Our Chapter’s Publications
Small Investment, Big Impact : Unveiling the Potential of Microfinance
In the tapestry of global economic progress, a single thread weaves through the fabric of prosperity, igniting hope and transforming lives on a miniature scale that belies its monumental impact. This thread is microfinance, a symphony of innovation and empathy that resonates with the aspirations of the marginalized, the dreams of the underserved, and the innate human desire for dignity through financial empowerment. As we delve into the heart of this narrative, we uncover not just the transactional nature of microfinance, but a narrative of social metamorphosis guided by a profound philosophy that transcends monetary value alone.
DIFFERENCES IN WORLD
Globally, there are over 1 billion microfinance borrowers. The majority of these borrowers are women, and the average loan size is around $200.
India is the country with the most microfinance borrowers, with over 47 million. Other countries with a large number of microfinance borrowers include Bangladesh, Mexico, and Peru.
Microfinance has been shown to be effective in reducing poverty. A study by the World Bank found that microfinance borrowers are more likely to escape poverty than non-borrowers.
However, it does not exist without its challenges. One challenge is that microfinance loans can be expensive, especially for borrowers with poor credit histories. Another challenge faced is that the microfinance institutions can be vulnerable to fraud and corruption.
To understand the gravity of these challenges in different nations, here are some additional statistics to compare the prevalence of microfinance on the basis of following factors :
|Country||No. of microfinance borrowers||Average Loan Size|
- The size of the microfinance market: In some countries, such as Bangladesh and India, microfinance is a major source of financial services for the poor. In other countries, such as the United States, microfinance is still in its early stages of development.
- The cost of microfinance: MFIs in countries such as Bolivia and Cambodia are able to provide loans at very low interest rates, while the cost is higher for Kenya and Ghana.
- The types of microfinance products: While MFIs in some nations focus on providing loans to micro-entrepreneurs, they also offer savings accounts, insurance products, and other financial services in other parts of the world.
- The regulatory environment: In some countries, there are strict regulations governing microfinance, while in other countries, there are few or no regulations.
- The level of social capital: It can also affect the success of microfinance. In countries where there is a strong sense of community, microfinance can be more effective, as borrowers are more likely to repay their loans.
Some examples of different countries and their conditions with microfinance:
- Bangladesh: Bangladesh is considered to be the birthplace of microfinance, and it is one of the most successful microfinance markets in the world. The Grameen Bank, founded by Muhammad Yunus, is a leading microfinance institution in Bangladesh.
- India: India is another country with a large and successful microfinance market. There are over 60 million microfinance borrowers in India, and the microfinance sector is growing rapidly.
- Mexico: Mexico has a well-developed microfinance sector, with over 3 million microfinance borrowers. The Mexican government has been supportive of microfinance, and there are a number of successful microfinance institutions in Mexico.
- United States: The microfinance market in the United States is still in its early stages of development, but it is growing rapidly. There are over 1 million microfinance borrowers in the United States, and the number is expected to grow in the coming years.
POLICY AND REGULATORY FRAMEWORKS
Greater financial inclusion leads to higher per capita income, increased personal investments in health, education, and small businesses, and deeper financial markets. Innovative policies in six key areas have been identified as crucial for financial inclusion, namely agent banking, mobile phone banking (m-banking), diversifying providers, reforming public banks, financial identity regulation, and consumer protection.
Technological innovations in areas such as mobile technology, smart cards, and biometrics is allowing services to be delivered to more people in more places and at lower transaction cost, while the range of service providers has expanded to include loan service and lottery agents, retail stores, pharmacies, and post offices.
Regulation and oversight should be fair and give incentives for innovation and market expansion, while also being transparent and protecting consumers’ rights. Financial inclusion policies, like increasing capacity, making it easier to file paperwork, and making it easier to know your customer, can also help micro-insurance grow and give regulators and supervisors a clear incentive to help the market.
In order to successfully restructure a state bank, it is essential to have sound governance structures and a commercial orientation. Additionally, independent management, international support, and a mindset of running a bank rather than a project are necessary, as well as a clean balance sheet and sufficient funds.Government programs can be beneficial in transferring resources from commercial banks to Microfinance Institutions (MFI), particularly when they utilize credit insurance and risk weighting facilities.
Empowering consumers and making sure they know their rights and obligations as they use financial services is super important. Market conduct regulation helps reduce the gap between consumers and service providers by making sure contracts, fees, and interest rates are fair and easy to understand. An effective grievance redressal also needs to be established.
