#Mifimon: Where in the world is microfinance working?

The following is a guest post by Grameen America DC’s Alice Geglio, for Opportunity International

Interested in learning about microfinance? Follow our biweekly Twitter discussion group #mifimon (because Microfinance Mondays was too long for Twitter’s 140-character limit!) The aim is to host an exchange of ideas about issues relevant to the microfinance industry. You’re welcome to lend your voice, whether you’re a practitioner in the field or a newbie just learning the basics. Just end your messages with the hashtag #mifimon!

We had a great turn-out for this week’s discussion: @ACCION_USA, @AJRenold. @amycarolwolff, @CFI_ACCION, @ChristieMisty, @CIPEglobal, @CU_Rising, @Grameen_DC, @jyandziak, @laurakummer, @lend4health, @OptINnow, @rarenaud, @ReVisionlabs, @robgarciasj, @suggett

This week’s #mifimon challenge: Leave a comment to this post, telling us about your favorite MFI. In which countries does it operate? Urban or rural borrowers? Is it large or small? Are its borrowers registered in the formal sector? Does it operate in conflict areas? What about it makes it your favorite?

This afternoon our #mifimon group discussed (View previous conversations) where in the world microfinance is working. Mifi is arguably the hottest new idea in international development, and in the past decade it has spread like wildfire. Surely the ability of MFIs to adapt to the conditions and cultures of each country is a tribute to the strength of the fundamentals of the microfinance model. However, we found that there were some interesting questions that came up over and over, no matter what the environment.

Policies and regulations

The rules governing financial sectors vary widely from place to place. Regions also differ in the level of transparency, red-tape, and consumer protection required by MFIs. Which countries have the most mifi-friendly business environments? Last month, The Economist issued a pilot study ranking 55 countries according to their microfinance regulatory framework, investment climate, and industry development. ACCIÓN International’s Center for Financial Inclusion offers a client protection library (http://www.centerforfinancialinclusion.org/Page.aspx?pid=1415) with information about requirements in a dozen countries. The Economist ranks Peru as the #1 microfinance environment, which is unsurprising considering the maturity of the industry. Latin America and Southeast Asia have well-established microfinance sectors, thanks to early work by Grameen Bank and FINCA, among others.But where will new growth be? Will microfinance branch out to the regions where there is an untapped demand for credit, but little microfinance-related policy in place? We discussed China: there is a vast unbanked population, and in the past few years there have been regulatory changes that make it one of the most promising countries for industry growth.

Rural and urban needs

Is microfinance more likely to serve rural populations, where poverty is especially severe and financial services especially scarce? Or will expand in urban centers, where MFIs can count on a certain degree of infrastructure and community? The answer depends on the country and on the goals of the MFI, but on a global level only time will tell.

Size of the MFI

As microfinance grows, will more small MFIs spring up, or will we see them consolidate into larger organizations? A large number of small players could lead to haphazard or uneven industry standards. Also, large MFIs can take advantage of scale efficiencies to increase their impact. Grameen Bank and ASA, for example, are able to reach millions and still deliver personal attention. However, there are also great niche MFIs tailoring their services to unique clientele, such as Haiti’s Fonkoze, which makes a big difference one baby-step at a time. In addition, a choice between many competing MFIs can mean better terms for borrowers.

Informal microbusinesses

In Mexico, many of the microenterprises funded by MFIs are part of the informal market — that is, they are not officially registered as businesses. Does a thriving informal sector make a good environment for microfinance? 93% India’s jobs are in the informal sector, so one can imagine that a borrower would have no trouble finding a business opportunity. On the other hand, many organizations say incorporating the financially-excluded unbanked into the mainstream finance industry is key to long-term poverty alleviation.

Political conflict

Violence has an undeniable effect on the business climate in developing nations. For example, recent political unrest in Mexico may explain why so many microfinance clients opt for informal businesses. The troubled situation in Afganistan may have attracted the attention and determination needed to get the ball rolling. However, conflict is very disruptive, as in Kenya, where it caused many borrowers to lose their businesses. It seems that MFIs must always seek a balance between going where the need is greatest, and where success is most likely.

Innovations

There are limitless possibilities for experimental changes to the model to fit each environment. Our collaborators were excited about microfinance and credit unions in Ghana and the US – any other ideas?

Next #mifimon:

Please join us Monday, November 2 from 12 to 2 CST for a discussion about the interaction between microfinance and other community development initiatives, like health care or disaster relief. We’d love to hear from you!