Microfinance Leaders Strive to Walk the Walk

Vijay Mahajan, founder of the microfinance institution BASIX, and widely regarded as the dean of Indian microfinance, is walking the hot and dusty roads of rural India in his kurta pajama and sandals.
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Vijay Mahajan, founder of the microfinance institution BASIX, and widely regarded as the dean of Indian microfinance, is walking the hot and dusty roads of rural India in his kurta pajama and sandals, and as he's walking he's thinking about the microfinance industry's tough year. A crisis of overindebtedness among some clients in Andhra Pradesh, India, political attacks on Mohammad Yunus of Grameen Bank, and academic studies that question the magnitude of microloan impact have all conspired to shake the global microfinance community at its roots.

Vijay, who has devoted thirty years of his life to microfinance, is taking these challenges very seriously. He has dropped all routine activities and is spending two months walking in villages across India, both as a spiritual journey and as a way to listen fully to the voices of low income people. He calls his walk a "Shodh Yatra, an extended grassroots enquiry into the lives and livelihoods of poor people."

For me, Vijay's Shodh Yatra provides an outward symbol of the soul-searching taking place across the microfinance industry today. Many microfinance leaders have thought carefully about the challenges their industry is facing, and important responses are emerging, three of which I will describe here. While very different from Vijay's Ghandi-esque walk, these three initiatives share with it a similar underlying spirit.

The three initiatives must be judged by their ultimate results, as the organizers must feel with every step they take. Is the response commensurate with the challenges facing the industry? Will it produce substantial change at the grassroots level? Or will it be dismissed as an exercise in image repair?

As a participant in one of these efforts, I won't pre-judge the results, but I will vouch at least as to intent. I see the microfinance industry, true to its roots, engaged in a serious attempt to examine shortcomings and make course corrections. Having focused for the past decade or so on reaching as many people as possible with sustainable institutions, microfinance leaders are re-examining the quality and value of their services to clients. They are using much that is right with microfinance to move the industry onto a better path. This should come as no surprise to long-time observers of microfinance; the rethinking reflects the profound commitment to improving the lives of low-income people that motivates most of the industry's leaders and supporters. It is worth noting that all three efforts highlighted here pre-date the recent spate of bad press about microfinance. This hard year has, however, brought greater attention and a sense of urgency to each initiative.

Microfinance Transparency (MFT). Chuck Waterfield is a gifted numbers geek whose work has helped hundreds of microfinance institutions (MFIs) better manage their financial information. In 2007, troubled by what he saw as excessive interest rates and profits at some MFIs, Chuck had the brilliant idea of collecting detailed pricing data from every MFI in a given country and publishing it in a comparable format. He set up MFT as a non-profit to do just that. Microfinance institutions have been extraordinarily willing to turn over their information to Chuck's team. MFT's now-famous (in microfinance circles) bubble graphs allow investors, regulators and, eventually, clients to see at a glance which providers are pricing competitively. MFT has already posted data on over 300 MFIs in ten countries. Chuck hopes the resulting exposure will exert pressure on all players to reduce rates.

Social Performance Task Force (SPTF). While MFT is a one-social-entrepreneur organization with a laser-focused goal, the SPTF is just the reverse: an informal group of over 850 practitioners and investors. The SPTF tackles a broad range of MFI performance areas, from protecting clients to being a responsible employer to reaching the very poor and disadvantaged. Coordinator Laura Foose describes the SPTF as a home base for all the various social performance initiatives around the microfinance industry. The participants subscribe to the premise that if MFIs measure and manage their social goals well they're more likely to achieve them. Begun in 2005, the SPTF keeps growing as more MFIs are attracted to its work.

The Smart Campaign. My own focus has been with the Smart Campaign, a global effort to unite microfinance practitioners and supporters around a core set of Client Protection Principles. The Smart Campaign educates and incentivizes MFIs to treat their clients fairly and avoid harm. The Campaign began in 2008 when microfinance leaders looked with repulsion at the client protection failings of the U.S. subprime mortgage market, where unwitting clients were sold mortgages they could not afford. At the same time, hot spots of excessive growth with subsequent client overindebtedness began to appear in some microfinance markets. The founders of the Campaign realized that although microfinance providers agreed to the Client Protection Principles, there was a need for clear standards to translate those principles into specific practices at the grassroots level. With over 1,700 endorsers from 120 countries, the Campaign connects at the grassroots level by working with the national associations of MFIs that monitor market conduct in many countries.

There are still other efforts, all intending to create an industry architecture to support and reward MFIs that do the right thing. The Rating Initiative promotes the use of social ratings by investors to steer funding towards MFIs with strong social missions. Many investors in microfinance, through the leadership of Princess Maxima of the Netherlands, recently signed a set of Principles for Investors in Inclusive Finance that commits them to select MFIs with good social practices. The Microcredit Summit is developing a Seal of Excellence to highlight MFIs doing outstanding work in addressing poverty.

But what about the MFIs themselves, the providers who actually serve clients? Have they bought into these initiatives? This question is about to be tackled by the CEOs of major microfinance organizations like ACCION International, Grameen Foundation, FINCA, Opportunity International, ProMujer and Womens World Banking (among others), who collectively represent hundreds of leading MFIs and tens of millions of clients. They will meet next week in New York for a weekend of intensive discussion with the leaders of the initiatives just described, at the instigation of Asad Mahmood, a social investor from Deutsche Bank. Their conversation will consider how the various social architecture initiatives can work together to support socially-beneficial practices without over-burdening providers.

So back to my original questions. How likely are these initiatives to get beyond articulating values and goals to produce real action? Will they make a difference that Vijay might see in the villages of India?

As Chou En Lai reportedly said about the French Revolution, the answer at this point may be that it is "too early to judge." But there are reasons to be encouraged. The initiatives provide tools that can readily be used, create incentives likely to resonate with investors and benchmarks to guide MFI performance. Many MFIs are responding enthusiastically. Such advances take time, but I think it's fair to say that all the initiatives are well-grounded with potential to become concrete game-changers.

As a microfinance practitioner interacting every day with other practitioners around the globe, I admit to bias. I think we will get there -- that we are getting there. Even as markets in crisis are grabbing headlines, MFIs all over the globe are implementing changes. If you follow the industry closely, judge it by results. Just don't judge too early. The industry's leaders and staff are deeply committed to walking the walk. Strap on your sandals and try walking along with them.