Doris Köhn Editor Microfi nance 3.0 Reconciling Sustainability with Social Outreach and Responsible Delivery Microfinance 3.0 Doris Köhn Editor Microfinance 3.0 Reconciling Sustainability with Social Outreach and Responsible Delivery Editor Doris Köhn Senior Vice President Africa and Middle East KfW Frankfurt am Main Germany ISBN 978-3-642-41703-0 ISBN 978-3-642-41704-7 (eBook) DOI 10.1007/978-3-642-41704-7 Springer Heidelberg New York Dordrecht London Library of Congress Control Number: 2013953713 © The Editor(s) (if applicable) and the Author(s) 2013. The book is published with open access at SpringerLink.com. Open Access This book is distributed under the terms of the Creative Commons Attribution Noncommercial License which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited. 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While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) Preface Fifteen years ago, microfinance was looked upon as one of the most promising concept to lift poor people out of poverty. Microfinance was perceived to be “good per se”. Many institutions proved successful both in development and in financial terms. Today, after an impressive pushing of the “financial frontier”, fi- nancial inclusion seems to have a mixed record: While it is true that many people in developing countries still lack access to finance, we have also witnessed the op- posite “too much/easy access” led to overindebted clients, unable to serve their several microcredits offered by (too) many institutions. In some markets, this im- plied a move into pure consumer lending, partly replacing the traditional lending to micro-entrepreneurs. “Good” responsible microfinance institutions were not able to continue to operate in these “contaminated markets”. In this context, the question (re-)emerged: isn’t it, after all, unrealistic to believe that pursuing a de- velopment mission can go hand in hand with financial success, particularly in the context of commercial microfinance? I do not share this view. In fact, I believe the two goals are intertwined in the sense that without financial viability, clients cannot be served in a sustainable way, and that institutions which do not understand their clients with their financial needs will hardly be financially successful. However, this does not happen auto- matically: on the contrary, it takes a lot of efforts to achieve both objectives: a high degree of professionalism and a strong commitment to a responsible service delivery. It also takes responsible regulators and more efforts to promote financial literacy of clients. This book is part of a publication series initiated by KfW on selected topics in the field of financial systems development, one of the core competencies of KfW. This edition addresses the ethics of financial systems development which have been under scrutiny in “developed” markets as well as in developing countries. As “banking” seems to have become a questionable activity, we will take a special look at the institutions that provide microfinance services. “Microfinance 3.0” in- tends to provide a new “framework” for the future of microfinance which builds upon past success stories as well as upon lessons learnt from bad practices and er- rors. It contains nine contributions, written by different microfinance experts, dis- tinguished practitioners as well as observers and analysts of microfinance for more than a decade. Some of these contributions were presented at the KfW Financial Sector Symposium in late 2012 in Berlin, where the future landscape of microfi- nance was discussed. These contributions touch upon some of the “ingredients of “microfinance 3.0”: the values needed to provide financial services responsibly, the appropriate busi- VI Preface ness models needed to serve a large number of unbanked people, the right role of funders to promote professional and responsible service delivery, and the question as to how to measure the impact of microfinance. As this publication is also available online (via Open Access), my special wish is that it contributes to a fruitful learning process around the globe and familiarizes financial institutions in KfW’s partner countries with our ideas of microfinance 3.0. May this book provide new insights for the reader and promote knowledge sharing among all stakeholders. August 2013 Doris Köhn Director General, Africa and the Middle East KfW Entwicklungsbank Table of Contents Chapter 1 Microfinance in India: Lessons from the Andhra Crisis...........................1 Vijay Mahajan and T. Navin Chapter 2 Armageddon or Adolescence? Making Sense of Microfinance’s Recent Travails.............................................................................................13 David Roodman Chapter 3 Core Values of Microfinance Under Scrutiny: Back to Basics?.............41 Reinhard H. Schmidt Chapter 4 Microcredit Interest Rates and Their Determinants: 2004–2011 ..........69 Richard Rosenberg, Scott Gaul, William Ford, and Olga Tomilova Chapter 5 Financial Services That Clients Need: The 3.0 Business Models, Reconciling Outreach with Sustainability...............................................105 Robert Peck Christen Chapter 6 “Microfinance 3.0” – Perspectives for Sustainable Financial Service Delivery ..........................................................................................123 Matthias Adler and Sophie Waldschmidt Chapter 7 Microfinance Beyond the Standard? Evaluating Adequacy and Performance of Agricultural Microcredit...............................................139 Ron Weber VIII Table of Contents Chapter 8 The Role of DFls in the Emerging 3.0 Responsible Funding Landscape – Responsible Corporate Governance and Beyond............155 Klaus Maurer Chapter 9 The Microfinance Approach: Does It Deliver on Its Promise? ............181 Eva Terberger Index.............................................................................................................197 Abbreviations ABM AccèsBanque Madagascar ABT AccessBank Tanzania AfDB African Development Bank AFR Africa AG Company limited by shares AP Andhra Pradesh APR Annual Percentage Rate ATM Automated Teller Machine BLP Bank Linkage Programme BRI Bank Rakyat Indonesia CDC Commonwealth Development Corporation CEO Chief Executive Officer CGAP Consultative Group to Assist the Poor CIDA Canadian International Development Agency CLO Collateralized Loan Obligation CMEF Council of Microfinance Equity Funds COCA Code of Conduct Assessment COFIDE Corporación Financiera de Desarrollo CSR Corporate Social Responsibility DFI Development Finance Institution DfID Department for International Development EAP East Asia and Pacific EBRD European Bank for Reconstruction and Development ECA Eastern Europe and Central Asia ECB European Central Bank EFSE European Fund for Southeast Europe EIB European Investment Bank ESG Environment Social Governance EUR Euro EZ Entwicklungszusammenarbeit (German Development Cooperation) FMO Netherlands Development Finance Company GBB Grameen Bank Bangladesh GDP Gross Domestic Product GIZ Deutsche Gesellschaft für internationale Zusammenarbeit GmbH GLP Gross Loan Portfolio X Abbreviations GNP Gross National Product GNI Gross National Income GoI Government of India GPFI Global Partnership for Financial Inclusion IFC International Finance Corporation IIMPS Invest India Micro Pension Services INR Indian Rupee IPO Initial Public Offering IRDP Integrated Rural Development Programme JRY Jawahar Rozgar Yojana KfW Kreditanstalt für Wiederaufbau KYC Know Your Customer LAC Latin America and the Carribean MEF Microfinance Enhancement Facility MENA Middle East and North Africa MF Microfinance MFI Microfinance Institution MFIN Microfinance Institutions Network MILK MicroInsurance Learning and Knowledge Project MIS Management Information System MIV Microfinance Investment Vehicle MIX Microfinance Information Exchange MSME Micro, Small and Medium Enterprises NABARD National Bank for Agriculture and Rural Development NBFC Non-Banking Financial Company NBFI Non-Bank Financial Institution NGO Non-Governmental Organization NPS National Pension Scheme NREP National Rural Employment Programme NREGA National