The microfinance industry has been through a lot in recent times. From the suicides of over-indebted clients in Andhra Pradesh, India, to in-fighting over the future direction of the industry, microfinance as an idea and a practice is at a turning point, suggesting an end of one era and the beginning of something new. Here to make sense of it all and set the record straight is Mary Ellen Iskenderian, president and CEO of Women’s World Banking (WWB), the world’s largest network of microfinance institutions.
Under her guidance, more than 39 institutions worldwide are working to develop credit, savings and insurance products to support the needs of women. The WWB network works with 26 million clients, 80% of which are women. They’ve disbursed over $7 billion in loans and currently hold $3.5 billion in savings. WWB has also helped establish training programs to ensure the success of the next generation of industry leaders. As WWB’s president, Iskenderian advocates for women’s representation in the microfinance industry – from boardroom and leadership positions to their stake as clients.
We sat down recently to discuss the state of microfinance and the future direction of the industry.
Mary Ellen Iskenderian
Why did you decide to get involved in microfinance?
I made the transition from a Wall Street career to a development career many years ago. I first went to the International Finance Corporation, which is the private-sector arm of the World Bank. I started there just as the Berlin Wall came down, and having Wall Street skills was important to those countries in Eastern Europe. I worked for about 10 years setting up stock exchanges, securities and exchange commissions and microfinance institutions (MFIs). That was the first time I saw MFIs being established, and it really gave people a sense of hope and an opportunity to put food on the table.
I was later transferred to Latin America, where you have some of the strongest, most robust MFIs. They’ve been able to grow exponentially, remain very profitable and yet still retain a focus on the poor. I was on the board of a microfinance investment fund that the IFC had taken a stake in, so when I was headhunted for the position [to run Women’s World Banking], it seemed like a great opportunity.
Why the focus on lending to women, and promoting female leadership and entrepreneurship?
Microfinance was two great financial innovations. First, recognizing that people don’t have physical collateral but they have social collateral. So their ability to come together and borrow as a group is a way of getting over this enormous hurdle to access. The other innovation was basing an industry on the fact that women are tremendously reliable re-payers. The things that women spend their money on when they have discretionary income are so different from what men spend their money on. It’s sort of remarkable how similar women are anywhere in the world: it’s the education of their children, health care and housing [that matters]. Men invest in those things, but only after they’ve made other investments.
We see lending to women as a good investment. WWB has been increasingly focused on moving the product line beyond just credit. We do a lot of work in developing savings products which makes good businesses sense because who in the household typically is the saver? It’s the woman, so we want to design a product that would be attractive to her and meet her needs.
We’ve gotten smart about what women look for – convenience and confidentiality. Women don’t want their husbands and their neighbors to know that they are amassing savings. We’ve also been designing health care products that specifically meet the needs of women. One reason that women’s businesses were being decapitalized or even liquidated was to cover unexpected health care costs. So we designed The Caregiver which essentially provides the woman with a per diem and makes up for lost income for time away from her business. Women will make really good decisions if they have the right tools. We find that the more stability there is in a household, the more future planning can take place.
We’re also very excited about opening the Center for Microfinance Leadership, launched with the intention to build leaders who understand what leadership needs to look like for the double bottom line (a business with profit and social goals). The microfinance industry is somewhere between 35 to 40 yrs old, and the founder of many of these institutions is at an age where he or she needs to think about succession planning. In many cases, the MFI may have completed the transition from NGO to regulated institution. The founder knows she’s not the right person to run a bank, and has probably brought in a banker to do that, but doesn’t want to turn over her social business to a banker. So we want to make sure that succession planning takes that into consideration – that you’re not just hiring people because they have banking skills and they know how to run formally regulated banks, but because that someone understands the social dimension as well.
Is regulation handled on a country by country basis or is there an industry-wide regulatory body to ensure that when this transition takes place, microfinance institutions will respect the double-bottom line?
