Nearly 50 years ago, the microfinance industry was born based on the belief that if those living in poverty were given access to loans, they could help themselves permanently out of poverty. The early pioneers would likely be amazed at the way the industry has developed and the hundreds of millions who have benefitted from microfinance services. And while they also might be gratified by the efficiency and effectiveness of many of today’s industry leaders, they would also be dismayed by the focus on profitability at the expense of serving those on the bottom of the economic ladder.
These days, there is a clear dichotomy between mission-driven and profit-driven microfinance organisations. To understand this difference, we need to look back at the history of the industry, and consider how a sector that began as the brainchild of a development mind-set, became part of the finance industry.
As microfinance organisations grew throughout the 1980s and into the 1990s, it became clear that finance expertise was needed if efforts were to truly grow and scale. Innovations we began to see in this era, such as group lending, came from the banking industry and were key to the growth of the industry and its on-going success.
In line with the nature of the banking industry, improvement was a focus, but so was making profit. This meant that in the mid 2000s mission-driven and profit-driven microfinance began to emerge as two separate approaches to the same solution. People would speak about the notion of ‘doing well by doing good’ – investing in activities that help the poor, but also making money.
There are two key factors to making a profit in microfinance: lending larger amounts of money, and maximising the number of clients per loan officer. If we consider for a moment the difference between urban and rural lending; urban clients typically need higher value loans because the operating costs of their businesses and livelihoods tend to be more expensive in cities. On top of this, loan officers can serve more clients in urban areas because of their proximity, and so providing urban microfinance makes more economic sense than providing rural microfinance.
Not to imply that profit-driven organisations don’t make a difference, or that their models aren’t to be admired. Any initiative that helps poor people toward a better life is worth celebrating. However, let’s not forget the 70 per cent of the world’s poor who live rurally, those people that may be deemed as ‘too expensive’ to help, who may be harder to reach, and whose requirements could be more complicated than their city-dwelling counterparts.