You must have heard the term ‘microfinance’ many times. Generally, the role of microfinance in economic development is to serve the needs of economically marginalized people. But do you know how it works? Or how did it all begin? And most importantly, how will it shape the future of financing?
In this blog, we will give answers to all these questions one by one. But before that, let’s understand what microfinance is.
What is microfinance?
Microfinance is a banking service aimed at low-income or unemployed groups and individuals. Sometimes it is also known as microcredits. The aim is to help those who don’t have the privilege of accessing financial services.
This microfinance mobile banking system provides microloans ranging from something as small as $100 to something as big as $25,000.
Not only this, but many banks also provide additional services like business education, savings accounts, and micro-insurance products. The prime objective of microfinance is to give poverty-stricken people opportunities to become self-sufficient.
History of Microfinance
The seeds of microfinance were sown in the 70s in the rural areas of Bangladesh. However, there is evidence that there used to be informal borrowing and lending in the APAC region for centuries.
The first modem microfinance transaction involved Dr. Muhammad Yunus of the University of Chittagong. Dr. Yunus saw village women who made bamboo stools trapped in a repressive debt cycle. He was surprised that they needed only 27 dollars to get rid of this debt cycle. This incident led him to start the Grameen Bank Project.
Grameen bank is an organization of community development bank that provides small loans without requiring any collateral in exchange. This project began in Jobra and its nearby villages from 1976-1979.
During its initial years, the Grameen Bank was sponsored by Bangladesh’s central bank and other nationalized banks. By 1983, the project became an independent bank via government legislation.
In 2006, Dr. Yunus received the Nobel Peace Prize for his work in the Grameen Bank. The Grameen Bank also received several awards and international recognitions such as the world habitat award, the congressional gold medal, the US Presidential Medal of Freedom, etc.
Currently, Grameen banks are operational in over 2500 locations and have a workforce of more than 22,000 people. Grameen Bank has a net operating income which is about $120 million.
Grameen Bank was not the only microfinance bank in the 70s. Shorebank was another community development bank that was founded in 1974 in Chicago.
The modern use of the expression “microfinancing” has its roots in Grameen bank. However, the history of microfinancing can be traced back to the 1800s, when Lysander Spooner, a theorist, wrote about the benefits of small credit to farmers and entrepreneurs to get people out of poverty.
Moreover, Friedrich Wilhelm Raiffeisen founded the very first cooperative lending banks that supported farmers in rural Germany.
Microfinance at present
According to the OECD, today, there are more than 10,000 microfinance institutions worldwide. If we talk about the number of borrowers and savers, then the number goes up to more than 70 million. And the total loan portfolio amounts to an estimated $40 billion.
The impact of micro-finance solutions has been tremendous. More than 140 million people have been helped by it. (CGAP Annual Report)
The South Asia region has emerged as the top beneficiary of microfinance as it accounts for approx. 60% of global microfinance borrowers. If we convert this into numbers, then we get over 83 million microfinance borrowers from South Asia.
However, this massive number is only a 5% of South Asia’s total population, which indicates a larger untapped market.
Another important stat about microfinance is that 80% of first-time borrowers are women near poverty. This stat is essential as the major intent behind microfinancing is to provide financial aid to those who otherwise can’t get access to credit. Moreover, there are also some microfinance lenders who encourage the financial growth of women by primarily providing credit to them.
Moreover, there are also some microfinance lenders who encourage the financial growth of women by primarily providing credit to them.
Global microfinancing is growing at a rapid pace. As per Globe News Wire, it was valued at US $ 238.12 billion in 2021 and is expected to reach up to US $ 261.84 billion by 2022. This figure will continue to grow up to US $ 426 at a CAGR of 10.21 percent.
As discussed earlier, microfinance revolves around providing small-amount loans to the underprivileged. However, with time the definition has changed as it now includes many other financial services apart from just microcredits, like insurance, payment solutions, savings accounts, etc. Today microfinance means delivering financial solutions to everyone at an affordable rate.
