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The impact of the Andhra Pradesh microcredit crisis was so strong that it contributed significantly towards the global dip in microcredit outreach in 2011. The Andhra Pradesh microcredit crisis was largely started by reports in popular media that suicides were being exacerbated by microcredit lenders charging high interest rates and harassing borrowers. The resulting political instigation of non-reimbursements in some Indian States almost killed the sector. Our research on microfinance in India investigated the relation being drawn in the media between microfinance lending and suicides amongst borrowers. We recognized that the data on microfinance borrowers is limited to the formal microfinance sector, and specifically to those institutions who choose to disclose their data. The data on suicides is fuzzy, based on reports of the National Crime Records Bureau of India and by different countries across the world (as reported to the World Health Organization). Thus, we suggest, from the outset, that our conclusions and observations be taken with appropriate reserve. To appreciate the complexity of drawing correlations and associations, as an example, the average suicide rate in France is about 16 per 100,000 which compares unfavorably with India's suicide rate of 10 per 100,000.Such a simplistic investigation suggests that with higher microfinance proliferation in India than in France, the suicide rates are lower in countries with higher microfinance. However, this is clearly over-simplified. Drawing from the research of Emile Durkheim in the nineteenth century, we know that the poor are likely to be less suicide prone than the rich. Divorce, women's participation in the labor force, and migration to cities, all increase with economic development. These factors all play a role in increasing the propensity to commit suicide, perhaps due to a stronger isolation of individuals and the breaking of traditional support groups such as families. At the same time, research on the Japanese experience has shown that people who are over indebted or have taken guarantees from other people are more prone to committing suicides. Therefore, first, we checked if the 54 suicides reported by the media in October 2010 could be expected on average in a country the size of India with a billion people – where the average suicide rate is 10 per 100,000 inhabitants per year. After controlling for the population of Andhra Pradesh, an average family size of five individuals per household, each with three or four loans and the size of Self-Help Groups, we found that 54 suicides should theoretically not be the cause for unjust alert or be unilaterally blamed on an increased borrower stress due to microfinance. Our investigation of the time series data on suicides in India revealed a slightly significant positive correlation between microfinance penetration and male suicide rates, and a slightly negative correlation (not significant) with female suicide rates – but no relation between microfinance and total suicides. Generally, no causal relationship can be assumed from these correlations. The cross-sectional data of Indian States indicates a small positive correlation (not significant) between microfinance penetration and suicide rates. However, the correlation doubles and becomes significant when we consider total suicides with number of SHGs loans outstanding to banks. Again, no causation is suggested as both directions are plausible. Fourth, world-wide country-wise analysis indicates that there is no correlation between microfinance and male or female suicides, yet regression analysis of 31 countries very weakly indicates that microfinance penetration among the poor is a causal factor for increased suicides. Thus, all we can really say for now is that perhaps there is a (causal) relationship between microfinance penetration in the country and suicides. This could be due to hidden factors which depend on the economic development overall. What we take away from our research and this debate (and furor in the media) is to clarify what we can do to alleviate borrower stress. First, unbridled growth and a drive to increase outreach may have created an environment where each credit officer in India is serving twice as many people as credit officers globally, leading to loss of personalization. Fast growth rates also mean that a credit officer’s recruitment and training have to be rapid and may ignore softer skills required to cope with borrower stress. Second, there is enormous pressure on credit officers who are doing their best to please the bosses who demand full repayment rates. The human consideration therefore needs to extend to this employee and his fears and frustration when the borrower does not repay. Third, if the increase of microfinance proliferation does increases male suicides, is this impact different for women and men - possibly due to their changing roles in society? Changes in relationship roles indicated the need for social support groups for males to take in shocks now that the woman is busy and possibly even more successful. Although more field research is required, some of our policy recommendations are listed below: The need for self help or other social support groups for vulnerable individuals (especially men) to better cope with the changes in the family situation being ushered in through the economic and social empowerment of women given their access to microfinance. The need for MFIs to be allowed to take deposits from a broader client base, beyond their own borrowers, as it is the case with leading non-bank (NGO) MFIs in Bangladesh. This would then change the relationship at the grass roots between the collection officer and the client. It would no longer be one of dominance of the field officer, but also recognition that if he wants to fulfill his deposit mobilization targets, he is dependent on the same customer. The need to cap microfinance loans to some percentage of the expected earnings of the household for that period. Failing this, the caps can be on GNI per capital for that period. Thus, a four month loan should have a lower cap than a one year loan, which in turn can have a lower cap than a two year loan. The role of a strong pro-poor regulatory environment needs to be stressed. A conducive environment is important in allowing borrowers to succeed with their business, enabling people to repay and, in turn, to make MFIs successful. If upper caps on interest rates are introduced, these need to be sufficiently restrictive of loan-sharking, yet enabling MFIs to survive and grow. Ashta, Arvind, Khan, Saleh, & Otto, Philipp E. (2015). Does microfinance Cause or Reduce Suicides? Policy Recommendations for Reducing Borrower Stress. Strategic Change: Briefings in Entrepreneurial Finance, 24(2), 165–190. author: Arvind Ashta - Saleh Khan - Philipp Otto

Massive Drop in Number of Unbanked,” reads the headline. In just three years, the number of adults with a bank account has grown from 51% to 62% -- an increase of 700 million people. That’s a fantastic number! And that’s the problem. Fantastic is good for children’s bed-time stories. It’s a bit more concerning when it comes to survey data. What’s the story behind this incredible, utterly unprecedented growth? What happened in these past three years that might explain it? The authors don’t really say. One area they highlight in the report accompanying the data is the growth of mobile banking. This has been tremendous – 2% of adults globally report having a mobile money account in 2014 (no numbers available for 2011). Many of them are concentrated in countries in Sub-Saharan Africa that previously had much lower financial inclusion rates. This is a major story and something to celebrate. But it doesn’t explain the headline figure. Of those with mobile money accounts, roughly half are mobile-only users. In other words, mobile money could account for 1% of the 11% increase in financial access globally over the three years. That’s 60 million adults worldwide – well short of the 700 million in the headline. The unstated implication is that this growth came through traditional means, with accounts being opened at banks, cooperatives, post offices, microfinance institutions, and so forth. That’s where the fantastic turns into unbelievable. Traditional channels can certainly bring about broad change, but not in three short years. The growth isn’t limited to a handful of large countries. It’s truly global. There are 39 countries in all that have seen more than 10% growth in the share of adults holding accounts, including wealthy countries like Italy, Saudi Arabia, and United Arab Emirates. Even the United States, which had an 88% account penetration rate in 2011 managed to jump to nearly 94% in just three years. This must surely come as a surprise to those who follow financial access issues in the country, where according to a 2014 study by the Federal Deposit Insurance Corporation, the number of unbanked households held fairly steady at 8% during 2011-2013. What to make of this puzzle? I believe the issue lies not in the survey itself. Rather, the problem may stem from the change in the definition of an account holder. And no, it’s not the issue of