In this second instalment on Microfinance, Opportunity’s Asia Programs Director, Mark Daniels, explores the changing nature of microfinance and the challenges that lie ahead.
Q: IT HAS BEEN SAID THAT ‘DEVELOPMENT IS A DISTRIBUTION GAME AND WE ARE A DISTRIBUTION NETWORK’. WHAT DOES THAT MEAN?
MARK DANIELS: That was actually said by Chris Murdoch, Opportunity’s former Head of Global Strategy. Chris is essentially saying that in development, we need to provide ‘doorstep’ services to people who live in rural and remote areas.
That means a distribution network and building the capacity of people who can deliver services to customers right through to the end of the distribution chain. Fortunately, microfinance institutions with client bases in the millions are a very effective delivery organisation. Low income communities prefer human touch when it comes to interactions, particularly while conducting financial transactions. Therefore, it is extremely important to not only establish that connection, but to also ensure people remain empathetic to the needs of the beneficiaries.
"Low income communities prefer human touch when it comes to interactions..."
Q: HOW HAS MICROFINANCE CHANGED OVER THE PAST 10 YEARS?
MD: Over the last decade, financial inclusion has experienced remarkable growth. Almost 900 million mobile money accounts (mobile accounts that are accessed through mobile phones) are currently registered in more than 90 countries and account for US$1.3 billion transacted every day1. Also, the entry barriers to financial inclusion have reduced which in turn have spawned innovation in the financial technology (fintech) sector. The other big change is in digital credit which has emerged as a new service with participation from banks, mobile network operators (MNOs) and fintechs.
However, while the 2017 Global Findex database showed that 69 per cent of adults around the world now have financial accounts, it still means that about 1.7 billion adults don’t. They mostly live in developing countries and the majority—65 per cent—are women.
Q: YOU ONCE SAID, “YOU CAN’T DO TODAY’S JOB WITH YESTERDAY’S PRODUCTS”. WERE YOU ALLUDING TO MICROFINANCE BEING A SECTOR GOING THROUGH RAPID CHANGE AND THE NEED FOR MFIS TO BE AGILE?
MD: Definitely! Microfinance customers are rapidly evolving. Traditional products and services that were relevant ten years ago simply don’t work now. There is a need to develop the MFI leadership, plus overcome the challenge of attracting and retaining senior management as well as frontline teams so they can quickly adjust to these evolving client needs.
Greater use of technology has also led to change in how staff and clients interact with microfinance. Innovations like mobile money and agent networks [the use of established distribution networks or independent agents instead of traditional bricks and mortar branches] are also being deployed.
It is important for Opportunity to keep track of the trends and work closely with our partners to respond to them. The challenge is how to provide micro moments of value to the 1.7 billion people in the world without financial accounts. Technology is a key enabler.
Q: WITH SO MUCH CHANGE, IS THERE A DANGER THAT TRADITIONAL MICROFINANCE WILL CEASE TO EXIST?
MD: There is already evidence that digital credit can displace microfinance. In Kenya for example, just five years after the launch of the first digital credit product, more than a quarter of the population has taken a digital loan2.
There is a real concern that digital credit providers will eventually cream off the high-value customers leaving the lower value, less profitable customers in more rural locations with microfinance institutions, thereby affecting MFIs overall sustainability.
But digital credit providers are also largely leaving out most rural borrowers as current product design is ill-suited for key use cases such as agriculture. Hence, we risk facing the scenario where traditional financial institutions, including MFIs, see a decline due to diminishing sustainability, while at the same time, there is no viable replacement in terms of suitable credit product for rural customers; this implies that financial inclusion may regress as a result.
At the same time, digital credit, as it evolves and finds its equilibrium, is undermining the credit discipline in the market. Overall, digital credit in markets where it is reaching scale is impacting microfinance in the immediate and will also have longer term impact and ramifications on the microfinance sector.
"We have reached a critical moment in time where it is imperative for microfinance institutions to respond to this digital disruption and embrace digital transformation."
The good news is that digital disruption can also help the incumbents create better, faster, and cheaper services, equipping them to better serve their customers. It is important for microfinance institutions to understand digital transformation as an investment to future-proof the institution and an exercise that should be approached strategically and one that is a change-management effort as much as it is a technological one.
Q: WHAT ARE THE RELEVANT CULTURAL DIFFERENCES BETWEEN HOW PEOPLE THINK ABOUT MONEY IN AUSTRALIA AND SOMEONE LIVING IN POVERTY IN INDIA OR INDONESIA?
MD: Tough question, but what I have learnt is that poverty is essentially when a household has to cope with one risk after another. I distinctly remember a client said to me once, “My life is one big risk”. Basically the poorer the household the higher proportion of income has to be spent on necessities. That may be everything they earn but still not enough. We know that poor households do not consume enough food, so nutrition levels are low and they suffer from chronic hunger, malnutrition and illnesses which make getting out of poverty that much harder – especially when there is no financial or welfare safety net.
So, what is required to get people out of poverty? In essence households can’t become sustainable unless they have moved through three stages: stabilisation, maintenance and self-sufficiency.
Stabilisation is minimising risks to prevent the slide back in to poverty. Those risks could be natural disasters too. Typhoon Ondoy in Philippines, for example, resulted in 500,000 people slipping below the poverty line as their assets were wiped out. So people need savings and they need insurance to protect against sudden crises, death, accident, illness and natural calamities.
Maintenance is simply maintaining that stability and generating surpluses that can be converted into assets and investments. This very much fits with Opportunity’s model because it requires an improvement in health indicators, nutrition levels, increased education, livelihood skill development, financial and legal literacy – much of what our broader program areas encompass.
Self-sufficiency occurs when the household is resilient, can maintain itself and can reap the benefits of assets and investments to move upwards out of poverty.
Having lived and worked in the Philippines for many years and having only just moved back to Sydney, I have been suffering reverse culture shock. I have realised that having too much is also poverty. When you examine the poverty of the non-poor in the West, we have our own set of problems: idolatry, injustice, greed etc. In effect the non-poor suffer the same kind of poverty as the poor only it is expressed in the opposite way. Too much is as bad as having too little – too little food makes us weak and prone to disease; too much food makes us overweight; the water in developing countries is dirty and bad for health, the water in the West is bad because it is increasingly polluted with chemicals; the poor have inadequate houses, but the non-poor are slaves to theirs.
“The rich get richer and the poor get the picture”
David Bussau, the founder of Opportunity International and a mentor to me, often talks about the ‘economics of enough’. Basically, what do you do , when you have more than you need? David challenges us to move to a life of significance. The best way of doing that is by giving to those in need. Ultimately as someone once said “The real measure of wealth is how much we would be worth if we lost all our money”. I am always reminded of the Midnight Oil lyrics: “The rich get richer and the poor get the picture”. The idea of too much or too little being two sides of the same problem also reminds me of Proverbs 30:8: “Give me neither poverty nor riches, but give me only my daily bread.”
What I have discovered in life is that whether rich or poor, everyone is searching for three essentials of happiness: something to do (a job), something to love (a family or community), and something to hope for (faith for a better future).
1. GSMA’s State of the Industry Report 2019
2. CGAP, 2018