Just about everyone agrees that international remittances should be cheaper. If you run the numbers on international remittance flows, incomes of recipients and transaction costs, you can make a case that reducing remittance costs would be among the highest ROI interventions for raising incomes of poor households in the developing world (and given what we’re learning about the use and benefits of cash transfers, there’s good reason to believe the money would be well spent).
As this became clear over the last 10 years, the World Bank, IADB and plenty of NGOs have drawn attention to the issue—and have largely succeeded in dramatically reducing the cost of sending money home (costs do still vary widely depending on sending and receiving country). Still, most people I talk with think costs should fall even more . . . Read More
No consumer likes overdraft fees. Overdraft fees are often unexpected, expensive, and in some cases undeserved. What’s more, they can wreak financial havoc on households living on a low-income.
But the larger issue is not the fees themselves. It’s the lack of transparency surrounding them and the widespread consumer distrust that results.
Edelman is a PR firm that surveys people around the world to create an annual Trust Barometer (among other things), which gauges levels of trust in different institutions. In 2012 it found that only 41% of respondents in the U.S. trust banks – which, by the way, were at the bottom of the list right along with financial services. The year’s ratings on banks are second-worst only to 2011, when they hit a low of 25% . . . Read More
The Taylors overdraft their checking account every two weeks, on purpose.
As described in a recent issue brief published by the U.S. Financial Diaries, the Taylor family’s income level varies significantly from month to month. Sometimes it’s not enough to cover all of their expenses. So, they opened an account at a bank with a simple overdraft fee structure: One $35 charge per overdraft, no daily fees, and an allowance of up to $500 at a time. Since the Taylors typically make only one large cash withdrawal per paycheck – the entire amount of pay – this bank would charge them at most one $35 overdraft fee each cycle, if they happen to need more cash than the amount of that week’s direct deposit.
The Taylors use overdrafts as another household might swipe a credit card or take out a payday loan. Since their credit history eliminates the card option and they are already tied up with a payday lender, over-drafting becomes another logical – and probably more convenient – place for them to turn to stay on top of their bills. It’s clear that the family responded to and relies on their new bank's transparent behavior. They saw its fee policy, understood how they could manage it, and became a customer . . . Read More
At a recent Microfinance Club of New York event with Michael Joseph, the former CEO of Safaricom in Kenya and now the Director of Mobile Money for Vodafone, Joseph cited regulatory barriers as the principal reason that mobile money has not taken off in India, the largest market in the world and his current project. A new paper from Eva Gutierrez and Sandeep Singh at the World Bank confirms his intuition, finding evidence for the importance of regulation for mobile money usage by combining the World Bank’s Global Findex database with cross-country variation in regulatory regimes.
The authors argue that both regulatory certainty — stability in regulation — and regulatory openness — policies that favor the introduction of new technologies — are necessary for mobile money adoption. They construct an index of regulatory favorability towards mobile money and look at the relationship between their index and actual end user behavior using the Global Findex to track outcomes for 35 countries, finding that overall, regulation is a significant factor in explaining mobile money usage among both the banked and unbanked . . . Read More
My last two posts on the potential repayment crisis in Chiapas described the high risk of a crisis in Chiapas, Mexico, and its potentially devastating consequences to the microfinance sector around the world. But here is the good news: thus far there is no crisis, and one could still be avoided.
I have argued before that development finance institutions and other funders could leverage Smart Certification to enforce client protection practices and thus reduce the risk of the kind of over-lending that's happening in Chiapas. However, that prescription alone would not work in Mexico, mainly because a large number of Mexican MFIs are independent of foreign funding, and there are many other lenders active in the same space, including consumer finance companies and large retailers that provide credit.
The answer to avoiding a repayment crisis in Mexico will thus require government action . . . Read More
A month ago I wrote a post singling out the Mexican state of Chiapas as a potential site of a coming repayment crisis. No, this is not a follow-up announcing that it has begun, nor am I rooting for one to start. In my next post, I will review the options that the Mexican microfinance sector has to avoid it, and what the global microfinance community can do to help. But for now, let’s dig a bit deeper into what a Chiapas crisis might mean, and why I continue to focus on Mexico, as opposed to the broader issue of excessive credit and over-indebtedness.
Let’s be blunt: not all countries are created equal. Some remember my warning three years ago about the danger of a credit crisis in Andhra Pradesh. Back then I compared a possible crisis in India to the crisis in Bolivia a decade before: "India is no Bolivia – if the bubble bursts there, the entire global microfinance sector will find itself reeling." Well, Mexico is no India . . . Read More
It's been over two years since the start of the great India insolvency. Four years since the Bosnia blight and No Pago Nicaragua. And nearly six years since the Morocco microfinance meltdown.
At this point, it's reasonable to say that the first global crisis in microfinance has passed. Life is on the mend.