adding mobile money. According to the metadata definitions in the Findex database, here is the 2011 definition for account at a financial institution<1>: “Denotes the percentage of respondents with an account (self or together with someone else) at a bank, credit union, another financial institution (e.g., cooperative, microfinance institution), or the post office (if applicable) including respondents who reported having a debit card (% age 15+).” And here is the definition for the same in 2014 (significant differences in italics): “Denotes the percentage of respondents who report having an account (by themselves or together with someone else) at a bank or another type of financial institution; having a debit card in their own name; receiving wages, government transfers, or payments for agricultural products into an account at a financial institution in the past 12 months; paying utility bills or school fees from an account at a financial institution in the past 12 months; or receiving wages or government transfers into a card in the past 12 months (% age 15+).” It appears that for 2014 respondents, there were several additional ways to count an account – ways that weren’t captured in 2011. A slight methodological change, but a crucial one. The latter measure may well be the more accurate one, but it’s problematic as a direct comparison with 2011. There is a wealth of data in the Findex database, shedding light on all kinds of trends in financial access, including borrowing, saving, us of informal services, and so on. The opportunities to learn and explore are vast, helping inform decisions for regulators, politicians, and private actors. The Findex team and its supporters deserve a great deal of credit for creating and maintaining this critical resource. However, the headline finding of a massive increase in number of accounts is difficult to explain as a reflection of a true global shift. Instead, it appears that a large part of this trend may be simply due to changes in the survey definitions. Celebrating the “massive drop in number of unbanked” may prove a little premature. <1> The two different years are denoted by and , e.g. wave 1 and wave 2 author: Daniel Rozas

Doing this in the unique context of a post-crisis environment may well be the single most difficult thing an MFI can attempt. For this reason, e-MFP is looking forward to receiving applications from those demonstrating Best Practice in this special context, measured against a range of performance criteria. How can these institutions tackle systemic risks, such as increasing PAR and delinquency? How can they thrive in the face of macroeconomic instability, environmental changes or failing infrastructure? How can they work with NGOs and governments to ensure that necessary relief and aid efforts complement the provision of sustainable and fair financial services? How can they ensure their staff is protected from kidnapping or sectarian violence? How can MFIs play a role in increasing social cohesion – bringing people together in the aftermath of tragedy or civil strife? Those institutions that achieve this can have an immense positive impact on their clients, including driving employment and economic growth, protecting families, providing key social services and, perhaps less tangibly, providing hope for a better future. These institutions who will be contenders for this prestigious Award will have demonstrated flexibility, vision, patience resilience and compassion – providing a range of financial and non-financial services to clients with unique circumstances and needs, and doing so in a way which can be replicated in other contexts. To this end, the 6th European Microfinance Award will recognise MFIs that operate in post-disaster/post-conflict areas and aim to combine their own institutional resilience with that of their clients in the affected, vulnerable population. Potential candidate institutions will be those that: * Have demonstrated an integrated response to support and build resilience for vulnerable households and communities living in exceptionally difficult environments or circumstances; * Demonstrate an effective strategy to increase both their own resilience (i.e. operations, staff, policy, control) and that of their clients (appropriate financial and non-financial services), while insuring responses that provide both for the immediate, medium- and long-term resilience of their clients; and * Are active in the financial services sector in in a developing country. Various types of microfinance institutions are eligible, including NGOs, cooperatives, MFI networks, investments funds, commercial banks, development banks, leasing firms and insurance companies. The extensive assessment criteria against which the candidates will be considered can be found here. The twin themes of resilience and vulnerability will be core in the assessment process: the resilience of institutions in adapting to an unstable and difficult environment (including in risk management, staffing, reputation and funding); the resilience which is engendered in clients by the institution’s actions (including by adapting financial services to clients’ needs and providing non-financial social support to the community); and the vulnerability of the post-crisis context which this resilience can guard against – comprising both the hazard of the external environment, and how that affects clients’ internal environment: the household and workplace. Applications from candidates are required by 3rd June, after which a multi-stage selection process will take place, culminating in the announcement of the three finalists in September and the winner in November. This is the sixth incarnation of the European Microfinance Award, and the first since transitioned into an annual (rather than biennial) event. First held in 2006 and jointly organised by the Ministry of Foreign and European Affairs – Development Cooperation and Humanitarian Affairs, e-MFP and the Inclusive Finance Network Luxembourg (InFiNe) in cooperation with the European Investment Bank (EIB), it includes a prize of €100,000 from the Luxembourg Development Cooperation and with it the invaluable promotion of the institution through the Award’s various support networks, to be awarded during European Microfinance Week at a ceremony to which the three finalists will be invited and where a short video about their programs will be presented. Previous subjects for the Award have included Innovation for Outreach in 2006; Socially Responsible Microfinance (2008); Value Chain Finance (2010); Microfinance for Food Security (2012); and Microfinance and the Environment (2014). e-MFP is thrilled that this year’s Award will take on this especially challenging and important area of the microfinance sector. In a world in which civil conflict appears to be increasing, and climate change poses a special threat to many microfinance markets, there has never been a more important time to evaluate and disseminate Best Practice in providing financial services to clients who are victims of conflict and crisis. The autonomy, cohesion and self-reliance which access to quality finance can create are never more important than for vulnerable populations. We look forward to learning about the innovations underway around the world in building the resilience of vulnerable populations, and helping to bring these innovations to new markets. For more information on the Award and how to apply click here author: e-MFP

not harm the clients. And one of the most important elements of client protection is responsible collections. To operate as viable enterprises, MFIs must collect on their loans. Inevitably, some clients prove unable to repay. Some cases seem easy – a client has suffered an unexpected tragedy, so an MFI will work to understand her situation and make alternative arrangements to repay the debts, be it a grace period, rescheduling, or even extension of a supplemental loan. But what to do with those cases where a client has simply borrowed too much? What if she did it for a “bad” reason – say, to buy a television? What if a borrower lied by denying that she had other debts? Unfortunately, such situations do happen. In such cases recovery is still the goal. But one cannot recover money that’s not there. Responsible MFIs don’t press their clients to sell key income-generating assets that they depend on for survival. The key is to find the middle path – maintain pressure to repay, but not so high that the client is pushed into destitution. So what about Greece? Does the experience of microfinance have any useful lessons for the Greek government and its creditors? Let’s start with the facts. The current disagreement is over whether Greece’s creditors will release another bailout installment to pay… Greece’s creditors. Any scan of the news breaking down the financials clearly demonstrates that subject at hand is Greece’s inability to make its scheduled loan repayments, thus necessitating the “bailout” funds. From a strictly financial perspective, this is highly problematic. Were a bank or MFI take a similar approach to delinquency management, it would have some explaining to do to its regulator. In industry parlance, this is called ever-greening – give the client funds so that she