The Consultative Group to Assist the Poor could not spot the inherent weaknesses in the commercial microfinance model that it was unabashedly promoting. This is a reason for self-introspection by its board, senior management and other stakeholders involved in its governance. CGAP, as an institution, should become more accountable to low-income people, whom it exists to serve in the first place
In India, financial inclusion has translated merely to the delivery of consumption credit (and some small production loans). That consumption credit alone is insufficient to reduce or alleviate poverty is perhaps a no-brainer, for all honest development practitioners. Despite the lack of serious impact studies, for those who have worked at the grass-roots and continue to so, it is rather evident that mere access to finance cannot and will not help people out of poverty. Access to finance, is therefore best viewed as a necessary, but not sufficient condition for poverty alleviation.
While microfinanciers and access to finance advocates can perhaps take comfort in the fact that consumption loans alone cannot make a dent on poverty, there is a caveat in order. They cannot escape the fact that the drive and desire to include low-income people with regard to financial services has resulted in the proliferation of financial services focused on loans and even within loans, primarily consumption lending. The enthusiasm to include low-income people has also led to not-so-good practices including multiple lending, over-lending, top-up loans, ghost/benami loans and the like driven by the motivation of some MFIs (microfinance institutions) to generate huge wealth for themselves and their promoters. In fact, one of the major reasons for the ongoing Indian microfinance crisis is the present mindless drive to include people financially, without asking the question (s) on whether the current bouquet of financial services being offered are appropriate, whether the practices being followed are fair, transparent and ethically sound and whether the other conditions so much necessary for effective use of the financial services exist at the grass-roots.
Without question, the onusi for this (at least in some small part) lies on institutions like the CGAPii —which is said to be the foremost agency for promoting financial access to low-income people globally. Without question, CGAP has played a very important in the Indian microfinance sector through various efforts over the last decade -ranging from capacity building to credit rating, researchiii on equity, technology, innovation and the like and dissemination of global best practices to microfinance stakeholders and the like. CGAP has also been at the forefront providing transparency and other awardsiv as well as grants-in-aid (to the tune of several crores of rupees) to some of the Grameen replicator MFIsv that mainly provide consumption loans using a high commercial for-profit strategy. Last but not the least, CGAP has also (indirectly) facilitated various institutions to invest in many Indian MFIs.
That is not all. At many conferences in India, it is common to see a couple of CGAP staff and their presence at discussions (on various occasions) with important microfinance stakeholders in India including DFIs, commercial banks, large MFIs and even regulators. Further, institutions like CGAP also intervene through projects such as the responsible microfinance project, promoted under the aegis of the World Bank and implemented in India by SIDBI (Small Industry Development Bank of India). Thus, in India, CGAP has become synonymous with Grameen MFIs and whenever an MFI gets into some sort of trouble with a state government in India, the first thing that the MFI does is to argue that it reports to and is recognised by CGAPvi . Please see quote below, which is provided as an example:
"MFI 'Z' has always been transparent and continues to be so. We have shown our original audited financial statements and rating reports of the last 3 years for verification and authenticity. We have our website which contains all the updates. We report regularly to all national and international microfinance agencies including CGAP of World Bank. Sir, we have also received the highest five-star rating for transparency from the Mix Market of CGAP-World Bank."vii
Now, given so much of active interaction with various stakeholders in India and given this leverage, it is indeed an obvious disappointment that CGAP could not spot the inherent weaknesses in the commercial microfinance model that it was unabashedly promoting. Without question, this is surely a reason for self-introspection by its board, senior management and other stakeholders involved in its governance. And going forward, they would also need to discuss ways in which CGAP, as an institution, becomes more accountable to the low-income people (whom it exists to serve in the first place) and ensures that promoting access to financial services does not in any way infringe on the rights to life, liberty and pursuit of happiness of such low-income people. Going to scale is critical but scale and growth cannot come at the expense of delivering appropriate financial services through fair and transparent mechanisms. There can be no compromise whatsoever on that and CGAP must ensure that this basic tenet is internalised in other countries where the microfinance sector is on such a rapid growth path.
Take the case of India—while MFIs grew for different reasons, it was during this period of burgeoning growth (April 2008-March 2010 and thereafter until September 2010) that the hitherto highly-successful model of JLGs/Centres was severely diluted. And the changes did more harm than good to the original concept of joint liability and peer pressure—where several JLGs operated in a mutually-reinforcing manner within a centre.
Four issues are relevant here:
These concurrent and parallel MFI loans, through shared JLGs and clients, appeared to be God-sent and clients just grabbed them during the phase of burgeoning growth-as by then many of them realised that they could not service their increasing debt. The cases of Zaheera Bheex and others clearly illustrate this. The MFIs too were ecstatic about turbo-charging financial inclusion and so were equity investors, banks, policymakers and other stakeholders including international bodies like CGAP. This is a very critical point that needs to be noted. The outreach of the Indian microfinance industry needs significant correction and revision to reflect this reality of multiple loans to shared JLGs/clients.
Therefore, it is high time that institutions like CGAP recognise and use the following lessons (from the Indian microfinance crisis) with regard to promoting financial access for low-income people in its day-to-day work:
Lesson # 1. The scope of current inclusive finance practice in India is rather narrow. While the intentions (like the report of the Financial Inclusion Committee and other policy pronouncements) may have been to provide low-income clients with access to a wide range of need-based financial services, in reality, the inclusive finance (or financial inclusion) paradigmxi has mainly led to the proliferation of credit and primarily consumption loans, although there have been some small production/livelihood loans.
