World microfinance sector largely undeveloped

Only 10 percent of the potential market for microlending is being reached by the 10,000 microfinance institutions (MFIs) worldwide. The 10,000 MFIs operating around the world includes the specialized microfinance units within commercial banks, some rural banks, cooperatives and credit unions, non-government organizations (NGOs) engaging in microfinance, and a few state-owned development banks, among other institutional types.

"Even using some of the most optimistic estimates, only less than 10 percent of the potential market for microfinance which includes micro-loans, micro-deposits including voluntary saving services, micro-insurance, small-scale payments, transfers, and the like," according to Stephanie Charitonenko, senior project manager for the Asian region for Chemonics International Inc.

Charitonenko was commission by several institutions including the Asian Development Bank (ADB) to conduct extensive studies on worldwide microfinance including the Philippines. Curiously, the top five institutions provide over half the current micro-savings and micro-loans in the global market.

These include the Bank Rakyat Indonesia’s Microbusiness Division [usually referred to as the BRI Units] with 29 million active clients, and the few NGOs operating in Bangladesh, namely, BRAC with about three million active clients, ASA with close to two million, and Proshika with 1.5 million clients. "Despite the tremendous strides made so far in term of outreach, demand for microfinance still far outstrips the supply of sustainable microfinance services," she said. Of the total population of MFIs, only about one percent have reached financial self-sufficiency, or FSS. Attaining FSS requires microfinance programs to cover all administrative costs, loan losses, and financing costs from operating income, after adjusting for inflation and subsidies and treating all funding as if it had a commercial cost.

For example, while 124 MFIs report to the MicroBanking Bulletin, a leading industry MFI benchmarking publication, only 66 of those are fully financially self-sufficient and able to operate without subsidies of any kind, Charitonenko reported. This reflects that during the 1990s, several MFIs began covering all their costs and a few have begun to attract significant commercial funding, especially in Latin America.

Unfortunately, many MFIs still strive for the objectives of being profitable and reaching the poor, either on their own or, as in many cases, with training and TA provided by donors. Increasingly, the emphasis is on MFIs to achieve FSS and reach poorer rural and hard to reach areas. After some 20 years of virtual neglect, donors are also turning their attention particularly to the agricultural producers in rural areas. Meanwhile, the Asia and Pacific region hosts some of the largest and most profitable MFIs. But it is also home to a huge number of poor performing MFIs. There is real resistance on the part of microfinance practitioners, particularly in South Asia to charging interest rates that fully cover their costs.

In the Philippines, the Bangko Sentral ng Pilipinas (BSP) and donors has established an enabling environment. Many countries in Asia, Africa, and Eastern Europe are 10 to 20 years behind Philippines when it comes to having microfinance-friendly policies and establishing an enabling legal and regulatory framework.

Continued, large subsidized credit programs, especially in South Asia, underscore the belief that making a MFI profitability is bad for the poor and would sabotage rather than assist in the development of the microfinance industry.

In Latin America (including South America and the Caribbean), the focus is on microenterprise finance. It is a maturing industry with many viable MFIs; commercial institutions dominate the market, providing over half of the available microfinance products and services.

In Africa, there are diverse institutional models, many very small MFIs having less than 1,000 clients and most are relatively new MFIs established in the 1990s. Most MFIs in Africa are heavily donor dependent. As in South Asia, benevolent attitudes toward poverty reduction and continued government subsidization of credit reinforce the subsidy dependence of many MFIs. Eastern and Central Europe represents the newest industry with few emerging MFIs. Only a handful of MFIs have over 10,000 clients. The focus here is on job creation and regulations are problematic.

Charitonenko said that there a few clear trends globally that imply future directions for the industry such as increased emphasis on voluntary savings both as a useful service for the poor and as a commercial source of funds for growing MFIs. "Most MFIs are still regulated while microfinance should be integrated into financial system," she said. "Diverse institutional models will be needed to serve the many different market niches for microfinance services (pawn brokers, banks, cooperatives and credit unions, NGOs)."