Fake deposits faking microfinance outreach

e-MFP, 20 September 2016

Last week saw two nearly identical financial scandals hit two very different parts of the world. One was the revelation that Wells Fargo, one of the leading US banks, had falsely created some 2 million accounts for customers who never asked for them and were largely unaware of their existence. The other was about banks in India secretly depositing 1 rupee (0.015 euro) into their customer’s accounts.

What’s remarkable is the sheer silliness of the scandals – for the most part, this was not a case of money being stolen or fraudulently taken from customers. Instead, the scandals were being driven by the need to meet targets. In the case of Wells Fargo, staff were under pressure to meet sales goals. In the case of India, the banks needed to comply with government targets aimed at expanding savings accounts to financially excluded populations. In both cases staff managed to meet the targets, while completely missing the objectives the targets were meant to achieve. The financial writer Matt Levine put this brilliantly: “Measurement is sort of an evil genie: It grants your wishes, but it takes them just a bit too literally.”

Naturally, in our line of work, it’s the India scandal that’s most relevant. And frankly, we at e-MFP are not one bit surprised. more →

Microfinance and savings outreach: what are we measuring?

e-MFP, 13 March 2014

For years, credit was the driving force behind microfinance. But times have changed. Instead of credit, we now speak of financial inclusion and expanding access to savings stands as one of the topmost objectives for the sector.

We also live in the age where it’s no longer acceptable to claim success without reliable metrics to back it. And on that front, the metrics applied to savings are woefully inadequate. According to a paper recently published by e-MFP, 50-75% of the savings accounts reported by MFIs stand empty. Like shadows cast by an evening light, the majority of savings clients are but illusions that obscure the real savers. We are thus doubly tricked – led to believe that more clients are saving than is the case, and that the clients who save are poorer than they really are. 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 →

What’s wrong and what’s right about consumer finance?

Financial Access Initiative, 8 May 2012

It’s the microfinance bête noire.  The great unspeakable.  The furtive shadow slinking down the narrow alleys of poverty.  Yes, the consumer loan.  Has microfinance really come to this, we ask?  Helping the poor buy a TV?  Charging 40% interest for the couch to go in front of that TV?  And what about family celebrations, festivals, dowries?  Is that really what microcredit is for?

Consumption lending has been creeping out from the shadows for some time, but mostly for “good” consumption like school fees, urgent medical care, or basic needs like food during those difficult periods when income is scarce.  Still, for many of us the TV-on-credit notion that represents what is so easy to think of as “bad” consumption remains too painful an idea to swallow.

But how to draw the line?  If not the TV, then what about a microwave?  A motorbike?  Plumbing in the home?  Is there a framework one can use to evaluate when consumer credit is acceptable and when it is not?  No less importantly, how does an institution dedicated to serving poor customers decide what type of funding mechanism – savings or credit – is more appropriate for a given purpose?  more →

The Economics of Microsavings: High-yield loans as the lynchpin of deposit-driven microfinance

Financial Access Initiative, 6-13 February 2012

I have a confession to make.  When I began composing this blog, I approached it with a fairly simple hypothesis:  Microfinance institutions (MFIs) that engage in large-scale deposit taking must likewise grow their loan portfolios.  After all, deposits are a source of funding with high operational cost that must be appropriately offset by growing revenue, and only microfinance portfolios provide yields high enough to achieve that.  And because many poor families have a higher demand for savings services than for credit, the resulting over-liquidity could push MFIs into unsustainable portfolio growth, eventually leading to the very credit bubbles that microsavings advocates are trying to avoid.

It seems a reasonable enough hypothesis, and sufficiently controversial to be interesting.  Trouble is, it’s not true.  Reality turns out to be more complicated.   more →

Unstable Core: is the funding of the Indian microfinance sector structurally flawed?

MicrofinanceFocus, 27 December 2011

On October 14, 2010, the Andhra Pradesh government issued an Ordinance that effectively shut down the microfinance market in the state.  That shutdown continues to this day, with collections at negligible levels.  It’s clear that the AP microfinance market is dead and will not recover for years.

Important as AP has been to India microfinance, it is not everything.  Despite the year-long crisis, repayment rates in other states remain strong.  And though AP-oriented MFIs have been seriously or even terminally wounded, others have remained unscathed.

Despite this, in the intervening period funding for MFIs – largely dependent on a handful of Indian state and commercial banks – has persisted in a state of severe liquidity deficit.  more →

Financial Inclusion and the Morality of Thrift

Financial Access Initiative, 27 July 2011

Expansion of financial inclusion through savings has grown immensely as a focal point in microfinance policy and leadership circles over the past couple of years.  Recent market crises where overindebtedness played a major role have only increased the urgency of this objective.

The focus isn’t unwarranted.  As Tim Ogden points out in an earlier post, the upside of asset accumulation is obvious, while there’s no comparable risk of over-saving as there is with over-indebtedness.

Much research has been done to examine the savings practices of the world’s poor, with the implicit objective of developing better savings services.  Some of the most enlightening findings come from Portfolios of the Poor, and from Stuart Rutherford’s work with SafeSave in Bangladesh.  One interesting finding from this line of research suggests that expanding financial inclusion through savings doesn’t end with offering opportunities to save, but also requires creating obligations to save. more →

Savings Banks: Rediscovering a Well-Trod Path to Financial Inclusion

MicrofinanceFocus, 7 June 2010

Savings is a hot topic in the microfinance policy circles these days.  The CGAP blog regularly features one or another posting on savings programs.  The influential blogger David Roodman recently recommended deemphasizing cross-border MFI debt funding in favor of support for savings services.   Meanwhile, the Gates Foundation has been channeling its millions towards expanding savings, in many cases bypassing the traditional microfinance sector altogether.  more →