• If Ever There Was a Time for Microfinance: Talking to Ira W. Lieberman

    Why won’t microfinance loans by themselves allow people to escape poverty? Why does microfinance nonetheless have an essential role to play in such efforts, particularly in response to this COVID crisis? When I want to ask such questions, I pose them to Ira W. Lieberman. This present conversation focuses on the book The Future of Microfinance (edited by Lieberman, Paul DiLeo, Anna Kanze, and Todd A. Watkins). As President and Chief Executive Officer of LIPAM International, Lieberman advises governments, nonprofit institutions, and private companies in a wide range of countries. Much of Lieberman’s advisory work focuses on the microfinance sector. He has held several positions at the World Bank, and served as Chief Executive Officer of its Consultative Group to Assist the Poorest (2CGAP) from 1995-1999. His other books include In Good Times Prepare for Crisis, also from Brookings Press.

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    ANDY FITCH: Could you first clarify, in definitional terms, how financial access, microfinance, and financial inclusion fit alongside each other? And could you flesh out microfinance’s double bottom line?

    IRA LIEBERMAN: Financial access means providing an opportunity for people normally unable to approach formal banking institutions for funding — or for safe savings. Financial access helps poorer people, many of whom work in the informal sector, to rely less on money lenders (or, for that matter, on family and friends) to finance their lives, particularly when it comes to a small-business or self-employment opportunity.

    Microfinance started off by providing small working-capital loans to people who needed financial access. Before microfinance, for many people, when they needed a loan, they had to work with a money lender charging significant interest rates. Loans from money lenders actually put many borrowers into deeper poverty.

    As microfinance expanded over time, it became clear that micro-savings might play just as important a role as micro-lending. Larger microfinance institutions, overseen by banking regulators, learned to mobilize savings safely, which gave people a way to prepare for major events in their lives like a wedding or funeral. In poor African countries, for example, with HIV/AIDS rampant, families paying for funerals would wind up in deep poverty. Savings opportunities gave people a cushion against a rainy day, or even a celebration.

    The phrase “financial inclusion” has been employed more recently, though the concept has existed for some time. Today many donor and governmental institutions talk about financial inclusion expanding people’s access to formal bank accounts — as well as to other payment systems and financial mechanisms extending beyond lending and savings, such as credit cards. Donors have migrated from microfinance to financial inclusion as their primary emphasis, seeking to broaden the scope of services that poor people can obtain.

    Now, for microfinance’s double bottom line, most people in the field would say that this concept took on its modern form with Muhammad Yunus and the Grameen Bank in Bangladesh. Yunus focused on quite poor people in poor countries. This type of microfinance came to be known worldwide through institutions like the Grameen Bank, Bank Rakyat Indonesia, and Banco Sol in Bolivia. These institutions provided working-capital finance to quite poor and largely self-employed people, in support of their individual business operations.

    Microfinance’s double bottom line comes from making sure that this kind of financing operation can sustain itself, while also remaining socially beneficial. We’ve gradually come to recognize that microfinance by itself won’t end poverty. But microfinance definitely can help poor people to maintain stability, and not fall into deeper poverty. So I’d argue that today the double bottom line means stabilizing people’s level of income, while ensuring that this sector can sustain itself — rather than simply throwing money out the window.

    So again in your own terms, why might microfinance be defined as serving the needs of the world’s working poor — not the poorest people in the poorest nations? What limits apply to where microfinance can operate effectively, and how have these frontiers themselves kept shifting over recent decades?

    Well to start with, sustainable microfinance does mean providing loans to people who can repay these loans. By contrast, providing actual loans to the very poorest would often put these borrowers in deeper debt, because they don’t have the means to repay. The microfinance industry has had significant debates on this topic. Muhammad Yunus, who chaired my advisory board when I started the Consultive Group to Assist the Poor secretariat (CGAP) at the World Bank, wanted to frame our consultative group not as assisting the poor, but assisting the poorest of the poor. But over time, it became clear that neither Grameen Bank nor ASA nor BRAC, three of Bangladesh’s leading microfinance institutions, really served the poorest of the poor (though BRAC did organize a program to assist the poorest of the poor, who then could graduate to receiving microfinance loans). Nor did the enduring microfinance providers in other countries — because if they had done that, they would have faced too much default. The microfinance default rate in fact has typically remained below one percent, if we take the broad average across most institutions.

