On April 18, 2013 a panel of distinguished experts, including JD Bergeron, Director of Truelift, met in the New York office of Baker & McKenzie to discuss important questions pertaining to microfinance . What follows is a summary of JD’s responses to these questions.
The role and efficacy of microfinance in eradicating poverty
1) What has been the overall impact of microfinance on eradication of poverty?
• JD Bergeron: Is “eradicating” poverty the only goal worth pursuing? There are other incremental goals that are equally needed and perhaps more easily measured and verified, including: Improving food security, consumption smoothing, poverty alleviation. In my opinion, ROIs have not been properly constructed for social investments, perhaps because we ask the wrong questions. A source I quite like is Chris Dunford’s blog The Evidence Project, which takes a sober view of the evidence of impact and challenges us to see microfinance differently.
Enticing investment and evaluating investment prospects
• JD Bergeron: There are many factors at play: social-first investment, double and triple bottom line; and patient capital. However, what we really need to come to consensus on is a shared system of social metrics. IRIS and GIIRS (Global Impact Investors Reporting Standards) are a really good start, as well as the B-Corporation movement in the United States. I would argue that there is still a strong role for activist investment—those willing to do what others are not in order to demonstrate what is possible and that all markets are viable.
Governance and Rule of Law
1) What is good governance and what are its effects?
• JD Bergeron: Board commitment and capacity are essential. We can learn a lot from the cooperatives and credit unions, both of which show strong successes in the microfinance arena, and in a way that is equitable, client-centric, and democratic.
• JD Bergeron: Four key areas: Sustainability, Affordability, Scale, and Transparency (such as that promoted by market facilitator organizations like MIX Market and Microfinance Transparency).
• JD Bergeron: I would be sure to add non-financial services, relating to health, education, women’s empowerment, etc., as well as financial literacy (or financial capability) to the scalability discussion. I think building permanent, profitable institutions that serve customers well is about: a) Governance, b) Incentives, c) the right funding structure, d) and self-regulation and effective relationships with policymakers and regulators.
1) Are there any examples of economies that no longer need microfinance (e.g. central and eastern Europe)? If so, what can be learned from these?
• JD Bergeron: No, I would not say that Eastern Europe and Caucasus, or any other economy, has graduated beyond microfinance. In fact, some developed economies are building microfinance, such as the U.S., France and the UK.
2) How do microentrepreneurs differ from entrepreneurs in the developed world?
• JD Bergeron: I’m critical of the concept of “entrepreneurialism” applied in microfinance. It refers to a romantic notion that every person has a great idea to turn into a business. The reality is that many choose to do the same business as their neighbors. Many would actually prefer to be salaried workers, but there are no jobs.
3) Are there ways to achieve economies of scale? What resources are needed (e.g. credit bureaus)?
• JD Bergeron: Unfortunately, the focus on “scale” has been the driver of many of the problems we’ve seen in microfinance. Scale on its own is not a social metric. Calculated growth is important, but not at the expense of the vulnerable communities we aim to serve. Flexibility and adaptability to local context are two critical factors in achieving economies of scale.
1) How should products be delivered?
• JD Bergeron: Learn the needs of the people you serve: Measure. Learn. Change. Measure what you care about. Learn from analysis of the data you collected. And change/adapt your products, services, processes, etc. to better serve your clients.
2) How should interest rates be set?
• JD Bergeron: Complex problem requires a complex solution. It is too simplistic to try to define what is “too high”. Microfinance Transparency, led by Chuck Waterfield, has created an entire movement to draw more attention to this challenge.
3) Can sound best practices avert a government intervention such as what occurred in India in 2010 where the industry was effectively shut down? How are these made known?
• JD Bergeron: When we say India, what we really mean is Andhra Pradesh; compare to Nicaragua’s No Pago movement in which most MFIs suffered after the government proclaimed that no one need pay back their loans, yet those MFIs with the strongest relationships with their clients saw fewer defaults. The most effective preparation for government relationships that are not obtrusive is self-regulation that leads to effective formal regulation. There are a number of industry initiatives in motion that attempt to frame responsible and inclusive finance, including the Smart Campaign, Microfinance Transparency, Social Performance Task Force, and Truelift.
Social impact analysis and metrics
1) Evidence of sustainable economic impact
• JD Bergeron: Allowing a focus on consumption smoothing to celebrate incremental change and trackability, as opposed to expecting the rhetoric and focus to be on the long-term goal of poverty reduction. Things like food security, more food, better quality food, are essential and worth celebrating in their own right. Accountability is key. Practitioners, funders, regulators, etc.—everyone should be held to high and reasonable standards with clear and concise guidelines of how to go from point A to point B. Client-centered thinking may be well developed in the corporate sector, but it has a long way to go in microfinance.
Other panelists at this event included: Mary Chaffin, General Counsel, Accion; Austin Choi, General Counsel, Kiva; and Camilla Nestor, Vice President of Financial Services, Grameen Foundation. For more detailed information on this event, click here.