Top Trend #7 for 2011: Microfinance Regroups

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In the early days of microfinance, advocates made audacious claims about impacts. As experience and research have accumulated, advocates’ claims have become progressively more humble. Rich Rosenberg from CGAP (as quoted by Dean Karlan) maps out the transition as follows:

  • Microcredit is a magic bullet against poverty
  • Microcredit will lift millions out of poverty
  • Microcredit raises poor people’s income and consumption
  • Microcredit helps the poor cope with poverty
  • The impact of microcredit isn’t about income or consumption, but rather about freedom and empowerment
Microfinance is not a magic bullet: it never should have been labeled that way.  As the Economist and the Financial Times point out, microfinance is a banking service for people living in poverty whose only alternatives are loan sharks or not having a banking vehicle. In some ways, the over-inflated expectations were harmful to the long-term growth of the industry, and the high-profile hiccups in 2010 may have re-adjusted expectations in a healthy way.

In 2011 India’s MFIs–at the center of controversy in 2010–will emerge less focused on growth and more attentive to the needs of their clients and the importance of effective communication. The shift to a focus on clients is evident elsewhere in the microfinance ecosystem, and MFIs in other, younger markets will pay attention.

In the last ten years, the most important studies in microfinance focused on institutions and the factors that affect them, for example local regulation. Increasingly, the studies presented at conferences focus on clients, their livelihoods, and how products can be redesigned better to meet their needs. In a broad sense, focus has shifted from the supply side to the demand side of the microfinance’s market equation.

One effect of this shift will be for MFIs and their funders to consider diversifying product offerings and revenue sources. MFIs can be effective distribution channels for other products and services, from microinsurance to healthcare to energy solutions (like Energy in Common, currently piloting the finance of inexpensive energy products through MFIs in Africa). As the microfinance industry regroups in 2011 it will emerge stronger, wiser, and even more focused on the clients whose livelihoods depend on it.

By Catherine Burns, Ross Baird, and Mark Hand.  Photo credit Brett Matthews.

01/13 Update: Check out some good news about microfinance posted on Wednesday at greenchipstocks.com.

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