MICROCAPITAL.ORG STORY: Grameen Foundation CEO Alex Counts Discusses The Issue Of Multiple Borrowing In The Microfinance Sector And Suggests Ways To Minimize Borrower Over-Indebtedness

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In a recent report on the Microfinance Focus news portal [1], the CEO of Grameen Foundation [2], Mr Alex Counts commented that a flexible approach in microfinance will help the sector tide over many new challenges. He added that the related issues of multiple borrowing and borrower over-indebtedness are becoming increasingly common in the microfinance industry. One way to address the problem of multiple borrowing is by ensuring that loan officers are dissuaded from underestimating risks in order to meet required targets.

Citing an example from his experience in Bangladesh, Mr Counts cited the example of a regional manager who had overtaken all other regions in terms of the total amount of loans made. This however eventually led to over-indebtedness of the MFI clients and even small-scale corruption. Though the manager was dismissed from his position, it took about ten years for that region to recover. Mr Counts referred to such practices as the “darker side of the microfinance institutions” and cautioned against the pursuit of short-term gains whilst ignoring the larger goal of serving the poor.

On the issue of the commercialization of MFIs, Mr Counts added that a line should be drawn between the acceptable levels of profit and repayment capabilities of borrowers. He was quoted as stating that “for the people who are below the poverty line, you should be thinking of it as fundamentally a break-even business.” He further added that extra profits should be re-channeled into the business of the MFI in question in the form of lower interest rates, better services, or stock options. Mr Count further stated that he favoured the initial amount disbursed to the ultra poor to be small enough, say USD 25 plus financial literacy as opposed to an initial loan of USD 100 over a six month period. Such an approach is likely to inculcate financial discipline among micro-borrowers.

MFIs should also continually assess if borrowers are improving their economic conditions or just treading water. In the latter scenario, borrowers might make a profit for a short time, but fail to sustain themselves financially or their businesses in the long run. Since the long-term focus of MFIs is to offer more financial and insurance products, they should focus on the economic stability of their borrowers and help to turn them into better customers for the full range of products, Mr Counts said.

By Chinq Yee Chong, Research Assistant

Bibiography:

[1] Report on Microfinance Focus entitles “Alex Counts: Flexibility is the mantra for Microfinance Institutions”: http://www.microfinancefocus.com/news/?p=257

[2] Grameen Foundation: www.grameenfoundation.org/

[3] MICROCAPITAL.ORG PAPER WRAP-UP: Microfinance: Where Do We Stand Today? By Ajit Jain and Caroline Norton

[4] MICROCAPITAL STORY – Highlights From A Hanson Wade Conference On Microfinance Investments And Observations By Key Panelists From MFX Solutions, ACCION, OPIC, Deutsche Bank, Microfinance Transparency And Others

[5] MICROCAPITAL STORY: Over-Indebtedness And Borrower Delinquency In The Indian State Of Karnataka – A Blogger’s Observations

[6] MICROCAPITAL STORY: Thirty-Five Organizations Sign Client Protection Principles to Ensure Fair Treatment and Financial Protection of Low-Income Microfinance Clients