Microfinance started as a simple
idea: to provide loans to poor entrepreneurs. Today it is a much more
diverse and dynamic sector, and includes institutions that provide savings and
remittance services, sell insurance, and offer loans for a wide range of
purposes. The idea now is to focus on bringing a range of financial
services to the underserved. The institutions that focus on this mission
vary in the income levels of the customers they serve, their use of subsidies,
and the breadth and quality of services offered. This diversity also
presents microfinance providers new opportunities as well as trade-offs.
When Muhammad Yunus and Grameen Bank
won the Nobel Peace Prize in 2006, the world community celebrated the ways that
expanding financial access can improve the lives of the poor. Many
microfinance “insiders” have been working toward a second goal as well: to find
ways to provide microfinance on a commercial basis, without long-term
subsidies. The argument that microfinance institutions should seek
profits has an appealing “win-win” resonance, admitting little trade-off
between social and commercial objectives. Should institutions move
up-market to provide larger loans and improve financial performance? Is
deposit-taking feasible at such scales? Can socially-minded institutions
survive commercial competition and regulation without re-defining their
mission?
Robert Cull, Jonathan Morduch and Asli
Demirguc-Kunt have been analyzing a global survey of microfinance institutions
compiled by the Microfinance Information Exchange (MIX) to try and answer some
of these questions. The data set includes microfinance banks and credit
unions which tend to be for-profit. Nongovernmental organizations (NGOs)
have non-profit status. And there are also non-bank financial
institutions, a category that includes both for-profits and non-profits.
So what do the data tell us?
Microfinance banks make up 10 percent of the
institutions in the sample, but they are large, accounting for over half
of the assets. NGOs are smaller, and although they make up 45
percent of the institutions, they only have 21 percent of the
assets. NGOs reach more of the borrowers, though – they serve over
half of the borrowers in the sample as opposed to the quarter served
by microfinance banks.
Financial self-sustainability and serving poor
households are not necessarily incompatible. But most institutions
serving the poorest customers earn profits too small to attract investors
seeking purely commercial returns. This accounts for the continued
importance of subsidies and noncommercial funding to NGOs. Still, a
substantial share of "non-profits" in fact earn profits, even if
they are relatively small. Nevertheless, a typical larger and older
institution in our sample does not achieve profitability and deep outreach
simultaneously.
Non-profits do not duplicate the work of commercial
lenders: they tend to make far smaller loans on average and serve more
women as a fraction of customers, relative to commercialized microfinance
banks. On average, commercial microfinance banks make loans that are
about four times larger than loans from NGOs, suggesting that they tend to
serve a substantially better-off group of borrowers. As a group, NGOs charge
interest rates roughly double the size of those charged by commercial
microfinance banks.
These findings suggest that the poorest customers tend
to pay the most for loans. As a group, NGOs make the smallest loans
and, hence, face the highest costs per loan. To break even, NGOs must then
charge the highest interest rates. Raising interest rates improves
profitability for many institutions but, after a point, higher rates are
associated with increased loan delinquencies and diminished profits.
Rigorous and regular supervision is critical for
deposit-taking institutions, but it is costly; regulatory supervision thus
tends to push institutions to serve relatively better-off customers as a
way to maintain profitability. Regulatory supervision is indeed
associated with larger average loan sizes and less lending to women. Supervision is also associated with having a higher share of staff
concentrated in the head office, a natural response to reporting
requirements and formalization.
Competition, or potential competition from mainstream
formal-sector banks, appears to steer microfinance institutions toward
serving poorer customers as reflected by smaller average loan sizes and
greater outreach to women, with little effect on their profitability.
Overall, microfinance promises to
correct market failures by expanding the opportunities of the
underserved. For some, the microfinance dream is also to reach the
world’s poorest and lift them out of poverty. But evidence suggests it is
difficult to realize both goals at the same time. In reality,
microfinance often entails distinct trade-offs between meeting social goals and
maximizing commercial outcomes. Reaching the very poor with small-scale
services remains a tough business and often entails charging high fees or
depending on steady subsidies.
