Development and Cooperation


	Contributions from the Column Focus “In the long run, clients will prefer individual loans” Microcredit world record Social control and group solidarity “Prime example of pro-poor growth” Mitigating risks in Uganda Never too little 01/2006		“In the long run, clients will prefer individual loans” Microfinance is a diverse industry with many actors pursuing different strategies Guillermo Salcedo, Microfinance Manager at the ethical investment fund Oikocredit, does not believe the markets have matured so far as to attract big commercial banks. He says, adequate institutional environments would best serve to speed up services for deprived people. [ Interview with Guillermo Salcedo ] Should a microcredit scheme be profitable for the organisation running it? It is important that, at some point, the organisation reaches sustainability. Sustainability translates into making a certain degree of profit, because profit is necessary to create reserves and thus maintain the level of assets. So the organisation should also become independent of charitable funding? Well, that’s the idea. Over the past 25 years, most MFIs – microfinance institutions – started with subsidies and grants, but eventually they need to reach a level of scale and operations that allows them to recover their operational and financial costs. That means charging sufficient interest rates as well as improving the efficiency of their operations. Do you see a need to start other services than only credit provision? Savings programmes can be important, of course. They can definitely help reaching sustainability. Moreover, one should always expect a growing business to diversify its products and services. Isn’t there a conflict between helping the poorest of the poor and of organising a profitable credit scheme? This depends on the objectives and mission of the organisation. For a strictly commercial organisation with the prime objective of making profit, there will likely be a conflict – as serving the poorest of the poor may not be financially viable. Most MFIs all over the world are still essentially not-for-profit. For organisations with the mission of reaching the poor, the balance between financial returns and social ones matters a lot. Would you say there is a profit margin that must not be exceeded, that it shouldn’t go beyond two percent or so? It is hard to make a definition of that sort. In technical terms, it is acceptable that a group of private investors should decide to invest in this kind of business, because they may consider doing so financially viable and even attractive. It would not make much sense to impose any such limit on them. Personally, however, I believe that microfinance services are there to target precisely those segments of the population which were normally not served by commercial institutions. In my view, the profit level should directly relate to covering all costs – including a reasonable return on shareholder equity. In the early nineties, I was on an assignment to report on microcredit schemes in Bangladesh. It struck me that some were using credit as an incentive for people to join their programmes and then worked on changing those persons’ view of the world. For instance, they were redefining the role of women in Muslim villages by emphasising literacy and vocational training. In a way, they seemed social workers using credit as an incentive. I believe that development programmes should be able to attract people to participate based on their own merits, thanks to the quality of their services and the benefits they offer. Microcredit should not be used to attract participants for other programmes. Nevertheless, development is about more than just money. No doubt, organisations providing credit along with other services can play a very important role in promoting certain groups, be they women or regionally marginalised people. But the other activities should have their own independent source of funding and not be confused with banking operations. But there are organisations that do what I have just described? Yes, there are many different organisations doing many different things in different countries. Some use microcredit to attract participants. Would you say that of the Grameen Bank? I haven’t been following closely what they are doing, so I am not in a position to comment. Grameen is a very big and innovative operation, that keeps evolving all the time. I know there are organisations that continue to depend on donors. It really is already quite a challenge and very difficult to become self-sufficient doing microcredit activities only, it is even more so if you want the business to grow and carry out other services such as training or female empowerment or anything of that sort. In my view, however, organisations providing microfinance should specialise in doing so. Loan officers should not be involved in providing technical assistance. You need specialisation within the organisations – and some organisations balance various approaches quite well. However, I would not in any way define mixing programmes as a best practice for the microfinance industry. What about forming groups of the very poor, who cannot offer any security other than stepping in for one another? Do you approve of this method? It depends on the local situation. Group lending has worked and continues to work in many parts of the world. Basically, it is effective where there are no other options. But individual lending tends to be more attractive to the clients, because they do not risk having to pay for someone else’s shortcomings. Moreover, group sessions take time and small scale entrepreneurs would probably want to spend that time working for their business. In the long run, as competition increases in the microfinance markets, clients will prefer individual loans. In Latin America, in the Caucasus and in many other countries, I have watched organisations specialised in group lending begin to offer individual loans as well, because they wanted to