Vulnerability: The 2013 Microcredit Summit Campaign Report

In 2011, microfinance providers reached fewer total people than they did in 2010, as well as fewer people living in extreme poverty, according to the 2013 State of the Campaign Report, which is released annually by the Microcredit Summit Campaign. Entitled “Vulnerability,” the report presents some stark findings. This is the first time the number of microfinance clients has decreased since the Campaign began its conducting research on the industry in 1998. This overall decrease occurred despite an expansion of 1.4 million more clients in sub-Saharan Africa. Most of this reduction occurred in India, and was in part due to the microfinance crisis that began in Andhra Pradesh in late 2010.

There are a number of reasons for the slowdown. Microfinance institutions (MFIs) are more likely to go to markets that have already proven to be successful. Reaching poorer and more remote clients is generally more difficult and costly for organizations. Additionally, data limitations make it hard to know when local markets are saturated. Maturing markets, the global economic crisis, investor wariness, and donor fatigue also contributed to the slowdown.

The report highlights mobile and electronic banking as an area of potential innovation for MFIs. It notes the use of electronic payments continues to grow, which could cut costs and could lead to greater outreach and inclusion. The report includes data from M-PESA, a major mobile money company in Kenya, which shows that 50 percent of its users are unbanked and 41 percent live in rural areas. This data suggest that mobile money is reaching people who are otherwise without banking services. Like many areas of microfinance, however, research on mobile banking’s effectiveness has lagged far behind its implementation. Additionally, currently mobile banking is mostly used for transfers and payments rather than for services that encourage asset generation. In the future, the range of financial services available through mobile technology is likely to grow considerably and could be and area in which MFIs may need to strike a balance between innovation, outreach and client protection.

The report also discusses some new research being done on consumer behavior, such as the psychology of scarcity, a concept developed by Princeton professor Eldar Shafir and Harvard professor and FAI affiliate Sendhil Mullainathan. The professors argue that living with scarcity produces a unique psychology that challenges the poor’s ability to make decisions. This psychology leads to behaviors such as tunneling, meaning that people eschew a longer-term vision in order to meet their most urgent needs. In practice, people are willing to borrow money even at very high rates in order to meet their immediate needs. The takeaway is that by developing an understanding of these limitations, MFIs can alter products to better meet their clients’ needs and help customers improve their decisions.  

The difficulty of measuring outcomes may also affect how accurately the goal of alleviating poverty through microfinance can be tracked. If improving financial access is truly a goal worth pursing, we must develop a clearer understanding of the nature and source of the difficulties the poor face, as well as an understanding of the role that financial products can play in empowering individuals. This is an important issue for both microfinance clients and providers. As Larry R. Reed, the author of the report, states, “Our work is tied to the vulnerability of our clients, and if we don’t develop the products and services that help them address their vulnerability, then our work becomes vulnerable as well.” A strong understanding of consumer behavior and the development of appropriate products are keys to mitigating the vulnerability of everyone involved in the microfinance industry.