3 Reasons Microfinance Still Matters

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Microfinance client José Hugo Beceira, outside Bogota Colombia

“Banco Occidente, Banco Caja Social, Citibank, BBVA…”

Don Hugo listed off the banks he had taken loans from in the past. A microentrepreneur, José Hugo Beceira runs a construction shop in a neighborhood on the outskirts of Bogotá, and as he described, there is no shortage of credit for small business owners in the city. Entrepreneurs can walk into any number of NGOs, Colombian banks, or multinational banks, and walk out with a loan.

So if a micro-entrepreneur like Don Hugo can get the loans he needs to grow his business from so many providers, can’t we just consider this microfinance business a success and pat ourselves on the back?

Not so fast.

Though credit is widely available in major Latin American cities like Bogotá, we’re still very far from universal access, and moreover, easier access doesn’t necessarily guarantee better results for individuals or at the macroeconomic level. So, why do we need a continued focus on microfinance?

There’s a wrong way to do microfinance (and it’s all too common)

Overindebtedness, high default rates, excessive interest rates – these are all symptoms of irresponsible lending. Client protection standards and financial education are necessary, and, unfortunately, far from universal. Microentrepreneurs I interviewed in Bogotá told me about their experiences with banks where it wasn’t necessary to present any information about your income or your credit history, and you could still walk out with a loan that very day. Convenient for the microentrepreneur in the short term? Yes. Good for their long-term financial health? Not so much. To combat this, movements like the Smart Campaign are improving industry standards and helping to ensure that microentrepreneurs don’t become victims of predatory lending practices. The microfinance industry needs to continue to develop products and services that serve client needs and minimize potential harm.

Not everyone has access

49% of Latin America’s population still lacks access to banking services. Despite the growth in microcredit, the poor are disproportionately excluded. Rural lending remains a major challenge, as the industry still needs to develop the appropriate methodology, channels, and infrastructure to serve rural clients. Moreover, regulatory and cultural barriers mean that in Latin America, mobile banking is not currently a feasible solution to present challenges. In addition to microcredit, there also remains room for growth in expanding access to and use of insurance products and savings accounts. Reaching excluded populations, and ensuring that products and services are accessible, usable, and targeted to their needs are important goals for the microfinance industry in reaching full financial inclusion.

Microfinance has unmet poverty-fighting potential

Many microfinance institutions include statements about reducing (or even ending!) poverty in their mission statements. The evidence shows us that access to microfinance allows entrepreneurs to start businesses, improve incomes, and generate greater business activity than they would have otherwise been able to do. But in terms of its poverty-reducing effects, the evidence on microfinance is a mixed bag. In my view, responsibly providing someone with a needed loan is generally a net good. However, research can help us figure out how to make the impact of that loan even greater. Do certain text messages encourage clients to pay on time? How can we increase usage of savings accounts? What are the long-term effects of microfinance on educational attainment or even quality of life? There is so much more that we need to know about whether microfinance works, and how we can maximize its positive effects. This research also needs to be translated into practice on the ground.

I’m back at Stanford for my second year of studies, and I can genuinely say that I’ve never seen so much innovation in one place. It’s inspiring to be on a campus where engineers, doctors, lawyers, and policy students have the opportunity to engage and try to tackle the world’s problems together. It seems like practically every day you hear about the latest social enterprise or technology that’s going to end poverty. But microfinance? That’s old news. The low-tech microfinance movement just doesn’t grab students’ fleeting attention like mobile technologies, remote crop monitoring, or big data’s applications as a poverty-fighting tool.

Microfinance moving forward

Though it may no longer be trendy, microfinance still has room to grow in meeting its potential to reduce poverty and expand economic opportunity. In fact, promising innovations in financial inclusion, particularly around mobile money and financial technologies, are helping to keep microfinance relevant. In Colombia, the talented people I had the opportunity to work with at Accion and Bancompartir are also continuing to work on the critical issues I mentioned above. There, microcredit may seem ubiquitous, but critical needs persist in responsible lending, expanding access, and fighting poverty. Leveraging brain power and innovative thinking to tackle issues like client protection and rural access can further help the field of financial inclusion to realize impacts that we haven’t yet dreamed of.

Accion Ambassador Emma Kelsey deployed to Bogota, Colombia to work on strategic planning for Accion’s activities in Latin America.

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