Microfinance, one small step for a man, a giant leap for the poor

“To define microfinance best practices, I just watched what conventional banks did, once I figured out their procedures, I just did … the opposite, and it works. They go to the rich people, so I decided to go to the poor people. They go to men, I go to women. They have lawyers; we said we don’t need lawyers. Banks want to know the borrowers’ past; we are interested in their future”. This is how Muhamed Yunus, the Nobel Peace Prize winner of 2006, created one of the first successful microfinance banks, the Grameen Bank.

The development of microfinance institutions (MFIs) came as an answer to the fact that poor people are excluded from the conventional banking system. With no access to loans, poor people find themselves in a vicious circle of poverty that will lend them either to beg or criminality. Many of the poor people have a heavy life baggage and their personal life could have been ripped from the pages of Les Miserables. MFIs came hence to fill this gap by empowering the poor and help them to help themselves.

While the social mission of MFIs is very clear in the mind of people, how MFIs ensure their continuity and self-financing scheme is less clear. The first question that comes to our mind is how a lending financial institution that doesn’t ask for collateral on loans has such a low default probability (less than 1% in many MFIs). There are many systems to enhance the repayment of the loans.

The first system is used by the Grameen bank for example and is based on “solidarity groups”. These small informal groups apply together for loans and its members act as co-guarantors of repayment and support one another’s efforts at economic self-advancement. A second system is based on what is called group-based credit approach. Under this approach, to ensure that the borrowers use caution in conducting their financial affairs and being responsible in repaying their debt, the MFI applies what is called the peer-pressure, i.e. the influence exerted by the surrounding community to behave in a positive manner in order to keep the social standing.

A third system is based on guarantors. The first loan can only be contracted if the borrower is guaranteed by a third person that is already a client of the MFI and showed a past financial discipline and savviness.

There are thousands of MFIs in the world with South East Asia and Latin America is the biggest hubs of microfinance. In the Middle East, the main institutions that are in the top 40 MFIs in the world are from Morocco, Egypt and Tunisia. In Tunisia, the microfinance sector is witnessing big changes. In November 2011 a new law legislating microfinance institutions was released in Tunisia. This law allows MFIs to be able to lend up to 20 000 dinars (13 000 dollars) per loan from 5 000 dinars per loan as previously allowed by the law.

In return, there are some new legal restrictions and the previously established Nongovernmental Asscociations (NGOs) has to become a corporation and hence pay taxes. This path is the natural path that was used by many MFI who went from a status of NGOs to corporations and finally banks such as BancoSol, Compartamos, Accion, etc.

In Tunisia, the microfinance is dominated by the NGO Enda who is by far the main leader of the sector in the country. Enda has implemented for many years best practices which allowed her to have a very good sustainable growth. Up to the end of 2012, Enda has more than 200 000 active clients, more than 1200 thousand of loans given, and finally more than 850 million dinars in disbursements. This has allowed her to get many international distinctions such as the German Jameel Leadership Prize in 2011 and the Schwab Foundation Social Entrepreneur Prize in 2010.

However, with the release of the new law, the specter of competition is gleaming, and many international institutions are interested in getting into Tunisia; among the major players there are MicroCred, Desjardins as well as Advans, to name a few. While economic theory has shown the benefits of competition to the end users, microfinance reality showed that too much competition can be lethal. The Moroccan experience is a very good example. The fierce competition between the 13 competitors (seen as a big number) lead to one of the oldest institution Zakoura to disappear in less than a year.

Instead of competing, the microfinance institutions should apply an old African say “alone we go faster, together we go further”