Do the poor benefit or lose from profit-seeking, commercial microfinance? It’s one of the most hotly contested issues in the field of microfinance. Potential benefits include lower fees and better interest rates for clients, creation of more financial products, greater institutional sustainability, and increased access to the world’s huge capital markets. But can profit chasers really keep the best interest of the poor front and center? Is antipoverty profit chasing microfinance an oxymoron?
From the evidence on the whole, I think not. The arguments on both sides are complex. Here I’ll just focus on some data on metrics that help illuminate the efficiency and pricing issues within the debate.
(1): Price Competition. Bolivia is widely considered one of the most competitive microfinance markets in the world. It was essentially the first country where microfinance became fully integrated with the traditional full-fledged financial sector. Leading the way, Bolivia’s BancoSol was the world’s first fully commercial for-profit microfinance instituion (MFI) and the first to attract significant international commercial investment. By the mid-2000s, competition among a host of more than 20 aggressive competitors meant that Bolivia could boast some of the world’s lowest microcredit interest rates.
Figure 1, from Richard Rosenberg and colleagues at the Consultative Group to Assist the Poor (CGAP), shows the interest rates charged on microcredit and bank loans in Bolivia from 1992 through 2007. As we can see, increasing competition dropped MFI loan interest rates by more than two-thirds in 15 years, from near 60% to about 18%. Rates have roughly stabilized since. That means that microcredit customers in Bolivia get rates similar to or better than what many Americans and Europeans pay on their credit cards, as I explored in a previous post. Encouragingly, traditional banks also apparently felt the competitive pressure.
Figure 1. Effective Interest Rates on Loans in Bolivia, 1992-2007
Source: Rosenberg, Gonzalez, and Narain (2009) [i]
Presumably competition could also increase interest paid on savings deposits, put downward pressure on fees and encourage banks and MFIs to minimize restrictive requirements and hassles for opening accounts.
(2): Scale. A commercial microfinance institution that actively pursues a double-bottom line of both profit and social impact holds several distinct possible advantages over NGOs and other non-profit MFIs. The necessity to turn a profit instills financial discipline and efficiency incentives in private-sector organizations that may be absent in government programs or charitable organizations with different goals. In the same way, as shown in Table 1, microfinance institutions that seek profits tend to grow to serve more clients than non-profit MFIs. That matters not only because more people get services, but also because of the efficiency advantages that come with scale.
|Table 1. Scale Metrics of For-Profit vs. Non-Profit MFIs|
|Median Values of||For-Profit MFIs||Non-Profit MFIs|
|Number of Loans Outstanding||21,031||12,668|
|Average Loan Balance per Borrower||$855||$537|
|Number of Depositors||56,155||26,404|
|Total Assets ($millions)||23.9||9.6|
|Data source: mixmarket.org; data for December, 2013. Note: Data set includes almost 900 MFI serving 95 million borrowers and 87 million depositors in nearly 100 countries.|
(3): Cost efficiencies. Larger MFIs tend to have larger loan sizes. As Figure 2 suggests (with data from 57 MFIs in Peru), MFIs with larger average loans tend to be more cost efficient, spending a lower fraction of funds on operating costs.
Figure 2. Loan Size and Operating Expenses as a Fraction of Loans
Note the median sizes of the organizations in Table 1, in the tens of thousands of clients, reflect large numbers of fairly small MFIs. However, as Table 1 shows, small MFIs only account for a few percent of clients. The vast majority of microfinance clients, more than 4 of 5, save and borrow at MFIs with hundreds of thousands or millions of clients, where the benefits of scale are particularly pronounced.
|Table 2. Measures of Outreach & Efficiency, by MFI Scale|
# of active borrowers
Less than 10,000
10,000 to 100,000
100,000 to 1 million
More than 1 million
|Market share of borrowers (%)||1.4||12.6||35.8||50.2|
|Market share of savers (%)||2.9||17.6||46.1||33.4|
|Total expense rate (% of assets)||27.0||24.8||22.7||17.5|
|Average real interest rate + fees (% of loans, inflation adjusted)||28.9||24.9||21.1||13.5|
|Profit margin (% of revenues)||-14.8||9.8||10.4||19.8|
|Data Source: mixmarket.org; data for December, 2013. Note: Profit, expense and interest rate averages are medians within category. Interest & fees row reports “Yield on Gross Portfolio”, using real rates, adjusted for inflation.|
Costs are relatively lower at larger scale, falling from eating up 27% of assets for small MFIs with fewer than 10,000 clients, to 17.5% for those very large MFIs with millions of clients. With lower costs come higher profits. Small MFIs on average operate at a loss, bringing in less revenue than they cost to run. By contrast, average profit rates for mid-sized MFIs are about 10%, and rise with MFI scale.
(4): Better Prices for Clients. Also note in Table 2 that that pattern of increasing profit with scale occurs despite the larger institutions charging lower average interest and fees, a benefit for their customers. Small MFIs average nearly 29% rates of interest and fees, adjusted for inflation, compared to 13.5% for the very largest. And those very largest serve more than half the clients.
Unquestionably ugly things have happened to some microcredit clients, like over-indebtedness and shady incentives for growth practiced by less-than scrupulous MFIs. Dark recesses unfortunately exist in financial products of all flavors, not just microfinancial services. The microfinance industry needs to take critics seriously and work diligently to improve client protections. However, critics should also acknowledge the demonstrable good.
Hundreds of millions of people worldwide voluntarily use commercial microfinancial services regularly. Hundreds of millions of customers voting with their feet says something powerful about the efficiency and low prices that commercial incentives bring.
[i]. Richard Rosenberg, Adrian Gonzalez, Sushma Narain, The new moneylenders: Are the poor being exploited by high microcredit interest rates? in Todd A. Watkins & Karen Hicks, Eds., Moving Beyond Storytelling: Emerging Research in Microfinance. Emerald, 2009.