The number of "microborrowers" worldwide increased by 17 percent in 2006, according to data from the Microcredit Summit Campaign, continuing double-digit annual growth that averaged some 29 percent annually between 2001 and 2006.1 (See Figure 1.) The global loan portfolio of the 340 microfinance institutions (MFIs) tracked by the Microfinance Information Exchange (MIX) also grew rapidly in 2006, at some 34 percent.2 (See Table 1.) The galloping advance of microcredit is increasing pressure on many MFIs to become more sophisticated and commercially oriented in their operations-at the expense, some analysts fear, of their original mission of poverty reduction.3
Microfinance refers to financial services, including loans, savings accounts, and insurance products, that are designed to serve people with very low incomes. The average microloan size worldwide is now $1,026 and the average savings account balance is $1,126.4 Globally, the loan write-off ratio was 3.1 percent in 2006-a better record than that of many commercial banks.5 Women are a key clientele of most microfinance programs, accounting for 98 percent of borrowers in Asia and some two thirds of clients in Africa, Latin America, and the Middle East.6 Only in Eastern Europe and Central Asia are women a minority of customers; there, some 47 percent of borrowers are women.7
As the birthplace of microfinance, Asia leads the world in total current borrowers, with nearly 113 million-some 85 percent of the global total.8 (See Table 2.) Latin America reported the fastest growth in borrowers in 2006, at 53 percent.9 This region also has the largest overall loan portfolio, while Eastern Europe and Central Asia report the largest average loan balance per borrower.
The potential of microfinance to reduce poverty and to succeed commercially has attracted growing amounts of foreign investment. Between 2004 and 2006, foreign capital investment in microfinance more than tripled globally, to $4 billion.10 Some 75 percent of this investment went to 30 countries in Latin America and in Eastern Europe and Central Asia.11 Africa and Asia, which are poorer and arguably would benefit more from microfinance, received only 6 and 7 percent respectively.12
Investment from development finance institutions (DFIs)-public monies from governments and intergovernmental organizations-jumped from $1 billion in 2004 to $2.5 billion in 2006 and now accounts for just over half of foreign investment in microfinance.13 DFIs include institutions such as the International Finance Corporation of the World Bank, the Inter-American Development Bank, KfW in Germany, and the Overseas Private Investment Corporation in the United States. These institutions brought a commercial approach to microfinance, but they did so on flexible terms and with low interest rates that helped to build and strengthen the industry.14
Commercial institutions such as investment banks and private equity firms are investing in microfinance in expectation of high returns. The concern surrounding involvement of these institutions is that they may pressure MFIs to act more like commercial firms, for example by distributing profits to shareholders rather than reinvesting them in microfinance activities or by charging the highest possible interest rate to create the greatest financial return, even if it dilutes the social return.15 Proponents of private investment counter that commercializing microfinance is needed to attract the large sums of capital that allow it to spread rapidly.16
The commercialization debate was highlighted most dramatically in 2007 when Compartamos Banco, a Mexican MFI, became a publicly traded corporate bank offering a full range of financial services to the poor.17 Its initial public offering raised more than $450 million and drew 13 times more bids for shares than could be accommodated.18 Compartamos Banco's popularity among investors is a direct function of its profitability, which in turn stems from its relatively high interest rates-roughly 83 percent.19 This is comparable to other Mexican MFIs but well above the 30-50 percent levied in many other countries.20 Microfinance practitioners, investors, and analysts are engaged in a fierce debate regarding the validity of the Compartamos model for microfinance as a whole.
Critics maintain that the high interest rates gouge the poor and put poverty alleviation goals-traditionally the core of microfinance-on the back burner. Mohammed Yunus, winner of the 2006 Nobel Peace Prize for pioneering work in microfinance, describes the Compartamos business model as "not consistent with microcredit" and argues that interest rates should be kept "as close to the cost of funds as possible."21 Proponents counter that Compartamos's rates fall within the range charged by many lending institutions in Mexico, are justified by the expense associated with tiny loans, and in any case are affordable-as the high repayment rate attests.22 They also argue that Compartamos plows a large share of profits back into the bank (rather than to shareholders), allowing for rapid expansion of lending to poor borrowers.23 Critics countercharge that capital for expansion could come from promoting savings among the poor, even if this meant slower rates of growth in microfinance.24
An intriguing innovation that could stimulate growth in microfinance is "branchless banking"-the use of mobile phones or a decentralized network of small retail shops for deposits and withdrawals. Retail outlets are already used for microbanking in Brazil, while mobile phones are in use in the Philippines.25 Both methods are thought to offer major cost savings for banks. In Pakistan, the setup cost of a conventional bank branch is estimated to be 30 times greater than the cost of contracting with a shopkeeper.26 And in the Philippines, where a conventional banking transaction costs $2.50, an automated transaction using a mobile phone is estimated to cost only 50¢.27 Neither mobile phone banking nor banking at retail outlets is easy to establish, however, and it remains to be seen whether branchless banking can become a mainstream financial services outlet for the poor.