can pay you back, and that way you can pretend that the loan is on schedule. It’s obvious that Greece at this point is insolvent – it cannot make its scheduled debt repayments, at least in the near-term. Yet so much of the discussion seems to ignore that financial reality. Consider the fight over the Greek budget. Greece’s problem isn’t excessive spending – it’s lack of earning. A quarter of its working-age population is unemployed – producing nothing at all. The country is akin to an impoverished family whose main breadwinner has been able to find only part-time work for the past several years. Consider some of the more contentious proposals in Greece – to rehire office cleaners or distribute a food subsidy to poor families. The effect of these on the economy is unclear. Perhaps the approach may prove counter-productive, but nobody knows the right recipe – certainly not the creditors. For the past five years, they and “the troika” have produced vastly overoptimistic forecasts of the Greek economy. There is little reason to think that the 6th year will prove any different. Moreover, for creditors to insist on specific budget targets for Greece is equivalent to an MFI telling a defaulting client how she should earn and spend her money. Letting the country’s government set the economic agenda, which is what it was elected to do, is both right and proper. Which brings us back to the client protection principles. If the creditors fail to disburse the next “bailout” payment, Greece will default. On its own, this is just an accounting event. In any real sense, Greece is already in default, and the financial position of the creditors remains the same – they can’t get repaid, except with their own funds. But the resulting consequences of default would go far deeper – a chain of events that may well push the country out of the Eurozone. At its core, refusal to release the funds to Greece is a threat the creditors hold over the debtor. And such threats are exactly what the client protection principles prohibit. This has nothing at all to do with finance. With Greece out of the Eurozone, the creditors’ ability to recover the loans would be far worse than were it to stay in. So the implicit threat of Grexit is counter-productive to the creditors themselves. Looking solely at the loans and their recovery process, and applying the principle of responsible collection practices, the choice for the creditors is obvious: the loans should be (again) rescheduled, ending the whole charade of bailouts and endless negotiations. The issues may be international and macro-economic, but the parties could do worse than take a look at the collection practices developed for the world’s smallest loans. author: Daniel Rozas

abuzz with the implications of the “final word” study on microcredit impact. For many, including myself, this has been an opportunity to consider a trend that’s been taking place for several years now – from microfinance to financial inclusion. In my last blog, I touched upon the subject of metrics that this new shift requires. I would like to delve deeper. To use the definition of the Center for Financial Inclusion, “Financial inclusion means that a full suite of financial services is provided, with quality, to all who can use them, by a range of providers, to financially capable clients.” That encompasses many things, but perhaps more intuitively, financial inclusion means providing serving those who aren’t being served – whether they are too poor, too informal, or too remote. It’s a compelling goal. Yet the metrics we use to measure progress came from a time when microfinance meant making loans to the poor. They simply are not up to the task of measuring financial inclusion. Don’t get me wrong. There’s a lot of great data being created to measure financial inclusion. The Global Financial Inclusion Database (Findex) is a fantastic resource. So are the indicators being promoted by the Alliance for Financial Inclusion (see, for example, its Core Set of Financial Inclusion Indicators). The Banking Superintendency of Peru exemplifies the kind of data transparency needed to track financial inclusion. So does the MIX Finclusion Lab. There are many more that I still haven’t listed. Indeed, one could say there’s a wealth of financial inclusion data already in existence and still being created. Why would one need new metrics? The problem is that all of these indicators are from the market perspective. What share of the population has an account, how many saved or borrowed in the past year (and how frequently), how many live within 1km of a bank branch, and so on. All this is incredibly useful. But if you’re an MFI or an investor in one, that value becomes a bit academic. You need to know what YOUR efforts have contributed to this broader picture. So maybe you could turn to social metrics? Not so much. The Universal Standards for Social Performance Management (USSPM) focus largely on the process – how an institution pursues its social objectives. Similarly, a lot has been done to better define the target population or practice. Is an MFI seeking to serve women? Consider the Gender Performance Indicators. Targeting the poor? Consult the Progress out of Poverty Index. Focusing on environmentally sustainable practices? See the Green Index. Still, none of these have much to say about financial inclusion. Consider the kind of data you may have as a fund manager. Most likely, you know the number of loan clients, though rarely disaggregated by type (size, maturity). You probably know the number of savings accounts, though have little idea how many are active, and know even less about the nature of that activity (frequency of use, average deposit/withdrawal amount). When it comes to insurance, in most cases you might know whether the institution offers such services, in some cases you may know the number policies issued, and in even fewer cases, this might be disaggregated by product. Rarely, if ever, would you know the coverage amounts, renewal rates or payout ratios. For transfer and payment services, information is more sparse still, often comprising little more than a checkbox of whether or not an institution offers such services, but little on actual usage levels, let alone frequency and amounts. And finally, when you try to look at the MFI holistically – how many people does it actually serve? – often there is simply no way to tell. The above is just for a single institution. Few, if any, portfolio managers would be able to discuss financial inclusion outreach across their portfolio – despite having it as their mission. The types of usage indicators developed at the market level, like Findex, are largely absent at the institutional level. The need seems clear. But is there capacity to meet it? What about indicator fatigue? How would such metrics fit in a space already crowded by seemingly endless indexes and indicators? And is it reasonable to ask MFIs to produce yet more metrics? The problem of indicator fatigue is overblown. We live in an age of data. Setting objectives comes with the expectation that we will have metrics to show how we have reached them. And despite the apparent crowding, few institutions are likely to use more than a handful of these different sets of metrics – a basic set for core reporting, with added modules depending on specific goals of the institution. So what about the reporting capacity of the MFIs? It’s not as hard as it seems. Nearly all of the missing metrics can be derived from data that’s already being captured by the institutions’ IT systems. Few, if any, entail gathering new data in the field. Yes, it would involve more reporting by the MFIs, but this is part and parcel of the financial sector, which is among the most data intensive segments of the economy. And for those MFIs too small to have appropriate reporting systems, reporting can be voluntary or simplified. After all, their impact on overall outreach is likewise small. The core task is to develop clear standards and incorporate the new metrics into the various reporting channels used in the sector, including MIX Market. The challenge is real, but hardly insurmountable. I admit, the title of this post is misleading. The biggest gap in financial inclusion isn’t metrics – it’s the lack of financial services available to the poor. But closing that gap will be harder if we can’t measure our progress. author: Daniel Rozas

