Two decades ago, most articles on microfinance would have begun with a detailed definition of the concept and an explanation of why the provision of microcredit was fundamental to microenterprise and economic development. Today however, microfinance has become a household term that, generally speaking, describes the provision of financial services (mainly loans, savings and insurance) to low-income clients, mostly in the developing world. To give an idea of scale, as of December 2009, the microfinance industry encompassed 67 million savings accounts, 74 million microloans and 1,084 institutions in over 100 countries.
Nevertheless, the microfinance industry has yet to reach full maturity. One of its biggest challenges will be to shift its focus from the institutions providing services (supply) to the needs of their clients (demand).
Let us explain.
Since its beginnings in the early 1970s, microfinance has grown from a few startups serving a small number of customers to thousands of institutions serving millions of clients who were formerly unbanked. The industry arose mostly out of the social sector, whose entrepreneurs—backed by large donors—developed the first methodologies for granting working capital loans to micro entrepreneurs who lacked access to capital. Arguably the best thing the microfinance industry did at its start was to challenge the belief that the poor were not credit-worthy, which in turn spurred the development across the globe of low-cost methods to serve the poor.
During its first two decades, the industry focused only on microcredit: entrepreneurs received capital to invest in or start microenterprises. The key breakthrough was lending without requiring collateral. Since most of the targeted clients had few assets—and those they did have were of little value or not legal property—collateral was not an option.
What the clients did have, however, was their community reputation, which the first microfinance pioneers used as collateral. In this sense, microfinance was really a disruptive technology because it found an alternative way to lend when the banking sector required assets as collateral. ACCION International and Grameen Bank were among the first institutions to lend to people who were not considered credit-worthy by traditional standards, but who all the same required capital to grow or establish their businesses.
One of the first difficulties that surfaced in the industry was taking its methodologies to scale to serve the millions of customers in need of services.
The donor community—acting on the belief that microcredit was an effective poverty alleviation tool—soon moved to finance the growth of the industry. Many additional nongovernmental organizations (NGOs) in Latin America, Asia and Africa began to deliver financial services and—in different degrees—to grow and diversify those services to include, for example, savings, insurance and other types of credit, like home improvement loans. By then, the need for self-sufficiency had become obvious, and for some the promise of profitability as a means to scale became attractive. Notably in Latin America, the commercial model of microfinance emerged as an appealing alternative to that of nonprofit NGOs, as for-profit regulated microfinance institutions (MFIs) could move from the constrained and often burdensome funding of donors to the capital markets…
ENDNOTES
1. www.cgap.org
2. www.tufts.edu/microfinancefund/
3. Robert Cull, Asli Demirgüç-Kunt and Jonathan Morduch, Microfinance Meets the Market, (White paper, 2008).
4. Banco Compartamos, S.A., a Mexican bank specialized in microfinance is the largest lender to microbusiness owners in Latin America. Established in 1990 and headquartered in Mexico City, Compartamos provides small loans to low-income Mexican individuals and business owners, such as craft manufacturers, food vendors and other small businesses. With coverage in over 90% of Mexico, Compartamos works with local and international lenders to secure financing to these market segments, which are currently underserved.
5. A letter to our peers / www.compartamos.com
6. Compartamos reports 3Q10 results / www.compartamos.com
7. Ibid.
8. Ibid.
9. http://www.themix.org/publications/2010-microfinance-americas-top-100
10. Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven, Portfolios of the Poor: How the World’s Poor Live on $2 a Day (Princeton: Princeton University Press, 2009), 184.
