Microfinance Practice: Re: [MFP] Debt relief for Cambodians & why legal aid matters

Dear Chuck

I saw the import of your mail. I needed to remind every one that better behaviour is still possible and MFIs can still make enough for the investors by being fair and transparent. I am available to those wanting to know what is in the code of conduct and how it was introduced voluntarily by the MFIs among themselves.

The question of regulator and its role begs a resolution. Why investors, especially impact investors, cannot refuse to enter a country with weak regulation and weak customer protection frameworks?

Best regards

Srinivasan

On 29-Jun-2020, at 6:12 PM, Chuck Waterfield chuck.waterfield@gmail.com [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Srini,

The words in my earlier blanket email were directed at general trends, trends which over the past 15 years have gone heavily in one direction. The vast majority of banks lending to the poor have moved away from double-bottom line and are heavily focused on ROE figures. There are some countries with a slower shift in this direction, such as India.. If the global industry were still behaving, on average, like India, I'd still be active in the industry. India's difference, I believe, has much to do with the strong role of the RBI in leveling the playing field so much, through strict rules about how MFIs could hide their true pricing and rules about over-indenting clients. If we had strong regulators making (and enforcing!) rules like this in most of the other countries, the industry would be in a different position.

Instead, we have a constellation of stakeholders that have driven the GLOBAL industry in the direction it went (again, this means a quite large percentage of the market, but not 100% of the industry):

Soft funders: Many of them pressured for business-behavior in order to get the soft money. They got far more than what they asked for. The soft money has now disappeared from the sector.

"Social" investors: The investor community is entirely opaque and without certification. They can label themselves social or whatever they feel will paint a nice image for them. Some of them are actually social (or at least of small pots of money that are tolerant of lower returns), but many of them are pushing for huge returns. A few years ago, the general expectation was 25% ROI, while having a website that shows pictures of smiling happy women paying interest rates that nobody knows, because the prices are hidden..

Industry data: We used to have impressive transparency, setting an example for other NGOs and businesses to emulate. That is no longer the case. The industry used to be able to mobilize the majority of MFIs willing to be transparent to pressure those reluctant to do so. We used to have ratings reports, MIX data, true pricing data (mftransparency.org) and social performance data as well. That is no longer the case. Where there is no transparency, nobody knows what is going on in the market - and then a few banks exploit that advantage. SMART Campaign certification refused to set any boundaries for prices charged or for profit extracted, two criteria that are fundamental to the decline of the industry.

Owners and Management: The industry used to be composed of double-bottom line professionals. That is no longer the case. Now we have situations like Opportunity running a group of their for-profit banks into bankruptcy and then trying (and thankfully mostly failing) to hand those banks over to a payday lender company charging 300% APR. (https://nextbillion.net/opportunity-international-and-mybucks-a-dangerous-partnership-decision/)

Regulators: Regulation is extremely spotty. Some countries (like India and Cambodia) have systems with strong, independent regulators. The vast majority do not. In most countries, regulators focus only on safety-and-soundness and are not given a role in consumer protection. In many cases, regulations are made and are not at all enforced (like in the West Africa Monetary Union). MFTransparency documented regulation several years ago and summarized it here: https://www.mftransparency.org/regulation/

I've made a lot of claims here with few footnotes. But all of this is detailed in the final report I wrote for MFTransparency when we ceased operations: https://www.mftransparency.org/resources/advocating-transparent-pricing-mftransparencys-7-year-history/

Chuck Waterfield

On Jun 29, 2020, at 7:35 AM, 'N. Srinivasan' shrin54@yahoo.co.in [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Chuck, Hugh,
Financial inclusion is not too bad in some countries, where they have focused on savings and payments. Inclusion also lays a pipeline to channel benefit payments from government to people without leakages. In the Indian context microfinance - whether through MFIs or Self help groups - has been kept out of the definition financial inclusion. RBI says that linkage to a banking institution (MFIs are not banks in India and prohibited from taking deposits) alone counts as financial inclusion.
May be we should focus on what financial inclusion is supposed to deliver rather than dismissing it as profiteering.
Best regards
srinivasan

On 29-Jun-2020, at 1:00 PM, hugh@vsla.net [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Spot on, Chuck, that you excoriate the term 'financial inclusion' which has come, solely, to mean that poor people get shoehorned onto a voracious debt-based MF conveyor belt as a definition of success. The day that shareholder return got prioritised these outcomes were inevitable..

Hugh

From: MicrofinancePractice@yahoogroups.com <MicrofinancePractice@yahoogroups.com>
Sent: 28 June 2020 17:03
To: MFP <MicrofinancePractice@yahoogroups.com>
Subject: Re: [MFP] Debt relief for Cambodians & why legal aid matters

Thanks for sharing this, Jami

This is such a tragedy. Cambodia was a poster-child of the "right way to do microfinance" 10-15 years ago. From what I saw in my visits and in the data was MFIs focused on reaching the poor and giving very reasonably price loans. The prices were among the lowest in the world when we collected them at mftransparency.org, especially considering the very small loan sizes.

Help came from the Cambodian regulators. Sleazy practices like flat interest were banned by the Cambodian government almost 20 years ago (in 2001), demonstrating tremendous foresight on how governments and lenders can work together to limit the temptation of self-interested lenders to hide their prices. It took industry actors like CGAP another 10 years to even begin to do anything cooperative with regulators and to respect them as useful and essential agents to help prevent the dismal decay of the industry we have since witnessed.

I originally saw the Cambodian MFI organizational cultures as balancing client and institution, as had been the case at AMK before they got bought out by a different group of private investors with a different set of goals. Then, while publicizing the previous balanced approach by paying authors to write an "independent" book about their ethical practices, they internally reprioritized toward profit making.

The messages sent by the international industry was for everyone to scale up (credit activity, not savings), to push loan agents super-hard to shovel loans out the door, all with the singular goal to maximize profit and allow international investors to cash out. When all this got put into practice. as is entirely predictable, debt saturation occurred. The bad seeds planted by the MFIs in the previous years become apparent, even if the economy is going well.

And then when there is a exogenous shock, the house of cards crumbles. And who has the centralized power in the catastrophic situation? The MFIs have built control of power into their systems. The poor, who weren't doing all that well *with* the vast amount of debt they were encouraged to take on (and shouldn't have), will now have life-altering consequences..

So, yes I'm still in the habit of using that term "microfinance" (and this listserve is MicroFinancePractice) that was in use for 25 years, until in the first wave of bad publicity, the industry dumped the term and replaced it with "financial inclusion" to try and confuse the public. So now when "financial inclusion" becomes an ugly word, what will we call ourselves next?

Chuck Waterfield
No longer associated with what has become the business of tapping the fortune at the bottom of the pyramid

On Jun 28, 2020, at 8:49 AM, Jami Solli jamisolli@gmail.com [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Dear Group,

I hope you are keeping well during the pandemic.

Sharing an article with you about the state of microcredit in Cambodia:

https://asia.nikkei.com/Politics/Hun-Sen-to-Cambodian-banks-Seize-property-if-borrowers-won-t-pay

I hope that any responsible investors in that market will instruct their investees to stop divesting the poor of their homes when they are in debt difficulty.

On a positive note, there is a legal aid organization in Cambodia LICADHO which is assisting borrowers.

All the investors should be thankful too as were LICADHO not present, it is possible you would see either borrower suicides or civil unrest or both.

Best regards,

Jami