The microfinance industry is ever-booming – with a registered growth of around 39% on a year-on-year basis according to data released by the Microfinance Institutions Network (MFIN). This is largely accounted for by technical or social innovative practices that have emerged along the way to ensure the sustainability of both Microfinance Institutions (MFIs) and its borrowers.
The idea of microfinancing humbly originated from Grameen Bank of Bangladesh which was set up by an Economics professor, Mohammad Yunus. Locked out of the formal credit market due to their lack of collateral, the poor often remains poor with their limited capital to set up their business. Some of them resorted to borrowing from unlicensed moneylenders which resulted in the accumulation of debts from exorbitant interest rates.
Due to the niche nature of microfinance (in contrast to traditional banking systems), microfinancing products tend to be tailored to the demographics of small-mid size communities. These products have also evolved over time, in little ways, to reach a reasonable compromise for repayment between MFIs and its borrowers. You can find some interesting microfinance products where innovation meets customization here at this link.
Beyond the economics of microfinancing, in recent years scholars in the field are increasingly looking into the environmental and social aspects of sustainability – especially in the Agriculture sector where businesses inflict the strongest and most direct impact on the environment.
For SMEs and smallholder farmers which make up majority of the borrowers in the Agriculture sector, loans often go into the purchase of cheap agrochemicals in attempts to boost productivity of the fields. When this is not done sustainably, it can result in serious environmental ramifications on lands which consequently becomes no longer useful for farmers to cultivate vegetation.
In this regard, what have MFIs done? One instance is offering lower rates to borrowers with sustainability-oriented plans. Another is partnering with specialized environmental organizations for their networks and resources so that MFIs can promote environmental protection among clients, such as training MFI’s farmer clients on agro-ecological practices.
Another dimension we’re looking at is social sustainability. Aside from enabling access to capital which economically-empowers the poor so that they do not have to rely on welfare/aid, meeting the basic needs through (self-)employment is only the prerequisite for the poor before they get to indulge in the luxury of partaking in community development activities, such as receiving education; and engaging in activities that enable citizen participation in governance like public debates.
Also; when looking at social sustainability, foreign, private MFIs need to consider the local community (and even competing stakeholders). An example from the aforementioned link on interesting microfinance products most aptly illustrates this point – where Barclays Bank Ghana worked closely with Susu operators – local micro-bankers and some of Ghana’s poorest people – to tap on their local networks and help build their capacities so that they can more effectively sell Barclays’ financial services.
What lies ahead in innovative microfinancing? Technology, particularly FinTech, is increasingly seeping into the sphere as it will be able to connect MFIs to wider markets and greater capital flow without the constraint of infrastructure. Thereafter, it’s only a matter of time before we can get microfinance right.
Thian Si Ying
Conference Producer, IBC Asia
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