London School of Economics Microfinance Society Debate, 2016-02-16, Dr Phyllis SantaMaria, Learning without Borders
It’s a great pleasure to be here in this debate, thanks to the LSE Microfinance Society. I’d like to start with questioning the phrase: ‘reduce poverty’. I’d like to change that to ‘improving quality of life’. We know there are many people out of poverty who don’t have quality of life. Financial inclusion via microfinance could improve the quality of life, and so it should.
I’d like to take you back almost fifty years when I was a US Peace Corps Volunteer in a Mayan village in the highlands of Guatemala. You’ll see me at the back of this photo from June 1967, just under the ‘7’. The women of San Juan Comalapa and I co-created the first women’s weaving group in Guatemala.
We took the pattern from their traditional blouses and made these micro-purses, monederos.
These purses and other weavings, plus connecting with markets and collaborating with other organisations improved the quality of their lives through poverty reduction and freedom. They could make choices in their lives. Several of the women created enterprises each providing employment to hundreds of other women and their families, created an industry where they could make socio-economic changes in their community. I have kept in touch, and am working with second and third generations.
Now that I’ve established that this debate from my standpoint is not limited to reducing poverty but about ‘improving quality of life’, let’s turn to the global picture for financial inclusion and to India.
Globally there are about 2 billion people unbanked. The average globally for developing countries is 41% with bank accounts. In some countries 95% don’t have access to financial services.
India is the fastest growing economy in the world with 1.3 billion people. Its aggregate poverty is 37%. Within that aggregate, 42% is rural and 26% urban. India is 74% rural, and it accounts for only 30% of GDP. In that 74% of rural population has only 18% bank penetration, and only 30% have access to deposit or savings accounts. The picture is pretty stark for India’s developing its financial infrastructure. The Government of India in a recent report on savings access throughout India asked for ‘simple, economical and local financial services’ linked with campaigns for raising awareness. Financial inclusion needs both financial services and awareness.
I’m going to use our E3.0 model to illustrate the growth of microfinance as part of financial inclusion. This model is from my Microfinance 3.0 chapter in a book for MF Practitioners, and we’ve expanded it to cover enterprises, hence E3.0. I’ve used the analogy of the web. In 1.0 we just received information, in 2.0 we participated and interacted by using Facebook, YouTube, blogs. In 3.0 it’s possible to co-create, connect and collaborate by having a business using the web, such as AirBnB, where people rent out rooms in their homes to guests.
Let’s look at the top right corner for E1.0. Grameen Bank 1.0 started with Mohammed Yunus lending $27 to 5 families who were then able to buy their bamboo themselves instead of always being in debt to someone else. Grameen Bank in its 1.0 version gave credit to groups of women. Dr Bateman has rightfully focused his criticism of financial inclusion and microfinance on microcredit. As I will illustrate this is only one part of the picture, and looking mainly at microcredit misses the point about the role of financial inclusion in improving quality of life.
Have a look at our five circles around the spider diagram. You’ll see that we use these five categories to diagnose an enterprise, and in our case today, a microfinance organisation.
So if we look at the 1.0 characteristic
- Purpose is profit-centric, as the MFI has to be self-sufficient
- Product is features-focused and sold on that basis
- People is time for money for the employees who often have to meet greater and greater targets
- Practice is on quality of delivery of the service
- Performance indicators are revenue and profit
Let’s turn now to E2.0 or ‘I participate’. In the late 1990s Grameen was in serious trouble, so it looked at the model that the other large Bangladeshi Microfinance Institutions were developing, namely ASA’s with savings and insurance. Most poor people don’t want credit, they want a safe place for their savings. Most E1.0 microcredit organisations have enforced savings before the people in the group can access credit. They also include fees for credit insurance in case the borrower dies. This is not what is meant in E2.0 by savings and insurance. Here we refer to individual savings accounts without the need to borrow, and insurance that could be for livelihood protection such as drought or flood. Transfers refers to developments, most notably first from Kenya by using mobile phones for transferring funds from one part of the country to another. This has since spread to many other countries, and it is possible to deposit savings using a mobile phone service linked to a bank, such as MPESA mobile payments with Equity Bank in Kenya.
Grameen 1.0 took 26 years to build up 2.5 million members who were borrowers and doubled their members in just 31 months after introducing individual savings accounts. Grameen 2.0 was born!
Let’s look at another example of E2.0, AMK in Cambodia, a country of only 15 million. AMK started in 2003, and has become the largest MFI in terms of numbers of clients, with a
- Strong purpose of being ‘customer-centric’, basing its products on customers needs.
- Benefit-focused for its products with great outreach to rural areas
- For people it is performance based, and also includes collaboration. It is developing a network of agencies in rural areas, so shopkeepers can provide savings services as agents of AMK. It workable credit rating system through collaborating with Village Presidents to check credit-worthiness of potential borrowers.
