Philanthropy Impact

Inspiring philanthropy and social investment across borders, sectors and causes

Microfinance

 

By Whitni Thomas, Investment Relations Manager, Triodos Bank

 
Highlights
  • Microfinance institutions (MFIs) provide financial services to people on low incomes who do not have access to credit and other financial services.
  • An estimated 2.7 billion people have no access to formal financial services. They are unable to open a bank account, negotiate a loan to start a business or buy insurance.
  • Recent turbulence in the sector is leading many intermediaries to refocus on the social objectives of microfinance.
  • There are various intermediaries and funds through which individuals can invest in microfinance.
Read more about Microfinance

Microfinance institutions, or MFIs as they are often called, provide financial services to people on low incomes who do not have access to credit and other financial services. While the services and products vary, MFIs typically make small loans (of around £50) to poor people for short periods of time. The original premise of microfinance was that people who were traditionally excluded from the banking sector because of lack of income or collateral could borrow to meet their credit needs. These needs either go unmet or are met at the exorbitant terms set by moneylenders or loan sharks.

For microentrepreneurs, not being able to access credit can mean not being able to buy inputs at wholesale price because of a lack of working capital or not being able to invest in even the smallest assets such as buying a goat or a stall at the market.
 
Contrary to the perceived wisdom of thirty years ago, the microfinance model1 has demonstrated that poor people can, and do, repay loans. Although microfinance came to prominence in the 1980s, experiments in it started three decades earlier in Bangladesh and Bolivia.
 
Since its early days, the industry has come into its own. The market for microcredit has expanded over many years, with MFIs extending loans to more than 200 million clients by the end of 2010 (Source: MicroCredit Summit Campaign). Through various socio-economic ties of the borrowers and their families, it is estimated that microfinance has impacted upon the lives of around 1 billion people in emerging markets and developing countries.
 
On the back of the industry's success, some commercial banks in developing countries have followed microfinance institutions' lead and partnered with them to reach out to lower income customers. In other markets, MFIs have transformed into banks with a full license, allowing them to further expand their services, for example to small and medium-sized enterprises, a sector that creates many jobs, or by providing mortgages for low income groups.
 
There remains an inherent tension between microfinance’s social goals (inclusion for the poor) and its financial ones (the need for a sustainable MFI). The need to balance the two is what makes MFIs such a powerful example of social businesses, creating social benefits while also generating a financial return on investment. The tension of these dual objectives has generally been good for the sector and has spurred innovation and more efficient delivery models.
 
While the industry has weathered the global credit crisis, some practices in certain countries - such as aggressive growth targets and increased competition - has led to overheating and to over-indebtedness of clients. This has been widely recognised and a new consensus has started to emerge in the industry about what constitutes best practice, in particular a renewed focus on the needs and interests of clients. At the same time, enhanced risk-based supervision of the sector by regulatory bodies addresses past weaknesses with the goal to avoid excessive and unsustainable expansion strategies.
 
Innovative solutions in the areas of mobile money and branchless banking are expected to lead to lower operating costs, and should contribute to the establishment of new banks and the growth of established players. There is still huge unmet demand for inclusive financial services and the microfinance industry plays a pivotal role in trying to address it.
 
How to support microfinance
 
There are various ways to support microfinance in developing countries. International funding for microfinance has reached over $25bn. How the support is structured will vary depending on the amount of money the donor has to invest, her motivations and risk profile.
 
The most common form of support is a donation to a charity, such as the Microloan Foundation, or fund which makes microloans to individuals or enterprises. There are normally higher costs associated with making small loans to hard-to-reach people, so many MFIs also rely on donations and grants as part of their funding stream, particularly to fund operating costs.
 
Social investors also have opportunities to combine financial with social returns, though as with any investment decision, we advise you to consult an investment professional in evaluating your options.
 
For example, an investor could structure her investment as a loan, an equity investment or a donation. For example, those wishing to support microfinance internationally might invest in one of the funds accessible to UK investors, like the Triodos Microfinance Fund.
 
MIX is a global information exchange for the microfinance industry. The MIX Market aims to facilitate exchange and investment flows, promote transparency and improve reporting standards in the microfinance industry. MIX is an excellent resource for investors and donors looking to support microfinance in developing countries. 
 
There is little information about microfinance in developed countries. For more information on microfinance in Europe and potential European MFIs to invest in, please see the European Microfinance Network.
 
More information on microfinance is available from a number of resources, including the World Bank's Consultative Group to Assist the Poorest (CGAP) and the Microfinance Gateway.
 

Case study 1: Triodos Microfinance Fund

Triodos Bank has contributed its unique expertise in sustainable banking to the microfinance sector since 1994. Through the management of four funds, the bank now has over £250m lent to 90 microfinance institutions in 35 countries spread across Africa, Latin America, Asia and Eastern Europe.
 
The Triodos Microfinance Fund provides an opportunity for UK investors to participate in this sector. The fund is targeting a 6-9% annual return to investors, with up to 40% of the fund invested in the equity of microfinance institutions. E-mail Triodos at investments@triodos.co.uk for more information.

 

Case study 2: Coutts Microfinance Pilot Donor Advised Fund

The Coutts Microfinance Pilot Donor Advised Fund provides clients with the opportunity to collaborate with each other by pooling funds and directing donations to make an even bigger impact. The Fund is not an investment scheme but rather a collection of donations, directed by donors to support charitable work in microfinance.
 
The Fund requires a minimum donation of £10,000 and is administered by the Charities Aid Foundation. Coutts clients also benefit from an independent Microfinance Advisory Panel, giving them access to written reports on microfinance and information on microfinance organisations that the Panel has helped prepare.
 

1 Microfinance offers social investors an opportunity to combine financial with social returns. As with any investment decision, we advise you to consult an investment professional in evaluating your options.

 
About the author
 
Whitni is investor relations manager at Triodos Bank where she focuses on distribution and marketing of the social and environmental investment offerings managed by Triodos. Previously, she was Head of Access to Finance at the New Economics Foundation. Whitni also has helped to run a microfinance programme in Mexico and has spent six years financing leveraged buy-outs at JP Morgan.
 
Triodos is Europe's leading ethical bank, with offices in UK, the Netherlands, Belgium, Spain and Germany. Triodos offers a comprehensive range of savings and investments, which it uses to finance organisations that benefit people and the environment: from organic farming to fair trade and microfinance, and recycling to renewable energy. www.triodos.co.uk

 

Glossary: microfinance

Collapse
 
 

Current News

Further Reading

Advice & Information