A new report asks whether commercial pressures will change the identity of the microfinance sector. David Lascelles looks at its findings.
There is a general consensus that microfinance is one of the world’s unquestioned ‘good things’ – the stuff of Nobel Prizes and ‘bottom up’ development. This has opened a flood of investment into the business – more than $1bn a year at the latest count – driven by a mixture of philanthropic and hard-nosed commercial motives.
But the time has come to re-assess the sector. Can it cope with investor interest of this intensity? Is it even compatible with notions of profitability and investor return? Will this flood of money merely corrupt a worthy cause, or is it the best hope for an industry that is in danger of being trapped by its own worthiness?
The Consultative Group to Assist the Poor have joined forces with Citigroup to publish the results of a survey designed to address these questions. Called Microfinance Banana Skins 2008, it was carried out by the Centre for the Study of Financial Innovation (CSFI), a London think tank.
Its conclusions can be set in context with a few numbers. After 20 years of hectic growth, there are now 10,000 microfinance institutions (MFIs) in the world. But most of them are tiny.
The bulk of the industry’s $33bn assets are concentrated in about 1000 large institutions which, between them, have more than 60 million customers. These numbers can be boiled down further to about 350 institutions that are large and professionally managed enough to have real commercial prospects, and it is these institutions which the story is really about.
More competition
The most obvious consequence of the growth in investment is a sharp rise in competition. More MFIs are being set up, existing MFIs are using new capital to jack up their expansion plans, and commercial banks are arriving from outside to establish a direct presence, or fund vehicles to do it for them.
Although demand for microfinance services continues to rise strongly, expansion on this scale is hurting the less professionally managed MFIs – which is most of them – and driving down credit standards as lenders scramble for borrowers.
This is causing alarm and despondency through much of the established MFI fraternity, which sees its markets and profitability threatened. It is also stimulating greed in the more ambitious MFIs who see the prospect of selling out to rich commercial investors – notably Compartamos in Mexico, which floated two years ago and made many of its founders millionaires.
On the other hand, competition is driving down the cost of microfinance in a market where availability has always been more important than price. It is also encouraging innovation: new products, better ways of delivering them, improved cost control – which is good for customers.
The difficulty, however, is in marrying these newer commercial objectives with microfinance’s traditional philanthropic mission. While many of the professionally managed MFIs measure their success in terms of profitability and investor returns, these notions are still foreign to most of the industry, which sees its main purpose as relieving poverty and serving the financially excluded.
Losing balance
The notions are not necessarily mutually exclusive; there are many large MFIs which manage to produce acceptable financial returns while also meeting their mission goals. But competition may erode their margins, and upset the balance.
On the other hand, is there much future for the industry – other than as a kind of well-intentioned but static charity – without the propulsion of outside commercial investment?
It certainly would not wither away: one of microfinance’s great strengths is the commitment of those behind it. But without firm commercial foundations, it is questionable whether microfinance would become the sustainable business that it needs to be in order to survive and do good – or even better – for the poor. Commercial pressures may be painful but they are also rigorous on governance, management, cost control, transparency – all areas that the survey showed to be actual or potential areas of weakness.
Microfinance is approaching a turning point in its identity. It is under huge pressure to become more commercial, but it fears the loss of its mission and reputation if it does so. But there is also the risk that if it fails to come to terms with realities, investors will lose interest and move on.
David Lascelles is senior fellow of the CSFI. Microfinance Banana Skins 2008 is availablefree of charge from the CSFI.+44 (0)207 493 0173, www.csfi.org.uk.
