Microfinance Meltdown?

The microcredit industry has grown in size and scale thanks in most part to the success of Mohammed Yunus’ Grameen Bank, which now serves over 7 million poor Bangladeshi women. It is in India that a number of problems have been surfacing in the last year or so. And it’s a sizeable problem that could get bigger when you consider the size of the industry in Africa - 427 microfinance institutions in Africa, lending more than $4.8 billion to over 8 million people (Mix Market (Microfinance Information Exchange).

The New York Times today reports that Indian banks have about $4 billion tied up in loans – about 80% of all microfinance in India. They’re increasingly worried about their returns in the state of Andhra Pradesh, where politicians, angry at how microfinance institutions are profiting from the poor, have encouraged borrowers to stop repaying their loans.

It’s a slippery slope as banks stop lending to protect from the increasing risk of defaults, and action spreads from state to state and country to country. Despite new legislation to regulate how and when lenders collect, there is an increasing feeling that what started out as a social development movement has become more capitalist and cut-throat than Wall Street.

That’s true in Africa too. Microcapital.org reported in January 2009 that the Malawian government had decided to stop guaranteeing loans from MFIs, given the “exorbitant” interest rates, naming two institutions that did not report to the Mix Market and did not publish lending rates.

The Central Bank of Nigeria and the Nigerian Deposit Insurance Corporation (NDIC), in an attempt to audit and regulate the microfinance industry, simply shut down 224 out of 800 mcirofinance banks. Microfinance Africa makes the point that while regulation is needed, the reputation of the industry now needs work.

About 10,000 organisations around the world have lent about $25bn to about 20 million people. An article by the BBC cites demand could be as much as $250bn. In the same article, Kate McKee, senior policy advisor at the World Bank's Consultative Group makes a now-oft-heard comparison to the financial crisis - that strong investor interest in the US sub-prime mortgage market created incentives for unsustainable growth and aggressive lending and the microfinance industry must guard against repeating the same pattern.

The Centre for Global Prosperity has an interesting article looking at the two mindsets in the approach to microfinance – profit and altruism. While this is in the context of the controversial IPO of SKS Microfinance in India it is a global issue. Like shareholder activism, if borrowers start to feel they are being taken advantage of – whether through NGO, government or civilian intervention – those dream rates of 95% repayment might be on the way down.

But then so will the opportunity to get out of poverty for the millions of people who have so far benefitted from microfinance. Philanthrocapitalism is one thing – many corporates, banks and private individuals want to see some financial return in the work they are doing to create good. But in Africa, as in India, there has to be more weight on philanthropy. The WSJ quotes an interview with Mr Yunus: "Microcredit should not be presented as a money-making opportunity. It is an opportunity to make an impact on poor people's lives”.

Governance - a victim of crime?

Governance is an important part of a nation’s brand, particularly with regard to attracting foreign investment. The annual Ibrahim Index of African Governance, looked upon as a credible calibration by the international community, was released on Monday, when South Africa saw its ranking move down to 5^th place due to high levels of crime, despite high scores in public management and most other areas.

Mo Ibrahim foundation board director Mamphela Ramphele commented that, "South Africa is in the Top 10 in every other category... but [with crime] we are lounging down there with the Somalians of this day and Zimbabweans. It's not a pretty place." In fact, in the personal safety sub-category, South Africa was ranked 44^th – still above Cameroon, Nigeria, Chad, Mauritania, Zimbabwe, Sudan, the Democratic Republic of Congo and Somalia, but not exactly where the country wants to be.

Crime’s been a target area in South Africa for the last twelve months, given the country’s hosting of the FIFA World Cup amid global concerns about safety. So why the drop? Is the issue policing, poverty or politics? Ramphele identified the root of the problem in the "political culture" of countries: "In our country, South Africa, we have fantastic policies but the performance doesn't always match the policies.”

She draws a parallel between business and government. Activist shareholders keep businesses in line. What we need is citizens’ involvement to drive better governance. But for that you need citizens with the same interest and stake in their government as a shareholder does. In a country where 95% of the population don’t pay taxes, 95% of the population have no reason to fight for a system that makes better use of their money.

But what does the future hold for driving governance, and who are the leaders who are going to ‘up’ the calibrations and raise the rankings on a pan-African scale?

The Ibrahim Prize for Achievement in African Leadership was not awarded in 2010 for the second year running, with no candidate that promoted excellence in leadership. It will be interesting to see how initiatives like the African Leadership Network build a more cohesive community of leaders for the community that might raise the rankings and compete for the award.

Meanwhile, does South Africa forge ahead trying to tackle crime in an isolated manner, or will the country use this as a benchmark for treating the root cause of poor governance overall?