The potential for expansion of microfinance could be significant. Today's 133 million microborrowers represent only 5 percent of the people living on $2 or less per day in 2001.28 Many of the unserved may not want a microloan or may not qualify for one, of course, but the experience of Bangladesh suggests that microfinance can penetrate deeply: some 62-75 percent of eligible Bangladeshis have had a microloan.29 On the other hand, Bangladesh may be exceptional; other mature microcredit markets, such as Bolivia's, have much more modest penetration rates.30 In any case, the Microcredit Summit Campaign, whose goal of recruiting 100 million borrowers between 1997 and 2005 spurred the surge in microfinance, is now working to expand the number of microcredit recipients to 175 million by 2015.31
The future of microfinance depends in part on how the industry handles the new challenges created by rapid growth. A 2008 survey of microfinance practitioners, investors, and analysts by the Centre for the Study of Financial Innovation identified 20 risks that could derail the advance of microfinance.32 Six of the top 10 were management risks: management quality, corporate governance, cost control, staffing, technology management, and credit risk management.33 MFIs lacking strong management skills may find it difficult to run a successful firm if their operations expand rapidly and become more complex.
- Worldwatch calculations based on data in Sam Daley-Harris, State of the Microcredit Summit Campaign Report 2007 (Washington, DC: Microcredit Summit Campaign), p. 22. Growth rate calculation excludes new borrowers from microfinance institutions (MFIs) that are reporting for the first time.
- Growth in borrowers from ibid.; growth in global loan portfolio from Microfinance Information Exchange (MIX), "Trend Lines 2004-06 MFI Benchmarks," MIX database, at www.themix.org, viewed 16 June 2008. The Microcredit Summit Campaign compiles participant data from more than 4,000 microfinance institutions worldwide; MIX compiles participant and financial data from 340 MFIs.
- Maria Otero, "Commentary: Microfinance at the Crossroads," Forbes.com, 19 May 2008.
- MIX, "2006 MFI Benchmarks," MIX database, www.themix.org, viewed 24 June 2008.
- MIX, op. cit. note 2.
- Number of borrowers from Daley-Harris, op. cit. note 1; loan portfolio and average loan balance from MIX, op. cit. note 2.
- Daley-Harris, op. cit. note 1.
- Xavier Reille and Sarah Forster, Foreign Capital Investment in Microfinance: Balancing Social and Financial Returns, CGAP Focus Note No. 44 (Washington, DC: Consultative Group to Assist the Poor, February 2008), p. 1.
- Ibid., p. 15.
- Ibid., p. 3.
- Ibid., pp. 3-4.
- Reille and Forster, op. cit. note 10, p. 16.
- Otero, op. cit. note 3.
- "Compartamos IPO: Microfinance Doing Good, or the Undoing of Microfinance?" Microcredit Summit E-News, July 2007.
- "The Banco Compartamos Initial Public Offering," Insight (Boston: Accion International, June 2007), p. 1.
- Richard Rosenberg, CGAP Reflections on the Compartamos Initial Public Offering: A Case Study on Microfinance Interest Rates and Profits (Washington, DC: Consultative Group to Assist the Poor, June 2007).
- "Remarks by Mohammed Yunus, Managing Director, Grameen Bank," Microcredit Summit E-News, July 2007.
- Rosenberg, op. cit. note 19.
- Daley-Harris, op. cit. note 1, p. 30.
- Gautam Ivatury and Ignacio Mas, The Early Experience with Branchless Banking, Focus Note No. 46 (Washington, DC: Consultative Group to Assist the Poor, April 2008), p. 2.
- Worldwatch calculation based on 133 million from Daley-Harris, op. cit. note 1, and on $2 per day from World Bank, "Understanding Poverty," at web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/0,,contentMDK:20153855~menuPK:373757~pagePK:148956~piPK:216618~theSitePK:336992,00.html, viewed 3 July 2008.
- Malika Anand and Richard Rosenberg, Are We Overestimating Demand for Microloans? CGAP Brief (Washington: Consultative Group to Assist the Poor, April 2008).
- Microcredit Summit Campaign, at www.microcreditsummit.org, viewed 3 July 2008.
- David Lascelles, "Microfinance Banana Skins," MicroBanking Bulletin, spring 2008, pp. 1-2.