    The working poor who use microfinance might have salaries or get paid hourly wages. They might operate small businesses, as seamstresses or barbers or owners of small retail stores. Market vendors, working in the informal sector, often have been the classic microfinance clients.

    According to current World Bank definitions, the poorest people live on $1.90 or less per day. That’s not the sweet spot for sustainable microfinance, because these people would struggle to pay back loans. But during COVID, unfortunately, we’ve seen a large resurgence of people in this poorest category. Microfinance’s sweet spot mostly contains people making between $1.90 and $3.60 per day, the World Bank’s second-poorest category. And when I discuss average daily earnings, this also means someone might find work and earn $10 one day, but then not have any income for the next week — or may earn a fair amount at one week’s end in wages, but then have no chance to earn money for the next month.

    Then for a third category, the World Bank tracks certain people in middle-income countries earning over $5.20 per day. Again, during COVID and the related economic crisis, many people around the world have dropped down into these three categories, becoming quite poor, and sometimes very poor. So there is a major opportunity during and following this crisis to expand the scope of microfinance services throughout the developing world.

    Now in terms of the microfinance industry itself evolving over recent decades, from donor-backed grant providers, to commercial institutions fully integrated into mainstream capital markets — if this trajectory sounds disappointing or counterintuitive to some progressive readers, could you sketch how it has benefitted impoverished clients’ lives?

    Again Yunus for a long time frowned on commercialization, even while serving on our advisory board, and even as the CGAP become one of commercialization’s early backers. Quite a bit of debate took place around this question.

    For me personally, through working at the World Bank and elsewhere for a number of years, I believed that microfinance wouldn’t always remain the flavor of the month for donors. They’d eventually move on to other projects. So if microfinance wanted to help people over the long haul, it had to become sustainable. Sustainability meant microfinance had to charge interest rates, to cover its operating costs. But sustainability also meant microfinance had to cover its borrowing or funding costs, and had to attract investors willing to put equity into microfinance institutions in the first place.

    So starting about 1995, when we founded CGAP, and then more into the 2000s, many microfinance institutions transformed from NGOs into commercialized banks or nonbank financial institutions. These institutions attracted equity investment, allowing them to become more sustainable. And also, critically for the industry and its clients, these institutions could borrow from capital markets, or from the interbank market, and could further scale up. When we started CGAP, microfinance served about 10 million people. But it soon reached the goal we set of serving 100 million people, and kept climbing past 200 million. In order to achieve that kind of scale, you need commercial viability.

    Alongside these developments, a number of microfinance investment funds emerged, the first fund in Latin America but thereafter globally. By say 2010, more than one hundred funds (debt funds, and equity funds, and families of funds) had emerged. Several European funds institutions mobilized a billion dollars to invest. They mobilized this money from pension funds, donors, and private investors. Most of the funds were joint public-private funds. By 2012, microfinance investment funds had invested some $12 billion in the sector. All of this increased the sustainability of the sector. You had clients’ micro-savings, the interbank market, and investors all making for a much more robust field that could survive donors turning away — as they have in fact, in recent years. Several microfinance institutions even went public during this period, raising funds through the capital markets.

    To trace microfinance’s shifting status specifically within economic-justice circles, could we bring in early research suggesting that microfinance failed to fulfill its aims of improving economic well-being for the working poor — as well as your own lived sense of mistakes made in assuming microfinance inevitably brought about poverty reduction? And could we get to more recent research showing that few pro-poor initiatives in fact provide more effective social investments, not as a magic cure-all for eliminating poverty, but nonetheless as one very important tool?