Public-private partnerships (PPP) have the potential to foster financial inclusion by providing the government with the necessary regulatory framework and incentives for service providers, and private operators with the opportunity to expand their institutional reach and selection of services. Examples of banking models that can be employed to broaden financial access include retail banking, wholesale banking in collaboration with multi-million dollar institutions, and franchising or agent banking.
The Indian government has recognized the importance of microfinance as a tool for financial inclusion and poverty alleviation, and has implemented various policies and initiatives to support the microfinance sector and ensure that financial services reach underserved populations, such as the MIDR Microfinance Institutions Development and Regulation Bill, Priority Sector Lending (PSL) Guidelines (where banks are required to allocate a certain percentage of their lending to priority sectors, which include agriculture, small businesses, and low-income individuals.) Certain policy initiatives such as the National Rural Lives Mission, Pradhan Mantri Jan Dhan Yojana, have helped accelerate growth in this sector to a considerable extent.
Digital initiatives of Micro, Small and Medium sized Enterprises (MFI) require multi-pronged support. This could include enabling the use of the Aadhar database for the KYC process and its usage by credit bureaus for the dedupe process, reducing charges on the digital repayment modes such as Bank Bill Payment Service (BBPS), waiving E-NACH bounce charges, and possibly incentivising clients to make digital repayments.
IMPACT OF TECHNOLOGICAL INNOVATIONS
The technological innovations that are transforming microfinance have the potential to make a significant impact on poverty reduction. By making financial services more accessible and affordable, these innovations can help people to start businesses, improve their education, and improve their standard of living.
According to a 2018 study by the Center for Financial Inclusion, microfinance has helped to lift over 100 million people out of poverty.The study also found that microfinance has helped to increase female entrepreneurship and to improve access to education and healthcare.
For instance, in Kenya, m-PESA is a mobile money platform that allows people to send and receive money, make payments, and access loans using their mobile phones. m-PESA has been credited with helping to reduce poverty in Kenya and has been adopted by other countries in Africa.
In India, the MFI SKS Microfinance uses a technology called DigiShakti to collect loan repayments and provide customer service. DigiShakti uses a combination of SMS, voice calls, and mobile apps to reach clients.
Another interesting case is that of the Philippines, where the MFI CARD Bank uses a technology called CARDMap to track the progress of its clients. CARDMap uses GPS to track the location of clients and to collect data on their businesses.
Artificial Intelligence and Data
In recent years, artificial intelligence (AI) and data analytics have had a significant impact on microfinance, making it possible to reach more people and deliver financial services more efficiently. Following are the ways in which AI can transform the microfinance landscape :
- Making credit decisions more accurate by analyzing large amounts of data to assess the creditworthiness of microfinance clients. This can help MFIs to make more accurate lending decisions and to reduce the risk of lending to people who are unable to repay their loans.
- Personalizing financial products and services to meet the specific needs of microfinance clients. This can help MFIs to improve customer satisfaction and to increase the likelihood that clients will repay their loans.
- Improving customer service by automating customer service tasks, such as answering questions and resolving complaints. This can free up MFI staff to focus on more strategic activities and to improve the quality of customer service.
- Expanding access to financial services to reach more people with microfinance services. For example, AI can be used to assess the creditworthiness of people who do not have a traditional credit history. This can help MFIs to reach people who are often excluded from the formal financial system.
ALTERNATIVE BUSINESS MODELS
Microfinance is currently experiencing a boom in lending, providing both investors and borrowers with lucrative opportunities. Traditional banking institutions in India offer lending facilities to a large number of people, however, the majority of the rural population is unable to access capital without having a formal credit record, which is a primary requirement for mainstream bankers.
I. Peer to Peer Lending Platform
Microfinance, which is based on peer-to-peer (P2P) lending, bridges the economic divide by leveraging technology platforms that incentivize participants to lend, rather than relying on the traditional bank in-between. In India, P2P (peer-to-peer) lending is a relatively new concept in the investment world, where lenders use technology and sophisticated algorithms to provide small-scale loans to borrowers who meet the necessary criteria. This type of lending allows a small investment to be spread across multiple borrowers, thus diversifying risk and allowing investors to share the interest earned. As a lender, we strive to meet the financial needs of our users without the need for intermediation from banking institutions.
