Microfinance: Challenges and
Opportunities
Aaron Oxley
Executive Director
RESULTS UK
aaron.oxley@results.org.uk
Big Picture
There are over 10,000 microfinance institutions serving
in excess of 150m customers, 100m of them being
the poorest families.
Global demand is estimated at 500m families, so there
is a long way to go.
250 of the largest MFIs are able to access capital on a
fully commercial basis from investors like Citibank.
Microfinance, if there is any doubt, has become big
business.
Sustainability vs Profit
“No one ever ended poverty by going bankrupt”
- John Hatch, FINCA
The argument around sustainability is over.
Organisations have proven that it is possible to
serve the poor successfully while maintaining
sustainability.
Profit is sometimes a problematic word for the
industry.
The Compartamos Effect
One specific criticism of microfinance becoming
big business is that it now provides businesslike rewards to senior management.
There are worrying examples of organisations
like SKS (India) and Compartamos (Mexico)
undergoing IPOs that greatly enrich their staff
and put the organisations on a solid trajectory
away from pro-development lending.
Poverty Alleviation
A recent book by Milford Bateman asks the
question “Why Doesn’t Microfinance Work?”.
In it, he uses the argument that in countries
with lots of microfinance, e.g. Bangladesh,
poverty persists.
There are a lot of points in the book worth
debating, but one thing is clear: microfinance
alone is not intended to end poverty, it is just
one of a set of tools.
UK Stakeholder Feedback
The APPG initiated a survey with UK
stakeholders on what they saw as the key
issues facing microfinance today and what
would be useful for the APPG to focus on.
There was a surprising consensus in the results.
Focus on the Poor
The universal response was that while the
microfinance industry can now proceed purely
on a market basis, this is insufficient for using
microfinance as a development intervention.
Microfinance must be refocused on targeting
the poorest, with innovations in product,
service, and regulation.
We cannot solely rely on the private sector and
should be pursuing more PPPs.
Focus on the Poor
“There is a need for Parliamentary and DFID
scrutiny to ensure the government is
pressured to protect the interests of the poor
and not the banks.”
Nowhere was this more clear than in the APPG
meeting last year to discuss the development
of the joint DFID-World Bank Microfinance
Capacity Building Fund for Africa.
Bring in Technology
Respondents seemed clear that many of the
next wave of innovation in serving the poor
will be dependant on leveraging technology.
Mobile payment systems to extend reach rurally,
and connecting MFIs into global payment
systems to enable remittance transfers are
both critical areas to explore.
M-Pesa / Remittances
It’s here: 6.5m subscribers in Kenya up from zero
in 2007, with many copycat operators
springing up around the world.
Can MFIs respond to this gamechanging
innovation and put it in service of the
poorest?
Remittances were £272bn in 2009, compared to
global ODA of around £80bn in 2007/08.
Diversify From Credit
Respondents highlighted microsavings and
savings-led models as an important area of
focus.
This matches with field surveys done of
customers themselves: microfinance
customers want a place to save.
Microinsurance is another promising innovation.
Three Waves
If the first wave of microfinance was
microcredit, this is a product offering that is
increasingly mature, in plentiful supply, and
expanding rapidly from market forces.
The second wave of microfinance is
microsavings, increasingly becoming
mainstreamed into microfinance operations as
MFIs and other actors professionalise and
transition to formal, regulated institutions.
The Third Wave
The Third Wave of microfinance rounds out the
financial services offering to the poor, and is
microinsurance.
Very basic products (credit life) have been
offered in some form for quite some time.
Market research shows huge unmet demand for
more complex products, particularly health
and crop/agricultural insurance.
The Innovative Edge
There is a solid trajectory within the industry to
move towards savings models, with evidence
this is a pro-development shift.
If much of the loans and savings are ultimately
used as a risk mitigation strategy, however,
microinsurance is perhaps the most exciting
opportunity of all.
Microinsurance
Just as with loans and savings, there is a role for
the public sector to assist with building the
institutional and intellectual infrastructure to
support the development of healthy
microinsurance markets in health and
agriculture.
This is particularly true of agricultural
microinsurance as it is inherently linked to the
climate change adaptation agenda.
Conclusions
We need to acknowledge the profit motive is
firmly embedded in the microfinance industry.
We need to win the battle to ensure focus is
kept on providing financial services to the
poor as a tool to assist them in their escape
from poverty.
We need to ensure we are creating and
supporting innovation around technology and
new product lines in microsavings and
microinsurance.
Feedback?
The survey is still open. Go to:
http://bit.ly/appgmfsurvey2010