In a context of renewed economic and social policies aimed at combatting poverty, the emergence of microcredit in the 1980s quickly sparked a lot of interest. Development stakeholders saw in this tool a means of reducing poverty by financially empowering the poorest members of society, and invested heavily in the development of microfinance. The sector has significantly changed since then, with the emergence of new services and new stakeholders.
The Microfinance Barometer has consistently reflected these changes. The Barometer presents microfinance as an effective system when combined with responsible practices. As such, the articles of this publication are both enthusiastic about the development of an essential development policy tool, and aware of the limits and possible risks of microfinance. This stance was reflected as early as 2010 by Alix Pinel, journalist at Mediapart: “Microfinance is not a universal solution for the development sector, it is not on its own a miracle answer. [That said, it] can usefully link up with other development policies and further increase its contribution to the fight against poverty.” Financial inclusion, social performance management, economic profitability: what have been the flagship themes of the Microfinance Barometer since its first release in 2009?
2010 to 2013: from criticism to improvement
“Microcredit, miracle or disaster?”, “microfinance in crisis”, “microcredit turns to tragedy”. In the early 2010s, following the numerous crises that damaged the sector, the international press painted a bleak picture of microfinance. These criticisms contrasted with the prevailing optimism in the sector, where microcredit was seen as a miraculous solution to poverty for which its creator, Professor Muhammad Yunus, received the 2006 Nobel Peace Prize. Then, after years of hope and enthusiasm, over-indebtedness of beneficiaries and excessive profits of unscrupulous microfinance institutions (MFIs) showed microfinance in a whole new light.
The huge profits earned by Compartamos in Mexico, as well as the crises in southern India, Pakistan, Morocco, and Nicaragua, highlighted the dangers microfinance could pose to its customers in the absence of responsible management. These crises were the result of a three-fold problem, as summarised in the 2011 Barometer by Xavier Reille, Microfinance Manager at the Consultative Group to Assist the Poor (CGAP), for whom “the microfinance crisis is due to an excessive search for profit, the uncontrolled growth of MFIs, and the lack of regulation.”
The sector then entered a phase of profound reform. The second edition of the Microfinance Barometer, in 2011, with the title “For a Return to More Social Microfinance”, reflects well this process of self-criticism that resulted from the crisis of the 2010s. From then on, the Barometer dedicated a section on questions of measuring social impact and the dissemination of good practices in this area.
This process marked a turning point that gave rise to the development of new tools. New self-regulation initiatives were gradually developed, demonstrating a genuine desire to empower and professionalise the sector. According to Cecile Lapenu, the current director of Cerise, it was in the early 2010s that “the sector entered a period of maturity. The lessons learned in recent years [contributed] to the establishment of responsible, ethical and inclusive microfinance.” (2013 Barometer).
These years of introspection saw microfinance stakeholders come together under the banner of the “Social Performance Task Force”, which now represents over 3,000 organisations working to promote responsible practices. They also gave rise to the development of the Universal Standards of Social Performance Management, published in 2012.
This period led to the creation of the Smart Campaign – a global campaign aimed at integrating customer protection practices into the activities of microfinance institutions.
From then on, industry practices have generally stabilised. These widely shared tools brought greater transparency to the measurement of social performance, allowed for the development of more responsible practices, and offered a better customer protection. These practices became widespread in the sector.
2014 to 2016: professionalisation and digitisation of microfinance
After the wake-up call of the early 2010s, the years 2014 to 2016 saw the continuous professionalisation and improved efficiency of microfinance.
The period was first characterised by a diversification of investors in the sector. In 2014, Christian Etzensperger, analyst at ResponsAbility, noted that the arrival of pension funds marked a turning point for the sector. Pension funds are generally risk-averse, and only get involved in sectors with proven profitability. Their presence thus demonstrated that “the microfinance sector has moved from the initial stage of subsidised programmes to that of profitable retail banking.”
The professionalisation of the sector was also reflected in the growing and innovative use of new technologies. The 2015 Barometer made this its central theme, depicting an innovative microfinance ambitiously entering into the digital revolution.
New technologies’ contribution to the sector was a source of great expectations, as Kalin Radev, General Manager of Software Group, summed up in 2015: “technological innovations now provide numerous solutions for most of the sector’s operational challenges, including accessibility [services], efficiency, process automation, security and cashless operations.”
But traditional microfinance stakeholders were not the only ones to identify the potential of new banking technologies. The arrival of new players (in particular telephone operators and fintechs) offering mobile money services shook up the market.
As of 2015, 34% of people living in Sub-Saharan Africa had access to a banking service thanks to mobile money.
Developments in mobile technology blurred the boundaries between phone companies, new digital stakeholders and traditional financial institutions. Partnerships between fintechs, MFIs, phone companies, and public institutions became a new formula for increasing both the impact of microfinance and its scope.
In 2016, one year after the adoption of the Sustainable Development Goals (SDGs), the Barometer addressed the issue of diversification of the microfinance offer. Beyond simple access to credit, the Barometer showed that microfinance also promotes access to essential services and opens up new opportunities for its customers in the areas of agriculture, energy and housing.
For example, Sam Mendelson, a consultant for the European Microfinance Platform, reflected on the links between microfinance and education. In addition to financial products to fund studies, MFIs also finance the construction of schools and infrastructures facilitating access to educational centres. They also offer non-financial services (teacher training, support for developing curricula, improvement of safety standards in schools etc.), and provide employment training services.
Arrival of new investors, digitisation of microfinance, diversification of the offer: the sector underwent rapid change sbetween 2014-2016.
From 2017 onwards: a sector whose influence extends beyond its initial borders
Beyond microfinance, an entire responsible finance sector is taking shape. The strong development of impact investing over the past few years may give the impression that microfinance is no longer fashionable, that it has been outdated by more efficient and ambitious players.
Yet, recent editions of the Barometer present a rather different image, with microfinance depicted as a pioneer in impact investing.
Creation of business models combining social impact with financial stability, diversification of stakeholders’ resources, tools and indicators for measuring social performance: microfinance actors have a unique expertise. Bonnie Brusky, Deputy Director of Cerise, commented on this last point in the present edition of the Barometer: “Unlike the traditional development actors that paved the way in microfinance, impact investors rarely have strong monitoring and evaluation habits and know little of the academic concepts of impact assessment.”
As a result, microfinance, as the only mature impact investing sector, has a lot to teach to these newcomers, particularly when it comes to impact assessment. In a 2017 article, Michael Knaute, Regional Director for Africa and MENA for Triodos IM, stated: “applying the lessons learned in microfinance over the past three decades to the impact investing sector will help to pave the way towards achieving the SDGs.”
Microfinance and SDGs
Microfinance continues to grow, with $124 billion in worldwide lending and 9.5% customer growth in 2018. These positive results are signs of an industry that has successfully grown from its mistakes and that will continue to develop and foster financial inclusion around the world.
While microfinance no longer has a monopoly on impact investing, the lessons it has learned can be useful to other responsible finance stakeholders. These are welcome news given the financial efforts required to achieve the SDGs.
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