In a recent email, Alok Prasad, head of the Microfinance Institutions Network in India (MFIN) described its most recent quarterly report as "green shoots in evidence." The numbers certainly bear him out. Elsewhere, investors speak of tightening their exposure to countries with overheating markets, pay attention to issues of overindebtedness, and are wary of the sort of runaway growth that was being posted by Indian MFIs back in 2008-10.
Development of sector-level infrastructure is likewise moving apace, with ever increasing credit bureau coverage of microfinance clients and increasing implementation of client protection practices . . . Read More
About 2.5 billion adults, just over half the world’s adult population, lack bank accounts. If we are to realize the goal of extending banking and other financial services to this vast “unbanked” population, we need to consider not only such product innovations as microfinance and mobile banking but also issues of data accuracy, impact assessment, risk mitigation, technology adaptation, financial literacy, and local context. In Banking the World, a new collection of research papers edited by Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch, experts take up these topics . . . Read More
One of the many important questions in the transition to mobile and/or electronic money is who will bear the costs associated with using the system. This question is particularly salient since the Kenyan government announced it was planning to begin taxing mobile money transfers, adding to the cost of the system. The Kenyan government seems to believe that operators will absorb the cost of the tax, but others suggest that it will be passed on to consumers, "picking the pocket of the poor."
Who will bear the cost of the tax and the other costs of operating mobile money systems? On a theoretical basis, this is an easy question to answer: the people who benefit will bear the costs—if those costs are lower than the benefits. In economic theory, it is even irrelevant who is initially charged for the costs, as costs will be passed on to those willing to pay to receive the benefits (known as tax incidence).
Practically, it’s a hard question to answer because we have very little information on the true costs and benefits of any money system . . . Read More
There’s not enough academic research on the regulation of financial inclusion. Many of the questions might seem too applied for some researchminded economists, but that leaves regulators with few guideposts. It also seems short-sighted.
Regulation is always a question of trade-offs between competing goals. Within microfinance, for example, there is evidence that the supervision and monitoring that is part of prudential regulation increases costs substantially for microfinance institutions. That, in turn, appears to push institutions to reduce outreach to their poorer customers and women (Cull, Demirgüç-Kunt, Morduch 2011). The alternative—less regulation in order to increase outreach—carries plenty of dangers. Those are difficult trade-offs to make and there is as yet not enough empirical evidence to describe optimal regulatory schemes for microfinance. Read More
The microcredit movement is premised on the idea that access to capital will be liberating, empowering, and profit-making. But as the Indian microfinance sector closed out another year, it’s hard to be so ebullient.
The Indian microfinance crisis continued through 2011, and we now have good data and the distance to get a clearer perspective. More than anything else, the data show disturbingly high levels of debt pushed into communities. While the government blames microfinance institutions for excessive lending, government-sponsored self-help groups turn out to have contributed to a large share of the problems . . . Read More
As CEO of a global microfinance network I spent much of 2010 answering questions about the crisis in India and advocating for the continued relevance of microfinance as a model. This year’s challenges, however, gave me an opportunity to talk about theessential role of transparency and good governance and the importance of building on a deep understanding of client needs to tailoring products to fit those needs.
While the crisis dominated the media for much of the year, it would be regrettable if we didn’t acknowledge some of the important positive developments in the last 12 months. As an organization focused on increasing women’s access to financial services, we at Women’s World Banking (WWB) have a few things to cheer . . . Read More
Some time ago, I had a conversation with a microfinance investor. What is the greatest challenge facing the sector? – I asked. His answer: multiple borrowing – multiple borrowing was getting people into too much debt; multiple borrowing was transforming micro-enterprise lending into consumer finance; and multiple borrowing was rewriting the traditional relationship between MFIs and their clients.
Of course, multiple lending is present in all of these cases. But thinking about multiple borrowing along these lines misunderstands the basic situation. Multiple borrowing isn’t a reflection of some recent or extreme developments to be ascribed to runaway growth, greed, or willing ignorance. Nor is it some foreign element to be excised from microfinance. No, multiple borrowing is an intrinsic part of the practice, one that has been with us for years. Nor, despite press articles to the contrary, is it a result of heavy market penetration, or even saturation.
This is a realization I came upon during a recent trip to Haiti . . . Read More
The Andhra Pradesh (AP) microfinance crisis looks set to drag on. In the wake of proposed national legislation to regulate microfinance across the country, the AP government has signaled that it will fight to maintain its current controls and limits on the industry.
Those limits have all but dried up microfinance in AP, a state which accounts for about 40 percent of all microcredit lending in India. I recently wrote a piece for the Harvard Business Review suggesting a way in which the AP crisis could negatively impact the global microfinance industry . . . Read More
The heated debate about non-profit and for-profit microfinance institutions stretches back for years. It’s truly time to put that debate to rest—not because it has been resolved but because it is limiting a more important conversation about proper governance arrangements for microfinance: the question of who oversees management and in what manner.
