Microfinance is a term used to describe financial services, such as loans, savings, insurance and fund transfers to entrepreneurs, small businesses and individuals who lack access to traditional banking services.

Consider being in a situation where you need money, for whatever reason, but have no banking structure in place. You can’t just go down to your nearest high street, walk into a bank and ask for a loan.

Without any structure or governance, the lending industry would create its own rules and interest rates which would create financial chaos. So consider the safety net put in place in the UK for any lending service, the governance and rules are put there to aid the people that need the money the most, so please be responsible borrowers and the industry will continue to serve you for many years to come.

The well written article below gives you some sort of idea of the relevance and need for microfinance in different societies and countries. The need for Alternative Finance is a necessity not a nicety.


Everybody is a Banker


Note: The author of the article after a rapid, enlightening and slightly zany excursion into the history of the microfinance movement comes to the conclusion that there is a need to take stock. The microfinance industry has indeed been a revolution. This revolution has brought about many fundamental changes that are explored. The author also criticising the infiltration of development practitioners who feel that it is possible, through simply the aid of a few microfinance websites and downloadable tools can assume the role of bankers, without the necessary training and practical experience. In sum, he argues that bankers should get on with their own business.

Dr Ascanio Graziosi – Senior Banking Consultant

After more than a decade of uninterrupted microfinance institutions’ (MFIs) growth there is a need to take stock. Here I would like to invite practitioners, researchers, and representatives of finance agencies, policy decision-makers to think over the strong and weak points of the microfinance’s boom to avoid a ‘sboom’.

Marketing bank services has always been a complicated business, since the very beginning of the banking profession. Bankers at any time have tried to give an appropriate answer to the following question: what is the best way to bring together marketing and finance? In other words, how to best market the banking business?


Democratisation of Money

As we know in the first wave of democratisation of money, bankers’ main focus of attention has been on savings-side and people have been taught the importance of saving even a single penny. In that context there have been the growth of savings banks, co-operatives banks, mutual banks, at the beginning of the first industrialisation in the nineteenth century.

Over the last fifty years with the explosion in the demand for credit and the ever-increasing capital needs for social and economic purposes lenders have managed to combine lending with security in many ways. In both industrialised and emerging economies, moneylenders have tested different financial instruments and tools. As a result we have witnessed various credit experiences: state guarantees, development banks, solidarity groups, etc, in all their multifaceted forms.


Free Market System

In the last twenty years, these previously mentioned ways of doing bank business has apparently become obsolete, and are no longer suitable in a free market system. In a social context with the individual borrower at the heart of the system, priority has been taken into exploring new ways and means on how to make everybody eligible for credit. At this very moment, microfinance was born, and with it the entire existing process of marketing financial services was been transformed.

Banking history registered the event and dated it some time two decades ago when the Grameen Bank’s lending to the poor became a success story. However, it should be noted that without the massive intervention of the World Bank Group, the current trend for MFIs would have been far from their present worldwide scale and scope. Since the late 1980s, dozen of World Bank’s staff have been given the task of studying the modalities that facilitate the access to sources of finance for unbankable borrowers. It could be said that the current wave of microfinance has been an invention of those people working under the new vision of the World Bank’s bosses. Since then we can count dozens of websites on microfinance and every financial provider has its own best practice guidelines. Incidentally, this is a positive approach because best practice has its roots in the MFI’s environment.

As a matter of statement issued by all financial providers, an MFI should operate by a) meeting both its running and financial costs in a long term perspective, i.e. it is sustainable; b) reaching as many of the population as possible, i.e. widest possible outreach; c) having a tangible effect upon rural communities’ quality of life, i.e. a positive impact on the communities served. MFI’s insiders are aware of the difficulties faced in translating the above equations into practice.


In the early days…..

The microfinance industry, practitioners’ energy was focused on the credit supply-side because it has been said that credit generates savings, in the sense that, the availability of money makes it possible for people to invest, and then to make a profit, and from which savings originates. Usually the development of an MFI takes place in an informal way, and in rural areas.

