What about the banks?

"As for microfinance, I have a question. As microfinance becomes more recognized as a profitable tool, are larger international banks becoming attracted to the field? I know the IMF and World Bank have become more involved in it. As these larger, establishment type entities move into the field, are they putting the squeeze on the smaller NGOs, charging lower interest for larger loans and such? My biggest worry is that the bigger banks will take over the field and the philanthropic part of microfinance will be lost. I just don't see Bank of America giving a crap about empowering people but they have big money muscle."

Thanks, Joe, for giving me a perfect segue into a fascinating topic! This is the one of the main issues these NGOs are dealing with right now and as microfinance continues to prove its sustainability and profitability this issue is at the forefront of everyone's minds! This topic has come up at every NGO we have visited and here's what I've gathered and understand.

First, I want to give a bit of background. Indian Banks have a quota they need to fill to lend to those who may not be considered traditionally "credit worthy." At the end of the fiscal year when they realize the need to meet this quota they send a few representatives out onto the streets, identify a few people, give them loans, and then write it off as bad debts to close the fiscal year. In this way they 'meet' their quotas and unfortunately propogate the notion that the poor are not credit worthy. This story was related by the founder of one of the NGOs we visited, Annapurna. The founder, Medha Samant, worked in the banking sector for three years before starting Annapurna.

So far we've spent time at three NGOs and all three cite the huge gap between the supply and demand for finacial services. As I said before, moneylenders were occupying the space in the market for poor people to get loans. Then, the NGOs came in and began promoting microfinance alongside a series of social programs. Now, microfinance is gaining international attention from investors and corporate banks alike as a way to make a profit.

The problem is that the demand for financial services is so high, that the NGOs who have the right intentions are not able to serve everyone. This leaves the door open for other microfinance insitutions (MFIs) to come in and compete for the business. For-profit MFIs are able to give loans with a one-day turn around with lower interest rates. They are able to give lower interest rates because the loan periods are longer - the maximum loan repayment period we have seen at these NGOs is 2 years. Many Indian NGO microfianance models are based on a Self Help Group model (SHG) that require savings for the first 6 months. When members want to apply for a loan they apply to the group and the entire process may take a couple of weeks, depending on how often the groups meet. (I will write an entry describing the SHG model in detail...). The point is, if people really need money and they can get it the next day, why not use the for-profit MFI?

Members of mature SHGs that have been around for 5-10 years understand the value of the SHG and the benefits they receive from being a part of the group. However, there is nothing to stop members of even mature SHG groups to take a loan from a for-profit MFI during times when they need quick cash, or don't want to go through the group model. The for-profit MFIs are threatening the effectivness and structures of the SHGs and may hinder the ability of NGOs to spread their socially empowering model of microfinance.

Many people I've talked to point out that the for-profit model just doesn't make sense from a business standpoint. The for-profit model focused only on lending neglects the other 'needs' of their customers and does not encourage growth in their customer base and is not a sustainable business model. In fact, there is a shift in NGOs towards evaluating microfinance from social performance perspective in addition to a financial perspective.

The main concern NGOs have about for-profit MFIs is that they are in the market to gain profits, which sets up exploitative models for their clients. The NGO models must be efficient, effective and even self-sustaining, but they are operating with a completely different mission: to better the lives of their clients. I have not visited a for-profit MFI and to be sure, they most likely do not begin under the pretense of exploiting people. But I would argue that regardless of your intentions, if your goal is profit and you are accountable to shareholders who are expecting returns on their investment then this will be reflected in the way business is conducted. The NGOs do recognize these MFIs are providing a service that they are not able to provide, and that indeed they are expanding the scope and reach of credit, but at what cost?

Which brings us to the next part of Joe's question...

"And how are the NGOs funded? Are they more or less sustained by the interest paid on the loans?"

This differs between all of the NGOs we've visited. There are two basic philosophies I've encountered:

1) Sustainable microfinance programs after 3 years.

NGOs are now requiring the Federations (groups of SHGs) to be completely self-sustaining by the end of three years. They recognize that costs of the initial set up, support and development of these groups cannot be burdened on the people. The NGO use funds raised through grants and other international programs to support those groups while they are forming and becoming self sustaining.

DST recently realized the need for groups to be sustainable and now have the SHGs calculate repayment rates of their groups, the individuals and the federations. The women are very cognicent of these financial ratios and concepts and strive to achieve 100% repayment through peer pressure and mutual trust. (Two reasons why the SHG model is so brilliant...will explain in another post).

2) Profits not only sustain the microfinance program, but also fund the growth and development of new projects.

At Annapurna, where the founder comes from a private-sector banking background, they use the profits from the microfinance programs not only to sustain their operations, but also to expand other social programs. I sensed that other NGOs founders do not support this type of expansion funded by profits - they would rather the profits go to the women, or go towards lower interest rates for their loans.

At this point in time, NGOs are being approached by investors and they are having some real internal debates on how to handle this. Of course in an NGO capacity, funding is always an issue, but many are wary of compromising their mission. The only one currently exploring the issue of outside private investors is Annapurna.

Whew! Congratluations if you made it through this very lengthy explanation! This is a very real and complex issue and something the microfinance community is going through. All of my opinions are based on what I've learned here...I'm sure there are more scholarly articles about this topic if you're interested.

Also, there probably won't be any more pictures added to this blog, I'm having some issues with the technology. So sorry!