Microfinance in Eastern Europe?

Anthony Randazzo is a Senior Investment Officer with Calvert Foundation's Lending & Services Team. He focuses on loan origination efforts for international investments in microfinance, water and sanitation, and renewable energy. Last month, Anthony met with microfinance industry leaders at the 14th Annual Microfinance Center Conference in Prague, CZ, the city where he kicked off his professional career nearly two decades ago.

Anthony Randazzo

I once told my Czech friends that their language – with its mind-bending grammar, and tongue-twisting pronunciation – is a paradox: the more I studied it, the less I understood. Though I did eventually master it while living in Prague from 1992 to 1993, my recent exchange with a waiter at the 14th Annual Microfinance Center Conference in Prague showed how quickly language skills atrophy. In my best Czech, I asked to order a coffee. The waiter stared back at me, smiling. I thought maybe he didn’t understand, so I persisted, “Prosim, mohu nabidnout kavu?” He eventually responded, politely holding back his amusement, “Well, I would gladly accept, but perhaps you wish to order a coffee instead, sir?” Embarrassingly, I had confused nabidnout (to offer) with objednat (to order). “Yes please,” I humbly conceded, in English. 

Despite my embarrassing exchanges with the wait staff, I was delighted to attend the MFC conference this year. With several hundred participants from 45 countries, it is arguably the most important annual microfinance industry event in Eastern Europe. Past MFC conferences have been held in Sofia, Ulaanbaatar, Belgrade, and Astana. Naturally I was thrilled to learn it would be held in Prague this year, providing an opportunity to return to a place where I lived and worked in the early days of my career.  

Prague was a different city back then. Only a trickle of tourists, but an estimated 5,000 American ex-pats (mostly college graduates escaping the ‘92 recession) were the only foreigners in the city. Czechoslovakia was still a unified country. The transition from totalitarianism to free market democracy was in full gear. I remember when the first McDonald’s restaurant opened. Instead of shunning fast food, Czechs welcomed this icon of American culture. I think for them it symbolized a newfound freedom, and they lined up for several blocks to get their first taste. Today, the center of Prague is awash in tourists, and fast-food restaurants abound. But Prague has refused to lose its magic, and in my opinion, is still one of the most magnificent cities in Europe. 

While most casual observers associate microfinance with the regions where it first emerged (South America, India, and South Asia), there has been a thriving microfinance market across most of Eastern Europe, and many microfinance networks (ProCredit, FINCA) have some of their largest operations there. In fact, about one third of Calvert Foundation’s microfinance portfolio is invested in Eastern Europe and two of our five largest investment exposures are in former Soviet countries (Azerbaijan and Georgia). That microfinance took off in Eastern Europe should come as no surprise. Forty-five years of state-controlled economic policy left the region in stagnation. However, the end of the Cold War created opportunities for individuals to start their own businesses, both formal and informal, and microfinance has played a key role in empowering those individuals to manage their own affairs. The wave of private entrepreneurship has revitalized Eastern Europe since the end of state-sponsored socialism.   

This entrepreneurial spirit was in the air at the MFC Conference. With the senior management of nearly every major East European microfinance institution (MFI) in attendance, it is a convenient venue to get business done. With Prague chosen as the location this year, the number of attendees was particularly high. While the conference always lines up interesting debates and discussions, a lot of serious negotiating is done on the side lines of the event. In the course of 3 days, I met with the CEOs of six microfinance institutions in which Calvert Foundation is invested, and interviewed an additional 5-6 prospects, often alongside staff from partner organizations Triple Jump and MicroVest.

There were also some thought-provoking roundtable discussions on the MFC agenda, which was entitled Reorienting Microfinance towards Balanced Growth. Interesting debates were held on the future of microfinance. One spirited panel discussion featured the contrarian views of Milford Bateman, author of Why Microfinance Doesn’t Work, who was invited to speak alongside the president of FINCA International, Rupert Scofield, and other microfinance heavyweights on the subject of Reorienting Microfinance: Generating New or Repairing the Old?   

Mr. Bateman was most likely invited to inject some critical thought into the discussions. Since the conference typically attracts only ardent believers in microfinance, I admired his courage. Bateman contends that microfinance inhibits the growth of a balanced economy by fostering the proliferation of self-employed micro entrepreneurs, all of whom compete in the same markets. This drives down profits and prevents the development of a modern, diversified economy. He also argues that there is little independent evidence demonstrating that microfinance creates jobs or alleviates poverty since studies produced by industry insiders are naturally biased. Mr. Scofield (and others) fired back, arguing that microloans had had a transformative impact on the lives of poor individuals. Scofield gave examples of $50 loans he helped make in the highlands of Guatemala that allowed farmers to buy fertilizer. He witnessed first-hand the dramatic improvement this had on crop yields and family nutrition. It also eliminated the market for loan sharks, who ruthlessly charged 5-10% interest per day for credit.   

As I watched the debate unfold, I felt that this kind of criticism is quite healthy. The microfinance industry can and should improve its ability to tell its story. Industry-wide efforts are underway, such as the SMART Campaign (a global effort to achieve common principles for protecting clients such as transparent pricing and ethical collection practices) and the Social Performance Taskforce (a platform for disseminating best practice for microfinance institutions to achieve their social mission). Still, measuring impact in a more scientific way would generate convincing evidence of the transformative benefits that many of us have witnessed in our work but which are not readily quantifiable. At Calvert Foundation, we rely on commonly used metrics to quantify impact (such as the number of female borrowers served by the microfinance institutions we support) but often these benchmarks fall short. One good example we have is an MFI in India that measures the poverty levels of clients that enter and exit their microloan programs. Nearly all of the borrowers that they take in live below the poverty line, but after five loan cycles the majority of these same clients are no longer poor. Metrics like these tell a great story, but are not easily obtained. They demonstrate that microfinance enables individuals to manage their finances more effectively, smooth out their consumption and build up assets. Still, microfinance is not the poverty alleviation equivalent of a silver bullet. It is just one of many tools in the poverty alleviation toolbox.  

So I say, bring on the criticism. It will only help the microfinance industry to realize its weak points and look for ways to improve. Complacency leaves us vulnerable to reputational risks. Like making embarrassing mistakes in Czech to a waiter in Prague, we should avoid being overly confident, and strive to continuously improve.