VALLADOLID, SPAIN (Nov. 16) -- Day two of the Global Microcredit Summit 2011, Nov. 15, examined one of the central debates in microfinance: the challenges and solutions considered since the problems that occurred last year in the Indian state of Andrah Pradesh, where allegations of over-lending and aggressive collection tactics by some for-profit microfinance institutions (MFIs) tarnished the sector. The day also included a plenary session about social business, a concept promoted by microfinance pioneer Professor Muhammad Yunus, founder of Grameen Bank and, with it, winner of the 2006 Nobel Peace Prize. He views social businesses -- which he says are "non-loss, non-dividend companies" -- as a natural extension of the concept of microfinance, which he says is a type of social business.
The first plenary debate involved leaders from the US, Pakistan and Bolivia discussing a paper written by Anton Simanowitz about the central issues faced today by MFIs worldwide, including client over-indebtedness, client dropouts, unethical collection practices, high interest rates, mission drift and poor governance structures.
"Whilst some people see the recent crises as isolated incidents, the majority feel that there are fundamental lessons that need to be learned," stated the author, Simanowitz. "Overall, a broad range of microfinance actors reject media suggestions that perhaps microfinance itself is a flawed idea, but highlight the need for the microfinance community to re-examine assumptions and find ways to increase effectiveness ... to achieve a more conscious and transparent balance between the social and commercial goals in all aspects of strategy and management."
Rather than declaring that microfinance has lost its way, the paper and the delegates gathered in Valladolid stated that they have come together to discuss the way forward. Simanowitz recommended "a deepening of financial inclusion by overcoming the exclusion of the poor, vulnerable and marginalised groups; creating value for clients by starting with clients and their needs, and building sustainable institutions that deliver value; protecting clients from harm by recognizing client risk and vulnerability in regulation, governance and systems to protect clients; and ensuring a quality of microfinance services by developing effective management systems to deliver on these objectives."
Tilman Ehrbeck, CEO of the Consultative Group to Assist the Poor (CGAP), said that no one should expect microfinance to solve all problems, adding that the sector "has improved its practices over the last 12 to 18 months," working to innovate and understand clients' needs. "There has been a lot of experimentation with business models to bring a broader range of services to more people at lower cost," he explained, "sometimes through the cell phone."
Roshaneh Zafar, Managing Director of Kashf Foundation, an MFI in Pakistan, acknowledged that the microfinance sector is facing a number of challenges, but insisted that "out of crisis comes innovation ... challenges give us an opportunity to change, to expand our offerings." She argued for a need to enhance the suite of products offered to borrowers, "especially savings, which is perhaps one of the most important imperatives for us."
Fabiola Cespedes, Social Performance Coordinator for Foro Latinoamericano y del Caribe de Finanzas Rurales (FOROLACFR), said that MFIs must have a balanced approach when it comes to financial and social performance, and must ensure that internal systems and policies that support that mission are in place. She also called for MFIs to "have a strong succession plan in place, so that their mission remains consistent even when leadership changes."
During the second plenary session, focusing on social business, Prof. Yunus insisted that "my move toward social business is not a move away from microcredit. Instead, microcredit is a social business." He explained that he has always been drawn to business-oriented solutions to social problems, and that during his time as Managing Director of Grameen Bank, he was able to create independent social businesses to help solve a variety of problems, such as selling vegetable seeds to fight night blindness caused by vitamin A deficiency; selling sanitary latrines to fight diseases causes by poor sanitation; selling solar systems to help provide rural Bangladeshis with access to clean electricity; and selling clean cooking stoves to solve healthcare and deforestation problems caused by indoor air pollution.
He praised another speaker at the plenary, Franck Riboud, Chairman & CEO of Groupe Danone, for its leadership in the social business space. Riboud thanked the Nobel Prize winner for his invitation to the Summit, saying, "Whenever he asks me to come somewhere, I will." Riboud insisted that "you cannot have financial success without a social component to your work," adding that "the question in social business is not whether you have profit or not - you must have profit for the business to survive.
"Yes, we need profits," he continued. "We need to cover costs, and provide a return to shareholders, but returns should be more than money." The best way to convince shareholders about social business, he said, "is to explain it well and deliver results. Show them that social business can deliver a competitive advantage. A commitment to social business, for example, can help companies attract the best talent."
Prof. Yunus ended the plenary by urging all companies to start social businesses, no matter how small. "Once you have your goals set, then gradually, continuously, you can start solving social problems. The Wright Brothers did not create a jet airplane right away," he said. "You must create a solution then continuously improve it."
The Microcredit Summit Campaign aims to reach 175 million of the world’s poorest families by 2015 and ensure that 100 million of those families move above the World Bank’s $1.25-a-day poverty threshold.
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