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Where will microfinance be in 2015? What is the future and challenges of microfinance? The first discussion held at the launch of the International Year of Microcredit 2005 focused on these key questions.
According to Elizabeth Littlefield, CEO of CGAP who moderated the discussion, with the innovations in technology that bring financial services “closer to the doorstep of every client”, and the rapid expansion of providers of microfinance services competing for clients, the sector is no longer a small niche. She posed two questions to guide the discussion: “To what extent will technology bring down the transaction costs associated with microfinance, and expand outreach, and what can we do to help people who are too poor to use financial services?”
Mr. Rudjito, President of Bank Rakyat Indonesia (BRI), explained that the main challenge in Indonesia is to reduce the growing number of poor people and the strain on society since the economic crisis hit the country in 1997. He went on to say that BRI provides a wide-range of financial products, is efficiently institutional managed, mobilizes funds from public savings (which have enabled full cost recovery and sustainability), and supports the creation of a favorable regulatory and supervisory environment. BRI is now adequately equipped to address the central challenge faced by Indonesia of increasing the income of poor people who make up 17.4% of the 213 million total population.
FINCA’s executive director Rupert Scofield noted that where microfinance is most active, the current clients would clearly be the winners in 2015. He noted that in the case of clients who are not being reached, the lack of an adequate regulatory and supervisory environment conducive to the development of microfinance is one of the most important concerns to be addressed. Scofield also stated that while microfinance is an important tool in achieving the MDGs, it should be provided in combination with other basic services such as health care, education, and building of basic infrastructure.
According to Maria Otero, President of ACCION, not enough people realize the compelling story of the perseverance of the people who work so hard and persevere despite many hurdles to overcome their situation. Small amounts of capital in the hands of poor people can bring about systemic changes. Ms. Otero stressed the role of leading MFIs who incorporate best practices in their operations to lead the expansion of basic financial services. In explaining the characteristics shared by these institutions, she described how they achieved efficiency in lowering costs while maintaining high profitability. She noted that they are sustainable, able to maintain a high rate of growth, and are often well integrated into the commercial financial sector to provide financial services to the bottom of the pyramid through tapping into commercial sources of funds. According to Otero, these MFIs will foretell the future evolution of microfinance.
Although in the last 10 years the industry has grown and changed immensely, Nancy Barry, Executive Director of Women’s World Banking, stressed that the industry is still very far away from delivering the adequate products people need. She remarked
that loan products dominate the portfolios of MFIs “due to the lack of understanding of clients’ demands.” She went on to say that the role of actors involved in outreach, namely commercial banks, cooperatives and MFIs, are very important in moving the industry forward. Expanding on the role of banks, she explained that efficient commercial banks can reduce the cost of funds, and can provide clients an average of 3.9 products. However, to successfully convince commercial banks to enter the microfinance sector, they need to first realize the necessity of microfinance, and the importance of their consistent commitment. She also stressed the importance of mobilizing new actors and approaches in order to fuel the development of the microfinance sector. Barry also noted that efficiency and productivity could be increased through new combinations of technology. She also stressed that mainstream and country-level rating agencies, as well as credit bureaus have a major role to play in ensuring transparency. Regarding the development of capital markets, she noted that efforts must focus on developing domestic equity instruments, such as Citigroup, Triodos and Oikocredit who are focusing on country risk diversification to provide local currency loans.
From the perspective of an international investor, Marilou Goldstein van Brouwers stressed the ongoing integration of microfinance into formal financial sectors. She explained how many NGOs have been converted into banks, and that there are now approximately 250 commercial banks involved in microfinance. She remarked, however, that there exists a “distortion in the international supply of loans” which is increasing, while the amount of local currency loans are decreasing. Although the role of international funds will be limited in building domestic capital markets, it will still have a role to play in building equity for the microfinance sector. According to her analysis, in the future, although more commercial banks will get involved, microfinance banks will be at the forefront of innovation and deepening outreach. She noted that microfinance is a powerful instrument to achieve the MDGs, but is not sufficient, as access to new markets, better of infrastructure, and property rights should also be developed.
In summary, to strengthen the potential of microfinance in achieving the MDGs, the panelists agreed that there is a strong need to understand the clients’ demand and provide a range of services. In accordance with the eighth Millennium Development Goal, the panelists suggested stated that strategic partnerships between local MFI’s and traditional banks would be the most useful in expanding outreach. Changing the culture and perspective of commercial banks was also defined as one of the main challenges. This type of collaboration to move the industry forward would best be accompanied by technical assistance for MFIs. Savings mobilization and building domestic capital market were also explained as key challenges. The discussion ended with a strong message about the role of the International Year of Microcredit: to keep the world focused and create a score card on policy issues focusing on what the governments need to do to build strong financial sectors.
IV Module I Key Principles for an African Model of Microfinance
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