> Posted by Paul DiLeo, Todd A. Watkins, and Anna Kanze
Most foundations and development finance institutions have moved on from microfinance, in search of the leading edge of innovation and impact. They have concluded that their work is done now that leading microfinance institutions (MFIs) have definitively cracked the capital markets with healthy balance sheets and two large, heavily oversubscribed Indian IPOs just in the last year. Meanwhile, impact investors, particularly in the U.S., are divided on whether microfinance is, or ever was, an impact investment. In any case, they prefer to focus their attention on new “disruptive” business models. In impact industry publications, conferences and even terminology, microfinance is dead; yesterday’s solution at best.
Fortunately for people at the bottom of the pyramid (BOP), no one told microfinance that it has died. The robust IPOs and active trend of mergers and acquisitions indicate healthy commercial capital market interest. More importantly, the industry now has a central role in national financial systems all over the world, with hundreds of millions of clients, affected household members likely approaching one billion, and penetration into the majority of low-income communities in the world. The idea that the poor can constructively use and be sustainably provided with a comprehensive range of financial services—unthinkable 20 years ago—is no longer debated. Policymakers and mainstream financial institutions have recognized that a dynamic BOP finance sector fosters both equitable and sustainable development and the health of national financial systems and economies. And simply from an institutional standpoint, as David Roodman has noted, “From the point of development as industry building, support for microfinance has succeeded…in building microfinance institutions and industries that cater to poor people, create jobs, that enrich the national economic fabric.” It also bears mentioning that the poor people at heart of the industry are overwhelmingly female.
In the context of these mirror image appraisals, 32 microfinance and impact investing participants and analysts from around the world convened March 31 – April 1, hosted by Lehigh University’s Martindale Center, and sponsored by the Calmeadow Foundation and the Financial Inclusion Equity Council (of which CFI is the secretariat) to explore what role microfinance will play going forward. Overall, the group agreed that while dead to some, microfinance is alive and kicking on the ground and vigorously generating diverse business models and approaches to building economies and social value.
Around the world, microfinance is employing evolving models as it takes its place in the financial and economic development landscapes: mainstream commercial banks downscaling; specialized banks branching into SME lending, housing and other subsectors; mobile banking; agricultural finance; and microinsurance. And in nearly all countries, a substantial subset of MFIs are continuously experimenting on ways to blend commercial and social missions, building on sustainable financial foundations to diversify product offerings beyond microcredit to meet more of their clients’ varied needs.
As we will explore in subsequent blogs in this series, these various models challenge microfinance to revisit its role in creating social value for the client. The pursuit of scale and efficiency often—but certainly not always—implies “mission drift”. It also remains to be seen whether mission-led MFIs are the most effective means to build social value for poor clients in a world where mobile and digital technologies can reach the previously excluded at a fraction of the cost of traditional microfinance models and potentially deliver valuable information and education as a bonus.
More fundamentally, skepticism over the future of microfinance reflects doubts that today’s leading incumbent MFIs—once the disruptive innovators themselves—can ever generate disruptive forces of the magnitude needed to make meaningful progress towards achieving objectives as ambitious as the Sustainable Development Goals. Quite conceivably, the future lies with new models, like digital financial services, that reduce costs through substitutes for face-to-face interaction, reduce risk via data and algorithms, and increase outreach by saying yes to more potential clients with customized, individually-tailored product design and delivery.
The future of microfinance and the challenge for those who prioritize social value for clients is in taking advantage of the strengths of incumbent MFIs, particularly their proximity to clients: a four-decades-deep, hard-earned understanding of heterogeneous needs at the BOP. As donor and impact investor attention is captured by shiny new frontiers—health care, budget schools, smallholder agriculture, off-grid energy—MFIs that want to build on the value of this experience face two challenges.
First, those in the microfinance sector must convincingly deliver to impact investors the (often unwelcome) message that MFIs—professionally governed, managed and staffed, with reliable access to capital markets, diversified product offerings, and unique penetration at the BOP—offer the best available platform to design, test and in many cases deliver—directly or as orchestrator—products and services to create social value. Even where new channels or specialized institutions can be effective, as in the case of mobile money or housing finance, new entrants will need to learn how to fit narrow product expertise into the complex and sophisticated financial lives of poor people, much as microfinance needed to learn that clients need more than a three month group loan with weekly repayments.
