The fifth European Research Conference on Microfinance was organized in 2017 at the University of Portsmouth, UK. Previously organized in Belgium (UniversitĂ© Libre de BruxellesâULB, 2009), the Netherlands (University of Groningen, 2011), Norway (Agder University, 20,013), and Switzerland (University of Geneva, 2015), the conference is a great opportunity for researchers in microfinance to exchange ideas on their common field of interest.
Much has been learnt in microfinance over the last ten years. But there is yet so much to discover on how to improve financial inclusion and development. A childâs fifth birthday is a great moment to celebrate. It is also the typical moment where the child discovers the world of reading. Likewise, we are happy to celebrate the fifth edition of the European Research Conference on Microfinance by contributing to this book with aâevidently subjectiveâmicrofinance alphabet, hoping to so provide the microfinance scientific community with an opportunity to âread togetherâ both where we stand and where we are heading. We hope you will enjoy it!
A: Asset and Liability Management (ALM)
ALM refers to the way in which banks address and manage the risks attributable to potential mismatches between the assets and liabilities. Even though ALM is barely considered in the microfinance literature, it is a key challenge for microfinance institutions (MFIs) willing to develop products that meet the needs of the financially excluded. Most MFIs are reluctant to supply long-term loans, and microfinance start-ups pay much more attention to the asset side of their balance sheetânotably to the quality of their portfolioâthan to their liabilities. Indeed, recently created MFIs are mostly financed by seed capital and subsidies, so that their liabilities are often not considered a priority. Later developments make, however, liabilities management necessary to address MFIsâ long-term needs for capital. When subsidies dry out, MFIs typically take loans from regular banks, at least in countries where commercial loans are accessible to them. In this way, MFIs can sustain their growth for a certain time, provided that the quality of their portfolio remains under control. Otherwise, commercial banks will consider MFIs too risky and cut their financing. But if an MFIâs portfolio keeps growing, its debt/equity ratio will at some point reach a level such that bank loans will become difficult to obtain. It is at this point that most MFIs start thinking seriously about collecting savings, which are the only long-term source of funds that allow a financial institution to grow steadily without liquidity issues.
B: Bottom Lines
MFIs are usually understood as double-bottom-line institutions. While economists tend to use the social-versus-financial trade-off to describe the objective function of MFIs, management scholars designate these dual concerns by referring to welfare and market institutional logics. Yet, the actual existence of a âsimpleâ trade-off is challenged on both sides. On the one hand, commercialization, which typically downplays the social concern, pushes towards a single business-like objective (see âCâ). On the other, some argue in favour of adding a third bottom line of environmental performance, leading to the notion of green microfinance .
C: Commercialization
The microfinance commercialization trend is now well recognized: The Consultative Group to Assist the Poor (CGAP), a consortium of donors active in microfinance, mentioned it already in its 1990sâ five-year plans. Yet, the bulk of the commercialization wave developed during the 2000s. Cases in point include the initial public offerings of two leading MFIs: Compartamos and SKS. Some scholars consider commercialization as a pre-requisite for MFIs to address financial inclusion efficiently. By contrast, others see commercialization as a major source of mission drift observed when organizations focus on profits and move away from their social goal. The co-existence of such contrasting views probably explains why we are still lacking a broadly accepted definition of mission drift.
D: Diversification of Products
Microfinance started as microcredit, as illustrated by the fact that the largest meeting in the field was named âThe Microcredit Summit Campaign.â Later, financial services for the disadvantaged populations were extended to savings, insurance, and money transfers, leading the industry to move from microcredit to microfinance, and more recently to financial inclusion (see âFâ). Meanwhile, the conversation evolved around the advantages and drawbacks of providing financial services onlyâthe so-called minimalist approachâor combining them with financial literacy, professional training, marketing support, or even business-unrelated servicesâthe âintegralâ approach.
