Microfinance industry needs to implement reforms, reorientation

MANILA, Philippines - The anti-poverty business formation known as microfinance is under attack worldwide, but efforts to get it back on track are afoot.

Negative global reports on the practice of microfinance for poverty alleviation have been accumulating.

There are accusations that microfinance has been used for usurious lending, which was one of the targets that it was designed to eliminate. This was followed up by various reports that microfinance has only buried the micro-borrowers deeper in debt.

A report by regional publication FinanceAsia indicates that Muhammad Yunus, founder of Grameen Bank in Bangladesh and recipient of the Noble Peace Prize in 2006, was ejected from the bank’s leadership.

In the Philippines, critics are saying that microfinance institutions are charging sky-high interest rates or that nobody really knows why the interest rates on microfinance products are higher than commercial rates.

But recently, MicroFinance Transparancy (MFTransparency) was in the Philippines to try to make some sense of all the disturbing feedback on the once-hailed answer to poverty. MFTransparency representatives held one-day seminars in three key regions to explain its advocacy for transparency in pricing of microfinance products.

The main objective for the Philippine “roadshow” was to introduce standardized pricing practices under the so-called Transparent Pricing Initiative.

In fact, it is introducing a standardized general formula for microfinance institutions (MFIs) that may be adopted and applied to the specific conditions of each market, stating that it is not possible to have a single, global interest rate level for micro-lending. But a standard formula on how the pricing of microfinance products and the subsequent interest rates was arrived at.

MFTransparency said that its mission is “to be the venue for the microfinance industry to publicly demonstrate its commitment to pricing transparency, integrity and poverty alleviation.”

Formed in 2008, MFTransparency urges the exchange of information on credit products and their prices in a clear and consistent fashion by all advocates.

That will allow the association to collate and release information on the pricing methods to guide the MFIs and the micro-borrowers to make wise decisions.

In one of its reports, MFTransparency said that the next stage in the growth of microfinance will require a new level of understanding and openness about the costs of lending in small units and transparent communication of the prices charged to cover those costs.

“An industry born to displace the moneylenders by providing low-cost credit to the working poor needs to ensure that its clients have clear information about the cost of the money they borrow,” it added.

During the World Economic Forum (WEF) held at Davos, Switzerland last month, it was stated more than three billion people globally are without access to formal and basic financial services.

It was likewise agreed in the annual gathering of global political and business elite that microfinance was facing major challenges. But it was also agreed that mobile banking technology was one of the best vehicles for extending microfinance.