Thirty years ago, microfinance, the encompassing term to refer to banking services (savings & loans, microleasing, insurance services) tailored to the needs of the poor and other social groups excluded from the mainstream financial system, was a small niche in the fold of international aid. Today microfinance is a global phenomenon with actors ranging from the new microcredit institutions to traditional commercial banks.
An example in point is the Grameen Bank established by Muhammad Yunus, awarded the 2006 Nobel Peace Prize. Born as a village bank, Grameen now boasts 1,084 subsidiaries employing 12,500 people, serving more than 2 million clients in more than 37,000 villages. Ninety-seven percent of its credit beneficiaries are women, and the system, based on a complex system of mutual trust and social control, has reimbursement rates as high as 98%.
Grameen’s growth is reflected by the fact that the 2006 target of 110 million clients, set in 1997 by the Global Microcredit Summit, has been reached. This has broken the myth that poverty is an unsolvable problem, or too complex to manage beyond international aid and philanthropy. To the contrary, the results show that the poor are not hard to reach and are not passive vis-à-vis their predicament. Furthermore, the success of microfinance proves that non-traditional market segments can produce returns on borrowing, and that positive financial results do not depend on higher interest rates than those prevailing in the market.
Microbanking promotes access to finance as a fundamental human right, involving whole communities and various institutional levels, while pursuing efficiency in service and economies of scale. Nevertheless, two thirds of the global population remains excluded from the credit market. This is the reason why the 2006 Global Microcredit Summit launched more ambitious objectives for next decade: the objective is to reach 175 million families belonging to the lowest income groups, thereby serving a total of 870 million people, which would translate in one hundred million families breaking the one-dollar-a-day threshold thanks to microfinance.
The attainment of such objective would mean more than half a billion individuals being lifted out of extreme poverty.
The Summit was also an occasion to debate factors that are critical for further development of microfinance: the lack of normative framework supporting microbanking is cited as the number one problem. Harmonization of government policies would be highly desirable on this issue. Its great strides notwithstanding, microfinance alone is not sufficient to free the world from poverty. Microcredit activities have to be matched by structural interventions aimed at creating opportunities for investment for those getting a loan.
While budget control and assessment of financial results are an obvious imperative, microfinance remains a social rather than an economic enterprise. It pursues financial sustainability, rather than financial profitability. In this field, to be sustainable means building a durable institution that combines economic efficiency, social responsibility and customer satisfaction. Microfinance is about catalyzing the virtuous circle by which higher individual incomes give rise to communal development.
by Francesco Perrini,
Full Professor of Corporate Management, Università Bocconi