UPDATE 13/02: I just came across a 2009 journal article by Susan Johnson by the same title. Had not been aware of it previously. The verdict is out. Final publication of six randomly-controlled studies (RCTs) has drawn a pretty thick line under the words of David Roodman: the average impact of microcredit on poverty is about zero. The notion that microfinance lifts the poor out of poverty is officially dead. Now, the caveats. The studies evaluated microcredit only – not savings or payments or insurance. Nor did they cover so-called microfinance-plus programs, which provide training, health care or other interventions, along with credit. It’s quite possible that these or other specialized branches of microfinance practice do raise the living standards of the poor. But, if I may be so bold, even the best of these initiatives are probably less effective than we might have supposed. This is good news. We in the microfinance community could use some humility. We’re financiers, not doctors, scientists, or teachers. To think that we can alter the lives of millions is hubris. That doesn’t mean that the value or even the existence of microfinance should now be called into question. Not everything that is valuable is life-changing. Marginal improvements are just as important. And microfinance – not just credit – can marginally improve the difficult lives of the poor. I am 100% confident that you the reader rely on a multitude of financial services for any number of needs. Life would be far more difficult without them. That the majority of the 2+ billion unbanked will eventually join the financial system is inevitable. The question is how soon and under what circumstances. We could just wait for economic development to take its course, and as incomes rise, banks will find their customers. What would be the cost of that wait? First, it would mean forgoing useful financial services to hundreds of millions for decades to come. That’s a real cost to them. Sure, they can continue to rely on the informal financial services – the ROSCAs, moneylenders, pawnbrokers, susu collectors, and the finances that flow between friends and family. Some of these are better than others, and all are better than nothing at all. Certainly, we should not ignore these informal systems, least of all because they give us a better understanding of how to serve the poor. But to think that we cannot improve on informal finance is to romanticize the lives of the poor. It sustains strengthens families and sustains communities! Perhaps. But people don’t seem to think so – as soon as people have the money to go to a bank, an insurance company, or a pension fund, they nearly always do. It’s nice to have a social network to help out when hard times come to pass, but mostly we seem to prefer to keep our friendships and finances separate. Second, over the past few years, the microfinance sector has made real strides in developing mechanisms to protect clients from harm. On its own, the banking system would never undertake such initiatives. However, client protection is increasingly becoming adopted by regulators as a core operating principle and this is a development for which the microfinance sector can legitimately take credit. This work is ongoing, and much work remains to be done to make sure these regulations apply to clients in all microfinance markets, and not just a select few. What’s left is the question of outreach, of reducing that 2 billion unbanked without waiting for them to become rich enough to do it on their own. This shouldn’t be just a game of numbers. The way microfinance currently operates, closing that gap would mean 2 billion loans. Or maybe 2 billion savings accounts and a smaller number of loans. We can measure the numbers, but what’s missing is the quality of the services we provide. Protecting clients isn’t nearly enough if the only choices given are cookie-cutter loans tailored for high-turnover businesses. And it’s here that we’ve barely begun. We have very little currently that enables MFIs to measure both the quantity and diversity of services provided. If financial inclusion is a stated goal, it’s not enough for an MFI to simply count the number of clients. For that matter, the foundation of all microfinance data – the MIX – doesn’t even allow tracking clients. You could check the number of active borrowers, or number of savings accounts, but without any idea whether these represent the same people or not. And unlike loans, many savings accounts are mere shadows, sitting empty, dormant or both. This is only scratching the surface. Who can answer how many insurance policies have been issued by MFIs worldwide, and how many of those are currently active? How many money transfers (and by how many people) have been done in the past year? And these are just the most top-level metrics. Remember those cookie-cutter loans? If we’re to measure diverse offers, we should be able to answer some more basic questions: what share of loans are issued with a term of less than 6 months? More than 2 years? How many savings accounts are in fact dormant? What is the average turnover (deposits + withdrawals) for savings accounts? What is the average payout ratio on insurance contracts? Answering any of these questions currently requires sitting down with an MFI’s data management staff and asking them to generate a special report – and that’s assuming the IT system even supports this type of analysis. We’re still far removed from the day where these questions could be answered at the country-level, let alone globally. Yet that is ultimately what’s needed. Today, the microfinance sector is embarking on an important journey. We leave behind earlier shibboleths of eliminating poverty, as we adopt new goals of better and broader financial inclusion. But this important goal requires a parallel change in the standards and metrics that will tell us how well we are doing. We can’t expand financial inclusion without being able to measure it. author: Daniel Rozas

Overindebtedness is like the unwelcome spectre at the feast. Amidst robust and exciting discussions about technology, product development, distribution innovations, client protection and rural finance at a conference like European Microfinance Week, overindebtedness is always there – hovering. It’s the underlying trigger of market crises. It’s what outsiders who’ve read a few alarmist headlines think about microfinance. And yet again, this year’s Banana Skins survey of industry risk (co-authored by e-MFP’s Daniel Rozas and me) found it to be by some margin the greatest perceived risk to the industry according to expert respondents from around the world. It’s only right then that the Day Two plenary session should bring together industry leaders from the key markets of Bangladesh, Morocco and Mexico to discuss how the spectre of overindebtedness has emerged, and in some cases been addressed, in their countries. Daniel Rozas moderated the Plenary session, entitled “Managing Overindebtedness: Speaking from Experience”, alongside Shameran Abed, Fernando Fernandez, and Youssef Bencheqroun. Shameran Abed needs little introduction, as the Director of the Microfinance Program at of Bangladesh’s BRAC – one of the largest MFIs, and the largest NGO-MFI, in the world. As a series of papers produced by CGAP have detailed, Bangladesh is the case of the cautionary tale averted. In 2007-08, there were several signs of market overheating, but a rare example of prudent self-regulation took place. A few of the largest MFIs – BRAC among them – took active measures to slow their growth. As Shameran points out, Bangladesh is a unique market in some key respects, among them that, as the first mature microfinance market, it was grown from NGOs rather than foreign-funded commercial entities, especially from the 1970s to the early 2000s. Huge growth began early that decade as commercial investment began to pour in, but by 2007 real issues were emerging. Already endemic multiple lending/borrowing was worsening. The staff-client interface was increasingly strained – in part a result of growing pressure to reach targets. The Bangladeshi model, with its genesis in joint liability group lending but which had transitioned to individual lending but still within a group model, had changed. Groups became less cohesive, and institutions like BRAC less able to rely on groups to provide feedback on individual borrowers’ status, indebtedness and creditworthiness. As Shameran tells it, an iterative series of discussions took place, and a consensus developed, within and between key large institutions, that asset quality would deteriorate without growth of 30-40 per cent per annum being actively slowed. The dominance of NGOs in Bangladeshi microfinance was a boon: the social roots of the industry and concern for client welcome made it easier to get Boards on board, so much so that they acquiesced in actions which led to BRAC not only slowing, but contracting – from 2900 to 2200 branches in 2009, and from 6 to 4.5 million active borrowers. Slowing growth was part of it, but not all. Shameran says they were all well aware of multiple borrowing, and the risks it could pose. But why was it commonplace? Was it that the loans weren’t big enough to be useful – sending clients to other MFIs for what they need? Interestingly, no – the problem was timing. Clients need a couple of hundred dollars now, and know that they’ll need a couple of hundred in a couple of months, and perhaps a hundred a month after that – the consequence of seasonalities and predictable calendar events for which credit was necessary. What they didn’t particularly want or need, in this case, is five hundreds dollars right now. The rigid 12-month loans were inappropriate to their needs, so they would spread them out so were getting the credit they needed when they needed it. Moreover, clients – like institutions – are conscious of spreading risk. They borrow from multiple organisations so that if their relationship with one were to sour, they’d retain access to credit from another. BRAC adapted, with more flexible loan terms, refinancing and rescheduling