Guillermo Salcedo
The most important innovation of the last five years is the inclusion of other services such as insurance, savings mobilization and money transfers. These are additional services added to the ordinary microfinance provided to rural communities. In view of this, microfinance has to extend to rural areas through establishing village development funds which in it will serve as microfinance entities.
Lawrence Makheya
The most important impact that microfinance has had is the growing interest and commitment of the financial sector to develop packages catering to the development agency beneficiaries traditionally excluded from financial institution services.
Ali Mokhtar
The biggest innovation in microfinance in the past five years is the advent of data mining, that is, the analysis of data to inform practical responses to business challenges. A handful of microlenders use this decision-support tool to increase the accuracy and efficiency of evaluating loan applicants (credit scoring), promote 'mass customization' of products and services (segmentation), and target adjustments to maintain customer loyalty (drop-out analysis). Donors can accelerate the advent of data mining through the standard tools of change agencies by reducing uncertainty among potential adopters by communicating what is data mining and how it works, for example via studies of its first uses in microfinance; reducing the risk shouldered by the first adopters by funding a few early projects; building local capacity for continuous application by training local data miners; and breaking down social inertia by bringing positive public recognition to adopters.
Mark Schreiner
The most important innovation in microfinance is flexibility in collateral, and its impact is increased access to larger loans.
Leonor Melo de Velasco
The most important innovation is the "back to its roots" drive that is gradually emerging throughout the industry. Microfinance is about excellent, appropriate and affordable service delivery to poor people, explicitly including the poorest of the poor. The Millenium Development Goals provide the conceptual and political or ideological framework for that objective and many practitioners are gearing up to contribute to it. As a consequence, what now are considered 'frontier areas' in the industry (hardcore poor, demand-driven product development, rural finance, etc.) will become key operational working areas for many MFIs as well as key intervention areas for donor and support agencies. The bulk of support in microfinance will return to those practitioners that make the extra step to reach the millions of poor currently considered beyond reach. But, quite different from the situation a decade ago, service delivery at that level will be far more professional, efficient and effective.
Herman Abels
Sometimes innovation is not the solution. Rather than innovate, it could be enough to replicate and adapt current good practices. If a key innovation were to happen, however, it should solve some of the following problems: microfinance has not reached some of the poorest, distant areas. Also, interest rates remain extremely high. The push for sustainability, efficiency and professionalism has been of great importance and there is still a lot to do to level up small and medium microfinance organizations; however, for microcredit to be a poverty reduction tool, it also needs scaling up, reaching poorer communities and have a better understanding of actual impact.
Hugo Sintes
The last five years have seen a dramatic change in the supply of credit to the most needy, neglected and untouched sector by formal financial institutions. This has brought the feeling to poor and needy people that credit is not a barrier in their development. The most important innovation that has come up is that social development is no longer grant based. People have accepted that the availability of credit is more important than grants. This has paved the way for the abolition of subsidy in any form. The most important impact is that the poor have developed a level of self confidence to grow according to their own plan rather than remaining dependant on assistance by way of grant or subsidy. This has led to a situation of living with dignity, which is what social scientists have aimed to acheive.
K.C.Malick
Bangladesh is a land of poverty-stricken communities. As a result, the poor communities of this country have witnessed several innovative approaches from time to time in relation to alleviating or reducing chronic poverty and to achieving results-oriented sustainability. At this point in that long and complex path, we have found some real achievements in practice, such as the development of more productive strategies of the group dynamics to use in the field of microfinance; the effective use of informal along with formal arrangements to ensure speedy services; and research strategies to find out the real cause of poverty centering the stigma of poverty in the midst of psycho-social, socio-economic, familial, religious, cultural legal and political factors.
Abdur Razzack
The most important innovation to come out of the microfinance sector in the last five years is the adoption by most players of a more holistic development approach through the integration of other development services in microfinance. It has greatly change the lives of the poor, especially women. Positively transforming the lives of the poor greatly enhances sustainability in both the clients and the microfinance service providers. Its impact gives more recognition to the industry as a poverty alleviation tool.
