This report investigates the poverty outreach of 14 microfinance institutions (MFI) across six Latin American countries: Peru, Colombia, Bolivia, Ecuador, Guatemala, and Nicaragua. It uses information that these MFIs have collected in terms of poverty likelihood using the Progress Out of Poverty® Index (a.k.a. Simple Poverty Scorecard) supplemented by in-depth interviews with industry experts. The following is a summary of the report findings.
Those who reach the highest percentage of poorer clients are the ones that focus on clients in regions with higher percentages of poor people. At the time data was collected, only a couple of MFIs had quantitative poverty-outreach targets. MFIs do not generally embed poverty targets into their loan officer-incentive structure. When the MFIs have quantitative poverty-outreach targets, they are either part of their commercial strategy (e.g., MFI C in Bolivia, MFI G in Guatemala), or a requirement from external stakeholders (e.g., MFI A of Bolivia, MFI R in Ecuador–both with World Vision). Moreover, a number of MFIs mentioned that product design (e.g., loan size and compulsory monthly educational training) leads to self-selection by poorer clients. The switch of the industry from MFIs being typically NGOs to for-profit institutions seems to lead to more emphasis on measuring success in terms of profitability (rather than poverty outreach).
The report also surfaced two interlinked factors driving poverty outreach across some Latin American markets: competition and over-indebtedness. MFIs seem to be reaching more poor clients in regions with higher banking saturation, even though their mission statements are not about reaching the poor. Indeed, in regions where wealthier clients are already served by commercial banks, MFIs service poorer clients (e.g., urban areas). However, they service relatively wealthier clients in regions where they are unbanked (e.g., rural areas). This was often cited as a factor driving the higher percentage of poorer MFI clients in urban areas relative to rural areas.
Increased banking competition is also leading MFIs to shift their operations into more suburban and rural areas in search for the unbanked. Thus, impact investors and development institutions could look into ways to foster greater competition amongst banking institutions as a path to serving more of the less wealthy clients1 and the unbanked. Increased banking saturation is changing the landscape of microfinance, pushing MFIs who do not explicitly target the poor to provide loans to poorer individuals. In their in-depth interviews, industry experts and MFIs discussed the implications of high banking saturation on their outreach. The change has come about because MFIs generally cannot compete with the interest rates offered by commercial banks, in addition the MFIs’ social missions discourage aggressive lending. Thus, they are moving operations to suburban and rural areas in search of the unbanked. Most of the MFIs included in this study cited banking saturation as a factor when deciding which regions to enter. Some MFIs focus on regions with higher percentages of poorer households, and the report finds that these tend to have a higher percentage of poorer clients in their portfolio.
Since its creation, the European Microfinance Platform has been actively involved in promoting social performance and social responsibility in microfinance.
What is meant by social responsibility is that MFIs are concerned with ensuring that their actions are at least transparent (notion of accountability), that they contribute to developing the financial services on offer and that they have no negative effects on stakeholders (decent work of employees, protection of consumers, protection of the environment, etc.). The notion of social performance encompasses the notion of social responsibility, but the meaning is slightly wider as it also takes into account MFIs’ actions to fulfil a “social and economic mission” in favour of their clients. The concept of social performance is specific to microfinance, it is defined as the effective translation of an MFI’s social mission into practice. This mission is based on four major objectives: serving an increasing number of poor and excluded persons, improving the quality and adaptability of financial services, creating economic and social benefits for clients and improving the social responsibility of an MFI.
In November 2007, during the European Microfinance Week, the issue of ethics and social responsibility in microfinance was identified by the European Microfinance Platform (e-MFP) members as a major issue for the microfinance sector to face within the current challenges of the sector (growth, commercialization, risks of over indebtedness, fight against poverty and vulnerability of clients, etc.). The e-MFP Social Performance Working Group focused in 2008 on the role of the investors in promoting social performance (see European Dialogue N° 1) In this publication, cases of some investors who participated in the e-MFP Social Performance Working Group or at the exchanges organized by the Swiss Development Cooperation in Bern are presented. The case studies of the European Dialogue No.1 provide a rich overview on what social investors actually do to make sure they invest in a socially correct way.
FUNDESER started in 1997 as a rural agricultural development initiative designed to deliver basic financial and non-financial services to Nicaraguan agricultural workers. In 2000, FUNDESER began specializing in rural microfinance and expanded to reach communities where people were struggling with poverty and financial exclusion. Headquartered in Managua, FUNDESER now has more than 18 branches across Nicaragua.
From 2004 to 2008, FUNDESER experienced its biggest growth spurt. The number of clients jumped from about 4,000 in 2004 to almost 32,000 in 2008 and the portfolio grew from $2.6 million to $21.5 million dollars respectively. These years were considered the “best time” for the institution from the employees’ perspective. While the average growth rate in Nicaragua´s market was 30 percent, FUNDESER´s was more than double that, reaching 70 percent.
These “exceptional” numbers were the results of a very flexible credit methodology with little supervision of adherence to the risk policy in loan underwriting, coupled with a staff incentive policy that rewarded portfolio growth and disbursement over portfolio quality. During the 2008 global financial crisis Nicaraguans struggled with high food and oil prices and a steep decline in remittances, among other problems. Additionally, as the economy deteriorated, the microfinance industry in the country was deeply affected by a political and social movement of delinquent borrowers known as the No Pay Movement.