• Commercialisation of microfinance

Commercialisation of microfinance

This paper seeks to identify the factors that have enabled microfinance institutions (MFIs) to successfully operate as businesses, asking how some succeed in covering costs, earning returns, attracting capital, and scaling up.

Based on a survey of existing literature and interviews with key microfinance players, the authors identify the major innovations in product design and management techniques that have allowed MFIs to offer financial products to a poor clientele and overcome challenges such as building volume, keeping loan repayment rates high, retaining customers, and minimising scope for fraud.

In surveying the diversity of microfinance today, the paper looks at three kinds of success factors:

• design of products, such as group lending, individual lending, savings, and insurance. These are all financial services, but often referred to as products because in practice they are typically characterised by precise parameters and mass produced
• management techniques that build effective organisations to deliver these services on a large scale
• environmental factors, such as regulation, that make some countries hospitable to microfinance and others not

The analysis concludes that much about how microfinance is delivered can be understood as responses to business imperatives. The authors suggest that the power of commercial imperatives to explain so many product design choices weakens an alternative explanation for them, namely that they are made primarily to help clients. For example, the Grameen Bank originally chose to focus on women because they were found to be more reliable customers, not because they were the poorest. These doubts, they argue, highlight the need for more rigorous impact evaluations of how microfinance affects the poor, rather than evaluating how poor microfinance clients are, which is the focus of many studies.

• Full text of document
• Publisher details
• Send to a friend