Magdaleno "Daleng" Bargamento
Remittances are one of the important innovations to come out of the microfinance sector. The number of workers from low-income areas migrating worldwide is growing rapidly. It is now estimated that over 200 million people migrate annually. They generate about US$100 billion of remittances per year. Microfinance institutions' (MFIs) involvement in the growing market of remittances, where they compete with money transfer organizations and formal and informal institutions, is very positive in mainstreaming MFIs, in supporting the need for new technologies, and in lowering the costs of sending remittances and other financial products and services. MFIs are much closer to migrant families than most of their competitors. In many circumstances, people receiving remittances are already microfinance clients, mainly parents, children, and relatives of the remitter and are dependent on remittances. Funds transferred can be used for food, education, health needs, working capital for small businesses, construction, and savings by migrants who might later return to their native country.
Padi Dingue
One significant innovation in microfinance has been the steady move away from seeing microfinance institutions merely as enterprises run for the poor and as institutions that rely exclusively on grants and subventions. There is a consistent move in the industry towards a financial systems approach to microfinance, where microfinance is seen as a viable business enterprise that can be self-sustaining and profitable; and that can easily be integrated into mainstream financial systems in any economy. These changes are helping to debunk the myth that the poor are bad credit risks who are not sophisticated enough to play in mainstream finance and economic activities. The recent entry of several big commercial banks into microfinance schemes means that there is now an increased capacity in the system. This alleviates the sustainability problems, which have been a drawback of traditional microfinance schemes. Indeed, we are on the verge of a microfinance revolution.
Kenneth Kalu
A professional microfinance worker can introduce innovations in his every step. In the last five years, the microfinance sector introduced the tools to identify the poor and developed strategies to reach to them. The microfinance industry proved that it can be sustainable and is one of the best ways to escape from poverty. Another innovation is that microfinance programs should be modified according to the customers' needs and expectations. They need to revise their products from time to time and make them customer friendly. Interest rates are not the major issue for the real poor, but rather the access of organizational credit. The microfinance industry can run more smoothly than other industries in periods of inflation or deflation and in political conflict or crisis. Economic and social change can be made through the microfinance sector.
Govinda Bahadur Raut
The development of investment funds for microfinance could be the greatest innovation for the industry. What could happen is that the person on the street in the developed world could become actively involved in microfinance through investment, and so a whole new era in transparency and accountability in the industry could emerge. This would mean that the many organizations that are incapable of managing MFIs would be exposed, the lack of capacity would be exposed, NGOs pretending they can absorb vast sums of cash into microfinance programmes may become accountable. It could also open up the microfinance industry to unimaginable prospects. What if bankers, students, professionals of various types in the developed world were to begin to understand what microfinance is, what it can do, and then play an active part in the industry. The sooner the industry can explain fully to people what it is and does, and accept that it needs the expertise of others, then whatever starts this process would undoubtedly be an important innovation for the industry.
Garrett Wyse
I nominate the trend to formal financial institutions, and, in particular, the ability to accept savings deposits from poor clients. Of particular interest is the concept of using modern technology to open an account on a magnetic card using only a fingerprint and photo for ID purposes.
James W. Hamilton
The most important innovation to come out of the microfinance sector in the last five years must be the training of the actors to become seriously responsible, such as being able to transform their own institutions into banks that produce more effective growth; mastering marketing and accountabilities; knowing theoretically and practically how and where to invest; participating in debates; integrating computer services; and getting control of the taxes. The microfinance sector has the best clients of the industry.
Cisse Abdoulaye
In the last five years, the most important innovation in the microfinance sector has been the recognition of its positive impact on poverty alleviation by the world development community. This global recognition can be highlighted by two main facts: the institutionalization of the MFIs as part of the formal banking sector; and the large replication of MFIs around the world, particularly in Africa.
