A lot of research has examined the impact of Microfinance on the betterment of peoples’ lives. Studies are conflicting; from a developmental perspective, the access to finance of course has positive benefits to the general economy. Any improvement in capital markets reaching the margins is a good thing. But when we look at individual, personal studies, it is half and half and debates are aplenty. There are some success stories and case studies of Microentrepreneurs using the funding to create a business or product, some are even award-winning. Many video interviews highlighting the improvement in their personal lives. But for every success story we see, we do not see those who did not succeed; those who used the funding for a product or service that simply did not fly, who are unable to meet the debt repayments, and have found themselves even deeper in debt than when they first started.
And if Microfinance is so successful, why does it continue to exist? It is counter-intuitive, but if such institutions have truly helped lift people out of poverty, should these people not already be integrated into the formal banking system, such that they would no longer need to be microfinance clients? Why are they staying on as clients indefinitely? The answer to this, is that Microfinance has a long way to go, at least in the Philippines. And there is still a need for it.
I spoke to Bong Roxas, head of Rizal Microbank, casually over a Zoom call, on that point. Just to understand what’s going on on the ground, especially during the pandemic. He says unlike other traditional banks, their onus is not simply to provide funds, but actually to take care of their clients. They not only have a personal relationship with clients that entails better customer service; no, the relationship is an intimate one. They know about their family situations, the dire situations they are in, as well as every little triumph in their lives. There is constant communication. And during COVID, more so. Microbanks have a more pressing need to extend relief measures, because if they do not, they literally would lose all their clients. And so, Bong says that they have not just extended relief, rather, they have over-extended their relief measures.
But what of the interest rates, I asked. Why, after so many years, are these rates still exceptionally high when you look at it on an absolute level (around 45% per annum), and Bong says it is quite simply the cost of funds. There is difficulty in accessing funds from NGOs or multilateral organizations who provide cheaper funding — the funds have dried up and they need to tap expensive sources, which inevitably get passed on to clients, so the interest rate is out of their control.
What then, can be done to improve the system? First of all, we agreed we could do a major revamp the credit scoring method. I wondered whether credit scoring even still works in this day and age of COVID when past performance no longer has anything to do with current performance (I touched upon this in my column a couple of weeks ago for traditional banks). Could we use more psychometrics instead? Could we look at other indicators instead of the usual historical performance, repayment rate, guarantors or collateral? Bong says yes, we could look for instance at savings behaviors, longevity as client, and other such indicators to calibrate interest rates. A second way to improve the industry if we cannot bring down the cost of funding, is to at least try and bring down the cost of operating. And a lot of the operating costs are hinged on access to reliable data, having efficiency in encoding personal information, and vetting and understanding a client’s background without having to spend so much time and resources. A very easy way to do this he says is, of course, with the Universal ID system. If there could be one reliable source of identification information then the costs of verifying identification for security would be slashed dramatically. Not to mention the increase in clients that can now apply should they have such an ID. And another is, having an open finance framework. Let’s share client information! Let’s share their spending, saving, and paying habits. They do this now in many other industries, where data is open, which benefits everyone and allows customers to have more competitive options.
Finally, Bong says, digitization is of course, front and center. Not just access to a mobile phone for those in far-flung areas, but the true digitization of the inner workings of a Microfinance institution. Digitizing the way to get client information, to have all this information in an app, on everyone’s fingertips not only makes things more efficient, eventually translating to a cost benefit, but specifically improves transparency and gives the clients more power and control of their finances, making them a stronger, better economic agent and ultimately strengthening the balance sheet of the Microbank.
Despite the criticisms, despite the burgeoning of fintechs, we still do need Microfinance, because we need more than just banks providing financial aid to the needy; we need an intimate relationship that goes beyond credit scoring, we need a mentality of care and custodianship, not simply customer satisfaction. We need to service those who are marginalized even by the digital revolution. And we need to stay the course, because when there are a lot of improvements that still need to be done and actually can be done, the only way is forward.
Daniela “Danie” Luz Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IÉSEG School of Management in Paris and maintains teaching affiliations at IÉSEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.