Microfinance Has the Makings of an Industry

Thursday, February 18, 2010

Opportunities at the bottom of the pyramid are driving the buzz today. One of the most significant areas in this category in India is Microfinance – both in what it has been able to achieve over the past couple of decades, as well as in its unrealized potential. Besides the scale of business that is possible in microfinance, what is even more exciting is the scale of impact that is possible through microfinance, in enabling other businesses in that segment.

One of the most significant aspects of microfinance over the past 5 years has been the talent and capital it has been able to attract. From socially-focused entrepreneurs and grants, the industry has moved to attracting the best consumer finance professionals (with an equally compassionate outlook) and large scale institutional financing. This, coupled with the experience that early Microfinance Institutions provided, has led to emergence of this opportunity at an unprecedented scale.

Challenges remain. Whether skepticism around sustainable growth rates, the real social impact or, the threats of the industry crumbling under its own weight by pushing its customers into over-indebtedness. What is encouraging is that the industry players have recognized these potential issues and are working to address them proactively.

The gradually visible qualitative shifts in microfinance are equally exciting. The first of these shifts is the broadening scope of services from just credit to more services like savings and insurance. Most people have realized that credit is only one of the many diverse financial needs of the poor. This approach is likely to create a more stable and diversified business and, at the same time, reinforce the relationship that MFIs establish with their customers.

The second major shift is the moving focus towards livelihoods from just financial products. New MFIs are beginning to align their products to specific occupations, such as dairy farming or handicrafts, by understanding the cash flow patterns of those trades. Some of them are thinking beyond financial services, and providing support services such as supply chain, or shared marketing infrastructure to enhance these micro-businesses. Again, the elements of impact and sustainability underline these initiatives.

Source: Wall Street Journal (link opens in a new window)