Anna Kanze | Grassroots Capital

Abstract

Micro nance – the provision of nancial services to the poor, marginalized, and otherwise underserved clients – is a unique and trailblazing innovation: a scalable, sustainable business model to engage the poor in the market economy in a way that builds assets, skills, and opportunity. Over the past forty years, the industry has evolved from non-pro t institutions providing microcredit, funded by non-commercial capital and grant funding, to professionally run, nancially sustainable institutions providing a variety of nancial products and services (mostly credit, but also micro-savings, remittances, insurance, etc.) The majority share of capital for micro nance institutions (MFIs) now comes from commercial sources, and MFIs have also accessed the capital markets. MFIs have direct client relationships with hundreds of millions of poor families, making micro nance the only business model serving the bottom of the pyramid that has achieved scale while also being consistently pro table. The industry has also expanded to include many non-traditional actors, like digital and mobile service providers, vastly increasing the capacity for scale and scope of nancial services for the bottom of the pyramid. While microcredit on its own has not been proven to measurably reduce poverty, together with other areas of support—education, a ordable housing, healthcare, sustainable agriculture, infrastructure—micro nance and MFIs can signi cantly contribute to poverty alleviation.

Microfinance as an asset class

Over the past forty years, micro nance institutions (MFIs) have evolved from being mainly non-pro ts with relatively small scale to include a mix of formal, regulated credit unions, cooperatives, commercial banks, and non-bank nancial intermediaries (NBFIs) playing a signi cant role in national nancial sectors. Micro nance worldwide today has attracted more than $30 billion in cross-border investments, and the large majority (~80%) of micro nance institutions (MFIs) operate pro tably. The scalability and pro tability of MFIs are key features distinguishing micro nance as an asset class.

This has led to the “mainstreaming” of micro nance: MFIs have successfully accessed the capital markets and diversi ed funding sources beyond donors to include local deposits, well more than 100 specialized investment funds with an estimated $13.5 billion of assets under management, and a number of initial public stock o erings (IPOs) worldwide. Commercial sources of capital now make up the majority of investment in the sector. According to an annual survey by the Global Impact Investing Network (GIIN), which interviewed over 200 impact investing organizations, micro nance commands the largest portion of impact investing assets1. Microloans and other nancial services targeting the poor and underserved now have a central role in national nancial systems all over the world, with hundreds of millions of clients; taking into account household members, outreach likely approaches one billion, far surpassing the earlier goal of one hundred million.

1 GIIN 2017 Annual Impact Investor Survey, Figure ii: AUM by sector; micro nance excluding outliers is 21%, including other financial services is 31%

Two of the main arguments in the past for micro nance as an asset class2 were the low correlation to traditional nancial markets and high portfolio quality. While micro nance for the most part was relatively una ected during the crisis that hit global nancial markets starting around 2008, the low correlation may begin to moderate as micro nance and MFIs become more interwoven in mainstream nancial systems. High repayment rates remain a hallmark of micro nance. There have been a number of crises in countries across the world which warn that high asset quality cannot be taken for granted; however, the sector overall has emerged stronger after dealing with these setbacks, as well as with the help of industry-wide principles like the Smart Campaign’s Client Protection Principles, multi-stakeholder standard setting bodies like the Social Performance Task Force, country-speci c credit bureaus and self- regulatory bodies, and other infrastructure.

Perhaps more consequential than low correlation or high asset quality are the many decades of infrastructure-building and investment and governance-strengthening support by donors, social investors and other sources of patient risk capital. As a result, MFIs have developed into well-run, professional institutions that employ tens of thousands of people often from the same demographics as the clients they are looking to serve. The sector has largely preserved its focus on the bottom of the pyramid and there is a growing emphasis on new nancial products that seek to provide more value to poor clients, like savings, insurance and remittances. As argued in a recent whitepaper on the future of micro nance3, the success of the industry in achieving scale and attracting capital is a result of a four-decades-long process of product development and testing, gaining insights into customer needs, earning client trust, building infrastructure, training, collecting data, benchmarking, and developing a robust supporting ecosystem. It is no longer debated that the poor can constructively use and be sustainably provided with a comprehensive range of financial services. Nevertheless, there is more work to be done to have a positive, measurable impact on poverty alleviation, gender equality, and other Sustainable Development Goals4.

Over the coming years, “the micro nance industry” will continue to blend into traditional financial systems as MFIs grow and develop, and more mainstream commercial banks acquire MFIs or launch subsidiaries dedicated to micro nance. Digital financial technologies will continue to reduce costs and the need for in-person interaction. MFIs as distinct institutions will become less crucial to providing financial services to their target populations, or will themselves evolve into more than just financial service providers to broaden the offerings of products and services to better meet the needs of their clients. MFIs are uniquely placed to address many social and environmental issues given their proximity to and deep relationships with their clients. Patient capital and likeminded investors that support innovation and target skill development, institutional capacity building and infrastructure required for better serving the bottom of the pyramid will remain essential for social value creation and deepening impact, in micro nance and beyond.

1 GIIN 2017 Annual Impact Investor Survey, Figure ii: AUM by sector; micro nance excluding outliers is 21%, including other financial services is 31%

2 For example, Microcapital.org August 2007 and 2009

3 “Microfinance: Revolution or Footnote? The Future of Microfinance Over the Next Ten Years”; Ira Lieberman, Paul DiLeo, Todd A. Watkins, and Anna Kanze; October 2017

4 https://sustainabledevelopment.un.org