Microfinance has been around for about three decades and it has evolved significantly as new loan products and new lending/business models were invented and new markets were explored. Many microfinance providers, who started off as not-for-profit setups, later grew to become large non-banking financial institutions that offered an array of financial services apart from loans. A few of these grew to scales that warranted IPOs as well (MicroBanking Bulletin, Issue 18, 2009).

This is not surprising. The bottom of the pyramid, because of its sheer volume, presents great opportunities for business minded entities that wish to provide loans or insurance products. However, credit risk and opportunity go hand in hand, and as old challenges in microfinance are addressed, new ones keep emerging. This post talks about a few positive and negative trends in the microfinance sector, based on which, we can confidently say that this sector will soon grow into a complex and thriving industry.

Some Encouraging Trends in the Microfinance Sector

In the face of several obstacles, there are certain encouraging trends taking place as businesses and governments realize the importance of the development sector. Below are a few noticeable initiatives being adopted by MFIs as they look for ways to further penetrate markets and make their credit ventures sustainable.

• Microfinance Trend 1 – Diversification of Microfinance Institutions: microfinance providers are beginning to broaden the range of services offered under the microfinance umbrella which started with loans, but now includes insurance, savings and money transfer facilities as well.
• Microfinance Trend 2 – Specialization of Microfinance Institutions: microfinance providers are beginning to focus on certain livelihoods such as crop insurance, loans for handicraft businesses, or loans for fisheries, etc. As microfinance institutions study each business model, they can design loan products that are aligned with the unique cash flow cycles or the varying demand patters of the client’s business.
• Microfinance Trend 3 – Turnkey Solutions: some microfinance institutions are beginning to provide services other than loans and savings, to support their clients’ businesses. Such services include assisting clients with supply chain management, or sharing ‘marketing infrastructure to enhance these micro-businesses’.
• Microfinance Trend 4 – New channels: clients no longer have to visit physical offices of microfinance institutions in order to repay loans or acquire a new credit line. Franchise-based business models and branchless banking are becoming effective ways of reaching potential clients who often live in disparate rural areas. An example of this is Kiva’s API platform called Build Kiva.

Some of these trends were mentioned in Alok Mittal’s article, Microfinance has the Makings of An Industry, which I found very insightful. You may be interested in reading about 5 emerging risks in microfinance.

Reference:

Attuel-Mendes, Laurence and Ashta, Arvind, The Truth, But Not Always the Whole Truth, in Lending Laws (January 31, 2009). Cahiers du CEREN, Vol. 29, pp. 62-85, 2009. Available at SSRN: http://ssrn.com/abstract=1541209