stay competitive. Is group lending the only way to start with the very poor? Not necessarily, individual loans can also be viable. The situation varies from country to country, it also depends on whether you are urban-based or in a rural based market. Groups are, of course, powerful instruments to change social norms and traditional attitudes. In the example of Grameen, every woman in a credit group has four others watching what she is doing. They meet at least once a week in their small group and also attend formal sessions with other groups. Every member is thus exposed to constant scrutiny by dozens of other women in her village… Yes, that method does work. It is a good tool, especially in the very early stages. But as the microfinance core business expands, I think other methodologies tend to be preferred and become more important. Oikocredit is originally a faith-based organisation. Does that play a crucial role? It is relevant for many of our members. Oikocredit is still supported by church or church- related organisations, even though their share has been declining. Since the very beginning, we have been working with support associations, who represent individual members as well as local institutions, whether religious or not. But religious affiliation really plays no role in our credit operations. We do not select organisations or institutions because of their professed faith. There are various international networks involved in microfinance. The model of the Grameen Bank is being copied in other countries, there are institutional networks in Latin America and elsewhere. Do you cooperate with them or are you building a network of your own? We are wholesale financiers, we are not directly involved in retail operations. We have regional offices and invest through existing MFIs, organisations of different sizes and legal structures. We find that some networks have developed and advanced a lot in certain markets. Cooperation with them often allows us to better accomplish our mission. We are also members of specialised discussion groups within the microfinance industry such as the Council of Microfinance Equity Funds, the Dutch Microfinance Platform and the Microfinance Centre. We also cooperate with donor institutions or governmental agencies from the Netherlands and elsewhere. So you are not in competition with ProCredit, Solidario, Finca or Acción? I wouldn’t say so. Although there may be differences between the way each organisation works and what markets they target, we really have very much in common. The world is huge, poverty wide-spread and demand for credit definitely not satisfied. Sometimes, we fund MFIs that are supported by – or even integrated into – a network, but we also fund other organisations. Some big commercial banks are beginning to talk of micro finance. Quite frankly, I don’t think that the markets we are trying to develop have reached the kind of maturity that would make them attractive to major commercial operations. We are still grappling with issues such as best practices, performance indicators and so on. Major commercial banks are still not familiar with the methodology or the markets. And profitability in absolute terms is definitely to small to be of genuine interest to them. Do established banking institutions matter in the microfinance sector at all? Well, most successful MFIs have developed from start-ups or from an up-scaling of NGO programmes. Just consider the networks you mentioned. They did not result from down-scaling efforts at established commercial banks. I don’t know of many examples of true down-scaling into the low end of the market. Today, however, the term microfinance is used very loosely. Sometimes, it refers only to particularly poor strata of society and, at other times, to small scale businesses in general. Is there a certain kind of regulation that MFIs need? Microfinance institutions need an enabling environment that allows them to be creative and reach their target groups effectively and at reasonable costs. They need to operate in a transparent, orderly manner but shouldn’t be under excessive governmental surveillance. There must be a balance of supervision and freedom, ensuring efficiency and preferably even competition, but not imposing remote control on operations? Exactly. Minimum requirements – for instance, on the level of loan loss provisioning how to assess and classify the risks of the portfolio– affect operations. They should serve to safeguard the stability of MFIs rather than to give the authorities leverage over business decisions. Should there be state guarantees for deposits in the case of failure? Some countries have such guarantees in place for deposits in commercial banks, therefore it should be acceptable to extend such a concept to MFIs. On the other hand, no well-managed financial institution should normally need such guarantees. Moreover, governmental capacities are normally poor in poor countries. Good management, in turn, depends on reliable figures and appropriate regulation can help MFIs to come up with them. How do you assess the effect of 2005, the UN year of microfinance? It has helped to increase funding significantly. More capital has been made available to MFIs than would otherwise have been the case. There has also been a lot of conferencing, with interesting results. However, my impression is that to a certain extent the MFI industry has been debating a lot among itself. Greater awareness of the importance and impacts of microfinance has not reached out very much to governments and other actors that are relevant to improving regulations or the climate for microfinance in general. Questions by Hans Dembowski. Guillermo Salcedo Jimenez is Microfinance Manager at Oikocredit, an ethical investment fund which supports small scale credit schemes. At the end of 2004, the Netherlands-based cooperative society was dealing with almost 400 project partners internationally with an outstanding capital of $114m. gsalcedo@oikocredit.org http://www.oikocredit.org