By Kelly Tanner

Audrey Choi, Managing Director of Morgan Stanley Global Sustainable Finance, moderated a panel discussion last week entitled, “Will Microfinance Succeed in the BRIC countries? Does Regulation Matter?” The answer to both questions, according to panelists Hans Dellien, Chikako Kuno, and Elisabeth Rhyne, is yes.

The event, organized by Financial Women’s Association and sponsored by Morgan Stanley’s Global Sustainable Finance and Women’s Initiative, focused on how regulation promotes and hinders microfinance institutions in Brazil, Russia, India, and China, collectively referred to as the BRIC countries. Though these countries are known as emerging opportunities for investors, they have “enormous potential and enormously different market dynamics,” says Choi.

She asked, “As we get to a real evolution of the field, where you have investors coming into microfinance with very different motivations, very different kinds of checkbooks…What happens? What is the right way to untangle mission and profit and fiduciary responsibility?”

Response to Hardship in the Microfinance Arena

Any discussion of microfinance in India must address the recent relationship between MFIs and the tragedies that ultimately led to an overhaul of regulation, first in the state of Andhra Pradesh and then nationally.

Elizabeth Rhyne, CEO and Managing Director of the Center for Financial Inclusion, attributes the problem in part to the pursuit of excessive scale by microfinance institutions, as the use of outside agents to recruit clients resulted in multiple lendings, and growth do fast that there was a loss of standards.

She added, however, “I would say there is a long tradition of suicides associated with bad agricultural years, so it’s not like the suicides were something really unusual, but the fact that they were linked to microfinance then gave the tinderbox that lit the fire with the press.” Rhyne hopes that the initial regulatory crackdown by the government will be seen as a “quick fix,” and over the next few years will pave the way for better, longer term solutions.

Within the next few generations, she predicts, there will be a “focus on broadening product range. A contributing factor to the problems was the fact that MFIs “were just doing one specific group product,” when, ultimately, “clients need savings.” “To me,” Rhyne said, “the story of ‘What’s the next generation?’ will be the story of how the range of products delivered to clients will broaden.”

Education and Regulation

Chikako Kuno, Director of Capital Markets for FINCA, says that microfinance is a relative term in Russia, where the average loan size is around $25,000. MFIs, she says, “were having a hard time getting a footprint, because the needs are vast,” and every time there was a banking crisis, commercial banks were withdrawing funding from the client base. By the last quarter of 2008, portfolios had been halved, and “banks were bleeding,” says Kuno. A law passed last year firmly established the right of microfinance institutions and banks to provide lending to microentrepeneurs, as will serve as a measure to alleviate the financial burden on small business in Russia. “We’ll see if it gives the impetus” to grow the industry, Kuno wonders, implying that the future of microfinance in Russia is still to be written.

Hans Dellian, Director of Microfinance Products for Women’s World Banking, spoke from his 18 years of experience managing microfinance institutions to discuss both China and Brazil’s positions in the industry. Dellian stated that the new legal structure in China formed in the last 3-4 years brings problems and challenges, such as the issue that, “from the regulation perspective, you can get licenses for only certain counties; of course, those counties have 20 million people, so it is not such a problem.”

However, the tight regulations mean that funds cannot be leveraged too much, due to constraints such as interest rate caps, and so MFIs are forced to lend only larger sums of money. “On the other hand,” Dellian goes on to say, ”the Chinese are very open, and very avid to learn, and they have invited all networks in the world to operate in China” as a way of importing knowledge.

This, he says, will speed the process of change, and he is optimistic that regulations will change in the next 1-2 years, making microfinance more attractive in China to investors. Similar inflexible regulatory constraints hinder Brazil, leaving a big vacuum in meeting the needs of clients, says Dellian, and culture also plays a role, since Brazilians “hate to acknowledge that there is some poverty in Brazil,” as they view themselves as very developed. As in China, Dellian feels that rethinking the regulatory models will speed up reform.

The Double Bottom Line

The panelists agreed that when creating at best practices for the microfinance industry, finding a successful template would necessitate looking outside these four large countries, and instead focusing on smaller countries which have been able to establish more flexibility.

In larger countries, government must be a partner, and must offer incentives in order to get sustained funding for microfinance, says Kuno. She continues that transparency is key, in part to monitor the players – that while microfinance has proven it can be sustainable and profitable, the industry will have to grapple with the fact that maximizing the profits may come at the expense of the client.

How to maintain that “double bottom line” will be an ongoing discussion. Dellian agrees that a strength of the Latin American countries has been their transparency, with the result well-regulated markets, and he notes that regulators and MFIs work together in collaboration, rather than as adversaries as is common in the larger countries. Rhyne feels that investors must “step up to the plate,” and become more responsible for the industry overall.