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Kadita Tshibaka Headshot

Microfinance's Risky Lending Is a Safe Bet

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As I look at the microfinance industry globally, I'm encouraged by the trends and the progress we've achieved so far. Whether you search in Wikipedia, CGAP or MIX Market, whatever the source of the data and however qualified, microfinance does have an impact on the lives of some 100 million clients today. And when you take into account that our clients are supporting an average of five people -- family members, adopted orphans and employees -- the impact of financial decisions are even greater. No wonder the industry is under such intense scrutiny!

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Photo: Opportunity International's Relationship Officer Phiona Ndikibuliraani, left, offers guidance to sugarcane farmer Loy Naigaga, in rural Uganda, ensuring Joy's long-term financial success.

When so many potentially vulnerable people are affected by an industry, it calls for the utmost care in how operators define and deliver on their mission. Microfinance must first and foremost be about making a difference in the lives of the impoverished and marginalized. It must be about having a positive impact for the overall welfare of microfinance clients. In order to effectively meet these needs, microfinance institutions (MFIs) must put clients at the center of their work.

MFIs must offer clients products and services that are responsive to their needs, with built-in flexibility to adapt as their businesses evolve. They must price products and services in a way that acknowledges that they are serving people in poverty. Yes, the microfinance target market arguably is very risky. Interest rates and fees charged should, justifiably, take into account this risk component, the high administrative costs of delivery of products and services, the funding costs, and the inflation rates in the markets served, among key factors. However, this cannot justify the high charges applied by some practitioners in certain markets, especially in cases where one finds large pricing differentials in the same market. I feel strongly that the profit motive must not take precedence over the social, transformative motivation. For some of us, serving impoverished people through microfinance is not simply a business. It is a calling, a mission, a passion.

MFIs must make every effort to treat clients fairly and gain a reputation for this ethos. Whether it is in pricing, or granting and collecting loans, microfinance clients must be respected, and they must feel that the institutions serving them will do so with humility and integrity.

MFIs must invest in the development of human capacity by training both MFI staff and clients. This is an added cost for the industry but one very much worth bearing in order to build the groundwork for sustainable financial growth among clients, and professional growth among staff.

Microfinance practitioners must ensure that they have in place sound governance and internal control structures, policies and procedures, as well as data integrity. That is, the information supplied to donors, funds providers, regulatory authorities, and the public at large must be accurate, transparent and reliable. They also must devise metrics to track a client's transformative journey, from group borrower to independent small business owner with multiple product needs, as she or he develops and expands the business. Not all microfinance clients are entrepreneurs. Nor will all entrepreneurs succeed. This is a truism for businesspeople in developed and developing countries alike. The strength of microfinance is in its variety of other product offerings in addition to small business loans. These products may include savings, domestic and international transfers, trade finance, insurance, financial literacy and life skills training, and more, depending upon the local regulations and the license held by the microfinance institutions.

MFIs must utilize metrics to track their impact and progress with clients, or where gaps may appear. Introducing self-assessment policies and procedures is a way to catch problems and issues at an early stage and, more importantly, to develop pre-emptive or remedial action plans in a timely fashion.

As competition in the microfinance industry intensifies in the coming years, MFIs must be careful not to follow the path taken by the mortgage crisis, with imprudent lending practices involving over-lending to clients. Where credit bureaus can be created by the regulatory authorities or the microfinance industry, this is to be strongly encouraged as a source of information for managing multiple borrowings by clients. I see increased competition in the industry as a net positive if it leads to more lives positively impacted, increased quality of products and services, and more innovative delivery systems aimed at lowering costs for clients.

A few aberrant cases of excessive pricing and coercive collection practices are enough to negatively impact the reputation of the whole microfinance industry. Initiatives like The Smart Campaign, which emphasize the need to put clients at the center of microfinance, are a bellwether for the shift in focus that is taking place. In Opportunity International's own banks, we strive to adhere to our Code of Conduct, published in every local branch, which outlines not only our commitment to transparent pricing and a fair return on equity targets, but our pledge to always treat clients with dignity and respect.

We must read the writing that has appeared on the wall in recent months. If the microfinance industry and its members fail to self-police, to exercise due prudence and restraint in the conduct of their operations, to serve and treat their clients fairly, and to rigorously comply with the laws of host countries in letter and in spirit, then we are inviting tight and perhaps detrimental regulatory oversight and public scrutiny. And even more importantly, our clients risk losing more than profits; they risk losing everything.