National regulators, and donors, should certainly not support (and perhaps should not allow) MFIs to operate unless they are also licensed to offer savings, to take demand deposits, that is, they are licensed banks. This does not mean that the requirements for licensing should be less stringent; it means that existing and perhaps some new banks should become directly involved in microfinance, perhaps in some cases starting by buying heavily discounted loan portfolios from bankrupt or troubled MFIs. Governments and donors should push banks in this direction.
I wholeheartedly agree. Yes, there is still the unresolved question of the impact of microcredit. Impact studies (even RCTs) have looked at microcredit and have only confirmed that while the impacts are modest at best, there also don’t seem to be reasons to fear microcredit wiping out its clients. However, as a sector, microfinance practitioners haven’t done enough to protect the industry from risks that should have been easily visible to all. I still believe that while politics might be a factor, it is certainly not the biggest one and that the sector has in the past, refused to learn from its mistakes. And now, “denial is no longer an option”.
Microfinance is broader than microcredit – one that could be a holistic model that combines an array of financial services with complementary support services. This distinction between microcredit and microfinance is easily lost in the microfinance debate where we tend to focus on the future of ‘loans’ and ‘MFIs’.
My agenda for the microfinance sector is this: MFIs have to help their clients graduate to banks. Harper’s point about mainstreaming microfinance through banks is an important one in this context. This might have been an improbable point to make even a decade back – that banks are in a better position to provide superior quality financial products and services. But now that the microfinance industry has demonstrated financial viability, banks will find a way to move in; in fact, donors and governments, as Harper says, should actively encourage them to move in.
The biggest reason we need banks and other deposit-taking institutions is of course, savings. We cannot ignore savings any longer. Savings services for the poor will continue to expand through mobile phones and other innovations, but banks need to be the institution that provides it the big push. Recently, there has been considerable focus on savings, but gaps remain. Banks – both in the public and private sector – should be the ones to step up and fill the gap. In the process, MFIs that can transform themselves to full service banks will survive; others will die or sell-out to banks. And in the capitalist system that the industry has fostered for itself, no tears will be shed.
The coming years should be years of consolidation – not just of MFIs into one another, but into organisations with higher levels of complexity, reflecting better financial products and services for its clients.