MFIs tend to lose focus as they ‘evolve’

A new report released by the Women’s World Banking (WWB) observes that as many microfinance institutions transform from non-profits to traditional financial intermediaries, they tend to shift away from their original focus on helping poor women and instead focus on making larger loans a la a traditional financial institution. The results were disheartening as the report found that:

… five years after “transformation” for 27 organizations and compared them to 25 that had not commercialized. On average, it found the proportion of women served by transformed institutions dropped from 88 percent to 60 percent. It also found that average loan sizes were two to three times greater than those of non-commercialized outfits.

Written by Christina Frank, the report also highlighted the possible benefits of such a transition.

Transformed institutions tend to extend their borrower reach and diversify their product offerings. The study reveals that the number of active borrowers increased by 30 percent a year on average for commercialized MFIs, compared to 25 percent for the non-profits. Also, since many countries do not allow non-profits to take deposits, savings accounts are more widely available with transformed MFIs. The number of savings accounts grew by an average of 45 percent annually for the commercialized institutions, while those in the non-commercialized group that were already able to offer such accounts only saw 28 percent average growth.

This phenomenon is something that needs to be closely monitored, but as can be seen by the report there are arguments for both sides. Theoretically as long as new MFIs come in to serve the now abandoned population, this evolutionary cycle may not be that disastrous, but one must then question the sustainability of the microfinance growth model generally then.

[Source: Microcapital.org]

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3 Responses

  1. I am not sure I understand your statement on the sustainability of the microfinance growth model. Are you questioning whether the microfinance will continue to serve low income households?
    In my understanding there is strong empirical evidence that as institutions get larger and transform their legal status, they ten to make larger loans thereby changing their customer profile since men are more likely to take up larger loans (which in turn mean lower transaction costs).
    However, I don’t believe that this has resulted in fewer loan options to low income households. Instead, as the reports suggest some MFIs tend to use the income generated from the larger loans to “subsidize” the smaller loans. There isn’t as strong empirical evidence on this and much of it is based on anecdotes from MFI executives. Either way, if you just look at the increasing # of borrowers being served by the microfinance sector – growth definitely does not seem to be an issue.

  2. I am not saying that growth is bad, but it is important to recognize that one of the major benefits of microfinance the ability for it to reach a population that is acutely vulnerable — women — and that it is important to notice that MFIs when they grow shift their focus away from this group.

  3. […] key question to taken into consideration in the context of the commercialization wave are what specific parameters should be institutionalized in order to ensure that the borrowers’ […]

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