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Microfinance supporters ‘must not set a debt trap’

November 2010

Socially responsible microfinance institutions have been warned against over-selling credit to poor people and neglecting the need to encourage savings.

Delegates at last month’s annual Microfinance Investment Summit in London heard concerns that although there has been a welcome boom in microfinance activity worldwide, too great a focus is placed on lending.

Dorine Putman-Devilee, institutional relations manager at the Netherlands-based ASN Bank, which specializes in socially responsible and sustainable investments, said she was worried that an over-emphasis on providing credit could entice people into debt.  She told delegates: ‘The majority of poor people don’t have access to banking facilities and that is what they need. Yet often what they are offered by microfinance institutions is credit. Is it in their interests to start on credit schemes while ignoring their need to arrange their finances with savings schemes and current accounts?’

Putman-Devilee, who is also president of the council of social ethical funds at the Netherlands Bankers’ Association, said loans can be helpful in the right circumstances – particularly for entrepreneurs – ‘but the situation of the poor is such that they can’t balance the times they do have money with the long periods when they don’t’.

She added: ‘The best way to help them is therefore to help manage their finances rather than provide loans. I’m not saying that credit is not useful, but the poor need much more than that.’

Donald Peck, co-founder of Lok Capital, a social venture capital company investing in microfinance projects in India, said many microfinance institutions now realize they may have concentrated on credit to the detriment of savings.

‘The writing is on the wall for the standard loan products, whatever their size,’ he said. ‘Institutions are very concerned about deepening their product offering.’

Kurt Koenigsfest, chief executive of BancoSol, a private commercial bank providing loans to low-income entrepreneurs in Bolivia, said microfinance institutions should remember they must serve ‘a very broad spectrum of clients’, not all of whom will benefit from borrowing. ‘I wouldn’t say that lending in itself is something that has been bad, but [MFIs] need to develop different methodologies,’ he said.

‘In our case we try to work with our clients and follow their needs. We have to measure the capacity of the client to pay money back, so that they don’t get over-indebted.’

Louise Moretto, Deutsche Bank’s vice-president of global social investment funds, reported that although the situation was by no means out of hand, she too had concerns about the emphasis on credit. ‘It has to be asked whether microfinance institutions are helping clients or creating problems for them,’  she said.

The International Labour Organization estimates there are nearly 10,000 microfinance institutions worldwide, reaching 140 million poor families.




Global | Financial inclusion

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