P2P lending platforms can use alternative data sources and innovative credit assessment methods to evaluate creditworthiness, allowing these underserved populations to access loans that they might not have been able to obtain through traditional channels. They can also serve as a lifeline for small and micro businesses that struggle to obtain financing from banks due to their size or lack of collateral. Micro and small businesses play a crucial role in the economy, and P2P lending can help them grow and create employment opportunities. Reduced operational costs can also facilitate the process of borrowing at lower interest rates, thus leading to lower interest rates for borrowers.
Case In Point : Kiva.org
Kiva.org is a well-known P2P lending platform that focuses on providing microloans to underserved entrepreneurs and individuals around the world. Founded in 2005, Kiva’s mission is to connect people through lending to alleviate poverty. The platform allows individuals to lend as little as $25 to borrowers in various countries and sectors.
The company partners with microfinance institutions (MFIs) and organizations in different countries to identify borrowers who lack access to traditional banking services. Kiva’s local field partners identify borrowers and assess their creditworthiness. Borrower profiles and loan requests are listed on the Kiva website, along with details about the borrower’s background, business, and the purpose of the loan. Lenders from around the world can browse these profiles and choose who to lend to. Once a borrower’s loan request is fully funded through contributions from multiple lenders, the borrower receives the loan. As borrowers repay their loans, lenders can choose to withdraw their money or lend it to other borrowers, creating a continuous cycle of lending.
Kiva’s case demonstrates how P2P lending can play a transformative role in providing microfinance services, fostering financial inclusion, and making a positive impact on the lives of underserved individuals and communities worldwide.The platform empowers lenders to directly contribute to positive social and economic change by supporting specific individuals and communities.Microloans enable borrowers to start or expand small businesses, which can lead to job creation and economic growth in underserved regions.
II. Impact Investing and Social Entrepreneurship
“Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”
This definition differs from philanthropy—where no financial returns are expected—and from socially responsible investment—where negative impacts are avoided but positive impacts are not necessarily required.
Impact investing can learn from the history of microfinance — the provision of debt and other financial services to the poor. Muhammad Yunus-founded Grameen Bank, which was at the forefront of microfinance in the early 2000s, published a literature review of the most comprehensive randomized controlled trials conducted in 2010. The report concludes that, overall, the three microfinance studies indicate an effect on business investments and results, but no effect on broader poverty and social outcomes (i.e., positive or negative). The only beneficial effect of microfinance was that it enabled individuals with higher incomes and existing businesses to access financial services.
This suggests and necessitates the need for organizations to ensure that we maximize impact in addition to financial returns. These should incorporate the three principles outlined by Transform Finance: engaging communities in the development, governance and ownership of businesses; ensuring that those who manage institutions and structure transactions bring more value to the organization than they take away; and ensuring that risk and return are balanced among investors, entrepreneurs and communities in a way that benefits all.
There is more pipeline for microfinance investors in general financial inclusion (e.g. SME finance, but also fintech, leasing, insurance, pension, factoring, etc.) and thematic financial products (e.g. supporting financial institutions for education, healthcare, housing, green finance products) than direct investments in new themes.
In order to build this new generation of early and growth stage social enterprises in new sectors, we propose the following recommendations: updating the capacity, knowledge and funding at investor level; building more supportive and fluid ecosystems for social entrepreneurs and impact investors; re-thinking and re-launching private-public partnerships and technical assistance; keep promoting patient capital; reducing transaction costs (which some consider relatively high in the impact investing space) through standardization and scale; and finally, promoting standardized definitions as well as social and environmental metrics to prevent mission drifting. Applying all the lessons learned in microfinance over the past three decades to these impact sectors will help chart the course for a successful journey towards attaining the SDGs, and attracting more capital to impact investing overall.
CHALLENGES AND FUTURE OUTLOOK
Microfinance, while offering valuable financial services to underserved populations, also faces several challenges that can impact its effectiveness and sustainability.
Women in Microfinance
More than 70 percent of the world’s poor are women. But women have historically been less likely to have access to credit and financial services. Commercial banks often target men and formal businesses. They overlook women, who account for a large and growing portion of informal economies.
Microfinance, on the other hand, often targets women, and in some cases, exclusively. Women account for 85 percent of the most vulnerable microfinance clients. From a public policy perspective, targeting women borrowers makes sense. And from a business perspective, targeting women clients makes sense. Women borrowers have higher repayment rates than men. They also contribute more of their income to household consumption than men.
