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Evaluating the Success of the Microfinance Model

Crunching the Numbers

The goal of microfinance institutions is to serve customers that are otherwise not serviced by the commercial banking system. Microfinance providers have challenged convention and achieved rapid growth in scaling to reach 211 million customers worldwide in 2013. However, although growth has been significant, evidence collected from recent studies has shown the benefits to customers using microfinance institutions has been less dramatic than expected. According to a series of six trials aimed at understanding various impacts of microloans on customers, changes in the income and consumption levels of borrowers have been minimal. On the flip side, positive influence was recorded in the areas of occupational choice, consumption choice, business scale, female decision-making power, and risk management.

Does this Mean That Microfinance Has Failed?

Given these moderate results, one could decide to write out microfinance as a viable business, but this would be a hasty decision, and maybe even a mistake. The microfinance business model is not necessarily a failure. We need to consider the costs incurred versus the benefits, specifically if the costs are small and the returns modest. This will enable us to assess the model in a different and more accurate light. While the benefits to borrowers may be slight, they are part of a broader ratio. If the costs are also minimal, a central premise of microfinance, the benefits may be better than they seem at first glance.

Cross-Sector Subsidy Is Not the End, It’s Only the Beginning

Data collected from over 930 microfinance institutions that provided services to 80 million customers in 2009 showed that there was no unified business model adopted by all. Instead, there was a variety of approaches employed by the different providers. The NGO chartered organizations, for example, typically offered smaller loans that had a higher cost per dollar and attracted higher interest rates than those chartered by banks. Additionally, their loans usually targeted poorer borrowers, they lent more to women and dealt with harder to serve clients than banks and NBFIs (non-bank financial institutions). But despite the diversity in business model, and while levels of subsidy varied, the cost of lending was high for all types of microlenders.

In conclusion, financial support remains vital across the microfinance sector. May it be in the form of public donations, state subsidy or private investments, it is currently inherent to the business model. Yet, if one takes a close and prolonged look at the findings of this research, they become less alarming and more challenging. Clearly, microfinance has a positive social impact, and it has problems too. It is crucial to keep iterating its business model, and cost structure to improve borrower benefits and lender independance alike.

Article Name
Evaluating the Success of the Microfinance Model
Microfinance institutions serve a purpose, but the business model is not always the most profitable. We look at the pros and cons of their existence.