Is Microfinance Innovating Enough?
Wrapping up my time here in Bangalore has me thinking about the big picture of financial inclusion. Microfinance is just one small piece of it; indeed, the field has moved definitively away from focusing only on credit. And, as I previously wrote, it’s no surprise that credit alone can’t do much to help people whose options are circumscribed by several layers of social exclusion and poverty. Accion’s portfolio reflects the push in financial inclusion to put resources into client protection, technological solutions and impact investing, among other hot areas.
But the fact remains that microfinance is big business – it’s impossible to ignore when you’re on the ground in India, where there are around 42 million MFI clients, according to MixMarket. Despite the continuation of overindebtedness for many of the country’s most vulnerable workers, and the uneasiness that followed SKS’s big IPO, millions of Indians remain poor, and microfinance institutions continue to profit. So while the international development community may have decided that microfinance isn’t the best route to alleviating poverty, that message certainly hasn’t been taken up by the folks running the MFIs here.
The industry is regulated, at least much more than it used to be. And industry associations like the Microfinance Institutions Network (MFIN) provide opportunities for higher standards to evolve, and importantly, for MFIs to compete with each other for recognition as industry leaders. But self-regulation can only go as far as the individual members will let it.
I’ve been on the lookout for signs that MFIs are aware of the turning tides of the financial inclusion sector. And while my exposure has been mostly anecdotal, what I’ve noticed is that the traditional MFIs don’t have much incentive to change their interest rates or group lending model. It doesn’t seem that the fintech explosion or proliferation of startups that offer individual loans for things like housing and school fees (not covered by standard MFI lending) are serious competition because they are still small scale – though these are interesting developments.
There are a few new players on the scene, though – MicroGraam, for example, is a peer-to-peer model that allows social investors to finance individual rural entrepreneurs, at an allegedly lower cost due to savings from their technology platform. It will be interesting to see how far new models can go in offering game-changing competition to the big MFIs. I’m especially interested in Prime Minister Modi’s new initiative, JAM, a large-scale cash transfer program combined with access to government IDs and bank accounts. Microfinance is often used by “base of the pyramid” clients because they simply don’t have access to cash when they need it – not because they are using it as catalytic, business-enhancing finance, so there’s the possibility that cash transfers could obviate to some extent the need for microfinance. If you’re hoping for a breakthrough in the MFI status quo, this may be the ticket to watch.
Mandana Nakhai is working out of Bangalore, India, in Accion’s local hub office, on developing strategic partnerships between MFIs and organizations that serve people with disabilities to understand their financial needs and link finance to livelihood and entrepreneurship programming.