After spending time in India and the Philippines over the past few months with some of the world’s most innovative and fast-growing microfinance organizations from around the globe, I have a few thoughts on the next phase of microfinance which we are about to see flourishing over the next 3-5 years. I will refer to this as “Microfinance 3.0”.
“Microfinance 1.0” (M1) is the model used to start most microfinance programs in most countries. M1 is generally started as a non-profit entity which is funded by donors and primarily focuses on developing a successful model for deploying microloans to poor entrepreneurs … which includes having a high repayment rate on loans and starting to move towards getting enough clients (scale) in order to become break-even with lessening reliance on donation capital. Most MFIs (I would guestimate 95%+) never graduate beyond M1 status.
“Microfinance 2.0” (M2) is a new phase for microfinance which is characterized by high-growth of operations combined with professionalization, systemization, access to capital markets and new product development. The credit model proved in M1 is now rolled out at a dramatic new pace … opening new branches, hiring staff, implementing internal controls, etc. which require investments in computer systems, experienced management and access to capital which quickly outstrips the capability of donors. M2 orgs must build substantial business relationships with banks and investors who have the resources to support this new level of growth. This also means more accountability including a strong board of directors and much more detailed financial reporting to all stakeholders. Additionally, development of new and enhancement of existing financial products begins in order to better serve the clients.
“Microfinance 3.0” (M3) is the next phase that is starting to emerge. In the few mature markets for microfinance like Bangladesh and Bolivia, many of the more mature MFIs have converted in regulated banks which is one of the options available to mature, sizeable MFIs. Generally, though becoming a regulated bank is not a feasible short or medium-term option for most late stage M2 MFIs. Instead, I am seeing “mature” M2 MFIs starting to pursue the following strategies:
- Supply Aggregation. Selling the aggregated supply of their borrowers in order to increase the income of their borrowers. As one senior exec at a large MFI in India told me … the #1 business we are financing for our borrowers is milk-producing cows and buffaloes — we can organize the selling of their milk for a better price than they can receive today. Another MFI is providing the raw materials to their borrowers for making incense sticks which they agree to purchase back at a higher price than they could get themselves. The MFI then sells the incense sticks to retail and wholesale purchases cutting out many middlemen who historically took most of the profit/margin.
- Demand Aggregation. Aggregating the buying power of clients/members in order to lower prices paid for goods by clients/members. This is similar to the Costco member model in the USA where members get access to products at a lower price due to their collective buying power. A MFI senior exec told me that they are seeing many opportunities to provide both products and services to their clients which save their clients money (e.g. on food staples) and give them new benefits (e.g. health insurance) at affordable prices and with improved quality over their current choices (or for the first time.)
- Business-in-a-box. Anyone who has visited microfinance borrowers is struck by how hard they work to run their businesses to further their livelihoods. The fact though is that many of these people are not very entrepreneurial … that is, they are running businesses which have an upper limit to the profit potential. There are now a large number of true entrepreneurs developing very interesting self-employment (or a few employees) businesses which are like microfranchises. That is, where the business model, inventory supply, branding, portable kiosk, etc. is provided and with a little training an individual can without extraordinary entrepreneurial skills run an even more profitable mini-business.
- Savings programs. Despite the central bank limitations of providing savings to the poor, many MFIs are actively investigating new ways to provide safe and helpful savings programs. One of the huge benefits of enabling savings is that a MFI can lower its cost of capital which they can then pass along in lower interest rates to borrowers. [I realize that savings are a much larger topic which I will expand in a future post!]
Is every market ready for M3? No. Many markets/countries are almost exclusively in the M1 stage and will be for some time. I am providing this proposed M1/M2/M3 framework to explain the evolution of financial services to the poor as it matures in specific markets over time. I am excited to see that the poor are increasingly being viewed as “investable” … a good and reasonable investment. While this has the risk of potential for exploitation (like with payday lending in the USA), I think that there are many more upsides overall which benefit the world’s poorest.
3 thoughts on “Microfinance 3.0”
How i wish i could join this crusade against poverty.. May be i can just contribute in some way.. More power and god bless!kristoffer
I’m from Norway, so please excuse any language errors. Thank you for your very interesting blog.Much of the tragedy of India and other poor countries are cultures leading to corruption and oppression. In India you have the cast system, which is no longer official, but still vital in the society. With MFIs in India you will probably find that most of the lenders reinvest in their own occupation due to cast thinking. This is strongly reducint the possibility of entrepreneural thinking. It would also be interesting to see how the Dalits (former “untouchables”) are granted loans. Giving these people loans would probably be a violation to the Hindu religion and would therefor be found more rarely. I can’t find much info about Dalits and microfinance, but if you’re speaking about “bottom of pyramid” in India and forget to talk about the cast system, you have a problem. A search for “Dalit” on YouTube would be recommended. Solving these cultural and religious challenges would give a new major release of microfinance (but I wonder if we Humanistic Western people are ready for it…..)
thanks for your comments!I am very familiar with Dalits and caste system in India. A good friend of mine is leading an interesting new movement with the goal of breaking the India caste system. If you search for “dalit” on my blog, you’ll find a bunch of posts that I’ve made.My experience with MFIs in India is that their clients are the poor irrespective of their caste or religion … although with a strong basis towards woman. When I interviewed borrowers many are dalits.Interestingly, dalits can often be better off than most OBCs (other backward castes) and tribal peoples in India as the ruling class has often co-opted these groups via preferences to buy votes.I agree that most MFI borrowers are focused on running businesses which they know or “should do” based on their caste. The most entrepreneurial of them, though are breaking out from these mindsets and starting new kinds of businesses. This is more likely to happen in the urban environment.