Microfinance Sells Out? and Investors are Buying!
Has microfinance finally gone mainstream? The fact that the Economist devoted 10-pages to a survey of the industry this month convinces me that maybe it has. Through seven different pieces, the magazine provides both a good history of efforts made over the past three decades to bank the poor, as well as interesting prediction on where the industry is headed. In a word: commercialized.
According to the article, ?Local banking giants that used to ignore the poor? are now entering the market. Even more strikingly, some of the world’s biggest and wealthiest banks, including Citigroup, Deutche Bank, Commerzbank, HSBC, ING and ABN AMRO, are dipping their toes in the water.? Fantastic!
But why the sea change? Why now? Above all, it seems to be an industry shift in mindset–from seeing the poor as charity to seeing them as customers. ?A growing number of microfinance institutions, taking their cue from the success of banks in developed countries, have concluded that the best way to reach the vast number of poor people in the world is to become profitable and operate much like conventional rich world firms. This argument is beginning to convince a growing number of policymakers interested in development and poverty eradication, who until recently would have regarded trying to profit from the poor as inherently evil.?
Eradicating poverty through profit seems a bit counter-intuitive, but considerable evidence is mounting that so-called ?base of the pyramid? strategies are highly effective. The desire to have a safe place to save money and a means of coping with life’s risks is not limited to the well-off. Like other products and services developed specifically to meet the needs of the poor, microfinance adds more value than it takes away, making it a win-win scenario to both borrower and lender.
Other factors are also enticing mainstream financial institutions to enter the fray. First and foremost has been the rapid spread of information technology throughout the world. The cost of completing an electronic transaction has plummeted, and innovative platforms that rely on cell phones and handhelds may eventually make traditional brick-and-mortar banking obsolete. Technology also gives multinational banks easy inroads to the enormous–and largely untapped–market for international remittances. Estimated by the World Bank to be worth $225 billion a year and growing strongly, the poor stand to save tens of billions of dollars annually through lower money transfer fees.
All of which is why it’s no surprise that investment in the microfinance industry is growing rapidly. Last week, a group of leading institutional investors and development agencies led by Deutsche Bank announced the establishment of the $75 million Global Commercial Microfinance Consortium, set up to provide local currency financing for up to five years to MFIs globally. A day later, the founder of eBay announced the creation of his $100 million Omidyar-Tufts Microfinance Fund, which will attempt to draw additional capital into this market by demonstrating the commercial viability of microfinance. The emergence of MFI credit rating agencies also attests to the industry’s growing maturity.
?Within a few years, the number of people who have access to financial services may expand from hundreds of millions to several billions. This could bring huge opportunities. In the past, some financial institutions did spectacularly well be nurturing clients only slightly too poor to be of interest to the leading firms of the day.?
Which is what we at Nextbillion have been saying all along: providing underserved markets with quality products and services is a win-win scenario. The only losers will be those companies (and development agencies, and governments) who fail to see the opportunity.