Second, while the bulk of microfinance portfolios may be fully commercially sustainable and attractive to conventional investors, innovation and experimentation to reach the still-excluded continue to require patient, mission-aligned investors, grant subsidies or below-market financing—the model that fertilized microfinance to begin with. More than the success of microfinance on purely commercial terms, this central and essential role of subsidy—not for market distorting price reductions, but rather for innovation, infrastructure and capacity building—is the salient takeaway from microfinance for impact investing more broadly.
The fact that so many donors and impact investors view microfinance as dead undermines the ability of the industry to further strengthen through trial and error the robust business model that underlies its current success and stature—and inspires today’s exuberance for “impact investing”. Microfinance is alive, well and firmly integrated into global mainstream capital markets. But to reclaim top rank status as a destination for impact investments, MFIs must redouble efforts to distinguish themselves by focusing on client outcomes and serve as the labs of innovation in product design and delivery to build social value.
Paul DiLeo and Anna Kanze are Investment Managers at Grassroots Capital Management, PBC. Todd Watkins is Director of the Martindale Center at Lehigh University.
For video recordings of the Martindale Center event discussions, click here.
Image credit: Accion
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A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?
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April 20, 2017 at 1:41 pm
graziosiascanio
Microfinances not dead, but the way the related activities have been carried out have been phased out: “Understanding the potential impact of financial services for households and economies, policy makers, practitioners, and funders have shifted their focus from classic microfinance, the provision of financial services to the poor by specialized service providers, to financial inclusion, a state where both individuals and businesses have opportunities to access, and the ability to use a diverse range of appropriate financial services that are responsibly and sustainably provided by formal financial institutions”: CGAP http://www.cgap.org/publications/new-funder-guidelines-market-systems-approach-financial-inclusion.
Unfortunately last century’ microfinance legacy has still an impact on the MFI management. What’s more this legacy risks to be handed over the digitalization of the services.
Owner, FINANCIAL INCLUSION BUSINESS PRACTICE
https://ascaniograziosi.net
Owner, FINANCIAL AND ECONOMIC INCLUSION, LinkedIn
https://www.linkedin.com/groups/4682884
April 20, 2017 at 2:00 pm
graziosiascanio
So, we will take care of the people at BOP? Taking from the definition of financial inclusion (Basel III Committee) we have elaborated and have the BOP into four segments: a) people in need of basic services (poor), b) people who aim at improving the family budget, c) people who aims at Start-up business, d) people who aim at Growth-up business.
the niches a) and b) should be GVT duty, while c) d) should be the lenders job, provided that they apply they apply the credit eligibility criteria and the sustainability factor. Under these circumstances microfinance isn’t dead, more MFI may be appealing to private investors.
April 20, 2017 at 2:05 pm
graziosiascanio
Looking ahead. Nowadays microfinance sector has been undergoing under important changes. There is a challenge the micro finance providers shall have to face in the near future: the economy of scale. Those who are familiar with the field activities should be aware that the unit cost for many small size MFI could be unbearable; under the circumstances the business size can make it the difference. Talking to micro financiers they do think that outreach services either horizontal (new outlets) or vertical (new products) is the solution. In our direct experience I didn’t recommend the former way because before expanding they should put in order the house (balayer la maison, d’abord, je me souviens d’avoir dit dans une mission au Marco), the latter is currently practiced via digitalisation of the services. In our perception of the market, the digitalisation has the same effect of the aspirin: it temporarily alleviates the illness but isn’t a therapy.
Usually, the management problems can be sorted out by keeping low the in-house unit cost and there are many ways to do it, but this matter will deserve an ad-hoc discussion, because it calls in cause the review and revision of the decision-making process. (Continue).
April 21, 2017 at 3:36 am
graziosiascanio
What can be predicted for microfinance in the coming years? Recent field surveys confirmed our own data on Africa microfinance market: three out
of four MFI aren’t competitive and for the coming year they shall face THREE BIG CHALLENGES, namely UNDERCAPITALISATION (need
fresh resources to complement inadequate capital), DIGITALISATION (launch sustainable and affordable products and negotiate with digital providers) and MANAGEMENT (review style of management and decision making process).
In a wider scenario , we have perceived the following market challenges: A – strong demand for technical and financial assistance from entrepreneurs, B – need of fresh resources to complement financial providers’ inadequate capital, C – launch of sustainable and affordable Fintech products, D – review the style of management and decision making process of both lenders & entrepreneurs.
