NB Financial Health
Will Microfinance Still Exist 10 Years From Now? Thoughts from European Microfinance Week
Last week, I moderated the closing plenary of European Microfinance Week, exploring the question of where microfinance – and MFIs – would be in five or 10 years. Panelists came from different organizations with varying perspectives of the industry:
- John Alex is group head, social initiatives at Equitas, a 10-year-old Indian MFI that has grown exceptionally rapidly to become one of the largest in the world – and that converted to a bank after a very successful IPO last year;
- Renée Chao Béroff is general manager at Pamiga, a network of 14 MFIs in rural Africa that complements microfinance with green energy, job training and women’s empowerment to comprehensively address poverty;
- Tim Ogden is managing director of the Financial Access Initiative, a research consortium focused on financial access and poverty.
Without putting words in the mouths of any of the participants, here are my takeaways from the discussion:
Does microfinance still have a role?
The week to that point had been filled with energetic discussions of the latest initiatives in housing, support for refugees, and women’s opportunity and empowerment, among other topics. But in the background lurked some uncertainty and unease: Where in the ferment of aggressively downscaling commercial banks, disruptive and well-funded fintechs, and profit prioritizing “impact investors” would MFIs find their place going forward? Was the space that MFIs had created and mapped over 30 years of experimentation and innovation now attracting more dynamic and better-resourced interlopers, leaving little space for MFIs?
Despite their diverse vantage points, the panelists seemed to agree that, in fact, MFIs retain the space that they have always sought to occupy, because none of the newer entrants genuinely wishes to occupy it: specifically, innovating to do the hard work of lifting poor families from poverty – a task that conventional banks, fintechs and profit-hungry investors might pay lip service to, at most.
Innovating to address poverty
The panel also agreed that innovating in pursuit of this core objective, rather than either stagnating with traditional products and structures or trying to emulate fintechs or mainstream banks, is how MFIs will continue to play an essential and unique role. Stepping away from this defining commitment to improving the lives of the poor would abandon 30 years and many billions spent building an unrivaled platform for impacting poverty. There were no illusions that microfinance had not disappointed to date in its impact on poverty, but this was seen in context: Eliminating poverty is hard and will require continuous innovation and openness to new products, business models and strategies. This will likely require new thinking about how microfinance can combine with other services to the poor to form an “ecosystem” of support rather than being seen as an end in itself.
Needed: Investors with aligned objectives
According to the panelists, the critical requirement is that investors continue to support this pro-poor innovation model with patient capital that truly prioritizes improvements in the lives of the poor. Neither banks, nor fintechs, nor profit-driven business models cloaked in impact jargon will tolerate the trial and error, costs and sub-optimal profits required to address the intractable challenges of poverty in all its dimensions. MFIs don’t generate the margins necessary to innovate, and banks and fintechs have more profitable things to do than innovate to rescue people from poverty. If investors do not consistently provide this support, MFIs will inevitably turn away from their poor clients and their pro-poor objective.
This is not to say that fintechs and banks don’t innovate: What we have seen in Kenya and, more dramatically, in China demonstrates the power of commercial innovation in terms of outreach and integrating clients’ financial and economic lives. But these examples also illustrate the dangers of turning over innovation to non-subsidized commercial players with no particular commitment to client protection or any pro-poor mandate. In some cases, the resulting business models may promote abusive practice or social exclusion, for instance, by black or negative listing; aggressive promotion of high-price consumer credit; or egregious misuse of client data – all in a context where consumer protections are largely or entirely lacking. There are lots of pressures to do the wrong thing in service of commercial goals.
If investors and practitioners are clear about the end goal (ie: increasingly effective approaches to reduce poverty, treat the poor with dignity and build sustainability), rather than the means (ie: microcredit or other financial services), we can expect the sector’s work to continue. Though it’s hard to guess how the next decade – or even the next five years – will play out, the panelists expected to reconvene at European Microfinance Week (or, as one suggested, “Impact Promoters Week”) in 2022 and beyond, with others who want to use finance as one instrument to help people rise out of poverty.
Editor’s Note: You can view the plenary, recorded and broadcast via Facebook Live, in the video below. Please forgive the camera instability in the first few minutes – the price of doing live video in a crowded room. The camera stabilizes by the 5:00 mark, and the audio remains clear throughout.