By Long Le
After experiencing its share of crises in the past few years, the microfinance industry can be said to be at or close to an inflection point.
That is, microfinance as a bottom-up development — once considered unequivocally a good thing — has gone mainstream led by commercially-oriented providers, including former NGOs who turned into for-profit lenders. As a result, this change has brought on mainstream problems such as client over-indebtedness. For many, the mainstream forces, which now include established banks rushing into what they see as potential long-term growth business, indicate “mission drift” where “microloan-sharking” is now part of the industry. For others, these mainstream problems are being addressed with appropriate regulation and demand-driven products, of which can signify success as new business models and communication technologies have continued to foster the microfinance industry’s growth.
Still, there are others who have long argued of the false choice between commercially oriented and socially oriented microfinance, or sometimes referred to as the debate between the institutionalist approach and welfarist approach. In short, this view sees the former as necessary for continued expansion of microfinance and whose incentives to innovate could facilitate financial inclusion and integration into the formal provision of financial services. Meanwhile, the latter — taking advantage of subsidies – is vital because it remains the model to reach and provide better access to financial services to the poorest customers.
In the post-microfinance crises, what is becoming clear is that, while commercially oriented microfinance institutions are addressing competition and client-driven risks of an evolving industry, socially oriented microfinance institutions, in general, are living up to their missions.
In particular, socially oriented microfinance institutions – expected to bring about socio-economic impacts large enough to justify and ensure the continued subsidized support – are addressing the challenges of providing sound practices on ethical finance, co-creation of value with clients, and social performance management. In particular, faith-based microfinance organizations are exploring for a more pristine environment for profit and loss sharing and for borrowers to become private providers in microfinance services. Moreover, such social missions need not result in notable efficiency loses, or that socially efficient can be correlated with being financially efficient.
Post-conflict microfinance could be the next frontier
While many diverse microfinance institutions can generate economic benefits in stable environment, it has been recently documented that in post-conflict situations microfinance can be an effective tool for relief and survival strategy. In fact, socially oriented microfinance institutions, especially faith-based ones, have been shown to have the capability to act as a catalyst for reconciliation and trust building in conflict-affected communities. That is, providing financial services through group lending not only minimize people’s vulnerability to poverty and insecurity, but also build social capital that could transcend ethnic and other differences and/or contribute to inter-ethnic cooperation between members.
Although critics often exaggerated the negative role of subsidies, subsidized funds have allowed Christian and Islamic microfinance institutions to be proponents of encouraging peace-building, reconciliation and conflict resolution through social capital enhancement in the post-conflict recovery in Iraq, Nigeria, Eastern Europe, and Southeast Asia.
To be sure, while some microfinance interventions succeeded at building trust and community among their clients, others have not done well or have focused exclusively on their financial viability in post-conflict environments. Even for successful microfinance institutions that have intervened and have been able to restore some levels of trust and peace for particular populations, there is no consensus on whether microfinance institutions should engage in post-conflict-affected communities. There is even less consensus on where microfinance institutions should intervene, when they should intervene, and how they should intervene.
Notwithstanding, fragile states and post-crisis situations are expected to increase in frequency, and perhaps also in ferocity.
Fortunately, the external and internal factors that affect post-conflict microfinance — its social and financial performance – are considered to be similar across different contexts. For example, a case study of microfinance’s social impacts in post-conflict Guatemala found parallels with other microfinance programs in Kosovo, Sierra Leone, Rwanda, Uganda, Bosnia and Herzegovina, El Salvador, and Southeast Asia. Noteworthy is that post-conflict microfinance institutions will probably have to restore social capital just to ensure repayment; will need to invest in community-building or build relations with trusted actors in order to gain the trust of the community; will need to promote particular type of lending such as rotating savings and credit groups to increase trust and social capital; and will need to construct member-owned types of local financial institutions to build basic blocks of civil society.
Last but not least is that, in post-conflict-affected communities, faith is a salient feature of identity where violence and discrimination against religious groups by governments and rival faiths are a growing reality. While there have been efforts for Orthodox, Muslim, Jewish and Christian microfinance institutions to work together, there are few partnerships in spite of the culturally plural circumstances in which humanitarian crises arise today. Moreover, interfaith partnership requires high levels of individual skill and organizational commitment to generate inter-organizational knowledge, as well as identifying specific theological mandate for inter-religious collaboration.
Overall, if there’s a new frontier for microfinance, it might well be the ability of socially oriented microfinance institutions to develop and become a catalyst in changing or restoring people’s attitudes towards each other and creating a base of reconciliation and coexistence in post-conflict-affected environments.