From Microfinance to Financial Inclusion: Opportunities are Everywhere
Over the past several decades, microfinance has gone mainstream. Even as microfinanciers are learning to manage the challenges of success, a second wave of microfinance ideas is emerging, learning from the success of startups in other industries and offering innovative new twists on for-profit and non-profit microfinance.
When Muhammad Yunus started Grameen Bank in the late 1970s, his goal was to help people raise themselves out of poverty, using a financial model that the wealthier part of the world already enjoyed: business loans. His revolutionary idea was to offer micro-loans in sizes appropriate for the entrepreneurs whose businesses were not official, had no employees or titles and often consisted of growing vegetables in their garden for sale or selling eggs from their chickens. Conventional banks didn’t see opportunity in offering tiny, unprofitable loans to poor people with no credit history or collateral. Yet, Yunus saw immense demand for microloans and put social impact before profit maximization.
Over the next three decades, the micro-lending industry grew quickly and expanded to most developing countries. The model was overwhelmingly praised, so much so that Yumus and Grameen earned the Nobel Prize for Peace in 2006.
By 2010, the rapid growth of the industry led to the perception that many institutions were prioritizing financial performance over their original social impact missions. Microfinance organizations were in danger of basically turning into commercial banks. Some leading institutions even faced claims that they pushed their clients further into desperation, as the borrowers were unable to repay their loans with extremely high interest rates. While most of the allegations appear to have been fabricated, the microfinance industry went through a period of soul searching.
Recently, the leading institutions in microfinance have begun transforming from product-centric to client-centric operations, trying to account for clients’ needs rather than for the most profitable products. Female empowerment and financial education have become new priorities, and products are becoming more tailored to different segments. For example, most poor clients are now offered leases on their business equipment instead of cash loans. Microfinance institutions encourage their clients to start micro-savings accounts and purchase micro-insurance for their families and property.
Microfinance has also started to build inter-industry relationships. Today third-party companies help small entrepreneurs that outgrow microfinance and continue scaling—all while ensuring that their growth benefits the community. Similarly, innovative startups are partnering with microfinance institutions to offer inexpensive solar, water purification and sanitation products to the poor. At the same time more consumer-oriented and targeted microfinance companies, such as KIVA, make microfinance familiar to the general public.
As the microfinance industry is evolving how it does business, its definition also got a makeover. The terms “inclusive finance” or “financial inclusion” gained popularity, emphasizing that the loans are only a part of the solution.
Over the last few years microfinance even entered the First World. KIVA ZIP allows someone to make direct loans to entrepreneurs in the USA. ACCION, which has over 30 years of microfinance experience in Latin America, Africa and Asia, now offers small loans for U.S. residents who have no credit history and to startups less than 6 months old. Bayou MicroFund, which was founded last year in Houston, specifically targets local micro-entrepreneurs and startups helping them receive interest-free loans.
Following the trends with tech startups, microfinance lending is also becoming more social. Puddle, a San-Francisco startup still in beta, allows users to create “a line of credit on-the-fly with your friends.” Once the pool of money is created, it is available for borrowing based on the terms and interest rate set by the group.
The microfinance industry is almost 40 years old, but it only recently began expanding beyond its original mission to help poor entrepreneurs in the developing world. Given that over 3 billion people still live at or below the poverty level, the industry’s potential for further growth and evolution remains immense.
The question is, what exciting new non-profit and for-profit models will come next?