Reasons for success

Microfinance: a methodology to serve poor communities and entrepreneurs

Over the past 35 years, microfinance institutions (MFIs) have developed a business model tailored to providing access to financial services to poor entrepreneurs and low income communities who typically have no collateral or credit history. Started in the 70's as a not-for-profit movement to alleviate poverty, over the past 10 years a large number of MFIs have decided to transform into commercial entities.

The transformation from non-regulated (non-for-profit) entities into commercial or banking entities enabled several MFIs to have better access to capital. This was critical in order to scale their operations, this way they could maintain their original social mission and they could have even greater impact through scale. Transformation has made MFIs an investable asset class for traditional investors for the following reasons:

Strong asset quality:
  • Close lender / borrower relationships, allowing institutions to closely monitor credit quality
  • Increasing loan amounts: borrowers can access larger loans if payments are made on time
  • Short loan maturities
Profitable business model:
  • Strong demand for microfinance products allow for steady growth in client outreach
  • Use of technology to streamline processes and reduce costs associated with small loan size (i.e. Branchless Banking, PDAs to collect and distribute information, etc.)
  • Interest rates generally higher than traditional banking to cover higher administration costs - Still much lower than informal lenders (i.e. loans sharks)
Transparent and flexible business model:
  • Increased efficiency and improved corporate governance
  • Assets consists primarily of basic and proven loan products
  • Lower financial leverage compared to banks
Less intertwined with the global capital markets than emerging market banks:
  • MFIs tend to have favorable liquidity positions, with short-term assets and longer-term liabilities
  • More stable funding from international development institutions
  • Favorable liquidity position (short-term assets and longer term liabilities)