Elisabeth Rhyne: The Year in Microfinance

I for one am glad this year is over.  Maybe, as the Washington Post suggested today, first prize for the worst year goes to the U.S. Congress, or maybe it goes to the government of Greece. But it was no picnic for microfinance. This was the worst year for microfinance since forever – at least since it was called microfinance.

This year the microfinance sector got hit with three whammies. The first was the crisis in Andhra Pradesh, where rapid loan growth created overindebtedness that triggered a political backlash that is still sending ripples through microfinance in India and beyond. The second was the news from impact research challenging the efficacy of microcredit in moving people out of poverty. The third whammy is the rise of “financial inclusion” making electronic payments innovations and mobile banking the new darling of donors and policy makers, and relegating microfinance to the status of legacy.

I watched the industry coming to terms with these challenges throughout 2011. Reactions varied. For many microfinance professionals, especially those in countries where no political or reputational crisis has hit, the challenges are not yet real, and business goes on as usual. For example, in the Center for Financial Inclusion’s opinion survey on “Opportunities and Obstacles to Financial Inclusion” providers ranked poor client protection practices 29th out of 30 possible problems. For others, the response was largely defensive, and I confess to have found myself digging my own defensive trenches at times. But those who recognize the depth of the three challenges have begun to work on making the difficult adjustments. The Client Protection Principles of the Smart Campaign have now been endorsed by 2,300 organizations and individuals, and work on implementation is proceeding rapidly. Ditto for Microfinance Transparency’s publication of pricing data. These efforts will help prevent future Andhra Pradesh situations. I also have seen increased efforts by industry players to face up to what research actually says about clients, thanks in large part to the influence of Portfolios of the Poor.  CGAP has recently decided to build a large work-stream around learning how providers can translate insights about clients into products and services. And efforts are multiplying for microfinance institutions to broaden their product range and engage with new technologies.

Each of the challenges coming out of 2011 requires the microfinance industry to change in profound ways. The challenges are far too deep to be resolved in a single year, and they will probably be the principal concerns of microfinance for years to come. By the time the challenges have been fully met, the microfinance sector will be very different and, I expect, much more valuable to its clients. 

Elisabeth Rhyne is Managing Director of the Center for Financial Inclusion. FAI invited Ms. Rhyne to offer her insights and reflections on the important events, opportunities and challenges facing microfinance this past year. This post is the first in an ongoing series featuring Susan Davis, Mary Ellen Iskenderian, Jake Kendall and others still to come on "The Year in Microfinance." These contributions will be posted weekly on the FAI site into the New Year. FAI also invites you to participate by telling us your own thoughts and opinions about the year in microfinance via comments.