Patrick Ndzana
In my opinion the most important innovation in the microfinance industry in the last five years is the increase in women's access to microfinance through product and process adaptations. Savings, credit, and insurance products have been developed specifically in response to needs expressed by women clients, such as for children's education, old-age pensions and medical expenses. Process adaptations included recruiting women staff to effectively interface with women clients. In order to push more innovations into the microfinance industry, practitioners must shift from product orientation to market orientation. Market orientation assumes that organizations must determine the perceptions, needs, and wants of target markets and satisfy them through the design, communication, pricing and delivery of appropriate and competitively viable products. This is the surest way that innovations can be beneficial to the microfinance industry.
Patrick Dogbe
The best example of innovation in microfinance is the creation of a regulatory framework in Uganda that is the result of a partnership between the Central Bank and the microfinance practitioners. The framework provides clear rules governing non-bank financial institutions that are licensed to accept deposits. It also provides the basis for sustainable commercial microfinance business in Uganda and could serve as a model for other countries. The next major step required in regulation is to establish rules on capital adequacy based on objective portfolio risk analysis which would allow for rapid growth of well managed MFIs while ensuring soundness and safety for struggling MFIs which are licensed to accept deposits.
Tony Singleton
The greatest innovation in microfinance is recognizing that the poor are bankable. Microfinance transforms the lives of the poor and the high success rate has attracted formal financial institutions and global attention. The poor need financial services beyond credit like savings, insurance etc. Insurance companies have joined hands with MFIs and MFIs are focusing to provide inclusive financial service. Standard financial products never suit target groups' requirements. Tailor made products are necessary. Standard and efficient MIS have been developed by different agencies to suit to the needs of MFIs. The impact is better monitoring and effective controlling of the program. Evaluation tools also have been developed by agencies to measure the impact. All of these innovations have worked to improve the microfinance sector.
J Milton Devadosan
The most important innovation is the lowering of the transaction costs of credit products. Some examples include reduced transaction costs for rural credit, as these are on a fixed term and require a simpler "back-office." With this innovation, less time is required from the teller as there is only one installment for the reimbursement and so it is not necessary to make a payment notification or a book of coupons. Nevertheless, finding and meeting clients in rural areas is still a very expensive proposition. Another innovation is mobile computing (through Personal Digital Assistants). This allows making the risk-process evaluation in real-time, which noticeably speeds up the process and considerably increases the productivity level with the consequent reduction of unit-costs.
Veronique Van Simaeys
International financial markets are markets for global players. An improvement in the basic conditions for international financial markets will only indirectly help to satisfy local players' demand for capital that is the condition for small and micro loans. If the objective of achieving equal participation is to be resolutely pursued, the range of microfinance options must thus also be improved parallel to strengthening the international financial architecture. The significance of the simplest financial services in developing countries was underestimated for a long time. The involvement of the poor in a reliable monetary system is key to participation, nearly all poverty-relevant areas being influenced by money. The establishment of simple, functionally viable banking systems, which give broad strata of the population access to savings and loans, must be given increasing priority in development financing. There is savings potential even in the poorest developing countries and this could be mobilized for investment purposes.
Heinz Terhorst
Microfinance is an irrevocable process. The top politicians across the globe support microfinance. They want it to further develop because it serves the Millennium Development Goals (MDGs) and is corruption nonsensitive. Larger commercial institutions are currently preparing their approaches to penetrate the industry. For them, the only questions are where, how and when; not if. The standing of the microfinance industry will improve quickly as the expertise of the people will make microfinance wanted throughout the world. Competition among NGOs, semi- commercials and commercial institutions will increase. Competition in the field between suppliers will increase availability (through new distribution techniques), efficiency and will drive down interest rates. Microfinance is one of the most important tools to realize the MDG's. Lending money can only be effective, however, if there is a core element of trust and an opportunity for the borrowers to feel pride through repaying their respective loans and experiencing their increasing independence.
Diederik Laman Trip
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