Microfinance, Charting New Territory

Elizabeth Littlefield @elittlefield

Conventional wisdom about the poor and reducing poverty have proven flat wrong time after time in the modern era.

One of the most far-reaching rethinks began in the mid-1970s, with the advent of microcredit programs or “schemes.”

These programs demonstrated that the poor were creditworthy and thus bankable. Institutions and groups providing interest-bearing loans while relying on little or no collateral were viable and scalable in low-income communities.

Prior to this time, few economists had focused on the negative consequences of moneylending: inefficiency, exorbitant interest rates and risk. But a growing body of research showed these factors stunted economic mobility in concrete ways.

By the 1990s, the professionalism of the sector was maturing. The term microcredit gave way to microfinance, which was no longer focused on “beneficiaries” but on “clients” and the push for creating programs evolved toward building institutions.

We began to realize that we were building something in and across developing nations far greater than we had previously understood — entire financial systems that could serve the majority of their populations — the poor — with a variety of essential, flexible, convenient and affordable financial services. The services would help reduce economic vulnerability by increasing and smoothing out uneven household incomes, thus improving the lives of the poor.

We began to realize that low-income people often wanted a safe place to save money and a convenient way to move small amounts of money even more than they wanted small amounts of credit or loans. And we found that robust, financially sustainable and regulated financial institutions could be built to serve them.

Just last week, the microfinance portfolio of the agency I oversee, the Overseas Private Investment Corporation (OPIC) — the U.S. government’s development finance agency — topped the $1 billion mark for the first time in agency history. OPIC’s microfinance portfolio is highly diversified, spread across more than 180 institutions, multiple regions and 50 developing nations.

As it turns out, microfinance is also one of the strongest performing parts of our $20 billion portfolio. It represents a sound, sustainable investment that earns returns for the U.S. government, in dollars, and for microfinance clients, in life-changing services.

Microfinance, or the “financial inclusion” sector, has attracted scores of institutions and investors from the public sector, nongovernmental organizations and private banks. Individually and collectively, they have experimented with business models, financial instruments and partnerships.

Few factors have had a greater impact on microfinance than digital technology. Microfinance and digital technology have become a kind of double-helix of financing for the poor: intertwined, steadily evolving, adaptable to local circumstances and replicable.

The use of cellular telephones in rich and poor countries alike, for example, has been meteoric. Mobile banking followed close behind. Microfinance organizations now use “mobile wallet” technology to allow the poor to send and receive money, and to disburse loans or receive loan payments. This not only saves time, it eliminates the expenses that middlemen charged for such transactions.

The mobility allowed by digital technology continues to change microfinance. A loan officer for a microfinance institution can now take an iPad outfitted with an electronic loan application into the field and immediately send a client’s data to a bank branch. This lowers cost, increases the productivity of the loan officer and allows clients to conduct business in an environment where they can easily draw on the advice of family and friends.

Even “big data” is changing the world of microfinance. Traditionally, microfinance institutions have looked at business cash flows and household finances to determine creditworthiness. Now, pioneering companies are developing and deploying computer algorithms that can unearth financial trends and provide credit histories. For example, they can analyze mobile phone transactions to determine how frequently a customer tops his or her account with additional credit, or the average top-up amount. Such data can be the basis of credit decisions on “nano-credit” loans of less than $25.

OPIC has actively financed, insured and supported these increases in efficiency because of their impact on the lives of the poor. For example, we recently committed $5 million in financing to help Tiaxa, a global leader in nano-credits, expand its operations. Already, Tiaxa is helping the poor by efficiently processing some 10 million small loans per day.

OPIC has committed $20 million in financing to Janalakshmi Financial Services in India. Janalakshmi started as a fledgling microfinance enterprise in the slums of Bangalore some 15 years ago. Today, it uses slate computers for “biometric-based” microfinance transactions. The net result? Microfinance becomes available to those who may be semi-literate, and opportunities for fraud are reduced.

Perhaps the most exciting aspect of the ongoing microfinance revolution is the widespread sense of potential still ahead.

The only reliable piece of conventional wisdom about microfinance today is that it will likely look different, and be much more powerful throughout the developing world, in the decades to come.