Gold Medal for Microfinance

While my compatriots compete to get on the podium in Beijing, I enjoy my last days sitting in the Geneva office of BlueOrchard. It is time to review the time I spent here working for the Microfinance Investment Fund Manager.

This afternoon, most of the desks are empty; many of my colleagues have gone on a journey, for either private or professional purposes. And I wonder if this wanderlust foreshadows my own future. Although I understand people suffering from jet lags and feeling uprooted (you can’t call it “holidays” to do Indonesia, Philippines and East Timor in two weeks), I begrudge my fellow-workers their knowledge of the world. In contrast to “ordinary” fund managers investing in big economies located in North America, Europe and the Far East, BlueOrchard analysts can avail themselves of having clients dispersed all over the world.

As a consequence, the microfinance market needs to rise up to challenges unknown to well-developed markets and this affects research and product design: how do you want to compare results from South America, Africa and South Asia? How easy is it to scale up new thriving methods of index-based microinsurance to a whole continent? Even though you might use randomized control trials providing “hard prove” by checking outcomes on control groups, it seems to me difficult to imagine that a successful pilot project carried out in Peru can be easily transferred to West Africa. Unlike in homogeneous Western civilisations, passing on best-practiced knowledge in a global scale looks set to be a tough task. Therefore, microfinance demands flexibility in reasoning, adaptation skills and the ability to draw analogies across countries and products without disregarding eventual differences. For me this bundle of ‘conditiones sine quibus non’ was the main lesson I learnt during the last ten weeks. It is impressive to work in an office with graduates from the best universities who bring in their different multicultural backgrounds to create a new ensemble.

Last week I could provide my own two cents to this project: I had the opportunity to present my results that I have accumulated during my work. On the agenda: which MFIs could be potential clients for our funds? How can we improve upon our selection criteria for new clients? And how can one measure social performance? Especially the last topic provoked a serious discussion and helped me to gain new insights.

There are many caveats to using numbers of average loan balances (ALB) as a simple proxy for social impact. At least, comparisons across regions have to be taken with a pinch of salt, even if you standardize your indicator (either by transforming it to an absolute poverty indicator by using PPP or by converting it into a measure of relative poverty by dividing by GNI per capita). The correlation between the proxy and the real poverty reduction is not likely to be linear, as the latter depends largely on the context. In Central America, for instance, - one of my colleagues explained to me - an opening of MFIs towards the middle class and the SME-sector – largely neglected by the formal financial market - would benefit the economy as a whole and therefore help to reduce poverty. The simple formula “the smaller the average loan balance, the bigger the poverty impact” (which forms the basis of the ALB-approach) does not seem to hold. Not every poor individual can start a microenterprise or can become a self-made man. For sustainable growth, the big bulk should work in small and medium enterprises to get integrated into the formal economy. This is especially the case in urban regions. To promote employment and economic growth assuring financial access to the middle class is crucial and maybe even more important than low-scale microfinance (this is an important lesson from the German economic miracle built on the “Mittelstand” after the Second World War).

Nevertheless, based on tables displaying raising ALB records, people continue to condemn this “mission drift”. Using my sample from the MIX market, I checked the evolution for the years 2005 till 2007. When you take the ratio in ALB of two consecutive years (2005 / 2006 & 2006 / 2007) you get for both time periods an average of more or less 0.9, meaning that the ALB increases over time. This seems to support the idea of a mission drift. But not necessarily: If the client pool hasn’t changed, these numbers could actually be a good sign: one explanation could be that borrowers are in fact getting richer. And if the MFIs have really moved their target to richer people, the above explained argument could justify and even endorse this development.

To clarify some of these questions it would be revealing to regress macro variables (GDP growth, HDI, college enrolment rates, employment rate…) on MF indicators. In some well-developed microfinance economies (like Bolivia or Bosnia), it could be possible to detect first impacts in a national level, but to get robust statements there’s much more time needed. A bottom-up process of economic development takes at least one generation.

There’s still much research to do in the field of microfinance. Me too, following my internship with BlueOrchard, I would like to continue on this track: In fall I will get back to university to finish my last year of studies; in my degree dissertation I want to focus on microinsurance linked to microlending and how it could help people escaping from the poverty trap. Traditional economic theory predicts the existence of multiple – bad and good - equilibria of economic growth. A “big push”, for instance in form of coordinated government intervention, is necessary to put the economy on the right path. In my opinion, microinsurance could facilitate this process because it has the promise to unlock credits and to promote financial access. But this is still to be demonstrated – in a theoretical and a practical manner.