The first thought that comes to our mind when we hear microfinance and FinTech is quite contrasting. For microfinance, the first thought is usually about small loans worth $200 to $ 500 for setting up small businesses.
On the other hand, for FinTech, the first thought is usually about the innovative and advanced technology in the world’s financial sector. So, what’s the common link between the two?
Surprisingly, both FinTech and microfinance company is closer than they seem. Both have the common aim of improving financial accessibility. Thus, by adopting FinTech, the MFIs (microfinancing institutions) can achieve their goals quicker and efficiently.
Micro finance institutions can utilize FinTech in several ways. Firstly, the MFIs can leverage FinTech to make loan repayment and disbursement quicker and more efficiently using mobile wallets, mobile money, and loan management software.
Secondly, ample data generation from FinTechs can help to make loan decisions, analyze profiles, and improve communication. In both the above cases, FinTech can improve the cost of doing business and speed for various MFIs.
Nowadays, we have numerous examples where many microfinance businesses are benefiting by embracing FinTech.
For example, Tala, a US-based mobile technology company founded in 2011, aims to serve the unbanked population. It has offices in countries like Tanzania, Kenya, the Philippines, Mexico, and India. The company enables individuals to get personalized loans based on alternate credit checks.
The mobile app used by Tala collects all the cellphone data such as text messages, call logs, and other behavioral data to construct a customer’s credit profile. This profile-building exercise leads to instant loans ranging from $10 to $500.
Once completed, the loans can be approved and disbursed within minutes via mobile payment platforms. Not only that, but Tala also helps its customers by building their credit profiles by sharing their information with the local credit bureaus, enabling them to secure bigger loans in the future.
Using a very similar approach, China’s MYbank uses non-traditional sources of data like payment transaction data and social network data to determine the ability of businesses to repay their loans.
MyBank, backed by Alibaba, is a great example of FinTech which also operates as a microfinance mobile banking app. It has loaned $290 billion to 16 million small companies over the course of four years. This FinTech has emerged as a boon for small entrepreneurs as it provides loans with an average size of $1,500 and a default rate of only one percent.
If we talk about customizing loans for the needs of entrepreneurs, then one name that comes up is Grab Financial. It’s one of the leading FinTech companies in South Asia that have entered the lending space by offering a suite of financial services to its drivers. These services include insurance, loans, and payments.
Grab’s motive behind building an alternate credit scoring system is to tailor its products to the needs of its drivers across Southeast Asia.
Future of microfinance
The future of microfinance seems bright as it will continue to expand beyond traditional institutions. New actors like distribution networks and mobile operators will assist in offering financial products and services at cheaper costs to an underprivileged and isolated population.
The new technologies along with online banks will help to market these large scale offerings. Talking about the regulations, they will be more focused on the client rather than on institutions, products, or processes.
In coming years, financial inclusion will become reality in most parts of the world which is currently excluded from several financial services such as business loan, personal loan, insurance etc.
Not only this, but technological advances will also cause crucial structural changes in the microfinance sector.
The new technological innovations are not only offering more diverse services like insurance, credit, and savings products but also are offering low-cost payment infrastructure along with other services to poor people.
More innovations in the coming years will give rise to microfinance mobile banking software and services in developing countries. Many niche actors such as agent network managers and small financial institutions, will emerge and try to make their name among the small customers and big banks.
Moreover, there will be a requirement for products that are easy to market, as banks won’t be able to train their agents in all the specificities and complexities.
An experiment that started in a small village in Bangladesh has become a huge revolution. And it is expected to become even bigger in the future. We saw how microfinance played a crucial role in providing financial services to people who are devoid of banking or credit service.
We also saw how microfinance has become a big phenomenon, especially after the introduction of FinTech. At present, micro finance services are made available by using cutting-edge technology. The present times are ideal for microfinance institutions, and the future also seems promising.
With the rapid technological developments, we are on the brink of witnessing the birth of major FinTech services in Microfinance. What would be those changes, and how soon would we see them? Only time can tell.