Lesson # 2. Standard (MFI) loans for consumption and/or small production needs, which dominate microfinance (or access to finance) in India today, tend to work well but for loan sizes in the range of Rs10,000-Rs15,000 per client and at most <= Rs 25,000.
Lesson # 3. Rs 25,000 as the loan amount is some sort of Lakshman Rekhaxii , that the MFIs should not breach, unless they are absolutely sure of the individual/household having the requisite debt servicing ability (could be a livelihood, production and/or labour, etc) to repay the larger loan. This is the most important lesson from Andhra Pradesh for MFIs, banks, policymakers and other stakeholders.
Lesson # 4. Indiscriminate (and multiple) lending to low-income people under the pretext of furthering financial inclusion-without regard to their (and their families) loan absorption and debt servicing capacity, and especially in the wake of vulnerable livelihoods, can only prove to be a recipe for disaster, and will ultimately exclude them altogether from the financial system. As has been argued above, when people with weak and vulnerable livelihoods are lent large sums of money (> Rs25,000), then repayment will either have to come from fresh loans (greening resulting in multiple lending) and/or restructuring of loans. At some point, this cycle will (have to) stop and the bubble will simply burst. These clients will then become financially excluded all over again.
Okay, if that is the scenario, then what can institutions like CGAP do to help the microfinance industry overcome the present situation? First, CGAP can help re-engineer the financial inclusion paradigm, to address some of the issues mentioned above. In my opinion, this re-engineering should ensure the delivery of quality credit that will reduce risk and vulnerability of low-income clients and give them more choices.xiii By quality credit, I am arguing for a greater focus on post-harvest and/or post-production financing for agriculture and other sectors that provide (or can provide) significant livelihoods opportunities for low-income people. In other words, among other things, this would call for financing of agriculture produce/other productsxiv marketing—a very critical aspect for small/marginal producers as it has the potential to enhance choices for them in terms of buyers etc. Of course, here, the existing relationships would need to be better understood if financial products are to be developed and delivered through appropriate channelsxv . Second, CGAP must ensure that the focus of financial inclusion is so re-engineered such that the delivery of a wide range of financial services (loans, savings, insurance, pensions etc) are used strategically to drive higher rewards, better remuneration and greater power down the value chain as shown in Figure 1—otherwise, it will be of limited use.
Hence, CGAP needs to help initiate a new microfinance paradigmxvi where financial products, mechanisms and instruments can be used to:
Thus, I would very much like CGAP to champion the larger cause of re-engineering the financial inclusion paradigm to facilitate poverty alleviation on the ground. They have it in their DNA and, in line with their acronym, CGAP must now become the "Consultative Group to Alleviate Poverty" and assume the lead role in fighting and trying to eradicate poverty globally. I am sure they have the wherewithal and resources to do this and let us hope their governing council, senior management and other governance structures take this appeal seriously.
iMy intention is not to blame anyone. I am merely highlighting what has happened and would like to see course corrections
iiThe Consultative Group to Assist the Poor, www.cgap.org is a specialized multi-donor body that is housed at the World Bank.
iiiCGAP's paper after the 1st Indian IPO did not seriously discuss the Governance problems in the MFI concerned despite many of these issues being found in the public domain (read paper, "Commercialization of Microfinance in India: A Discussion of the Emperor's Apparel", by Professor Sriram in EPW, June 12th 2010, Vol: XLV No: 24)
iv Some of the institutions that received the CGAP transparency award appear to have had serious governance problems.
vThe CEO of one of the Grameen replicator MFIs that CGAP gave a huge grant-in-aid to some years ago was cited by The Economic Times in Jan/Feb 2011 as having annual compensation much higher than the highest paid CEO of one of India's large private sector banks.
viIf CGAP is interested, I can share letters that are in circulation.
viiLetter dated, September 6th 2006 from MFI Y to District Collector.
viii(a) http://www.moneylife.in/article/implementation-safeguards-against-notorious-agents-are-an-imperative-for-the-proposed-microfinance-bill/19017.html); (b) http://www.moneylife.in/article/how-and-why-did-microfinance-agents-become-a-part-of-the-indian-microfinance-business/19301.html; (c) http://www.moneylife.in/article/implementation-safeguards-against-notorious-agents-are-an-imperative-for-the-proposed-microfinance-bill/19017.html
xiIn India, typically, financial inclusion (FI) is presently characterized by: (1) Preoccupation with opening of savings accounts; (2) Large focus on consumption credit and small production loans; (3) Low outreach with regard to vulnerable groups in agriculture; (4) Lack of suitable and affordable risk management services; and (5) Lack of appropriate livelihood financing. The above two aspects of lack of suitable and affordable risk management services and lack of appropriate and affordable livelihood financing are note worthy aspects because they again show the huge gaps between a great vision and intended strategy (the recommendation of the well intentioned financial inclusion committee) and actual implementation on the ground, which is narrowly focused on consumption and small production credit
xiiA popular metaphor for a line not to be crossed
xiiiThis can happen through alternative channels that afford lower costs, have greater trust, and high levels of mutual acceptance
xivLike handicrafts etc
xvOf course, this would need to be validated specifically for a context, a product and a partner but these are general suggested arrangements.
xviSourced with adaptation from Arunachalam "UNDP Financial Inclusion Strategy in 7 Focus States: Strategic Consideration and Suggestions, UNDP" (2007)
xviiWeather and crop insurance are gaining ground. Contract farming schemes exist but are not producer oriented
xviiiSome innovations exist here for health as well as life coverage but much work is necessary in the nature of product design and also distribution. Micro-pension schemes are also available.
xixPost harvest loans in fisheries/agriculture and warehouse receipts are examples of such products.
xxThe figure draws on ideas from reports published by the NCEUS
(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments).
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