Before I came out here, I was wondering how microfinance would be impacted by the economic crisis. How coupled to the global economy is the fate of a rural pig farmer? Not very, I thought. People have got to eat. As it turns out, the microfinance institution (MFI) where I’m working hasn’t seen a marked increase in borrower defaults and delinquencies as a result of the crisis. But they’re feeling the impact of the credit crunch in a different way — their funding is drying up.
Simply put, MFIs receive grants to allow them to lend money to borrowers. Now there are just fewer grants out there, which means they can’t offer their services to as many clients as they’d like. Thankfully, they are still stable enough to serve their existing clients.
While I work on cash flow management and foreign exchange hedging, 2 other volunteers are hard at work on a sustainability calculation. In other words, how much would the MFI have to charge as interest in order to cover all its (already low) costs without receiving any outside grants?
Microloans already have high interest rates (20-30% a year isn’t uncommon), due to 3 reasons: lack of scale – the administrative costs of a $100 loan are proportionally much higher than the cost of administering a $10,000 loan, client visits – loan officers head out on motorcycles, spending hours to visit borrowers, often collecting money weekly instead of monthly, and additional services – MFIs often offer training courses to their clients, and give them access to health resources whether for themselves or their livestock. For example, my MFI has a vet on call, who regularly inspects the enclosures used by all our clients who raise animals for sale.
I suspect that sustainability is within reach for my MFI. If it decides to go in that direction, the result may not be pretty — as interest rates rise, I’m sure borrowing criteria will become more stringent, leaving many clients behind. Perhaps only larger microloans would continue to be funded. I could easily see how efficiency exercises could result in a lack of personal connection between loan officers and clients.
Embankification is rife within the microfinance industry these days. MFIs are turning into small-scale banks all over the place. As small-scale banks, MFIs can access capital at market rates. Their executive directors (CEOs?) can for the introduction of more profitable loan products instead of writing grant applications. Perhaps MFI staff members would be paid more, about which I wouldn’t shed a tear.
As for the MFI I’m working with, I think they will continue to be partially self-sustaining, with the remainder coming from grants and interest-free loans. Their mission is to serve their clients first, and to earn money second. Is that irresponsible? I honestly don’t know. They’ve been doing this for 17 years, weathering more than one economic crisis, so it seems unlikely that they’d just go belly-up.
And if it were to come to that, what if they’d rather go out of business than charge their clients significantly more interest? For most of their clients, a big hike in interest rates might be functionally equivalent to them no longer offering loans at all. If their mission is truly to lend money at low interest rates (and not, say, the lowest they can offer while covering their costs), then if there comes a time when they are no longer able to fulfill that mission, would they be happier disbanding and doing something else? I don’t pretend to know the answer to that question, but isn’t it worth asking?
Financial sustainability is the holy grail of non-profits right now. But if people don’t live forever, than should organizations? I don’t pretend to know the answer to that question, but I have a fair bit of respect to the old-school attitude of the MFI I’m working with. I hope that if I ever start my own organization, I’ll be really clear about what I want it to stand for, and the day that’s no longer feasible, I’ll hang my hat and go home a satisfied man. Meanwhile, for this MFI, I hope that day won’t come anytime soon, and that soon these years will represent just another storm weathered in service of their clients.
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