- Its success is due largely to its practice of focusing on the customer experience since 2003 and overcoming a turbulent time in 2009. AMK is a learning organisation that bases its products on customers needs. It also uses mobile services for its agency network, a move towards eco-friendliness in Cambodia’s rough terrains in rural areas. It mobilises savings both from rural areas and from middle-class savers in larger towns to create a local enterprise, not overly dependent on foreign investment.
- Its performance is measured in lagging indicators, after the fact of transaction, and are localised.
Now let’s turn to an example of E3.0 in BASIX India, its largest MFI, who says ‘we are livelihood developers’, not simply financial services.
Remember our E3.0 mantra: co-create, connect and collaborate as we see how they engage with the 5 Ps. As you remember India’s population is 74% rural.
- Purpose: Looking at the black box in the top centre you will see that 90% of BASIX’s customers are rural poor, 10% urban slum dwellers. Many microcredit organisations focus on urban dwellers, making it easier to reach customers, and also overheating the market with a lot of competition, and the danger of indebtedness. We give the E3.0 stamp to BASIX for being ‘purpose-centric’, keeping their social mission paramount above their need to be sustainable. They have found that the poor are willing to pay for financial as well as advisory services, at a modest amount of $10 a year.
- Product: Looking at the ‘Livelihood Triad’ you see that BASIX co-creates its products as three services with various organisations: financial, institutional and business/agricultural development.
- People and practice: The BASIX platform is the development of transaction points in the villages with easy access for financial services in the form of savings, credit and insurance. The agents at these points use mobile phones for connectivity and there is voice recognition for their customers’ passwords. These transaction points multi-tasks for other service providers such as agricultural advisors.
- BASIX’s performance measures are at 2.0 for its overall portfolio and data from the agents’ transaction points.
We see that BASIX is at about 0.275
Now back to my point about quality of life with three development lessons to guide us.
The first is development as freedom or agency: microcredit does not guarantee automatic agency as used in publicity by microcredit in the past. Credit is a source of possibilities and a bond. We need improvements in microcredit, and they are coming through quality campaigns such as the SMART, Microfinance Transparency and the Social Performance Measurement Index. The top MFIs belong to these campaigns, yet there is a challenge for MFIs to reduce their interest rates. The better MFIs with a social mission such as AMK pass their profits to their clients in terms of better products or reductions in charges. Credit bureaux for MFI clients are in great need and hard to implement. There’s also a need for the same with investors as an excess of foreign investment damages microfinance, causing a bubble as in Andhra Pradesh in 2009-10, and again happening in other Indian states. Local investment and mobilising savings are more realistic for E1.0 microcredit institutions, some of whom have become licensed deposit taker through the bank correspondent model, which the Reserve Bank of India sees as an organic way to grow financial inclusion.
E2.0 with its range of services offers a greater opportunity for escaping from poverty, our second development lesson. However, the evidence is scarce for this except for savings-led approaches. AMK makes a convincing case for poverty reduction through a six-year evaluation, with clients compared to non-clients more able to pay for their children’s secondary education and to invest in assets. Most poor people are vulnerable to emergencies and shocks such as family health issues or natural disasters, crop failures. Here is where micro insurance prove invaluable. It takes a lot more development than credit only, and is a good use of subsidies for getting this sector with its great need for regulation moving.
Our last development lesson is industry and eco-system building. Escape from poverty does not come from small loans but through industrialisation with all its disruption. Microfinance has made inroads into creating an industry that can be part of the infrastructure that enables billions of poor people to have some control over their lives. BASIX with its 3.5 million members is an example of how a self-sufficient connected institution can enable ‘quality of life’. They do not make lavish claims about reducing poverty except for their dairy sector, yet BASIX does provide quality of life for many of its members.
I finally rest my case about the development of quality of life by going back to our beginning in the town of San Juan Comalapa in Guatemala. I have kept in touch with my Mayan women co-creators over the decades, have seen the progress made by these women leaders building up their assets, widening their choices and developing an industry that grew. It faltered in the 80s and 90s due to competition through globalisation, lack of connectivity and marketing skills. The second and third generations and I are working on a project with Karina, the adopted daughter of one of the weavers, the sons and grandsons of another.
To conclude, E3.0 financial inclusion via microfinance and livelihood development can enhance the quality of life. This takes co-creation, connection and collaboration, and I trust that some of you can be part of this eco-system development throughout your careers.
Please connect with me on Facebook or Twitter where you can find out about our LWB activities and the UK’S Financial Inclusion Forum, both where I’m a Founder-Director. Three events are coming up so you can carry on the Financial Inclusion debate and network with professionals. Our event in June/July on Young People’s Microfinance will be organised by Dr Sarah Mohaupt Heilmann, our intern in 2005 for when I was the coordinator of the UK for 2005, the UN Year of Microcredit. Sarah’s been a Director of the FIF for almost 10 years, has earned two MAs and her PhD from LSE. She co-founded the first LSE Microfinance Society in 2005.