Worldly value, as opposed to spiritual value, can be viewed as a monetary quantification of the benefits derived from a product or service. At the individual level, this is reflected in the price he willingly pays for a product or service. Assume, for the purposes of this article, that our client is a woman and that she is served by a microfinance institution (MFI). If all of her transactions with the service provider are aggregated, we can get a measure of how much value she has derived over a period of time, say a month or a year from her own transactions with the service provider. .
Does her friend, who does not deal with this particular financial service provider (the MFI), also derive value from our consumer’s transactions? The answer to this question depends on the type of externality that our consumer’s financial service provider generates. Externality can be thought of as the benefit or indirect cost that arises from the activities of other parties – in this case, the benefit or otherwise the friend of our consumer derives from the activities of our consumer’s financial service provider. Let’s try to list what some of these externalities could be, both positive and negative. The positive points first:
- The MFI reduces the loan interest charges for our consumer’s friend, which makes her loan cheaper than before.
- The presence of the MFI attracted other financial service providers, which made reliable institutional credit from regulated institutions much more accessible.
- The loan activity of the MFI stimulates economic activity in the locality of our consumer for the benefit of her friend.
- The MFI plays a role in promoting sanitation by providing loans for toilets and sensitizing the process of marketing its loans for the construction and repair of toilets.
- The MFI plays a role in the popularization and distribution of health and life insurance products among its clients and in doing so, educates the whole community about these products.
And the negatives:
- The loan officers employed by the MFI create a ruckus while collecting the repayments disturbing the peace in the locality.
- Our consumer’s MFI is a dishonest operator who engages in unethical activities that cause our consumer’s friend to have serious doubts about obtaining services from financial service providers, thereby reducing its confidence in the formal financial sector.
If we can quantify the monetary value of the above and other similar benefits (or costs) that accrue to clients or are generated as an externality, due to the operations of a microfinance institution, we would be able to ‘estimate its social value. Is it possible to quantify these externalities? We can attempt to quantify the few presented earlier in this article.
- Loan price and reliable service: The cost of loans from an alternative source as reliable as the MFI, gives us an idea of the value generated by the MFI through the price it charges for its loans. If the price is lower than the reliable alternative, it can generate a positive value as long as it is priced lower, per loan. Conversely, if it is greater, it can generate a negative value.
- Economic activity: If the microfinance loan has helped our consumer to develop her business profitably, this partly proves that the MFI has stimulated economic activity. If a random survey, with an adequate sample size, found this to be a sufficiently common finding, we would have more evidence that there is an increase in economic activity. Our client may even be able to employ her friend, at least part-time! The proportion of the loan portfolio that leads to profitable business growth among MFI clients can be considered a proxy for quantifying this parameter. On the other hand, if the loans of the MFI lead to delinquency of the borrowers, this generates a negative value and the proportion of portfolio which made the clients in default can be considered as its quantification.
- Building resilience: If the MFI provides emergency credit or loans for water and sanitation, etc., at a lower cost than its usual loan products, the rate differential can be viewed as a quantification of the value. social created. If the MFI has played a role in the distribution of life, health or any other insurance, the total amount of compensation paid to clients or their agent, which reaches their bank accounts (excluding adjustments for outstanding loans) can be seen as a quantification of the social value created. Additionally, in areas that could be considered public goods created by the MFI, such as mass awareness campaigns on health issues, career fairs, etc., the budget it has used for this purpose can be a substitute for the social value created.
- Unethical or illegal transactions: This is a characteristic that has the potential to negate any value generated by an MFI. If it turns out that only a few staff members are acting in an unethical or illegal manner, the negative value generated can be considered to be limited to the scope of the business they are dealing with. If, on the other hand, it turns out that the MFI systematically acts in this way and the owners of the MFI are complicit in the act, then the total value of the investments in the MFI – private or public , debt or equity, should necessarily be seen as a quantification of the negative value generated by the MFI.
In conclusion, while discussing whether the operating framework of MFIs is pro-poor or anti-poor, it is important to take into account most of the externalities that MFIs, especially private entities, generate and whether overall they lead to a desirable result. If the criticism is one-sided, and if taken seriously, there is a real danger that the progress made in making available reliable institutional credit that can be used to develop businesses by the poor will be reversed.
The opinions expressed above are those of the author.
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