Microenterprise Economics: High returns, low incomes

e-MFP, 13 January 2013

It’s a question that comes up at nearly dinner discussion of microfinance:  why are the interest rates so high, and how can poor clients afford them?  So, you have the answer – interest rates are high because operating in difficult environments is costly, and because those costs have to be recouped from small loans.  After a few examples (it costs the same $10 to make a $100 and a $1000 loan…), you eventually set your questioner at ease that most MFIs might not be ripping off the poor after all.  But after all that, you’ve largely forgotten then main point of the question – how can the poor afford it?

After reading yet another article questioning the affordability of microfinance loans, it occurred to me:  microfinance clients face the same economics as the MFIs.  Consider your typical market trader.  She buys stock to resell.  The cost of the stock, together with some fixed assets, constitutes her investment capital. What are her returns?  I propose that they must be high as a matter of principle.  More →

Are MFIs overstating their savings outreach?

e-MFP, 28 Oct 2013

Since the microfinance sector broadened its focus from loans to financial inclusion, savings have become a major focus.  And rightly so – the argument for providing poor customers with a safe and reliable place is backed by both robust research and common sense. Meanwhile, MFIs are already delivering on the promise: in 2011, MIX Market reported nearly 80 million depositors world-wide, with an average balance of $994.

It’s a great story. Unfortunately, it’s at least somewhat misleading. Simply put, when it comes to microsavings, objects in mirror may be larger than they appear.  More →

The Day After Chiapas: Imagining a repayment crisis in Mexico

Financial Access Initiative, 27 March 2013

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.

A full-blown crisis in Mexico would be unlike anything we’ve seen, easily surpassing the negative impact of Andhra Pradesh. more →

From Responsible Lending to Responsible Profit

Financial Access Initiative, 16 November 2012

If there’s one issue that’s most difficult for microfinance practitioners to explain to the lay public, it’s high interest rates.  As Elisabeth Rhyne describes it, at some point the numbers get so high that people become outraged and stop listening altogether.  Most recently, the issue was put back in the public eye through Hugh Sinclair’s Confessions of a Microfinance Heretic and the media coverage it has spurred.

With few exceptions, his critique that microfinance investors are investing in MFIs charging exorbitant interest rates has gone largely unanswered. That’s not a tenable position for the long-term.  For a socially responsible fund, the case ought to be simple – if you have investments that you’d rather not have to publicly support and explain, then either those investments don’t belong in your portfolio or you should learn how to explain those investments.

Rates in excess of 100% (in APR terms) are not unknown in microfinance.  more →

Repairing a Tarnished Image: a Plea for Transparency in Indian Microfinance

MicrofinanceFocus, 28 March 2012

Last month, the headlines of the world’s papers read déjà vu.  “Suicides in India linked to microfinance debt.”  “SKS Microfinance implicated in farmer suicides.”  The headlines may have differed, but the article was one and the same, penned by Erika Kinetz of the Associated Press.  SKS was appalled, calling the report “libelous” and “scurrilous.”

For what it’s worth, the damage has been minimal.  SKS stock slid 4.25% on the day of the article, but recovered within a few days of trading.  The slide shows little distinction from its already volatile trading pattern (Figure 1).  Of course bad news can also cause lenders and investors to take a second look, or simply slow things down.  One MFI manager told me of exactly this very reaction on the part of an Indian bank in the immediate days after the AP article.  But the story got relatively little press in India, and no follow-up of significance.  By now it’s reasonable to say that the microfinance sector in India can breathe a sigh of relief. Seeing bad news get swept back under the carpet can be quite satisfying, even if the stink remains. more →

Bring Microfinance into Politics

MicrofinanceFocus, 7 July 2011

It seems wherever you turn these days, politics is getting into microfinance. In Andhra Pradesh, the state government exercised its prerogative to kill off an entire industry. Next door in Bangladesh, Prime Minister Hasina decided to hound Yunus out of Grameen Bank, no matter the cost. The No Pago (No Pay) movement in Nicaragua counted on the support of the country’s president. What’s the industry to do in the face of such onslaught?

Weathering the Storm identified state intervention as one of the core risks faced by MFIs. It drew its lessons from the case of PADME in Benin, which was effectively nationalized by the government in 2008. At the time, PADME was in the process of transforming from an NGO to a for-profit entity, and the Benin government had made clear from the start that it was not in favor of such a plan. Despite this, PADME’s management and prospective investors had decided to push ahead, thinking that they would be able to parry the government’s attempts to block the process.

They were wrong. more →