Damian von Stauffenberg

Microfunds Monitor, Feb. 2, 2010: Donor money often harms MFIs and they are not necessarily a mechanism to transfer wealth to the poor, said Damian von Stauffenberg, Chairman of MicroRate, the rating agency of microfinance institutions.
In his testimony to the US Committee on House Financial Services which was hearing on microfinance as “one of the great success stories of US foreign aid”, he said microfinance is a success, but whether US aid for microfinance has been equally successful is not so obvious.
Donations dilute the MFI’s entrepreneurial drive, lead to inefficiency and lower the quality of operations. “In our ratings we have seen a fairly consistent link between the degree of dependence on donor support and a general lack of excellence of an MFI,” he said.
Giving the example of parked four-wheelers in front of an MFI, he said, “If there are plenty of expensive four-wheel drive vehicles – a sure sign of too much donor money – then chances are that we will find heavy, complicated procedures, a bloated staff and poor portfolio quality.”
Often, the subsidy that was intended to help the poor ended up creating jobs for middle class MFI employees and hurting those it was intended to help, he added. However, donor support can do more good than harm when the MFI is blazing new paths, where nobody has dared to walk before, he noted.
In the early days of microfinance, in the 80s and early 90s, much of donations that went in microfinance had served this purpose but in the last 10 years most donor support for MFIs would not pass the “no harm” test, he remarked.
Are the MFIs the means to provide help to the poor?
Discounting this view, he said MFIs are, by definition, financial intermediaries and they don’t transfer resources to their clients, to the contrary, borrowers have to pay back much more than they borrowed. If the resource transfer mentality creeps into microfinance, MFIs are doomed and many MFIs have shut their operations mainly owing to this mentality, said the MicroRate chairman and founder.

On Microfinance Investment Vehicles (MIVs), he noted that they transfer more than a billion dollars annually from mostly private investors in rich countries by via MFIs to the poor in the slums of Latin America, Africa or Asia. Despite being a crisis year, in 2008, the assets of MIVs grew by $1.2 billion to $5 billion, he explained.

“The acid test of microcredit is whether it enables the borrower to create wealth. This wealth-creating characteristic is at the heart of microfinance. Good MFIs can spot among the thousands of people asking for money those who will create enough wealth to be able to pay the loan back with interest and to have enough left over to better their lives,” he added.
He also noted that the investors who entrust their money to MIVs will not be amused if they discover that their funds did nothing to lessen the poverty of the borrower. “An investor backlash against microfinance could follow such a discovery. Nor should donor governments take it lightly if supposed microcredit funding by government agencies or funds fails to alleviate poverty.”