    So again, in this industry’s early days, Yunus and others claimed that microfinance took people out of deep-seated poverty. But Fazle Abed, who started and ran BRAC, which I’ve always considered the best national NGO I ever encountered anywhere, visited me at the World Bank and said: “Microfinance actually doesn’t serve the poorest people. And it doesn’t by itself take people out of poverty.” And then an important breakthrough came from a book by my deceased colleague Marguerite Robinson, from the Harvard Institute of Development. Marguerite received much recognition for her work in microfinance, particularly with Bank of Rakyat Indonesia. She helped design that whole savings program, which they implemented in more than three thousand different uni desas (or village units) all throughout Indonesia. They mobilized something like $14 billion in savings, all where no institution had mobilized significant savings before.

    Marguerite presented microfinance as an important anti-poverty tool to give people financial means. But of course people also need other things. They need electricity. They need potable water. They need education and a whole host of social investments to bring them out of poverty. Microfinance on its own could not provide all of that. But microfinance alongside these other tools could take people out of poverty.

    Around this same time, I started noticing that many academic researchers undertook six-year performance reviews of microfinance institutions, and conducted six-year focus groups, and then concluded: “Well, you see. People haven’t come out of poverty.” It was obvious to many of us working in the industry that microfinance by itself wouldn’t take most people out of poverty — but also that six-year focus groups provided an entirely inadequate picture.

    I remember visiting villages throughout Mexico. We had funded Compartamos, one of the leading microfinance institutions in the world (and particularly in Mexico), in its early days, and I knew the people involved, and we wanted to see how it was performing. I interviewed women in the villages, and they kept saying: “At least our kids are getting an education.” And it hit me on the spot how their story overlapped with poor Irish or Italian or Jewish immigrants’ who came to the States. Many of these immigrants arrived poor. But their kids received a solid education. Their kids didn’t stay poor. So I came to view microfinance bringing people out of poverty as a second-generation phenomenon. I’d really like to see academic researchers follow the next generation and the third generation, and track where they end up.

    What related concerns of mission drift have arisen around ensuring that microfinance institutions fulfill an ultimate goal not just of handing out funds, but of improving clients’ lives? What mission-drift concerns have arisen around the perennial possibility for profit-maximizing institutions to neglect the best interests of vulnerable clients? And how have exemplary nonprofit and for-profit operators taken proactive steps to address these concerns?

    For one example, some institutions began to drift away from microfinance, and to focus on small-business lending, because they could make more profit. That shift hurt micro-clients, with some finding themselves unable to obtain services their institutions previously had provided them. Still most microfinance institutions figured out how to maintain micro-lending while also doing small-business lending — which did address a great weakness in the field, because developing-world commercial banks often had avoided small-business lending, or had only done it on onerous terms, for instance demanding prohibitive collateral.

    I moved from CGAP to become the Acting Director of the Global Small Business Department for the World Bank Group. I spent a lot of effort developing a World Bank strategy for small-business lending. And frankly, we have enormous need in the US as well. You might have noticed how much difficulty the Treasury had directing COVID-related funds to small businesses, mainly because the banking infrastructure for this field is comparatively weak, including the Small Business Administration and among the community banks. That same pattern plays out across much of the world. So we did want to see microfinance institutions move into small-business lending, but ideally not at the expense of micro-clients.

    Focusing now on questions of scale, Todd Watkins’s chapter struck me with its emphatic opening claims that: “The large majority of microfinance institutions are too small. Most serve too few clients, with too narrow a scope of services to be efficient and stable…over the long haul.” So first in quantitative terms, how might scale prove crucial not just to expanding the range of clients served, but again to various organizational efficiencies and infrastructure investments ultimately benefiting clients’ own bottom line?

    Good question. I don’t think we knew, when microfinance institutions began to commercialize, that their interest rates would actually be lower on average than NGO institutions’. But the data do show that as microfinance institutions get larger, and start competing with commercial banks, and benchmark their interest rates against commercial banks’, their own interest rates tend to drop.

    More broadly, in terms of scale’s importance: first, it attracts capital investment. Second, it allows you to serve 100 thousand clients (or more), instead of five or 10 thousand. Third, even while serving this greatly expanded number of clients, you still only need one CEO. You still only need one chief financial officer or chief accountant. You only need a certain amount of senior management, and you only need one board. All of those costs can be amortized across five thousand or 100 thousand clients. The more you scale, the more you can minimize operating costs. So in microfinance’s early days, for example, with few institutions having more than 10 thousand clients, and many having significantly fewer, operating costs would run extremely high. Outside investors would take a look at this industry and say: “That’s not viable.”

