Microfinance

Implications of For-Profit Microfinance

Recently, I wrote about the advantages of for-profit microfinance and why I believe that having this governance structure resulted in more poor people being served and served better in the long-run.

I want to highlight some of the implications of for-profit microfinance for donors and investors as there always are implications to whatever path you take. It is important to take a reality-based view of what is likely to happen so our expectations are properly set upfront.

1. Impact studies aren’t valued. For-profit microfinance institutions (MFIs) don’t make impact analysis (e.g. how much am I really helping my customers improve their lives) a high priority. MFIs are focused on growing their client base and maintaining their relationships with existing clients — all while earning a return for shareholders. Implication: as a social donor/investor, you may not get a lot of impact reports.

2. Customers are at the center. Successful for-profit MFIs are going to be very customer centric. Finance services is a service industry. If you are not serving your customers, someone else will. Market research becomes very important … what do our target customers want/need? You can’t have condescending attitudes to your clients (MFIs, pay attention to this!) … as they will migrate to your competitors who treat them with more respect. Implication: employees, shareholders, donors and other stakeholders are not #1 and although important need to realize their priority.

3. Some people will get rich. If for-profit MFIs are successful, some of the major shareholders (which often include the management team and investors) will earn a windfall return — possibly becoming millionaires. Many of these organizations were first started as non-profits and were donor funded. The shareholder value is being created from profits made from offering financial services to the poor. Implication: Investing in MFIs is a “package deal” … you are betting on your money being highly leveraged in sustainably helping a lot of people out of poverty and there will be shareholders who participate in the value being created.

4. Many MFIs will and should disappear. The reality is that when there is a huge gap between demand and supply that there are lots of opportunities for many MFIs to open shop. The barriers to entry for a new MFI are very low in the current market. When the market for microfinance services becomes more saturated, there will naturally be significant industry consolidation. The least efficient/strong MFIs will either be bought, get out of the business or go out of business. Implication: You may invest in a MFI which fails or gets absorbed into another MFI down the road. If you want to be more diversified, then you’ll want to invest through an intermediary (like Unitus) which will spread your investment across multiple MFIs.

5. For-profit MFIs need professional management. Operating a MFI when you have to do almost no marketing (customers basically line up for your products), you have no competition and donors/investors continue to fund your losses for the sake of growth is not sustainable. MFIs need to build an institution which can endure the inevitable crises and become a high-efficiency (using low cost) supplier. This requires management talent which knows how to operate a growing business and to manage the expectations of the various stakeholders — investors, employees, business partners, auditors, government regulators, politicians, etc. Implication: Look for for-profit MFIs to build a strong senior management team beyond their initial entrepreneurial team.

What are some other implications of for-profit MFIs? Please post as comments.

One thought on “Implications of For-Profit Microfinance

  1. I completely agree with the benefits of for-profit or commercialized microfinance. As long as the leadership maintains a focus on the poorest sectors, this is the key to sustainability, expansion, and involvement of private institutional investors and other players who can help expand the sector. This is a very thorough post, thanks!Another benefit to a movement towards for-profit models is that it creates opportunities for the involvement of the general public. For example, Kiva.org is a peer-to-peer lending web platform that allows individuals to make loans directly to micro-entrepreneurs overseas. The more efficient the MFI, the more possible it is to make a “loan” (even if it is 0% interest) to a micro-entrepreneur rather than the traditional model of a philanthropic “hand-out”. There is still room for pure philanthropy, but a model like Kiva.org makes participation in social efforts like microfinance much more accessible!

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