Microfinance a Tool for Development Finance

Microfinance institutions (MFIs) provide loans savings, insurance and related products to groups with low-income, as well as micro, small and medium enterprises, to enable income-generating activities and help people to break out of poverty.?

Though acknowledgment of positive social impact should not, overshadow financial diligence and investment returns. The sustainability of a microfinance model is predicated on its long-term viability for investors. If it doesn’t work for those lending the capital, it can’t continue to work for recipients of micro financing. Exclusion from the financial system is widely regarded as a major obstacle to people’s efforts to grow out of poverty. In 2017, 1.7 billion adults across the globe had no access to a bank account, with the vast majority of them living in emerging and frontier markets. According to World Bank 56% of these were women, and 59% of these women did not participate in their country’s labour force.

Wit a default rate lower than 1% well explains that microfinance can offer investors not only an attractive return, but diversification benefits for Investors that are increasingly sought in the current environment with slow economic momentum.

In 2006, the United Nations (UN) launched the Principles for Responsible Investment (PRI), putting sustainability in the spot light and kick-starting a change in the way investors considered sustainability in making investment decisions. The power that capital and its allocation has to improve some of the world’s most pressing social and environmental problems. The PRI framed environmental, social and governance (ESG) factors as an integral part of an investor’s ownership and engagement responsibility, and as a meaningful driver of sustainable returns.

The PRI is immensely influential, with over 2,300 signatories from over 60 countries, representing over $86 trillion. Now almost it counts nine in every ten of the largest fund managers in the world as its signatories. ESG has gone from the side lines to centre stage.

But in today’s time I see the design of microfinance projects reflects the continued commercialization of the industry, with investments structured alongside private financiers and development partners. Modern microfinance transactions are structured in a way that attracts traditional financiers, and also taps both local and international capital markets thus actually funding the people who are jobless, no income and no assets as a collateral. MFIs actually impacting and targeting an important goal of development finance.

I recently joined a Micro Finance Company and with over 15 years working in BFSI sector I never thought of even reading about Microfinance and micro credit but from last few months I am actually thinking Why investors want to invest in MFI whereas even when world’s First World Countries post COVID19 are even facing the economic slowdown which is believed to be harder and stronger than Great depression of 1930’s.

Well!! Financial results are measured by internal rates of return (IRR) and return on equity (ROE), while social impact is measured by the number of low income clients served and by the quality of the financial services offered. However, in microfinance, financial and social performance both tends to move in the same direction, a major reason why the industry is so attractive to both private and public players. A rapid and large investment inflow into any industry is a cause for concern by economists around the world as can make an impact similar like Great Recession of 2008.

In the case of microfinance, a large supply of loanable funds can lead to the temptation to depart from established loan procedures or relax credit risk analysis in order to book more assets. This will likely have a negative impact on the asset quality of MFIs, thereby increasing credit risk and bad debt, further increasing investment may bring risks of excess liquidity.

The Future is bright but are we prepared to watch and see the Sky after the Black clouds get over.

Perhaps, microfinance investments will be successful if they adapt to the changes in the market place and to newly available technologies, and attract qualified human capital to the sector.

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