options, top-up loans, and emergency loans. And while it wasn’t BRAC alone, its actions – along with those of its competitors – helped avert a crisis. Morocco wasn’t quite so fortunate (or prescient). Youssef Bencheqroun is Director General of Al Amana. As many will know, Morocco was one of the countries, with Bosnia, Pakistan and Nicaragua, which suffered market crises in 2007-2009 – followed by AP/India a year after. Youssef attributes several factors to what happened. Three large organisations dominate microcredit in Morocco. Following a period of “infancy and growth” (which saw 50-100 per cent per annum industry growth in the years up to 2007, couple with 99 per cent reported repayment rates and sub-five per cent PAR-30), the absence of credit bureaus; a cultural Muslim scepticism or misunderstanding of concepts of debt, interest and obligation; consolidation; reach into very remote and high risk areas; and the collapse of the second largest MFI in the country, caused a perfect storm. The regulatory authorities were ‘frightened’, which led to the absorption of the collapsing MFI by the third largest – a subsidiary of a commercial bank. But not before some belated, self-regulation took place. The three dominant organisations set up a de facto credit bureau – pooling their client data each week. Growth slowed from 35 to 10 per cent – what Youssef calls an “incompressible figure”. Action was taken to stem overindebtedness. Strict limits were imposed on renewing loans to some clients. More mainstream tests for credit-worthiness were imported from mainstream commercial finance. And the Central Bank, not before time, set up credit bureaus – which now give institutions “a 360 degree view of reality”. The actions meant the industry weathered the storm, but not without considerable costs. The problem, Youssef thinks, is that the organisations in the country lacked the ‘DNA’ to manage risk. The price that’s been paid is the difficulty in encouraging healthy, manageable growth. “Rate of growth depends on risk appetite or aversion; clients love us, but the current environment isn’t supportive to microfinance, meaning it’s difficult to get beyond ten per cent growth.” Public opinion turned against microfinance in Morocco, and has not rebounded. And the industry needs public support to be able to develop, says Youssef in conclusion. Daniel points out that it’s easy to conflate overindebtedness and multiple borrowing (something he and I know well from reading the responses to and writing the Banana Skins survey) but they’re distinct. Multiple borrowing and repayment risk can be driven by many factors, only one of which is overindebtedness. Likewise, clients can become overindebtedness for various reasons – only one of which is borrowing from multiple institutions at the same time. Multiple borrowing, as he pointed out with some startling charts, is perhaps most endemic in Mexico. Fernando Fernandez heads up Pro Mujer in Mexico, the first MFI to get certification by the Smart Campaign. According to recent data from Finca, the percentage of microfinance clients in Mexico with more than four concurrent loans is more than double that seen in Bosnia in 2009, Morocco in 2008 or Andhra Pradesh in 2010. If this data is representative of the industry in that country as a whole (and it’s not clear it if is), Mexico’s microfinance industry could be on the brink of collapse. Mexico is as unique as Bangladesh – but for very different reasons, to do with context. In 1995 a financial crisis decimated the banking system. For the following several years, financial services in Mexico was dominated by five international banks. It wasn’t until the 2000s that credit markets were properly re-activated, and the Mexican government went, as they say, “all in” – deciding to create and promote credit entities providing housing, mortgage and car loans. Consumer credit exploded – led by the (in)famous Compartamos Banco, whose 2007 IPO, the first in the global industry, on the back of three-digit interest rates, caused widespread concern among more socially-focused observers. This is all-important, Fernando says, because it shows that Mexico wasn’t led by a tradition vision of financial inclusion microfinance – small loans, ostensibly for microenterprises, with the goal of financial inclusion. The focus instead was very commercial: profit maximisation through consumption lending. Provide debt, and do it as profitably as possible. This model naturally has high returns, but it is important to question, he says, why interest rates don’t in reality go down – as competition ought to mandate. This wasn’t the private sector left untrammelled which caused this, either. On the contrary, it was seven years before the spate of market crises, that the government approved the operation of specialised banks to fill the gaps in the internationally-dominated market, three of which offered consumer credit for household goods, in all states of Mexico, and which followed Compartamos’ lead. Inclusion isn’t a priority. Providing credit to the base of the pyramid, however, is. It has been, within those parameters, a massive success, with 30 million such clients within five years. But the number of people marginalised by the system is growing too, says Fernando. The search for profits and the appetite for risk are so high that some have been left out of the market – genuinely financially excluded from a system that has commoditised credit, with no focus on client protection. Today, the authorities in Mexico are wise to this, but it’s not clear what can or will be done. What’s also not clear is how widespread overindebtedness is. The representativeness and replicability of the Finca data isn’t clear. It’s not clear, Fernando says, whether overindebtedness is limited to individual consumer loans, or has contaminated ‘productive microcredit’. It’s not clear if it’s localised to certain over-concentrated regions. These are ‘grey zones’, and more research will be needed to understand it. There is an opportunity here, too. “This can perhaps be a signal that time has come to improve efficiency; we are vey inefficient in granting credit, the machinery that operates on the market is inefficient and price of products pay for the inefficiency, with high social cost and therefore high social risk”. But the market leaders, for the most part, are not like the social visionaries in some other markets, and the commercial focus “allows us to say is doing deep financial inclusion, when that isn’t always true”. Pro Mujer is unusual in this hyper-commercial market – the first to pursue and get Smart Campaign certification, and an organisation which, he argues, is trying to figure how not just what is profitable but who do we want to serve an why. Women in the poorest segments are Fernando’s priority. But there is a long way to go in Mexico. For the most part, MFIs follow the logic of the mass market, consumer lending competitors: quick returns and low-hanging fruit, with little interest in the complex and expensive job of training clients. Instead, the mindset is to let someone else do that, and “we’ll get them on their third or fourth loan”. But microfinance still makes up only less than one per cent of the financial services sector as a whole. Which means nobody sees it as an existential threat. The risk, Fernando says, is social, and reputational. Fernando believes something echoed by Shameran, Youssef and Dan – that overindebtedness is managed, mitigated or averted when institutions go back to basics. Think long-term. Recognise that they are in the business of relationships with clients, and not transactions. Institutions need to set limits. Strengthen these relationships. Collaborate with competitors. Diversify and adapt demand-driven product offerings. Be there when clients need them. Invest. And be mindful and vigilant with respect to the warning signs of overindebtedness. The problem is that not all industry leaders are like these three men. It’s the others out there who will need to follow suit. author: Sam Mendelson