    But today, with many microfinance institutions serving over 100 thousand clients, and a score serving over one million clients, we have a whole different dynamic in terms of operational performance. These institutions can get good returns on their assets, good returns on investment. They can attract talented analysts. Venture-capital firms began investing in them once their numbers showed viability. Again, some have gone public or raised capital in the bond market.

    So how does this all benefit clients? Well alongside offering lower interest rates, microfinance institutions can afford to increase the amount they lend to a client as this person’s business grows. They don’t have to limit themselves to two-hundred-dollar loans. They can give loans of one thousand dollars or more. They also can offer multi-year loans for clients’ capital needs, not just working-capital loans.

    Now in more qualitative terms, scale likewise proves essential for broadening the range of microfinancial services on offer — for instance as NGOs scale up to become regulated commercial banks that can accept client deposits. Here could you outline a broader range of products (for savings, insurance, remittances, transfers, specific housing and education credits) that you consider crucial to further expanding and refining microfinance’s social impact?

    Right, this whole industry dynamic changed as microfinance institutions started getting approved by regulators to take people’s savings. Working-poor people around the world suddenly had a safe way to save. They didn’t have to stash their money in their garden or cupboard, or someplace where friends or family or even strangers might find it. That savings opportunity actually protects the poor just as much as borrowing opportunities do. And we’ve had very few cases of savings being at risk from microfinance institutions defaulting.

    More generally, as soon as microfinance institutions started to scale, they began to broaden their services. We started to see, for example, micro-insurance increase substantially. Craig Churchill and Aparna Dalal, micro-insurance specialists at the ILO, the International Labour Organization in Geneva, contributed one of this book’s chapters. During the HIV/AIDS epidemic’s worst parts in Africa and other places, people could get loans for funerals and burials through microfinance institutions — but now they also could get an insurance contract, which paid for funeral fees and paid off loans if borrowers passed away. Insurance hasn’t diversified and expanded as much as we’d hoped, but it has offered a useful product.

    Microfinance institutions also began to add remittances as a service. As you know, many communities in countries like Mexico and the Philippines rely heavily on remittances from their people now working all around the world. Microfinance institutions began to offer money transfers, and funds for housing rehabilitation. One extremely important area has been financing education, with Equity Bank in Kenya providing one of the best examples. Another good example is Latin America’s Higher Education Finance Fund, focused on lending to microfinance institutions in poorer South American and Central American countries, for education loans.

    For one disappointment in the industry, I wish that this diverse range of services had expanded by now beyond 10 or 15 percent of many institutions’ portfolio volume. Working-capital loans have remained the prime product for many of them. Loan officers still find working-capital loans easier to offer and to collect on. They know how to get it done, while education and housing loans tend to have a longer timeline. Many lending institutions probably still need to redo their incentive structures for loan officers. I also don’t think we have good enough data, frankly, on what many portfolios look like now. But it does disappoint me that while more institutions now offer more services, these portfolios haven’t diversified sufficiently.

    Expanding the range of products takes us to what Paul DiLeo and Anna Kanze frame as digital finance and fintech posing the “greatest opportunities” and the “greatest competitive challenge” for microfinance today. Where do you see tech innovations most positively reshaping microfinance through which specific products, which restructurings of how institutions operate, which introductions of new participants (both on the provider side, and on the client side) into this field?

    I’ll start with digital finance. We’ve seen an enormous emphasis all around the world, and particularly at CGAP, on adopting digital finance as the future of microfinance. We’ve seen a lot of literature (too much, some of us have thought) on digital finance. The attention often focuses on Kenya, where a major cell-phone operator started providing ways to make mobile payments. This Kenyan company, Safaricom, expanded payment options by working with banks, but also with the bigger microfinance institutions. Safaricom also developed what they call payment networks or agent networks, with small convenience stores across the country able to take deposits from people, and with these people then able to make payments through a credit-card system.