E: Ethics of Randomized Control Trials (RCTs)
RCTs are often considered as the gold standard of impact evaluation in microfinance. RCT results are known for their high internal validity in terms of causal linkages, associated with limited external validity due to their poor degree of generalizability. Nowadays, prestigious economic journals refrain from publishing non-RCT empirical studies due to endogeneity concerns. Strikingly, the RCT conversation focuses on methodology and the ethical issues are left aside. Yet, RCT ethics committees would gain from internationally binding guidelines based on strict, universal ethical rules as is the case in medicine when it comes to, for example, patient consent and providing ex ante equally attractive options to the treated and control groups, a rule known as equipoise. The serious history of mistreatments of third world populations by past medical experiments is a strong incentive to increase our vigilance in that regard.
F: Financial Inclusion
Financial inclusion is increasingly replacing microfinance in the alphabet of financial services to the poor and the unbanked. In fact, this change in language broadens the scope of the sector since it goes beyond MFIs and includes new service providers, such as fintech, and new technologies, such as mobile banking. It might, however, obscure the original objectives of poverty alleviation and empowerment of the disadvantaged populations.
G: Governance
Any microfinance alphabet must address MFI governance. This topic encompasses the role of the boards, which is increasingly investigated quantitatively with international datasets. Governance studies also check whether the decisions of MFI executives match the mission of the organization they serve. Top executives gain both increased legitimacy from stakeholders, such as donors and public authorities, as well as extra financial manoeuvre room from commercial fund providers. Some relevant governance mechanisms are internal, such as boards, organization charts, incentive structures, and corporate culture. Others are driven by the environment, such as accounting standards, regulation, and supervision requirements, as well as the due diligence of debt providers. Corporate governance in microfinance points to major risks as pinpointed by the Banana Skins reports.1
H: Human Rights and Microfinance
Muhammad Yunus considers that microcredit should be a human right. He states that access to credit is instrumental to economic development, poverty alleviation, and the improved welfare of all citizens. This view is challenged by those arguing that credit is not a universal need. Moreover, credit that is too easily obtainable can have perverse effects like over-indebtedness. Meanwhile, other financial services, such as savings and money transfers, are less risky and sometimes even more useful socially than credit.
I: Interest Rates
The interest rates charged by MFIs have been criticized since the early days of microcredit in the 1970s. Outsiders find it hard to understand why lending to the poor is costly. MFIs must cover three types of inevitable costs: the cost of funds, the operational costs, and loan loss provisioning. Well-managed MFIs can limit both their costs of funds and loan loss provisioning, but reductions in operational costs are difficult to achieve since numerous small proximity loans imply costly features, such as multiple branch and frequent home visits. But this evidence is not a reason for charging abusive interest rates, and more so from MFIs benefitting from a monopoly/oligopoly power over financially vulnerable clients. Excessive interest rates have been exposed since the emergence of microcredit, but criticisms have grown widespread of lending practices in leading MFIs in certain countries, such as Mexico.
J: Juggling with Financial Products
Microfinance clients juggle with formal and informal sources of funds and financial services. They use a variety of financial tools, linked to informal networks, local merchants, family and friends, and various providers of financial services. The dark side of this resourcefulness is the risk of over-indebtedness and subsequently an increased frequency of credit defaults that can undermine the microfinance sector.
K: Keeping an Open Mind
Microfinance is not a panacea against poverty. And microfinance alone cannot tackle all the complex issues associated with poverty reduction. MFIs do, however, respond to a real demand from the poor and unbanked populations for reliable financial services. At the very least, like banks, MFIs help smooth income. The question raised by Richard PattenââIf microfinance is the answer, what is the question?ââis still relevant.
L: Loan Officers
Loan officers are key players in the microfinance arena. Not only are they the visible side of the organization, but they are also those who screen clients and enforce loan reimbursements. The typical day of a microfinance loan officer is made up of many house visits so that they become an integral part of the community they work in. Loan officers face conflicting challenges: They are the partners of their clients analysing their needs and providing them counselling, while also having to promote their employerâs agenda including portfolio growthâwhich implies pushing creditsâand timely repaymentsâwith various forms of pressure. Even though the role of loan officers is fundamental, it is only recently that scholars have started studying them specifically.
M: Microfinance Promise
Researchers in microfinance typically start with reading the influential and most-quoted article on the sector, âThe Microfi...