Today the regulation is country by country, and an increasing number of countries are recognizing that there’s something a little different about microfinance. You can’t regulate it the same way you do banks. There are usually lower capitalization requirements which allow branches to be set up at a lower cost. The industry is trying to be particularly attentive in self-regulating. There’s a social performance task force that looks at exactly the issues you mentioned. When an MFI reaches a return on equity of a certain percent – and we haven’t agreed what that percent is – there has to be some movement on the part of the institution to return some of that money and lower their interest rates. Just saying what’s a reasonable profit for a microfinance institution is important when you realize the people that they’re making those profits off of are very poor people.
I see this as a huge opportunity because a lot of these institutions are quite profitable. If you could even give stock or shares to the poor so that they become owners — that’s an enormous psychological shift to be an owner of an asset and not just a borrower. So, I think there are some intelligent things being done, but we’ve not reached any kind of consensus on this. The Bank for International Settlements, Basel, as a global regulatory body has only in the last couple of years come to recognize that microfinance is on the radar screen. But I think it’s a positive step that the industry isn’t waiting around for regulators to think about this, we need to proactively think of some solutions.
Do you think there’s a place for both for-profit and not-for profit MFIs in the industry?
Absolutely. Microfinance has captured all of our imaginations because it’s all about sustainability. And it’s always been about institutions being allowed to charge a rate that allows them to recuperate their costs. It’s a very expensive business. It’s very high touch. In Bangladesh you can walk outside your door and find a thousand clients right there, but in many areas – Sub Saharan Africa, for example – populations are much more dispersed so it’s very expensive to reach the more remote populations. But we have to make sure that people are not gouging and I think that’s the tension right now.
What are the most important metrics to measure the success of microfinance?
We have a set of performance standards that our 39 member organization has to adhere to. If you don’t get a score of at least 70% for three years running, we’ll disaffiliate you. The things we like to look at are sustainability and number of clients, because we find that growth and sustainability are interlinked. But we also look at whether or not you’ve been able to grow without your loan size becoming too high.
Diverse organizations make better decisions about complex problems, so we really try to foster women leaders on the board of microfinance institutions as well as in the leadership of those organizations.
There’s been talk about microfinance actually stifling entrepreneurship because the repayment periods are too short. The thinking is that it tends to reward cautiousness. Is there anything being done to address that?
Research has found that if you lengthen the repayment period, the likelihood that women would reinvest in the business grows exponentially. I think we’re at an important moment to evolve. You’re seeing the industry move away from that group loan methodology to individual loans. When a woman grows her business to a certain point, she’ll pair with just one other person and they’ll counter-guarantee each other. So you don’t need the whole group any longer. Frankly women don’t really like the group model after a certain time. It’s very time consuming, you have to go to meetings every other week, and as you said it rewards caution and borrowing small.
Because a credit culture is so new to many of these countries, is there anything WWB does to prevent the over-indebtedness of their clients?
This is a huge issue. In order to be a member of our network we require that you have very explicit client protection principles in place so that you’re not making the problem any worse. We want to ensure that when you take on a client you’re actually doing due diligence. That’s a lot of what that over-indebtedness by engendered by. I think one of the reasons why we did do so well in the crisis was because we got back to basics in a very real sense.
Another big piece of the over-indebtedness problem came from the business needs of clients. The perfect example of this is in Gujarat, India. A big business that many women micro-entrepreneurs pursue is buffalo, because there’s a very good dairy cooperative system in Gujarat, and you get paid by the amount of fat in the milk and buffalo milk has the highest percentage of fat. You need 30,000 rupees to buy buffalo. None of the MFIs in that state would lend more than 10,000 rupees. So they were throwing the women into a situation where they had to borrow from multiple sources.
Don’t just arbitrarily say, 10,000 rupees. MFIs really need to look at the household’s capacity to repay. In some countries there’s a lot of what masquerades as microfinance that’s really consumer finance that’s charging exorbitant rates for refrigerators and TVs and motorbikes. Making sure your client really knows the difference is important.
Should microcredit’s goal should be to finance entrepreneurship, or to expand financial access to the poor?
I’m squarely in the financial inclusion camp. Not that I have anything against entrepreneurship, but not everybody is an entrepreneur. There are still 2.8 billion people who have no access to any financial services, including microfinance. There’s huge unmet demand for banking accounts, insurance and basic financial services. So I think MFIs have a large role to play.