Microfinance as Business

Abstract

We analyze microfinance institutions (MFIs) as businesses, asking how some succeed in covering costs, earning returns, attracting capital, and scaling up. We draw on existing literature and interviews with industry players and academics. Key microfinance business challenges include building volume, keeping loan repayment rates high, retaining customers, and minimizing scope for fraud. Since the 1970s, microfinance innovators have developed clever solutions to these problems. Some have built huge organizations that serve thousands or millions of clients and have demonstrated an impressive capacity for change—in countries, to boot, with weak infrastructure and human capital. The individual innovations have spread both through a Darwinian process of selection and through cultural diffusion. We examine three kinds of determinants of commercial success: product design, management, and environmental factors such as regulation. We conclude that much about how microfinance is delivered can be understood as responses to business imperatives. Indeed, the discoveries of techniques for cost-effective microfinance delivery are the real genius of microfinance, rather than the “discovery” that the poor can repay that dominates its public image. But by Occam’s razor (simpler explanations are more plausible), the power of commercial imperatives to explain so many product design choices weakens an alternative explanation for them, namely that they are made primarily to help clients. These doubts point up the need for more rigorous impact evaluations of microfinance. The Center for Global Development is an independent think tank that works to reduce global poverty and inequality through rigorous research and active engagement with the policy community. Use and dissemination of this Working Paper is encouraged, however reproduced copies may not be used for commercial purposes. Further usage is permitted under the terms of the Creative Commons License. The views expressed in this paper are those of the author and should not be attributed to the directors or funders of the Center for Global Development.