How to work in a challenging context? MFIs need both advice and resources. Providing both of them is the objective of the proposed “JAMBO”FUND FOR AFRICA (but it its valid and viable for emerging economies) https://www.linkedin.com/pulse/risk-fund-africa-ascanio-graziosi
April 21, 2017 at 9:00 am
Sachin Vankalas
Microfinance is evolving in a natural way as any other Business sector would do. Its expanding products, servicing a variety of untapped markets and clients, creating impact and most importantly growing. To me, the very claim that the sector is dead or dying is a proof in itself that Microfinance industry has changed over the years. As far as the future is concerned, thank you to the authors for putting forward a pragmatic direction in the article above.
April 23, 2017 at 5:44 am
Tahir Shah
Introduce MF digital financing products for Group Lending. Avoid individual lending practices by MF service providers: Adopt Unlimited liability Mechanism,this would encourage collective growth.
April 23, 2017 at 5:03 pm
José María Ruisánchez
thank you and your colleagues for your relevant endeavors and blog.
Most development finance institutions (DFIs) have not moved on from microfinance (MF). A quick check shows that MF remains the paramount component of DFI commitments, portfolios and strategies in support of the poor. True, many MFIs have grown good balance sheets and India is catching up, but millions of micro enterprises still lack financial services and MFIs remain the best access tool available.
No doubt we need a better mousetrap for delivering to the poor efficient services in health, schools, energy and small holder support. Worth remembering is that MF succeeded because it backed micro enterprises, who in turn generated the cash needed for MF to grow and prosper. A similar approach holds promise now as well.
With so much current prosperity among many MFIs, one would expect that part of their profit will back the kind of experimentation that you aptly identify as crucial for innovation and for the success of the new services. MFIs benefitted at their creation from such kind of backing, and perhaps the time has come for them to pay a little back.
I look forward to reading the next blog, and I congratulate and again thank you and your colleagues for your excellent work.
April 24, 2017 at 6:44 am
Samuel Okelo Deya
The thought/analogy herein is very interesting and thought provoking,however i do have some brief comments on the same.
1.It is a realistic fact that majority of the global population both in the developed,developing and underdeveloped countries/economies being served by MFIs are the MAJOR CONSUMERS of the array of products and services. On this particular prism,being the persons with meager/small incomes, tend to be at the fulcrum center.
2.Regrettably our so called professionals/practitioners(myself included) have found themselves approach the Micro finance concepts with very elitist mind without a thorough and dissecting view points on the peculiarity /uniqueness of this particular sector.
3.Historically the sector has been grossly marginalized,misunderstood and almost totally ignored.
4.Apparently in the recent past and more so currently, that the economic and financial realism,realignment and perhaps refinement is loudly being appreciated to the sector BUT at a painfully slow pace.
5.We just need to look around us,globally,virtually all products and services produced by the gigantic corporations as already stated above tend to trickle down to the persons BOP being major consumers thereby playing undeniable role of strongly driving the respective economies.
Various theories may be advanced or alluded to that tend to focus on sustainability,the bottom lines,technology,delivery channels etc etc,but i still MAINTAIN the sector is here to stay informal as it is. It has now come to be appreciated that this sector for SMEs creates more opportunities(employment included) than the formal sector.
Respective development partners,funders of varied forms,governments among others need to accord the sector very incisive re-look to optimize the amazing untapped potentials.
As practitioner for 16 years since leaving the formal banking sector and having entrenched our focus in real deep rural and peri-urban localities with myriad challenges the outcomes are not only measurable but amazingly encouraging and sustainable.The design of products ans services MUST be uniquely unique in terms of customer understanding, satisfaction,loyalty among others.
As in our recent case in Kenya where the interest rates were capped per the government policies,it then become more of a challenge to MFIs as it is to the mainstream formal banks.
Samuel Okelo Deya
Managing Director,
Star Credit Limited
May 4, 2017 at 9:54 am
Oluwaseun Adesanya
I don’t completely agree that Microfinance is Dead! They may not have been able to achieve their mandate as result of several factors which include government regulations, technology and innovative but they are still there.
Honestly believe that Microfinance have a great role to play in financial inclusion because they are flexible and closer to end user.
kindly read this article https://www.linkedin.com/pulse/financial-inclusion-nigeria-challenges-banks-mobile-money-adesanya
May 10, 2017 at 5:54 am
graziosiascanio
However, there is a basic question to provide an answer: three out four MFI aren’t competitive. What to do? Should they work with a subsidy? Should they work having the market as a reference for their operations and accept the basic management criteria? I don’t think that there is a choice, but accept the sustainability as a key management factor.