By all accounts, the microfinance phenomenon is a dazzling success. Since it began over 20 years ago, the industry has become one of the most talked-about methods of empowerment for the world’s poor, particularly women. The concept of providing sustainable financial services—often in the form of small loans—has taken off, and women are proving that they are the best investment with the highest repayment rates.
Today, microfinance serves over 133 million clients and women account for nearly 83%. Yet demand continues to outstrip supply with still over one billion potential customers.
But is simply putting more $100 loans in the hands of a larger pool of women enough? Our experts aren’t so sure. Read on to learn more about the proven promise of microfinance—as well as the possible pitfalls they see emerging in this growing field.
It’s More Than Micro
Mary Ellen Iskenderian:The issue of women is so closely tied to poverty alleviation—you can’t talk about one without talking about the other. When you give a woman access to basic financial services, you give her the keys to her economic independence. But the benefits of promoting women’s economic empowerment through microfinance go beyond increasing a woman’s self-esteem. Because women invest back into improving the immediate wellbeing of their families at higher rates than men—at 89 cents on the dollar versus 60 cents, respectively—developing women as leaders has tangible social and economic benefits that are critical for long-term poverty alleviation. But, it’s true, there is no single cure-all to end global poverty.
Lynne Randolph Patterson: Women need more than credit. Microfinance is part of the answer, but it’s not a panacea. Women need business training to run profitable businesses; they need access to health services to maintain their health and the health of their families.
Prema Gopalan: Yes, microfinance is by itself not an answer to all the problems that poor people face. For example, microfinance can lead to a debt spiral if loans aren’t revenue-generating. I have seen that when microfinance goes beyond loans to mobilize and network women, it has led to increased access to resources and women’s empowerment.
Jessica Flannery: I don’t think there’s a single, foolproof, silver bullet solution that is the “answer” to the problems of poverty. But I think microfinance comes as close to this as anything I’ve ever seen. The hope and dignity microfinance provides women is as important, in my opinion, if not more important than the financial resources.
The Worrisome Impact of Commercialization
Mary Ellen Iskenderian: To me, the trend that is most shaping the industry today is undoubtedly commercialization, where previously nonprofit microfinance institutions (MFIs) transform into regulated for-profit institutions. While for-profit microfinance holds great promise for expanding microfinance to more than one billion of the world’s poor who have yet to benefit, we must take great pains to ensure that women do not get left behind. At Womens World Banking (WWB), we have seen a troubling trend. We conducted a study that looked at approximately 50 MFIs, half of which were nonprofit and half of which were in the process of commercial formalization, and found that as MFIs formalize, the absolute number of women being served by microfinance is increasing (because more people are being served overall), but the percentage of women being served relative to men has actually decreased in those studied from 78% to 63%.
Roshaneh Zafar: Also, as we move towards more for-profit-oriented organizations, I strongly believe that consumer protection and transparency are very important aspects to ensure that abusive and exploitative practices are curtailed in the industry.
Jessica Flannery: I believe that tapping new sources of capital for use in microfinance, such as 0%-interest loans aggregated from many individual online lenders is a very exciting trend. As knowledge about microfinance continues to spread worldwide, more and more individuals care about it and want to get involved. At Kiva, we are working hard to partner with more MFIs so they can offer loans to millions more people who still don’t have one.
The Promise of Technology
Roshaneh Zafar: Right now, we are seeing greater reliance on technology, which can definitely bring down the costs of operations, especially of collecting micro-deposits.
Susy Cheston: Yes! Technology will help us bring our costs down, but it will also help us to reach new customers and charge lower interest rates. By using point-of-sale devices, smart cards, mobile bank branches, cell-phone banking, and the like, we can reach people who are hard to reach otherwise. For example, a domestic servant in Malawi was laid off from her job and placed her severance pay in the Opportunity bank of Malawi. When her husband died and his family tried to seize their assets, her savings were protected because her savings smart card had her fingerprints encoded on it.
The Important Role of Women
Mary Ellen Iskenderian: Above all, I believe cultivating women leaders at all levels of the industry—from loan officers to board executives—is more crucial than ever. Women continue to be excluded from formal financial systems. In addition, due to the high rates of growth that the microfinance sector is experiencing, a new publication produced by the Consultative Group to Assist the Poor came out this year that stated that the quality of management is the greatest risk facing the microfinance industry, and more high-quality leaders are needed. What’s more—according to a 2007 report, a microfinance institution’s overall financial performance is improved when the CEO is a woman.
It’s because the outreach to women clients increases, and they make powerful role models for the women clients they serve. When MFIs have talented female loan officers who are able to go to women’s houses and meet with them, it really makes a difference in conservative societies where women’s mobility outside the home is limited. WWB has developed a women’s leadership program that promotes women as leaders in the field of microfinance. The program includes mentoring by corporate women executives, exchanges, and an “ecommunity” to provide virtual support. We have also designed an Organizational Gender Assessment methodology to diagnose obstacles, challenges, and opportunities that women staff often encounter.
Susy Cheston: Yes—I’m most interested in mainstreaming women in leadership into microfinance organizations. We’re not there yet, but we’re working on it. What personally excites me the most is seeing how microfinance unlocks women’s power to serve as agents of change in their own communities. I have seen women in Opportunity’s trust groups organize to bring clean water and electricity to their communities, plant trees, fight gang violence, and take care of the homeless. These are poor women by financial standards, but rich in so many other ways.
The Way Forward
Susy Cheston: Though many people seem to think the work on microfinance is complete, we have a lot of work ahead of us before we have reached all of the world’s poor with financial services. The exciting news is that as soon as a microfinance bank for the poor becomes financially sustainable, there is almost limitless investment capital available for that bank.
Lynne Randolph Patterson: Now, we need to think outside the box, question our assumptions, take another look at our clients, and try to develop products that are both convenient and suited to their needs. We are finding out how to be more flexible, and efficient, and find creative solutions.