Moving Beyond Storytelling: Emerging Research in Microfinance: Volume 92

The microfinance industry (MFI) has crossed the threshold into a period of tremendous growth. This growth was significantly accelerated by media attention to the industry during the United Nations Year of Microcredit in 2005 and the awarding of the 2006 Nobel Peace Prize to Grameen Bank founder Mohammed Yunus, as well as the interest of high-profile donors and investors, including eBay founder Pierre Omidyar and Microsoft founder Bill Gates. Despite the promise for international development, despite the proven track record of exceptional loan repayment rates, and despite the development of competitive markets in countries like Bolivia, Peru and Bangladesh or the global expansion of microfinance access to tens of millions of new clients, little research has explored the impact this expansion has had on global poverty and economic and social development, in general.

In April 2007, Banco Compartamos of Mexico held a public offering of its stock in which insiders sold 30 percent of their holdings. The sale was over-subscribed by 13 times, and Compartamos was soon worth $1.6 billion (for details of the story, see Rosenberg, 2007; Malkin, 2008; Accion International, 2007). A month before the offering, the Economist (2007) had written: “Compartamos may not be the biggest bank in Mexico, but it could be the most important.” Compartamos’ claim to importance stems from its clients – not from their elite status, but from the opposite. The bank describes them as low-income women, taking loans to support tiny enterprises like neighborhood shops or tortilla-making businesses. The loans the women seek are small – typically hundreds of dollars rather than many thousands – and the bank requires no collateral. It is a version of “microfinance,” the idea associated with Muhammad Yunus and Grameen Bank of Bangladesh, winners of the 2006 Nobel Peace Prize. For Yunus, microfinance can unleash the productivity of cash-starved entrepreneurs and raise their incomes above poverty lines. It is a vision of poverty reduction that centers on self-help rather than direct income redistribution.

Within the past few years, a new phenomenon has taken place among the world's leading microfinance institutions (MFIs) – entry into new capital markets through initial public offerings (IPOs). “Going public” launches MFIs into a new frontier, not only presenting challenges but also providing new opportunities for the institutions and the clients they serve.

The rapid growth of foreign private lending to microfinance institutions (MFIs) in the past several years has led to a surprising reversal of roles between government-owned development agencies and private lenders. Development institutions [International Financial Institutions (IFIs)] are concentrating their loans in the strongest MFIs, leaving private lenders to look for opportunities among smaller, riskier borrowers. Development institutions are “crowding” private lenders out of the best MFIs.

Woller, Dunford, and Woodworth (1999) and Morduch (2000) were among the first to discuss the existence of a “schism” in the study of microfinance. Although the exact dimensions of this divide are stated differently by various authors, the existence of alternative schools of thought is widely accepted (Brett, 2006; Bhatt & Tang, 2001; Mitlin, 2002; Robinson, 2001; Rhyne, 1998).

Over the past two decades, institutions that make microloans to low-income borrowers in developing and transition economies have focused increasingly on making their lending operations financially sustainable by charging interest rates that are high enough to cover all their costs. They argue that doing so will best ensure the permanence and expansion of the services they provide. Sustainable (i.e., profitable) microfinance providers can continue to serve their clients without needing ongoing infusions of subsidies and can fund exponential growth of services for new clients by tapping commercial sources, including deposits from the public.

The Government of Iraq (GoI) and the U.S.-led coalition in Iraq have used microfinance institutions (MFIs) as part of their counterinsurgency campaign. This raises several questions. What role can MFIs play in counterinsurgency? Are the economic or civilian and military motivations for supporting microfinance convergent or divergent? What constraints does conflict impose on microfinance borrowers, lenders, and institutions and how can an MFI ameliorate these constraints? Analyzing these issues is the core of this chapter.

In the past decade, microfinance institutions (MFIs) have experienced a boom in innovations of lending products, partly fueled by donors who see microfinance as the next promise to alleviate poverty. Examples of these new products are the combination of credit with health or life insurance, business and health education, savings products, and the adoption of (or conversion to) individual loan liability. The add-on features generally aim at reducing the vulnerability of clients while contributing to asset creation, hence improving repayment rates and the sustainability of the service. The product innovations typically result from organizations striving to extend outreach, increase impact, and promote sustainability. As in other industries, MFIs typically decide whether to adopt new strategies based on other MFIs’ success with the innovations. Many new microlending products and approaches continue to be developed. However, MFIs must generally rely on qualitative and descriptive case studies and anecdotal evidence on the effectiveness of these innovations to decide whether to implement the new strategies. The usual case study approach does not provide tangible evidence that can enable other organizations to know what changes can be expected if they were to adopt similar product changes.

Despite the remarkable expansion of microfinance over the past several decades, the industry remains in a developmental period of experimentation and rapid growth, exploring which approaches work best under different circumstances. Widespread diffusion and local adaptation of techniques and innovations from pioneering organizations such as ACCION International, Grameen Bank, FINCA, Bank Rakyat Indonesia, BancoSol, and many others fostered the emergence of a global industry that by most counts now serves more than 100 million clients. Yet along many dimensions of the industry – for example, client methodologies, information technologies and infrastructures, transparency and performance monitoring, product and service portfolios, funding structures, human resource management, health and environmental amelioration, and regulations – significant barriers remain to achieving the broad vision of microfinance as a major contributor in fighting global poverty.

We are confident that the Wal-Mart concept is “exportable.”…If Wal-Mart had been content to be just an Arkansas retailer in the early days, we probably would not be where we are today. State borders were not barriers, and people and ideas moved freely from one area to another…We believe the successful retailers of the future will be those that bring the best of each nation to today's consumer. We call it “global learning.” We are committed to being a successful global retailer and we believe the attributes that made us successful in the United States will also lead to success internationally.– David D. Glass, President and CEO, Wal-Mart Stores, Inc. (Govindarajan & Gupta, 2001)

Julie Abrams, President, Microfinance Analytics, has been a consultant to the microfinance industry for 15 years. She has authored or co-authored 16 publications on microfinance topics including international financial institution funding, foreign investment, MFI debt default, foreign exchange risk, an e-course on financial risk management, capital structure, profitability, financial performance, and MFI appraisals. Julie has been on the review panel and jury for CGAP's Financial Transparency Awards. She currently serves as an advisor for Research and Analysis to the International Association of Microfinance Investors (IAMFI) and is a member of the Calvert Foundation's External International Investment Committee, including reviews of MicroPlace and all syndicated lending. She began working in microfinance in 1985 with Women's World Banking. Julie was a fellow at the Lauder Institute of Management and International Studies, where she earned an MBA from the Wharton School and an MA in International Studies from the University of Pennsylvania and holds a BA in Economics from Oberlin College.