Microfinance: Too Much Money Chasing Too Few Clients

Experts trace sector's origins, suggest where it's headed

Swaminathan Aiyar, Stephen Rasmussen, Damian von Stauffenberg, and moderator Sasidhar Thumuluri

WASHINGTON, May 9, 2011 – The state of the global microfinance industry came under full scrutiny here at a panel discussion at Asia Society Washington and co-sponsored by the Financial Inclusion Forum of DC (FIFODC), which featured speakers Damian von Stauffenberg, Stephen Rasmussen, Swaminathan Aiyar, and was moderated by FIFODC Chairman Sasidhar Thumuluri.

Von Stauffenberg, who founded MicroRate, the first microfinance rating agency, described how the practice of providing financial services to the poor of developing nations essentially evolved by accident. Organizations aimed at helping the poor discovered that lending small amounts of money to a group previously considered “un-bankable” could result in a large portion of those loans being paid back.

At the same time, private investors in Western nations started investing in microfinance because donor money simply wasn't sufficient to meet the demand for capital. 

"When I realized something important was going on," von Stauffenberg said, "I didn't need prophetic powers to see sources of funding for this activity were going to be grossly inadequate to cover the demand. There was only one pool of funding big enough to meet it, and that was capital markets."

While the basic principles of microfinance remain constant across the globe, the panelists all agreed that large differences exist in the way microfinance institutions and governments interact from country to country.

Rasmussen, director of the Technology Program at CGAP (Consultative Group to Assist the Poor) said, "In some countries you can set up microfinance institutions to be able to take deposits, to mediate funds, but Indian microfinance institutions aren't able to do that." He also mentioned that the dialogue about microfinance in India has long been led by a "poverty perspective," and this has led to conflict between microfinance institutions and politicians who see this as an intrusion on their role.

Aiiyar, Research Fellow at the Cato Institute and Consulting Editor of The Economic Times, went into further detail about India's lending environment, which has seen considerable media coverage of indebted farmers' committing suicide. Aiyar said that India is a special case because of the role that politicians play in the relations of microfinance institutions and their clients.

"India is a place that has a tradition of politicians coming along and saying, 'I'm going to write off your loans, so please vote for me in the next election!'"

Aiyar explained how a government-run microfinance scheme in India resulted in a nearly 80% default rate during the 1980s, saying despite the enormous potential of microfinance in India, "The biggest market of all turned out to be politically explosive." Aiyar argued that stories of suicide, particularly in the Indian state of Andra Pradesh, had been pushed in both the Indian and Western media because of their sensational nature.

With regard to the industry's future, Rasmussen predicted it will now grow much more slowly than it had before. Von Stauffenberg warned of situations where "Too much money is chasing too few clients," and predicted that some microfinance institutions are going to become fully fledged banks that offer a range of financial services. "We will see banks that are micro-credit based but no longer restricted to microcredit." Just as people in developed nations need access to different financial services, those in the developing world need them as well.

Reported By Adrian Stover, Asia Society Washington