What

An Overview Of The Micro Finance Industry:

 

From its early days in the 1970’s to 2005, the Year of Microcredit,

and its increasing emphasis on profit-based self-sustaining models.

 

 

INTRODUCTION

            This paper provides a broad overview of the microfinance industry, traces the emergence and evolution of the profit-based models (Fernando, 2004) and provides updates on key current events. It highlights the emergence of new venture funds, and the evolving operational characteristics and financial results of selected microfinance institutions (“MFI”).

            Microfinance has evolved beyond its initial humanitarian activity. It has broken “free of the structural paradox of most humanitarian efforts, in which the costs of reaching every additional person brings the program closer to its economic limits. Successful microfinance, on the contrary, becomes more self sufficient with scale.” noted Michael Chu, past President of ACCION in 1997 (Daley-Harris, 2005). Both the for-profit and non-profit worlds have gradually adapted this non-profit charitable model to fit commercial and entrepreneurial requirements, while still targeting to meet the social goals of reducing or eliminating extreme poverty.

            In the past few years, this evolution has resulted in a shift in thinking, that the poor are indeed worthy of commercial attention, and that the poor are in effect a niche market of its own. “They are reading about the fortune at the bottom of the pyramid” observed Maria Otero, CEO of Accion in March 2005 (Otero, 2005).

            Commercial for-profit companies are more willing to explore and innovate methods of selling to this niche market. In the long run, this will benefit both the companies and the target market served. The key benefit for companies, is the double bottom line of: 1) having new sources of revenue and profits for existing lines of businesses, and 2) social benefits of improving the society in which the company does business while being perceived as a good corporate citizen. The key benefit for the poor, is having access to basic financial services that did not exist for them before, and having the opportunity of using credit facilities to potentially bring themselves out of poverty.

            A timeline of the MFI industry’s evolution from its early inception in the 1970’s through 2005, a year declared by the United Nations to be the International Year of Microcredit (Microfinance, 2005), is presented. Selected MFIs are highlighted to show various operating models and results. The best practices adopted by some MFIs are noted, along with lessons learned.

ABSTRACT

 

            Leading commercial for-profit microfinance institutions (MFIs) such as Grameen Bank in Bangladesh, BancoSol in Bolivia and Bank Rakyat Indonesia (BRI) in Indonesia, have shown that the MFI business model can be sustainable and even profitable with some innovation and good management. As each year passes, their consistent results prove to the financial world that the business of micro finance services for the poor can be a lucrative investment opportunity, in addition to its original humanitarian goals of combating and eliminating poverty.

 

            However, it is also clear that vastly differing regional and local conditions, make it unsuitable for any one model to work all the time. Various organizations have entered the industry to fill in the gaps in knowledge and take advantage of potential opportunities. The microfinance industry has come a long way, and it is an exciting time now, as it appears to be in the early stages of large scale commercial funding.

Timeline of Noted Microfinance Industry Events (1960s - 2005)

 

            The industry has come a long way from lending a few dollars to a group of poor women. Below is a timeline of selected notable events1 in the microfinance industry, with emphasis on for-profit or commercial developments and profiled organizations:

1961    - ACCION founded in Venezuela by American Joseph Blatchford

1968    - Bank Rakyat Indonesia (BRI) established as one of five state-owned 
            commercial banks in Indonesia, primarily responsible for providing rural 
            banking services

1970    - Bank Dagang Bali (BDB) founded in Indonesia by I Gusti Made Oka and
            his wife, one of the world’s first commercial banks established primarily to 
            target low-income borrowers

1971    - Opportunity International began lending uncollateralized loans to very

            poor borrowers in Colombia

1972    - BRAC starts as a relief organization in Bangladesh, founded by Fazle 
            Hasan Abed

1973    - ACCION began issuing small loans to micro enterprises in Brazil

1974    - BRAC microcredit started

1976    - Grameen Bank founded in Bangladesh by Dr. Muhammad Yunus

1984    - FINCA founded in Bolivia by American John Hatch

            - Grameen Bank transformed into an independent commercial bank

            - K-Rep founded in Kenya to address operational shortfalls experienced by
            NGOs involved in micro-enterprises.

            - Indonesian Central Bank loosens lending and savings rate caps on banks

            - BRI’s rural banking unit, BRI Unit, spun out as a sustainable rural 
            commercial bank

            - BancoSol’s predecessor PRODEM founded as an NGO by a group of      
            businessmen to provide small working capital loans to micro enterprises

1988    - Good Faith Fund founded in Arkansas, U.S.A. as a replication of 
            Grameen Bank. Supervised by Chicago’s Shorebank Corporation and funded 
            by Winthrop Rockefeller, MacArthur, Mott and Ford Foundations.

1991    - K-Rep Bank Limited, a division of the K-Rep group, established in Kenya 
            as the first commercial bank that caters specifically to low-income people

1992    - BancoSol founded as a commercial bank, taking over PRODEM’s clients 
            and portfolio, and leveraging on their experience

1995    - Prisma Microfinance Inc, started in Nicaragua with a $1,000 personal start 
            up capital from founders Roger Aburto and American David Satterthwaite, 
            and a $4,000 loan from American businessman George Kraus. Prisma 
            operates for-profit MFIs.

            - Grameen Bank decided not to receive any more donor funds. Their 
            growing amount of deposits from savings accounts were expected to be 
            more than enough to run and expand its credit programs and repay existing 
            loans.

            - Profund, a US$23 million fund to invest in Latin American MFIs created.

1996    - German-based ProCredit started an MFI from scratch in Bosnia-
            Herzegovina. It now operates a network of for-profit MFIs, in 14 different 
            countries. Received an investment-grade rating from rating agency Fitch.

1997    - Microcredit Summit, a gathering of more than 2,900 people from 137       
            countries, launched a 9-year campaign to reach 100 million of the 
            world’s poorest families, especially the women of these families, with credit
            for self-employment and other financial and business services by 2005.

            - at this time, an estimated 13.5 million had been reached by microfinance

2001    - BRAC Bank Ltd., a commercial bank, launched

2003    - Grameen II launched

2004    - Bank Dagang Bali (BDB), the oft quoted microfinance success story, was 
            closed by Indonesian banking regulators due to low capital adequacy ratio
            and liquidity problems related to family ownership of the bank; notably
            though, the closure was not attributed to the creditworthiness of their
            low income clients

2005    - United Nations’ declared Year of Microcredit

            - Microcredit Summit reported that by the end of 2004, 67 million very poor   
            people were reached with microcredit, 84% of them women. A total of 3,164 
            MFIs participated in the reporting.

            - According to Grameen Bank, 58% of their borrowers’ families crossed 
            the poverty line. As of July 2004, Grameen Bank had 3.7 million borrowers, 
            96% were women, 1,267 branches servicing 46,000 villages in Bangladesh.

            - Profund liquidated its entire MFI portfolio and reported a 6% annual   
            return on investment.

Microfinance Overview April 2006
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