Those were the days of yore, when Micro-Finance Institutions were perceived as charitable organizations. Today, most of the countries have spread the wings of awareness and empowerment which has ultimately enabled the MFIs with a huge market share which accounts to 75 million customer base. The huge customer base is lined up with the stringent regulations and legislations as the monitoring and regulatory bodies by the governments worldwide have lead to this macro trend in the MFI sector. The father of MFI Dr. Muhammed Yunus , gave the first loan to a group of women in Chittagong, Bangladesh, which was merely USD 27. After three decades, the microfinance industry shines with flying colors. They not only have a customer base of 75 million people but the amount of loans outstanding soars as high as USD 38 billion. This depicts, on an average each borrower has taken up loan up to USD 506.67.
By now, there are 80 investment funds that specially cater to the microfinance sector, and the inception of 30 out of the 80 companies have occurred in the past three years. The funds are still meager and are highly concentrated in the American and the Europian region, but their pool of capital available is growing fast. Currently the largest investors in microfinance are the German KfW or the European Investment Bank, the World Bank’s IFC.
The hurdle that the industry is facing is mostly on the technological front. As the preliminary technological cost ant the cost of maintenance charged by the vendors, is way too high. This has lead to the non-adoption of the new technologies by the MFIs. However, the humongous market size of the MFIs and the technological innovations have has helped the vendors to find out cheaper and effective software/hardware solutions for the MFIs. Cloud computing and Software as a service (SaaS) are like the silver streak for the MFIs as it does not only cuts down on the cost but also reduces the efforts. Still, there is a long way to go for the MFIs before they build in a robust hardware solutions for the banking platforms.
The market is new and hence the innovations are bound to happen. The market is flooded with various innovative models across the globe as all the market players are trying to cater to the needs of the mammoth customer base. One of such innovations in the MFIs has occurred online. MYC4, Has registered 15,643 investors from 94 nations. It is a peer-to-peer lending facility and has a reported investment up to 9.3 million Euros in the microfinance sector in seven African countries by far. Another company named as Micro Place, has provided 40,005 loans through online platform and it was formed in 2007, it is reportedly an e-Bay company. Another US-based Section 25 company named Kiva, has pioneered the idea of online lending, it claims to distribute one loan in every 14 seconds, implying a lending capacity of USD 1 million a week. The potential of internet to connect retail investors to microfinance borrowers and entrepreneurs is present across the world and India is not far behind, Rang De and Dhanna-X are the Indian companies that have adopted the online model.
Another upcoming technological trend in the MFIs is shared branching – It can help as an alternative tool for MFIs to reduce cost, if dealing in large market size. It helps in meeting the geographical expansion challenges in terms of cost by using a branch set-up of any of the association members operating in any location. One of such examples is the opening of new institutions in Honduras, Mexico and Colombia by a German based company, ProCredit Holding in 2007 so as their operations.
Banks are keen on improving their alliances with the mobile operators as the penetration of the mobile companies in every county is huge. The only way these MFI can think of expanding is through a healthy tie-up with the mobile operating companies. The market is already flooded with such services (pay bills, transfer money, recharge etc from your mobile). Therefore the tie-ups of the MFIs with different mobile operators is an inevitable model so as to ensure a robust delivery channel.
Be it the technology solution providers, governments, venture capitalists, Bankers or public the necessity of a strong micro finance industrial base has been realized by all. MFIs have emerged now as a necessity for the development of the nations. The outstanding commitments by IFC accounts to USD 640 million for the microfinance industry and in next three years it plans to double the amount of investment. Grameen Foundation, Accion International, Lok Capital, Bill and Melinda Gates Foundation, Ford Foundation, Sequoia Capital, have inveted millions in the micro-finance sector. On an average the funding accounts to USD500 million to USD 1 billion for the MFIs in a year.
|Country Region||Banking Penetration||Market Size|
|India (South Asia)||8 7.1 percent||USD 6 billion|
|Source: A study on Microfinance by Infosys|
However, there is still a long way to go before MFIs take the first step towards the road to Eldorado. There are various factors which contribute to the other side of the picture for MFIs. The only way these institutions can nurture is through keeping the flag of social activism high above their heads. However, apart from the technical glitches the market also suffers the mar of limited products, erratic interest rates and lack of accessibility. In spite of having huge funding organizations at their positive side the industry, MFIs still needs to have a robust monitoring and regulatory policies but internal and external(governments). By far only 30 per cent of the total demand has been met by the MFIs. Whereas, the World Bank estimates the market size for the MFIs to be of USD 300billion. An effective and stringent regulation of the industry would not only help in winning the faith of the public but would also ensure that the reasonably available market size is covered.
The article is authored by Shruti Jaiswal from Xavier’s Institute Of Management.
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