A chance to reform microcredit, if they want to do it

After the Andhra Pradesh suicides, microcredit has a chance to reform itself and continue to spur on positive change. A commentary we found today takes a look at economic crises of the past and how it spurred positive reform. Microcredit has the same opportunity ahead if it does want to reform itself. Writer Oscar Abello from the Center for International Private Enterprise presents the challenge that is ahead.

After the 1997 East Asian Financial Crisis, development finance institutions in East Asia knew that they needed to restore investor confidence and get economies back on the market-oriented growth path that has reduced more poverty than in any other region in the world. Led by the Association of Development Finance Institutions in Asia and the Pacific (ADFIAP), their collective response was to strengthen corporate governance in the region, starting with themselves.

With a collectively-built corporate governance rating system, region-specific training materials and the ADFIAP-housed Institute for Development Financing to support and conduct regular risk management and governance seminars for staff and board members (more info on www.governance-asia.com), development finance institutions got themselves on track to strengthen corporate governance in the region by serving as the standard to which they held their client networks accountable.

After the Andhra Pradesh crisis, its largest to date, can microfinance follow in the footsteps of development finance institutions? Though not inclusive of all microfinance providers, there are about $26.9 billion in deposits and $65 billion in loans on the balance sheets of the 1,933 microfinance institutions reporting to the Microfinance Information Exchange as of writing this post – and those numbers have been growing about 20 percent a year. Microfinance providers are thus emerging as new economic hubs.

By serving as examples of effective corporate governance, microfinance providers could succeed where so many financial institutions have repeatedly failed, and in so doing could ‘infect’ their client and community networks with the ‘disease’ of strong corporate governance. With almost three billion unbanked people still to reach, those are huge potential networks to infect.

Such an epidemic would be good for reducing poverty, as it would serve to attract investment into new and growing businesses. It would be good for financial sectors around the world trying to end the succession of financial scandals and crises. It also would be good for new or struggling democratic states, once more transparent financial sectors within countries take over development financing from international institutions.

If they got their corporate governance act together, microfinance providers could ignite a good governance epidemic. But that’s a big if.