The idea that for-profit or non-profit status is determinative in the future course of a firm, what customers it serves and how is so overly simplistic as to be laughable. There are responsible and corrupt for-profit organizations and responsible and corrupt non-profit organizations. What determines the course an organization takes over the long term—whether it hews to a vision of serving the poor or pursues profit above all else, whether it flexibly adjusts to changes in markets and contexts or becomes hidebound and irrelevant, whether it maintains a commitment to a long term vision or shifts like the wind with fads of the day—comes down to the governance arrangements that are put in place after the choice of profit status . . . Read More
India is the biggest, fastest-growing microfinance market anywhere. And it's at risk of hitting a bad crisis. This will be surprising if you haven't been paying attention to the global press for the past 3 weeks. The last big microfinance news from India centered on the millions of dollars earned by investors following the SKS IPO. Vinod Khosla made the front of The New York Times for his $100 million plus pay-day.
Just a few weeks ago, most of the who's who of microfinance in India got together for a conference in Mumbai. The agenda gives no sense of what the rest of October would bring.
But a spate of suicides by microfinance customers, in response to alleged harassment by microfinance loan collectors, has turned attention back to conditions in villages -- and it's not all pretty. Regulators are now rushing to clamp down on microfinance institutions.
Shloka Nath has the best piece I've read, online today in Forbes India . . . Read More
This is the second of two guest posts by Barbara Magnoni, President of EA Consultants, on what we can learn from Banex and its demise. Banex had been one of the most prominent microfinance institutions in Nicaragua, but as it pushed forward with an aggressive growth strategy, its foundations proved weak. In early August 2010, Banex (formerly Findesa) entered liquidation. Magnoni gives starting points for understanding how the bubble burst.
While I do not claim to understand the dynamics of Banex’s drastic deterioration, I would propose we examine some possible causes to avoid repeating mistakes in other MFIs and other countries. Some of the issues to take into account (in no particular order) are:
1) Extremely fast growth and how this may have affected loan analysis (when entering new areas such as livestock, consumer lending and agriculture) as well as hiring practices, training of new staff, and conformity to loan policies and procedures.
2) Incentive schemes . . . Read More
The SKS IPO is a microfinance milestone: the first IPO of an Indian microlender – an event big enough to be covered by the international media. When the first IPO happened in Mexico in 2008, Banco Compartamos was attacked for its high interest rates and (arguably) excessive profit rates, with Muhammad Yunus leading the charge.
This time, there's controversy of a different sort: the focus is on the investors rather than the microlender, namely Unitus. This is Jonathan Lewis, founder of Opportunity Collaboration, pinning down the questions swirling around Unitus, a key SKSsupporter which has, at best, massively botched its PR strategy:
With its announcement, Unitus unleashed a series of web and media commentaries . . . Read More
Two very different events hit the microfinance world this summer. In India, the SKS IPO sparked debates about the lines between profit-making and social responsibility when investors profess a “double bottom line.” In Nicaragua, the failure of Banex is an event that may have even wider reverberations. This is the first of two guest posts by Barbara Magnoni, President of EA Consultants, on what we can learn from Banex and its demise.
I have been working with the microfinance sector in Nicaragua since the end of 2004, arguably the beginning of the “bubble.” At the time, Nicaragua was strangely popular among investment funds, due to its relatively mature microfinance market, which had received support from various donors over 15 years. This aid ensured a certain level of efficiency, transparency and best practice that helped convince investors to keep pouring money in, as more and more money was coming to investment funds from donors, socially responsible and commercial investors.
Since then, MFI performance has plunged . . . Read More
That is indeed the question when regulators so often find themselves playing catch up – trying to figure out if and how something that’s already happening should be supervised. When it comes to prudential regulation – or, safeguarding deposits – the stakes are particularly high.
In microfinance, most MFIs aren’t big enough to threaten the health of the financial systems they’re part of if they run into trouble. However, if prudential regulation of microfinance is inadequate – or when it fails – poor customers stand to lose their savings entirely. And the stakes really don’t get much higher than that.
As with other forms of regulation, the basic dilemma is that regulators of microfinance want to ensure the health of financial institutions without creating undue burdens on the institutions, or on themselves. Striking the balance is tricky when experience with regulating financial access and evidence to support hypothetical costs and benefits are so thin.
In his third Policy Framing Note for FAI, David Porteous sheds some light on why these challenges are so, well, challenging, and describes early experiences with prudential regulation of microfinance in India, Nigeria, the Philippines and Nigeria.
According to the paper, there are two basic ways to integrate microfinance into regulatory frameworks. One is to amend existing regulations; the other is to write new laws that open special “windows” for microfinance. The window approach is appealing, since microfinance is a rather unique animal in the world of financial services . . . Read More