16 Feb, 2012, 04.28AM IST, Krishnamurthy Subramanian - "The Economic Times"
Commercial MFIs can make markets work for the poor
(Also check the attached photo)
Commercial microfinance institutions (MFIs) are an exemplification of
making markets work for the poor. Are they indeed? A recent piece of
research, comparing the lending performance of for-profit MFIs with
not-for-profit MFIs, shows that though for-profit MFIs serve close to
three-quarters of the market, the evidence does not seem to indicate
that these MFIs lend indiscriminately when compared to their peers.
Supporters and critics of microfinance agree that the demand for
reliable financial services is huge. However, the role of
fully-commercial, profit-seeking institutions in providing such
microfinance loans remains controversial. Critics argue that MFIs are
nothing but brute moneylenders, the very beast that microfinance was
built to root out. Supporters, however, argue that several hundreds of
thousands of poor customers that such MFIs serve would otherwise have
had even worse financial options. Would not serving them be a better
social outcome?
Since the for-profit MFIs would be expected to pursue profit
maximisation disproportionately more than the non-profit ones, in a
recent piece of research, I compare these two categories of MFIs to
examine whether profit maximisation by an MFI compromises on its
social objectives.
The following are the results. First, as seen in Figure 1 for the
number of active borrowers and the number of loans outstanding, the
for-profit MFIs in India serve more than three-quarters of the
microfinance clientele. Second, contrary to the fears that profit
maximisation by a microfinance institution would impel it to lend
indiscriminately, we find no difference between the for-profit MFIs
and the non-profit ones with respect to (i) the average number of
loans outstanding and per borrower, and (ii) the outstanding loan
balance per borrower.
If the for-profit MFIs were providing further loans to already
indebted consumers and the not-for-profit MFIs were not, then we
should have seen a difference between the for-profit and
not-for-profit MFIs in these two variables.
Third, as seen in Figure 3 with respect to the revenue performance,
the for-profit enterprises charge higher interest rates when compared
to their non-profit counterparts. However, as seen in Figure 4, close
to 97% of the for-profit MFIs in our sample lend at nominal interest
rates lower than 30%.
Fifth, as seen in Figures 4 and 5, we find the operating costs and
expenses for for-profit MFIs to be on average significantly higher
than that for non-profit microfinance institutions. This may possibly
be because the for-profit MFIs have to pay market-based compensation
to their employees, which the non-profit MFIs may not. The for-profit
MFIs pass on about two-thirds of these higher costs to their
borrowers, which are reflected in the higher interest rates they
charge when compared to their non-profit counterparts.
Using statistical methods that control for other differences between
for-profit and non-profit MFIs, the for-profit MFIs in India are no
more profitable on average than their non-profit counterparts. Last
but not the least, the lending portfolios of the for-profit MFIs in
India are no more riskier on average than those of their non-profit
counterparts.
These findings indicate the apprehensions that profit-seeking
objectives of MFIs led them to (i) charge usurious interest rates
and/or (ii) push loans indiscriminately to their borrowers
irrespective of the borrower's debt capacity may be exaggerated.
The close linkage between the costs and expenses faced by MFIs and the
interest rate they charge their clients suggest that policy measures
that increase the costs and operating expenses of MFIs will have
detrimental consequences either in the form of increased interest
rates charged or through credit rationing if a ceiling is imposed on
the interest rates.
Commercial MFIs can make markets work for the poor
(Also check the attached photo)
Commercial microfinance institutions (MFIs) are an exemplification of
making markets work for the poor. Are they indeed? A recent piece of
research, comparing the lending performance of for-profit MFIs with
not-for-profit MFIs, shows that though for-profit MFIs serve close to
three-quarters of the market, the evidence does not seem to indicate
that these MFIs lend indiscriminately when compared to their peers.
Supporters and critics of microfinance agree that the demand for
reliable financial services is huge. However, the role of
fully-commercial, profit-seeking institutions in providing such
microfinance loans remains controversial. Critics argue that MFIs are
nothing but brute moneylenders, the very beast that microfinance was
built to root out. Supporters, however, argue that several hundreds of
thousands of poor customers that such MFIs serve would otherwise have
had even worse financial options. Would not serving them be a better
social outcome?
Since the for-profit MFIs would be expected to pursue profit
maximisation disproportionately more than the non-profit ones, in a
recent piece of research, I compare these two categories of MFIs to
examine whether profit maximisation by an MFI compromises on its
social objectives.
The following are the results. First, as seen in Figure 1 for the
number of active borrowers and the number of loans outstanding, the
for-profit MFIs in India serve more than three-quarters of the
microfinance clientele. Second, contrary to the fears that profit
maximisation by a microfinance institution would impel it to lend
indiscriminately, we find no difference between the for-profit MFIs
and the non-profit ones with respect to (i) the average number of
loans outstanding and per borrower, and (ii) the outstanding loan
balance per borrower.
If the for-profit MFIs were providing further loans to already
indebted consumers and the not-for-profit MFIs were not, then we
should have seen a difference between the for-profit and
not-for-profit MFIs in these two variables.
Third, as seen in Figure 3 with respect to the revenue performance,
the for-profit enterprises charge higher interest rates when compared
to their non-profit counterparts. However, as seen in Figure 4, close
to 97% of the for-profit MFIs in our sample lend at nominal interest
rates lower than 30%.
Fifth, as seen in Figures 4 and 5, we find the operating costs and
expenses for for-profit MFIs to be on average significantly higher
than that for non-profit microfinance institutions. This may possibly
be because the for-profit MFIs have to pay market-based compensation
to their employees, which the non-profit MFIs may not. The for-profit
MFIs pass on about two-thirds of these higher costs to their
borrowers, which are reflected in the higher interest rates they
charge when compared to their non-profit counterparts.
Using statistical methods that control for other differences between
for-profit and non-profit MFIs, the for-profit MFIs in India are no
more profitable on average than their non-profit counterparts. Last
but not the least, the lending portfolios of the for-profit MFIs in
India are no more riskier on average than those of their non-profit
counterparts.
These findings indicate the apprehensions that profit-seeking
objectives of MFIs led them to (i) charge usurious interest rates
and/or (ii) push loans indiscriminately to their borrowers
irrespective of the borrower's debt capacity may be exaggerated.
The close linkage between the costs and expenses faced by MFIs and the
interest rate they charge their clients suggest that policy measures
that increase the costs and operating expenses of MFIs will have
detrimental consequences either in the form of increased interest
rates charged or through credit rationing if a ceiling is imposed on
the interest rates.
A much needed comparison among the for profit and non-profit Micro-finance institutions. I hope you would have more clarity on whether their is discrimation of interest rates in for profit MFIs.
ReplyDeleteRgds.