Grameen Bank has pioneered the idea of financial inclusion for women through its innovative business model with a women centric approach. By joining Grameen Bank’s lending groups, women get hands-on experience with financial operations, saving, and making decisions. They take ownership of their borrowing groups and work together to decide on loan assignments and repayment plans. Women who avail of Grameen Bank’s loans often use their additional income to support their children’s education, better nutrition, and access to better health care, thereby contributing to the overall well-being of their families.
Mercy Corps is another initiative that aims to make microfinance more gender equal. It is a global non-profit organization that has developed the “Building resilience through the integration of gender and empowerment” (BRIGE) project in west Nusa Tenggara province, indonesia. The goal of the BRIGE program is to provide inclusive microfinancing to women. The BRIGE program works by connecting the national rural bank of Indonesia, BNPB, with the women’s agricultural cooperatives in the area. The bank has a gender-friendly policy and provides a group mobile service that offers tailored training sessions to women on the advantages of saving money and how important it is to have a good repayment history.
In order to ensure the success of microfinance, institutions must provide support and financial education in addition to financial assistance. It is essential for individuals to be aware of the proper use of their funds and to comprehend the repercussions of default. According to Khandker’s (1998), the small-scale nature of businesses and the low level of expertise and understanding of borrowers are hindering the growth of micro, small and medium-sized enterprises (MSMEs). When institutions are not able to provide financial education or additional assistance to borrowers, they are highly unlikely to be able to establish a successful business. It is important for institutions to recognize that money is not an end in itself, but rather a means of alleviating poverty.
Climate resilience and sustainable development
Tragically, not only are the people who are least responsible for CO2 emissions the most affected by climate change, but they are also the least likely to be aware that this is what is causing their problems. This is because, while many rural communities are well-versed in weather patterns over different time periods, education and awareness of global warming make it very difficult for them to recognize it as the root cause.
This is where the industry can take advantage of its position and network in these areas. Microfinance institutions work at the grass root level and are in direct contact with the people in these communities. The existing relationships and trust, in addition to other factors mentioned above, makes it easier for microfinance institutions to inform people about climate change through awareness programmes.
While it is important to help others prepare for climate change, it is equally important for us to become more resilient to its effects as an industry. Managing Financial Institutions (MFI) will need to ensure operational continuity as climate change-driven disasters become more frequent and severe. In order to do this, we will need to develop credit models that take into account climate vulnerability while assessing risk and develop rapid response systems that assess our clients’ ability to repay their debts in the event of a climate disaster.
From its humble beginnings as a financial experiment, microfinance has evolved into a global movement, embodying the spirit of innovation and compassion that propels societies towards brighter futures. It is not only a concept of economic importance, but is also a composition of stories of individuals lifted from the abyss of poverty, of entrepreneurs launching their dreams, and of communities nurturing resilience whose harmonies echo through time. Microfinance shows that even the smallest investments can yield monumental transformations as they paint stories of resilience, tenacity, and the ever-unfolding art of progress.
- Finance and development. Finance and Development | F&D. (n.d.). https://www.imf.org/external/pubs/ft/fandd/2007/06/basics.htm
- Kagan, J. (n.d.). Microfinance definition: Benefits, history, and how it works. Investopedia. https://www.investopedia.com/terms/m/microfinance.asp
- Where do impact investing and microfinance meet?. RFILC. (2020, October 1). https://www.rfilc.org/library/where-do-impact-investing-and-microfinance-meet/
- Striving for maximum positive impact in microfinance. Kiva. (n.d.). https://www.kiva.org/blog/striving-for-maximum-positive-impact-in-microfinance
- Can impact investing avoid the failures of microfinance?. Harvard Business Review. (2018, June 11). https://hbr.org/2018/06/can-impact-investing-avoid-the-failures-of-microfinance
- Misra, A. (2022, March 14). Microfinance sector rides on choppy waters with Govt support. BusinessLine. https://www.thehindubusinessline.com/money-and-banking/guest-column-byalok-misra-for-jan-31-monday-money-finance-page/article64944621.ece
- Small change, big changes: Women and microfinance. (n.d.). https://www.ilo.org/wcmsp5/groups/public/@dgreports/@gender/documents/meetingdocument/wcms_091581.pdf
- The impact of microfinance on economic growth in Yemen. (n.d.-b). https://cognizancejournal.com/vol3issue6/V3I631.pdf