Generally speaking, the most common way for an MFI to establish itself is either from an informal financial provider transforming/converting itself into a non-banking structure, or from a donor sponsoring an SME project, or by various other stakeholders pooling resources together. It starts up businesses by simply responding to the needs of a given niche of the population, or a certain area, or by targeting particular objectives. In recent times, the role and importance of savings has been re-evaluated for obvious reasons. However, MFIs have a lot to compete for the confidence of depositors. Currently, a new wave in microfinance points out the need to take a further step and offer a wider range of services.

In parallel with the increased sophistication of the services offered, new evaluation methodologies have been applied (see Table A). The results of the above exercises have been mixed and if the trend doesn’t improve in ten years time we could agree on the fact that microfinance has been a merely way of wealth redistribution without capital accumulation.

We can say that micro finance movement is on the other side of the coin from small enterprise development. MFIs and SMEs have a lot of similarities and a common understanding: small entrepreneurs and small bankers know each other very well because they do have a common background. This factor is of paramount importance because it minimises the negative influence of the asymmetry information, which affects the credit decision-making process. MFIs and SMEs have a reciprocal interest in doing business together and in fact they derive their own benefits from so doing.

The fact that microentrepreneurs didn’t receive a warm reception from the commercial banks, didn’t mean that they gave up the idea of opening up businesses altogether. Indeed, in the last twenty years we have witnessed an ever increasing upward trend in small enterprises areas which at early stage have been financed by all sorts of financial sources: by families, the informal financial sector and eventually MFIs themselves. Although currently MFIs’ favourite area of intervention is supporting/financing SMEs, the microfinance industry has also been trying to serve some other market segments. Let’s have a close look at this phenomenon by bearing in mind this current trend in MFI services.

MFIs’ intervention (and performance) is a function of different independent variables that, by and large, refer to three big market segments: food security, micro enterprise development, commercial objectives.

Each of the above objectives/segments has its own environment and sometimes the development objective will be in direct contradiction with the food security objective. Yet, these market’s segments are not isolated; and on the contrary any intervention in one segment will generate relationships and correlations between them all and promote the emergence of new opportunities.


Summing up

We can say that the need for supporting services is in inverse proportion to the degree of sophistication in the market: i.e., the more developed the financial market, the lower the requirement for supporting services to meet the demand for credit is. This concept is depicted in Table B. So, the real question for a MFI is: how much outreach is compatible with sustainable growth?

Moreover, it is worthwhile to note that while implementing a credit program there are more than two players: besides lenders and borrowers there are also stakeholders, project management, final beneficiaries, and government bodies. Like in any game, each protagonist-player has an interest to defend and consequently tries to get the maximum benefit from the intervention.

These concepts can be expressed in mathematical terms by saying that the expected results of any credit project are functions of the interest-positions of the players (independent variables).

The reactions of the players will depend on their sensitivity facing the demand for credit at that point in time. The extent to which a player tries to intervene can drastically modify the scope and the aim of the programmed activities. Actually, it could happen that the objective of the intervention could shift from the “enterprise development” to “income generating activities”.

As it is known, the difference between the two approaches is that, in the first case, the objective is based on the intent to create a return on investment which contributes to capital formation, while the income-generating objective aims at increasing a person’s disposable income by having social empowerment and self-reliance as a primary goal, and business development as a secondary goal.

Some conclusions. There is a wide consensus on the fact that microfinance is a revolution: “the emerging microfinance industry has profound implications for social and economic development. For the first time in history, capital is well on its way to being democratised,” (CGAP).

A revolution as such required driving people. The IT people took over the leadership in broadcasting the new creed. Since they have taken over the responsibility of advertising and disseminating microfinance concepts, everything has become easy, perhaps too easy to be true. Since the massive entry of the computer scientists the proliferation of the microfinance industry has been happening without pause.

Two parties rule the microfinance movement: bankers and development practitioners, with the latter group currently prevailing. This is not a good occurrence for the simple reason that the vulgarisation of the banking profession can create the wrong assumption that everybody can be a banker. For instance, while not everybody can be good entrepreneur, not everybody can be a good banker.

The belief of the development practitioners’ is that all that is needed to become a banker is for one to connect to a website and simply download a software package! Here is word of caution is needed. Training on banking business is very important, of course. But it is only with the daily exposure to lending operations that the practitioners can acquire the expertise and be effective lenders; and this process takes time. In conclusion, bankers are urged to get on with their own business.