    Microfinance has faced significant challenges expanding beyond congested urban settings into small villages and rural areas. Somebody working in Nairobi wanting to bring money home to his family might have faced a 10-hour bus ride back to his village, and a one-in-three chance of getting robbed along the way. But suddenly, this person could just step into a small store, or contact his microfinance institution on his phone, and make a deposit, and transfer the money, and his family could access it within hours.

    Safaricom now has 20 million Kenyans doing microfinance and making payments on their phones. Those successes are being emulated all over the world. My colleague Jennifer Isern has worked on this in India. In China, Alibaba and TenCent Holdings have become important microfinance institutions through their fintech services.

    So how can fintech augment digital finance, both in the developed and developing world? I’ve studied fintech’s domestic applications with a team for the US Treasury, for Treasury’s Community Development Financial Institutions Fund. In the developed world, fintechs have created digital mechanisms for measuring people’s creditworthiness. You feed it data on your electricity bill, on your tax payments and the like, and within a day this service can qualify you for a loan — much faster than, say, a microfinance institution’s loan officer processing these calculations.

    One problem for many fintech products comes from having no immediate way to attract clients, if they don’t have a marketing base and branch networks. So fintechs have started acquiring microfinance groups, or partnering with them, or with banks like JPMorgan Chase — and doing, say, all the analytic work on small-business lending.

    Could you also sketch more ominous prospects for fintech to reinforce disparities when it comes to demographic divides, or financial know-how, or institutional accountability? Which dangers of exploitation and fraud, or again of less malicious but perhaps no less insidious mission drift, stand out most to you? And what kinds of engagement by which advocacy, commercial, and government players will be crucial for harnessing fintech to constructive ends?

    First, digital finance and fintech don’t necessarily go together. You can have digital finance without fintech. And I personally would prioritize digital finance, but microfinance institutions may not have the resources (the financial or technological or human resources) to develop digital products on their own, or to partner with the mobile carriers.

    Second, many regulators have resisted allowing digital-finance operators to do banking. And the banks have resisted digital finance in some cases (especially for microfinance), because it takes so much work. You might sign with an agent network, but if you don’t consistently feed them enough product, they’ll go dormant on you. They face big burdens themselves. They might not offer you as much as you think. Here again, especially as the tech products get more sophisticated, scale becomes very important for microfinance institutions’ good governance, for establishing a good board and an effective management group (to assess risks), and for financial capability to develop digital services over a period of time.

    So digital finance and fintech do offer the potential great advantage of suddenly reaching many remote clients. But then, as you suggested Andy, these clients also need reliable digital access. They might need education on how these products work, and how to ensure you’ve made your payment correctly, and don’t unknowingly go into default, and what happens to your credit if you do default. We’ve so far seen many more defaults through digital finance than through traditional microfinance — where payment officers worked directly in villages, directly through branch structures, and could provide much more guidance. I don’t know about you, but when I make online payments, I’ll sometimes need to correct something, and then I’ll have a real hassle trying to correct this with the institution. Unless you’re very attuned technologically, not to mention financially attuned, you might wind up in trouble.

    Our field sometimes describes microfinance as “low-tech, high-touch,” and digital finance as “high-tech, low-touch.” The ideal balance would marry the high-touch microfinance approach with the low-touch digital-finance or fintech product.

    Here I also appreciated Renée Chao-Beroff’s model of a “high-tech, high-touch” approach to 21st-century “client centricity”: significantly reducing operational costs, and making a broad portfolio of microfinance services competitive — while also providing ongoing financial education and constructive client relationships.

    I should acknowledge that I served on Renée’s board and as the chairman of a fund she created, for her NGO PAMIGA, a network of 15 rural microfinance institutions in East and West Africa. Again, rural microfinance faces many more difficulties than urban microfinance. But Renée’s ideal involves reaching these communities through digital finance, while also providing a diverse range of services through the high touch of microfinance. It’s an ambitious approach, and she considers it the future especially for rural microfinance, and I’ve been impressed to see her take up that challenge.

