Reversing The Microfinance Setback: a Cross Sector Opportunity

Reversing The Microfinance Setback: a Cross Sector Opportunity


Adapted from my original post on the OikocreditUSA CHiRP Force Blog.

The Microcredit Summit Campaign (MSC) recently released its 2013 report: Vulnerability: The State of the Microcredit Summit Campaign Report. This report is the latest update in an ongoing campaign to reach more than 175 million of the poorest families with microfinance services and ensure that 100 million of those families rise out of poverty by the end of 2015. For the first time since reporting began in 1998, the total number of clients and the number of poorest families reached by microfinance declined. This means a major setback for the campaign’s goal.

According to the report, this drop in clients reached was an unfortunate, but expected, setback in the microfinance industry for 2012. Major causes for the decline include backlash from the financial crisis in Andhra Pradesh, oversaturation of current markets and misaligned incentive structures that reward MFIs for more clients and higher returns – not a reduction of poverty. To get back on track, the report recommends that the microfinance industry further utilize technology, gain a deeper understanding of end users and use both to develop more appropriate products.

Last week, I had the opportunity to further explore the reports’ insights by joining a webinar on the report hosted by the MSC. A point of discussion that particularly struck me was the importance of group dynamics in microfinance lending groups and the potential for technology to break down these relationship ties. Professor Luisa Brunori, a psychology professor at the University of Bologna, explained that lending groups—which create a form of moral support for borrowers to help them repay—are not just ways to lower a microfinance institution’s costs and ensure loan repayment. They also provide a medium for intimate interaction that produces what Professor Brunori describes as, “a near infinite amount of relational goods.” These “relational goods” can take the form of a simple sympathetic gesture or support during tough times.

Through her research, Professor Brunori has found that relational goods are a key benefit of lending groups and have a positive effect on microfinance institutions. This discussion becomes more interesting when we consider the effect technology, especially mobile technology, has on the groups. Mobile technology is often depicted as critical to successful financial inclusion due to its wide reach and low cost. But does it rob lending groups of these relational goods in the process?

The report suggests the development of more appropriate, relationship-focused product offerings to correct the decline in families reached by microfinance, but this is a tall order for the microfinance community alone, especially if it is to reach its 2015 goal. Why not work across sectors to develop these product offerings? Partnering with organizations in other industries that are tackling the same core issues will open up more resource and knowledge sharing, innovative idea generation, and development capacity.

For example, 2U is developing the best methods for delivering university-level education online. Salesforce is working to make the digital work environments more social. Both of these organizations would be excellent cross sector partners for developing mobile solutions for microfinance lending groups that wouldn’t sacrifice the essential relationship component. The heart of unsectored thinking is bringing different sectors together around a common problem or objective. To me, the microfinance industry is a huge untapped opportunity to turn that thinking into action.

photo credit: FromConcentrate