Microfinance as a Business

Posted on April 23, 2006

I was lucky enough to attend the microfinance conference at the University of Chicago recently where the topic was “Microfinance at a Crossroads.” There were many distinguished speakers at the conference who spoke about where microfinance is going and where it should be going. One theme that permeated the day’s discussions was microfinance as a business. Specifically, the thought was that we need to begin to think about growing, and possibly merging, microfinance institutions (MFIs) in order to make microfinance more efficient. The increase in efficiency would allow interest rates to be lowered making it possible to move down market and reach more of the poorest of the poor.

One of the panels during the day was geared toward talking about just that and focused on consolidation in the industry and the possibility of mergers ahead. However, Monica Brand of Accion brought up a great point. When mergers happen in the public markets the stock usually goes down. The reason for the drop is that mergers are hard. There are internal power struggles and management issues and the synergies that were seen as possible previous to the merger can sometimes never be obtained. Also, as opposed to “regular” businesses, MFIs are usually started with a very clear social vision in mind rather than a business vision. When the opportunity to merge comes up, especially if a commercial bank is involved, the social aspects will be what the MFI founders consider first and foremost. If they are not convinced their potential merger partners will uphold their social vision they will not merge or they will go forward with the merger only if their position remains preserved in the post-merger entity.

So, what can we do to obtain the synergies and take advantage of economies of scale that come when organizations grow or merge with others? One thing we can do is combine the data mining and CRM of organizations rather then merge them completely. Data mining and CRM are very expensive but the expense per action decreases as volume increases. MFIs can band together to form joint ventures that are designed specifically to run their back office operations. Combining operations not only saves costs, it also allows the MFI CEOs, founders and other personnel to keep their positions at the MFIs they run and maintain the integrity of their social vision.

Helping people is why microfinance exists and why all of us are so passionate about it but that doesn’t mean we shouldn’t think about it like a business. Business is not a bad thing. It values efficiency which is going to be critical in taking microfinance to the next level. The more efficient microfinance becomes, the more people we can ultimately help and the better we can serve the worlds poor. I personally look forward to the future of microfinance and to more ideas that will create a world in which everyone has access to basic financial services.

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2 Comments so far
  1. Microfinance at Disruptive Thoughts May 7, 2006 12:19 pm

    […] Ever since I was first introduced to the idea of microfinance I have loved it. My friend Eric was fortunate enough to attend the microfinance conference at the University of Chicago the other week and posted his thoughts following it. Helping people is why microfinance exists and why all of us are so passionate about it but that doesn’t mean we shouldn’t think about it like a business. Business is not a bad thing. It values efficiency which is going to be critical in taking microfinance to the next level. The more efficient microfinance becomes, the more people we can ultimately help and the better we can serve the worlds poor. […]

  2. […] I have already talked about treating microfinance like a business in another post so I won’t bring that up again. Also, I don’t think much more needs to be said about making an effort to truly reach the poorest of the poor including those in rural areas. That’s the goal and we are all aware of it. On a side note, I think it will be easier to reach to poorest of the poor, even those in rural areas, as microfinance becomes more efficient. That said, in this post I would like to focus on the addition of more products into the microfinance mix. […]