Opening Session of European Microfinance Weeks Asks if Financial Inclusion, Stability and Client Protection can Co-Exist Financial Inclusion has long since become the dominant discourse in providing financial services to under-served populations – something which used to be called ‘microfinance’, and before that just plain ‘microcredit’. Inclusion (or ‘Inclusive Finance’, as is voguish) means different things to different stakeholders, but “the provision of quality financial services to those previously excluded from the financial services sector” is probably acceptable to most. But is it costly? Or rather, is the key “quality” element something that is irreconcilable with commercial goals, because of the burdens its provision places on institutions, or the adverse affect it can have on market stability? Put another way, is client protection, in all its forms, in opposition to financial inclusion (in that it prevents vulnerable populations being reached), and can market stability be possible if attention and resources are devoted to client protection at the expense of growth, profitability and scale? “Balancing Financial Inclusion, Market Stability and Client Protection” was the topic for the kick-off plenary at EMW2014. After an introduction by Scott Brown, CEO of Vision Fund and part of the Microfinance CEO Working Group (eight CEOs of international MFIs, covering 45 million clients in 70 countries, and working for advocacy, and industry and institutional strengthening), Antonique Koning from CGAP kicked off a wide-ranging panel debate. Antonique heads up CGAP’s workstream on customer empowerment, balancing, as she put it, “financial inclusion (I), financial stability (S), financial integrity (I), and financial consumer protection (P) (collectively I-SIP)”. Narda Sotomayor represents SBS Peru, the country’s Superintendency – the banking regulator. From a financially excluded background herself, she returned from overseas doctoral study to lead research on changes in regulation, and the impact it has on institutions and clients. Armenuhi Mkrtchyan represents the Armenian Central Bank. As she tells it, for ten years, they set up the infrastructure that could be envisioned to strengthen the supply side of the microfinance market. Credit bureaus, deposit insurance, joint regulatory bodies. “Everything to make investors feel secure”, she says. But in 2006, she and her colleagues realised that this just wasn't enough to achieve “deep inclusion”. Why? Because the customers don’t understand finance, and credit in particular. This meant strengthening the demand side through consumer protection and financial education. Kim Wilson is a Lecturer in International Business and Human Security at the Fletcher School at Tufts University in the US. As a teenager, she says, she was “a child of credit”, working summer holidays for her retailer father to repossess furniture and appliances from defaulting customers. Ten years ago, she found herself as Director of the Global Microfinance Unit at Catholic Relief Services. “We didn’t have any impact assessment or smart understanding of what we were affecting – just lots of hunches, lots of problems among 35 programs, some of which were fully functional but some were plainly non sustainable NGOs. What she came to feel, she says, was that they were clashing against what they were actually supposed to be doing, because it’s difficult to see all the consequences of every action. Microenterprises were serving as fronts for money laundering, for example. So she left that position, “hid” at university, and was approached by Gates Foundation to launch the Fletcher leadership course – two matriculators of which are Armenuhi Mkrtchyan and Narda Sotomayor, alongside her today. So, a central banker, a regulator and a practitioner/academic: a range of experience in how to find the products, mechanisms and regulation to maximise market stability, reach excluded populations, and ensure those clients are adequately protected. What does the audience think, asked Antonique Koning, who moved on to put three statements up for a show of hands and discussion. “There is no trade-off between financial education and financial stability” was the first – with the audience roughly split 50:50. The question is an unusual one – maybe “It is possible to reconcile provision of financial education and market stability” would've yielded richer responses. One audience member argued in favour of the original statement, arguing that investment in education ultimately pays off in stability. The second statement up for discussion was this: “By definition, financial inclusion implies consumer protection”. The trouble here (and the explanation for the audience’s reluctance to commit either way) is that there’s a disconnect between theory and practice. Perhaps most people in the audience agreed with one member, who said that, yes, genuine inclusion needs to incorporate consumer protection, because otherwise all we’re talking about is financial access; inclusion has to mean more. “Financial inclusion means quality financial services, and they cannot be quality if consumers aren’t protected”, goes the argument. But in practice, consumer protection isn’t given the attention it needs in promoting inclusion – although no doubt this is generally improving. The third statement garnered an almost unanimous response, because it’s virtually axiomatic: “Financial education is an essential part of consumer protection”. This is so clear it hardly bears analysis. So, it’s clear that protection, inclusion and stability aren’t ‘zero-sum’. There are synergies to be found. Narda’s focus at SBS Peru is primarily market stability. This means, in practice, “generating the incentives such that financial institutions can develop their own consumer protection initiatives”. Put another way, creating the environment where it’s in the institution’s interest to protect, rather than exploit, the customer. Consumer protection, she says, comes mainly through transparency. A consumer who is well informed about a financial product’s characteristics, including the terms and the risks is in better position to make good decisions, manage risks and understand and meet his or her own obligations. “This is win-win for the client, the institution, and the sector”, she says. For Armenuhi, synergy comes a different route. “In policy, this balance, or synergy, comes about because when people are excluded, this poses threats to financial stability and integrity”. What is financial integrity? Absence of money laundering is one factor, reduced flows in opaque, shadow banking channels. To what extent this is an issue peculiar to certain markets like Armenia, or something that is inherent in all developing markets, was left undiscussed. Caps on interest rates, whether by design or accident, dominated the rest of the session. All the speakers are opposed to caps – as were, from the questions, almost all the audience. After all, when policy makers want to cap rates and do it effectively, they need to have the knowledge of what the caps should be. “Nobody can do this better than the market”, argued Armenuhi. Narla cited her home country of Peru, which went through a well-intentioned experiment in interest rate caps last decade, but with “totally unexpected results”…we ended up damaging those people we wanted to benefit – those in the bottom quartile”. Higher socio-economic segments benefitted, she said, because cheaper credit gives incentives to corruption (and presumably higher socio-economic segments benefit more from corruption). Moreover, market stability mandates sustainability, which means institutions need to be able to cover all their costs. Binding rates are anathema to this. Ultimately, a market with fair competition should take care of it, and push rates down. Kim cited interest rate caps in certain US states, especially on payday lenders. “Credit is heroin”, and people get into a dependency on usurious credit. But she defended caps in this case, because payday lenders (as they do in the UK as well) charge 3 or even 4-digit interest rates – orders of magnitude above their costs, and the caps in place were still high enough that anyone could sustain a business by charging within those limits. Intervening always has its costs. Armenuhi says that in the long term, they’ve found that in Armenia, setting rates is more costly than subsidising vulnerable groups. Narda points to how Peru has now reached its position as the highest rated microfinance market (as recently re-affirmed in the 2014 EIU MicroScope). But policy-makers must remain vigilant. As banks downscale, MFIs are motivated to go and find harder-to-reach markets, and their portfolios change as new, previous excluded people are brought in. A credit portfolio can deteriorate quickly unless the methodology is still appropriate for the new customers, she says. “The process of lending isn't static; it’s very dynamic – and creating a close relationship with demand side is very important.” “Go downmarket, but adapt – or risk destabilising and affecting customers”. Kim finished with a positive story – a morality tale for how to find this elusive balance: “A few years ago, I was in Tajikistan, and kept coming across these ‘ExpressPay” kiosks, where people pay their utility bills and other things. Then, I found out that the network had been closed down. I met the CEO. The regulator had shut him down, but said the following: ‘ if you work with me to meet our requirements, in three months you’ll be licensed, you can re-open, and you’ll even be able to store funds’. True to form, three months later, ExpressPay reopened, fully licensed to take payments and also to hold funds – providing a range of new business opportunities to the company, and services to the customers.” “ExpressPay reopened because there was a great regulator at the Central bank, who understood the key elements of stability, protection and inclusion, and knew that with some adaptation and buy-in from the CEO, all three could be achieved. The lesson is that regulators are human beings too”. author: Sam Mendelson

