The future of microcredit
Microcredit organisations that make a profit preferably choose wealthy clients. This is logical, as they bring in more money. The fact that some institutions avoid poorer clients goes too far. The young Dutch economist Pim Engels advocates a return to responsible investments, also for the poor.
At the end of 2007, the then Maastricht University student was doing an internship at the Grameen Bank in Bangladesh. This institution of Nobel laureate Muhammad Yunus is known as a pioneer in the field of microfinance. It was there that the Dutch intern had the idea to write his thesis on the relationship between the profitability of microcredit organisations and the number of poor clients.
"People with a bit more money borrow larger amounts at once, have fewer contacts and repay their debt over a longer period of time," says Pim Engels, meanwhile a consultant in the field of "inclusive finance", a new term also referring to microfinance.
Rejecting poor customers
"Financial support from poorer entrepreneurs is relatively expensive. They get small sums, come sometimes every week to pay a fee or to ask for advice and pay back in a short period of time. If institutions turn away poor potential clients for these reasons, this way of doing things no longer has anything to do with the original purpose of microfinance".
Around 150 million people worldwide make use of microfinance. A total amount of 60 billion dollars is invested. The rapidly growing business market does not always cooperate with the transparency of microcredit. Stories about abusive interest rates are well known. Pim Engels does, however, have an explanation for this situation.
"In the 1980s and 1990s the financial result was more important than the price the client paid for a small loan. The idea was that a profitable sector can attract more capital, so it would grow faster and be better able to reach poorer entrepreneurs. That goal has been achieved," says Engels. Microcredit organisations are less donor-dependent thanks to the growing interest of foreign commercial investors. Competition among themselves has also increased. And that is also good for a company's flexibility.
There is now a growing risk that financial returns for microfinance organisations are becoming increasingly important. It is extraordinary how their profits are growing while costs are falling. But in such cases, financial profit is more important than sustainable development, concluded Princess Máxima of the Netherlands during the microfinance conference on Radio Nederland.
In his thesis, Pim Engels warns that the pressure for financial results by microcredit organisations can lead to a misrepresentation of the mission. A number of successful organisations in Mexico and India have recently opted to go public. "In that case they have to reckon with the demands of the shareholders. That can lead to a departure from the original purpose."
Meanwhile, the Social Performance Task Force, created in 2005, investigates sustainable business in microfinance organisations. The so-called "Smart Campaign" goes a step further and seeks to protect clients from loan sharks by providing information. But attempts to bring microfinance back to the grassroots have almost no effect. There are no clear agreements on whistleblowing and no agreements on possible consequences in case abuses are found. Pim Engeles acknowledges that there is still a lot to do.
Despite the need to clean up, microfinance is still alive and kicking, he emphasises. Also among the poor. The influence of small loans on the total economy of a country is small, but in the meantime they have provided a solution to the lives of millions of people.
It is up to microfinance institutions to find the right balance between commercial tasks and responsible investments, is his conclusion. "The outcome of the discussion is essential for the future of microcredit."