    For one example now of microfinance campaigns going awry, to the serious detriment of working-poor communities, could you describe the localized pressures leading up to the 2010 microfinance crisis in Andhra Pradesh? And what kinds of reformed best practices have come out of such setbacks?

    The first major microfinance crisis happened in Andhra Pradesh. Like the few other crises that have followed, this one was politically driven. Certain microfinance institutions had grown very rapidly in India. They had begun to crowd out programs funded by the World Bank and the Indian government, and operated by the state of Andhra Pradesh (as well as some other states). These state-backed self-help groups (SHGs) saw microfinance institutions cannibalizing their clients. So leading political figures in Andhra Pradesh basically encouraged people to stop paying the microfinance institutions. The government began making it very difficult for microfinance institutions to exist. Soon this became a Reserve Bank of India (the central bank) issue, and a number of large microfinance institutions were in deep difficulty. We’d never seen failure of this magnitude in the sector before.

    But out of this Andhra Pradesh crisis we did get a much better regulatory structure from the Reserve Bank of India, and also an improved incentive structure from the government. They began to encourage microfinance — by allowing small banks to become regulated banks that could take savings, and also could become publicly listed. In recent years, maybe five or six microfinance institutions have done this, and have grown dynamically. After years of less effective state-subsidized small-business lending, and agricultural lending, and forcing big banks to lend downstream, the Indian government suddenly got behind microfinance, as well as expanded financial access and inclusion.

    And if there’s a place for microfinance to keep growing today, it’s India. All of us have felt for some time that this industry’s future would be anchored in India. China already has achieved a lot of that through Alibaba and TenCent. And hopefully, eventually coming out of this COVID-19 crisis, we’ll see significant demand in India for a more technologically driven, more sustainable microfinance sector. Jennifer Isern’s writing in our book really spells this out.

    Along related lines, could you give some sense of the broader global damage that COVID has brought on microfinance initiatives? And in what ways do you see double-bottom-line institutions, with their distinct industry networks and committed investors, as uniquely capable when it comes to serving vulnerable working-poor communities during such a time of crisis?

    That’s an important question to ask right now. Some colleagues and I have been promoting rescue funds for microfinance, particularly in Africa. I have to say that the effort to raise these funds isn’t doing very well. The donors aren’t biting, because they have so much else to consider. But the World Bank and IMF project 150 million more people going into deep poverty due to this crisis in 2020 and 2021 — with that number likely to rise, given poor countries’ great difficulties getting a vaccine supply. While we may get something like herd immunity in the US or Europe before too long, we might not see that in Latin America or Africa, or poor parts of South Asia, until 2023 and beyond. To me, that argues strongly for returning to basics, and for growing the capacity of microfinance to deliver services to poor clients throughout the developing world. So I’d argue that if ever there was a time for microfinance, it’s right now.

    Paul DiLeo and I have written about sustainability for microfinance institutions during this crisis. Other World Bank work I did focused on crisis resolution in emerging-market countries during the 1990s and early 2000s. And we’ve seen some emphasis in the donor world and among microfinance funds particularly to develop standards for institutions to roll over their loans — allowing clients, in turn, to roll over their loans through the first year of this crisis.

    The great concern of course has to do with solvency, and which smaller and medium-sized institutions no longer have sufficient liquidity, and certainly don’t have the capacity to lend like they once did. I know the IFC, the World Bank’s private arm, has put a lot of additional funding into its billion-dollar-plus microfinance portfolio. We haven’t yet seen any major failures in the industry. But if this crisis and its economic fallout continue for several years, without the donor world deciding to put a lot more money behind this sector, then I fear we’ll see significant failures.

    This crisis is unlike any we’ve experienced in a hundred years. It hasn’t hit the banking system. It hasn’t hit the financial sector. It hasn’t hit most large companies. It really has hit the working poor the most. It has hit small businesses, and micro-businesses, and people operating in the informal sector. To address those particular communities, we should be calling on microfinance institutions, with their branch structures and their outreach across so many poor and remote parts of the world. They’re really the one set of institutions that can connect to the people most in need right now.

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