Q:The theme of this year's conference is, "Developing Better Markets." Why do you believe this is an important topic to highlight? IR:The importance of this year's conference theme of 'developing better markets' is that it comprehensively captures both demand and supply side aspects. It focuses on the 2.5 billion people around the world that lack financial access, takes into account agricultural communities, youth and gender issues and even the very specific challenges associated with former conflict regions. On the supply side, the conference highlights the essential need for ethical values in serving the market responsibly, emphasises customer centricity yet at the same time balances these themes with the constant need for prudent and proficient risk management, which is at the heart of all financial sector activity. Q: Could you tell our readers about WSBI and ESBG and your role within these organizations? IR: WSBI and ESBG are international banking associations. WSBI brings together savings and retail banks from 80 countries representing the interests of approximately 6,200 banks in all continents and focuses on issues of global importance affecting the banking industry, whereas ESBG brings together savings and retail banks of the European Union and European Economic Area that believe in a common identity for European policies. Together, the two organizations agree and promote common positions on relevant matters of a regulatory or supervisory nature, foster the exchange of experience and best practices and support members advancement as sound, well-governed and inclusive financial institutions through delivery of world class training and consultancy services, which are also available to other institutions. I am a Director at WSBI-ESBG, responsible for the group's global training and consultancy activities, with 20 years' experience in leading financial sector programmes and bank reform projects in more than 70 countries worldwide that support international efforts to advance sound, well governed and inclusive financial sectors. I am a Board member and Treasurer of the European Microfinance Platform, and WSBI representative on the Knowledge Committee of the United Nations' managed 'Better than Cash' Alliance. Prior to joining WSBI-ESBG, I worked for National Westminster Bank Plc in the UK and Australia. Q: At the upcoming conference, you will be speaking during a session titled, "Savings for the bottom of the pyramid: Institutional outreach." If you don't mind, please provide us with a preview of some of the points you will be discussing. Could you explain your perspective on the current use of savings in developing countries, and how this tool could be better utilized to promote poverty reduction? IR: Based on experiences developed since 2009 in running a 10 country programme known as the 'WSBI Doubling Savings Accounts' programme, I will plan to the scene for this session from the banking sector's perspective in addressing four challenges: i) how to provide usable savings services for the poor, ii) how to do so at a price that they can afford, iii) how to overcome the challenges of lack of proximity, and iv) finally to address some business case aspects in order that the services may be sustainable. Q: In your opinion, what issue (or issues) must be immediately addressed in order for the microfinance industry to move forward in the coming year? What improvements can European institutions specifically make in regards to this issue? IR: Financial sectors everywhere – including the microfinance industry - are facing a world of disruption from technology, changing customer behaviour and regulation. In the coming years, the delivery of financial services to communities around the world is set to change beyond recognition today. In the new scenarios that are emerging, adaptability and innovation are essential to survival. On the one hand, European institutions can help the developing world through partnership, investment and transfer of know-how; on the other hand, some European players may be surprised at the degree of innovation that is emerging from some developing countries, from which they themselves can learn to the benefit also of European markets. author: Niamh Watters

I’ve been poring over the data collected by the Angelucci, Karlan & Zinman study of Compartamos clients. To recap from my previous blog, with an average monthly loan payment of 2,100 for the loans in the study (and for Mexican MFIs generally), the figure of 1,572 pesos as the average client income poses a seemingly impossible debt-to-income ratio of 130%. The immediate question is whether the income figure is reliable. It does seem extremely low, putting the clients below the 3rd income percentile in the country. Can we get anything more from that data? Here’s the breakdown of the summary data (using the full panel dataset, i.e. households for whom both the baseline and endline surveys are available): [<{"type":"media","view_mode":"media_large","fid":"1181","attributes":{"alt":"","class":"media-image","height":"175","style":"display: block; margin-left: auto; margin-right: auto;","typeof":"foaf:image","width":"480"}}>] At first glance, the data seems even more problematic – the median income per adult is well below the average, at 1,200 pesos/month, meaning that half the clients make even less than that. Our already impossible debt-to-income ratio has now grown to exceed 175% for half of the clients. However, at the household level, total income (which includes job earnings, business activities, remittances and government payments), things don’t look quite so dire – a median of slightly over 4000 / month, or just over 50% ratio. Seems more reasonable, though many (including myself) would view even that ratio as excessive. And for the bottom quartile that earns 2000/month, the ratio remains still very much impossible. Might these incomes be understated? Well, looking at expenses, median food consumption is 750. So the loan payment is nearly three times higher than that. Indeed, loan payment is some 80% higher than the combined expenses for food & other nondurable items (large costs, such as transport, utilities, and housing aren’t included in the dataset). So in principle, the loans look somewhat plausible at the household level. But that’s for one loan – if we accept that many households have 2, 3 or more loans, then the ratio breaks down completely. None of the above figures can support debt repayments above 4200, let alone 6300/month, unless it’s the wealthier households that are borrowing more. As it happens, the survey did capture some information on borrowing, both with Compartamos and with other lenders: [<{"type":"media","view_mode":"media_original","fid":"1184","attributes":{"alt":"","class":"media-image","height":"595","style":"display: block; margin-left: auto; margin-right: auto;","typeof":"foaf:image","width":"972"}}>] Indeed, one can see that borrowing tends to increase together with household incomes. A household earning 8000/month has formal loans totaling nearly 17,000. Then again, we still see plenty of impossible-seeming figures, such as households earning 1000-2000/month carrying debt at over 8,000. We don’t know the repayment figures with these loans, but we do know them for Compartamos, and for these households, the 5,000-peso loans feature a repayment amount of 1600/month – their entire monthly income. That there is a substantial under-reporting of incomes in this survey is inescapable. A substantial number of households (17%) report incomes below 1000 pesos, while showing debt well above average. Some households have business activities that push their incomes into negative territory altogether. It's difficult to conceive that so large a share of borrowers are living on incomes that place them below the 1st income percentile in the country, while borrowing more than households making several times more. Certainly, some of these borrowers may well be struggling financially, but really, no credit bubble can be sustained with so large a number of households so deep in debt that they their repayment requirements literally exceed all of their income. Were that really the case, we would have long ago been hearing of daily tragedies, and seeing a great deal of resentment among borrowers. At least on the the surface, there is not a large number of borrowers in Mexico showing such signs of stress. This survey is among the most detailed recent assessments of the incomes of Mexican microfinance borrowers, yet the numbers still don’t add up. Most microfinance clients continue to be repaying their loans. The question remains – with what? The exploration continues. author: Daniel Rozas

