I’m very concerned about the incentives for microfinance charities. As I see it, these are the things that they are “rewarded” for:
- Profitability, for obvious reasons. Any for-profit investors in microfinance institutions are presumably putting great pressure on them to produce a good bottom line. (We believe it’s not safe to use profitability as a proxy for social impact.)
- “Scale” (clients reached, loans made, etc.) and “repayment rate.” These are the numbers that are put front and center by charities like Kiva, Grameen Foundation, and Accion among others. (We have serious questions about what the “repayment rate” even means as well as whether repaid loans = people helped.)
We feel strongly that there are many more questions a microfinance institution must answer to give an idea of whether it is helping people, and worth donating to. And in theory, many others feel this as well. But looking around MixMarket shows how much more attention the “scale and profits” indicators are getting as of today.
- The frontpage cites “1,678 total MFIs reporting data” (and we have collected the data, which is overwhelmingly complete on the financial indicators front, for the 268 members of U.S. networks). Yet only 66 institutions have filed social performance reports.
- The independent ratings found on MixMarket also seem overwhelmingly focused on issues of scale and potential profitability, as opposed to social impact (for a representative example, see the Microrate documents at WISDOM’s profile).
The bottom line? It looks to us like all of the pressure that these institutions face is to maximize scale and profits, without much eye to making sure that they’re improving clients’ lives. And that could explain some eye-popping quotes from publicly available surveys of microfinance dropouts (full documents available at that link; emphasis ours below).
- “At the end of the meeting the research team watched the process of one group being pressured to complete payment. They were told that they should not leave the meeting until the money was paid. There was heated discussion among them, with members telling each other to contribute, and denying that they themselves had the money with which to contribute. There was Ush. 8,000 missing. Finally a man from another five person group provided the missing money. He told the team that he would probably get the money back from the defaulter (who was not present) and that the defaulter would ‘probably buy him a soda’.” (Uganda report pg 13)
- “The research team also found one instance where one MFI had started operations in a poor area, issued loans, experienced quite widespread problems with loan repayment and decided to withdraw the programme in its entirety. This resulted in many people’s savings being attached to repay the outstanding loans of others, and the MFI left behind a fair degree of chaos and bad feeling.” (Uganda report pg 13)
- “the treasurer said that the group’s monthly repayment (Tsh. 300,000) that was to be deposited in SEDA account had been stolen. Two days later the treasurer got very sick; he was bewitched by some of the group members. However after seeing a witchdoctor he recovered. We took him to the Ward Executive Officer; who forced him to repay the money in instalments. He did repay the money but then he was forced to leave Arusha town completely. If he had continued to stay they would have killed him through witchcraft. I lost Tsh. 4,000 through the ROSCA.” (Tanzania report pg 10)
- “Most MFI’s in Kenya have a very strong emphasis on credit but some are getting into the position where clients are virtually forced to take loans. This is partly because of the MFI’s needs to pump out loans to achieve operational sustainability and partly due to a belief that loans are good for small entrepreneurs – even if they don’t want them!” (Kenya report pg 7)
- “One of the key determinants of drop-out, often lost in the category ‘failure to repay loan’ by these studies, is the insistence by field staff that clients take loans. Irrespective of what official Head Office policy says, there is a clear understanding among most field staff that they should push out loans – often with little care for whether the clients need or can use them… Matin (1998) also notes, ‘MFI lending technology is insensitive to variations in household conditions. Most MFIs put all households on a treadmill of continuously increasing loan size and insist on a fixed repayment schedule.'” (Bangladesh report pgs 3-4)