Re-tooling The Microfinance Model in Asia

More than three billion people live in poverty around the world, but millions are managing to raise their living standards to some degree, thanks to microfinance. Even so, there’s plenty of scope for scaling up the current model of microlending to help others.

Organisations like ACCION were willing to hedge their bets on the poor as far back as the 1970s -- and today microfinance is flourishing in Asia especially, with around 49 million borrowers.

“We are product-neutral, gender-neutral,” says Stanley Kwok, ACCION’s Chief Executive Officer, who took part recently in an Asia Society talk in Hong Kong called ‘Microfinance in Asia: What lies in store?’

As one of the pioneers of microfinancing, Kwok reveals it wasn’t easy for ACCION in the early days. “It took us 12 years to figure out microfinance was going to help people and in 1973, we made our first microloan.”

Loans disbursed by ACCION then were a lot smaller -- at about $100. Today, this has multiplied tenfold to $1,000 -- attesting to the success of its microfinance model.

This has, in turn, paved the way for other institutions. Another panellist, Matthew Gamser  of the International Finance Corporation (IFC), the private sector investment arm of the World

Bank Group and a large investor in world microfinance institutions, says  the early days of the ACCION movement in Latin America “showed us that poor people were very willing to pay back. Moreover, we learnt that if we loaned (money) to women, women tended to pay back better than men … We started realising that not only could you get the money back, but if you set up the businesses right … you could actually make enough of a surplus to reinvest and grow the business. And the rest is history.”

The founder of Grameen Bank, Muhammed Yunus, made his first loan of $27 to a group of 42 women so they could expand their bamboo furniture making business some 30 years ago and went on to win the Nobel Peace Prize for his work. “The institution came when no one else would trust an individual, would provide them services; was honest, reliable, and not only provided them one loan but continued to provide them with services over time,” says Jennifer Meehan, the CEO for Grameen Foundation in Asia.
 
“I think microfinance is one critical tool that’s needed … (because) without the capital to create income to break out of this low income, low ceiling, low investment cycle, you can’t make that progress. So financial services I actually personally view as something of a prerequisite to all of these other development opportunities that we know of today. And so I think that’s really a critical piece of the puzzle,” Meehan told INSEAD Knowledge in an interview.

She cautions however, that microfinance does have its limitations, as it is neither a “silver bullet” nor a “panacea”, though it is “a powerful tool that you can (put) physically into the hands of a poor person”. These people who are likely to be illiterate or innumerate, she adds, can use microfinance as a “tool” to help them open a hairdressing shop in the Philippines for example, or start an animal husbandry business in Inner Mongolia.  

That said, Meehan also believes that microfinance has not yet reached its full potential, because with more than three billion people in the world living below the poverty line at under $2.50 a day – half of whom live in “abject poverty” at $1.25 a day -- a lot more people can be delivered from poverty.

Hence, the question of scaling up the current model becomes even more pertinent. “The big new challenge is what can microfinance mean in the broader sense? It’s not just microcredit, it’s about savings; it’s about money transfers, it’s about insurance,” says Gamser, who is advocating the idea of “responsible finance” where structure, governance and regulation all have a part to play.

He sees great potential in the ‘rural space’, in particular agriculture and food security, which have suddenly taken on greater significance in the wake of climate change, though he notes very few institutions are actively financing agriculture.   

Meehan too believes this current model needs to be re-worked. “I think this model is not sustainable in the long term; this model cannot scale to the size of the problem.”

But with current microfinancing interest rates as high as 30 per cent, surely the model is in dire need of a revamp?

“The interest rates are probably the most difficult thing for people outside the industry to understand and for us to articulate in a way that sounds constructive,” says Meehan. “But the bottom line is to think about the service that is being offered to poor people. It’s not just the first time they have access to financial services; it’s at their doorstep, it’s designed for them with no collateral.”

She concedes that it is expensive to deliver these services at the village level especially if the loan amount is a mere $100 loan. “If we’re going to go village by village, town by town, having someone drive a motorbike … it’s going to take a really long time. But if we embrace the power of tools that poor people have in their hands -- and that’s potentially mobile phones -- it could be transformational in terms of the potential to grow.”

Gamser agrees: “If we could, through cellphone technology, reduce the cost of moving money from one place to another, for the same poor people by a couple of percentage points, you wouldn’t need those new contributions to the poorest countries … It doesn’t require donations; it requires thinking about business models that can work, and it’s about making the incentives right for cellphone companies, banks, distributors, clearing companies.”

“It’s about fitting together with the mainstream of the financial sector, and really figuring out how to make these parts ‘play nice’ with each other, in a way that’s in poor people’s interests.” 

[This article is republished courtesy of INSEAD Knowledge
http://knowledge.insead.edu, the portal to the latest business insights and views of The Business School of the World. Copyright INSEAD 2023]