This is part 3 of a 3-part installment from my brief visit to Mexico in October 2014. Read parts one and two. The biggest mystery about Mexico is understanding the numbers. They just don’t quite seem to add up. And that’s what was dogging me throughout the visit, including the two days spent in Mexico City talking to various actors in the sector. I was lucky – it just so happened that ProDesarrollo was releasing its 2013-14 Sector Benchmarking, and I managed to get myself invited to the event. A great opportunity to network with many actors in the sector at once. I also got to see the presentation of the market figures. At the outset of the trip, I laid out several hypotheses. It seems to me that there are really only two that matter more than all the rest: 1) the number of unique clients and number of loans they hold, and 2) the profile of the MFI clients on which the market rests. The question of market size continues to bother me. ProDesarrollo reports roughly 6.5 million active combined clients among its 82 affiliate MFIs. That’s by no means the whole market, but it is the bulk of it. It’s also not hugely different from the 2012 MIX Market figure of 6.0 million clients, so my earlier estimate of some 4 million unique clients is close enough. It’s also something that seemed reasonable by several microfinance practitioners I talked to. Of course, this figure is a guess. Without better data, it will remain that, at least for now. It also remains the case that these clients are poor. How poor? Well, some months ago, I cited the IPA study of Compartamos clients, which pegged the average client’s household income per adult at 1,571 pesos per month ($120) and an average loan amount of 6,462 pesos ($500). Given a loan term of 16 weeks and an average APR of 110%, the weekly loan payment (principal and interest) would be about 480 pesos, or nearly 2,100 / month. So we have a dilemma – the loan repayment is 130% of the client’s income. That’s a seemingly impossible ratio. Were all loans purely business loans, one could rationalize that the increase in business income would offset the repayment requirement (though such an increase wasn’t found in the IPA study). But it’s well known that many loans are taken for consumption-smoothing purposes. And if a family might manage a costly loan to tide over a difficult period (by relying on a spouse’s income, for example), consistent borrowing above one’s income is hardly a sustainable recipe. And that doesn’t even include the problem of multiple borrowing, which could magnify loan repayments by a factor of 2, 3 or more. To complicate matters further, the same study found essentially no change in the client’s financial situation. It’s a dilemma I can’t resolve with the given data. The figures just don’t work. It may well be that the incomes captured by the IPA study are incomplete (and they do seem awfully low, even for poor families in Mexico). Or perhaps multiple borrowers tend to be wealthier. I’ve asked the study’s authors to share additional data they have collected during the study that may shed additional light (or disabuse me of a silly misunderstanding of what that data represents). I will share what I learn in due course. For now, these core questions – who are Mexico’s microfinance clients, how many of them are there, and how much debt do they have? – remain unresolved. These questions shouldn’t be impossible to answer, but until then, Mexico will remain a mystery. But therein lies the key to understanding the problem of overindebtedness in Mexico. author: Daniel Rozas

This is part 2 of a 3-part installment from my brief visit to Mexico in October 2014. See: parts one and three. My first stop in Mexico was a place I first heard about nearly two years ago: Chiapas. The state is in many ways one of the centers of Mexican microfinance. According to ProDesarrollo’s 2013-14 Benchmarking, Chiapas is tied with much larger Veracruz for the largest number of the network’s members (32). The number of MFI branches per population is nearly double the national average. It’s also Mexico’s least developed state. In all, I spent about 22 hours in Chiapas. But even that paltry amount of time can prove revealing. Among the first things I noticed was the degree that credit is embedded in the culture (and apparently, this is nationwide, not just Chiapas). For example, at many retailers the prices quoted are not so much prices as monthly (loan) payments. The price is included, but often in small print. The example here shows a washing machine at a major retailer (Coppel) that’s priced at 6,999 pesos ($520), but the big number you see is 258 pesos ($19) – a fortnightly payment for 18 months. The interest rate is nowhere to be seen, though this one works out to 39% APR. Interestingly, the price of the washing machine is nearly identical to the average microcredit amount in Mexico, which ProDesarrollo reports is now 7,147 pesos ($530). So, at the outset, the interest rate offered by the store is much lower than the MFI rates in Mexico, which often approach (and even exceed) 100% APR.[<{"type":"media","view_mode":"media_large","fid":"1176","attributes":{"alt":"","class":"media-image","height":"480","style":"float: right;","typeof":"foaf:image","width":"360"}}>] The point here isn’t to discuss interest rates. No doubt, the store selling its goods on credit is making quite a markup on the items themselves, so the comparison with loan rates isn’t really appropriate. Moreover, the buyers here are quite likely different – many are probably wealthier than the typical MFI client. Indeed, from my conversations with a handful of borrowers in Tapachula and a nearby village, MFI clients are not big users of store credit – not a single person mentioned buying goods on store credit, though they were quite open discussing their microfinance borrowing. And on that point, I discovered some interesting things. First, of the eight individuals I spoke with at some significant length, there were two types: 1) active microfinance borrowers, each of whom had 2-3 loans, and 2) non-borrowers. I didn’t meet a single individual who had just one loan – for most markets, that’d be very unusual, but it wasn’t unexpected in Mexico. Both groups were largely made up of the same individuals – small vendors in two of the local markets we visited. However, there were also notable differences: all borrowers were women, while the non-borrowers were split roughly evenly between women and men. Half of the non-borrowers also expressed a negative attitude towards microfinance, saying they would never borrow, certainly not at the rates charged by the MFIs. Two were particularly passionate on this point, one saying that the high interest rates amount to “robbery.” Both also said that it was impossible to grow a business relying on such expensive, short-term credit. A couple of the non-borrowers said that the loan officers visiting the market would ignore them – most likely because they didn’t have permanent sales locations, and were selling from boxes or temporary stalls set up outside the market. This differentiating tactic is very common for loan officers in other countries, since such clients can be harder to track down for repayments. The feedback from non-borrowers is important to bear in mind, particularly when seeking to model demand. As is the case in many other places, the target market for MFIs is substantially narrower than just the poor in Mexico. Even among those who work in the informal sector, a substantial proportion will be seen as either too poor (i.e. no permanent place of sale) or simply uninterested in borrowing. Meanwhile, the borrowers all viewed MFIs as generally positive, and all were long-time clients (7+ years). Again, the sample is too small to extrapolate, but it is instructive when juxtaposed with the non-clients. The average years clients have been active in microfinance is something to consider when evaluating capacity for continuing growth, especially in mature areas like Chiapas. What is likewise notable is that at least two borrowers suggested that one of the loans they’d taken were intended not for them, but for someone else, i.e. family or a friend. This appears to be quite a common practice in Mexico, and is well recognized by those working in the sector. Regarding the economic profile of the borrowers: the vendors in the Tapachula markets had permanent stalls in the market area, and sold a mix of goods, from shoes, to poultry, and so on. The borrower in a nearby village was much poorer. Indeed, the village – which had no paved road, a polluted and partly flooding stream, and very basic homes in various states of completion – could be easily compared to poor villages in Cambodia or India. It was a world away from the upper middle income Mexico that one might see in the country’s capital or other developed areas. Such borrowers form a major part of MFI portfolios, so this is consistent with the hypothesis that the sector’s clientele are truly among the poorest in the country. Finally, the question of competition – Tapachula was clearly a competitive market. The borrower in a nearby village could recall six separate MFIs active in there, though each recall was prompted by mentioning a specific MFI. Presumably, there were others that we simply failed to mention. But in light of the fact that Chiapas is the most densely served market in a country that with a uniquely high level of multiple borrowing, the situation on the ground didn’t seem exceptional. I didn’t see multiple competing branches next to each other, as I’ve seen in Lagos, for example. So what to make of this extremely brief visit to Chiapas? First, Mexico’s credit culture arguably creates more credit demand than comparable markets. Second, the target population of MFIs does seem quite narrow, and within that narrow slice, there are many who are not (and are unlikely to become) clients. And finally, the market is clearly competitive, but on the surface, it doesn’t seem to be exceptional. Perhaps the most important thing is what I didn’t find – though some borrowers knew other clients who had defaulted, not a single borrower mentioned overindebtedness as a major issue. More to come. author: Daniel Rozas