What is microfinance?
Microfinance is the provision of small loans and other small scale financial services to the poor. Having access to affordable credit, a secure place to save money and insurance to protect against the unforeseen can make a world of difference for the "unbanked", some 2-3 billion poor people in "The Base of the Pyramid". Affordable microfinance services enables them to build businesses, to increase and stabilize their income and to reduce their vulnerability.
Bottom up economic development
Microfinance is the provision of small loans and other small scale financial services to the poor. Having access to affordable credit, a secure place to save money and insurance to protect against the unforeseen can make a world of difference for the "unbanked", some 2-3 billion poor people in "The Base of the Pyramid". Affordable microfinance services enables them to build businesses, to increase and stabilize their income and to reduce their vulnerability.
Huge unmet demand
In the '80s and '90s microfinance pioneering institutions like the Grameen Bank of Bangladesh have developed models that work. They have proven that the poor are capable of paying a market rate of interest and repaying their loans. Today, there are more than 5,000 microfinance organisations across the globe. Most of these are small scale "grass roots" organisations, operating on a non-profit basis and serving only a small community. Only a few hundred have managed to reach a critical mass and operate on a sustainable basis.
The total volume in microfinance today is estimated at 15-20 billion euros, and potential demand is estimated at some 300 billion euros. Around 100 million poor families have access to microfinance, but some 500 to 600 million families are still dependent on moneylenders and other informal sources.
Double bottom line
Microfinance is not only an effective poverty alleviation tool and an instrument to support micro-entrepreneurs and promote economic development. Increasingly, microfinance is also recognized as a valuable financial service and a sustainable business opportunity at the 'Base of the Pyramid'. A significant number of microfinance institutions across the world have demonstrated that it is possible to reach out to the poor and to be profitable at the same time.
Moving towards mainstream finance...
The vision of providing access to affordable financial services for all poor families in the world is within reach, but only if mainstream financial institutions become involved and committed. Increasingly they are doing that. We see non-profit microfinance institutions (MFIs) transforming into for-profit full service finance companies, mainstream banks and insurance companies adding smaller scale services themselves or partnering with MFIs to extend their reach, and we see entrepreneurs from outside the microfinance sector starting up commercial MFIs.
New business models are emerging, and alternative paths are taken to overcome growth constraints, such as securitisation,
service company models and branch franchising. New technologies, systems and mainstream resources are entering the arena.
Competition is becoming a reality here and there, driving interest rates down and client focus and efficiency up. However,
the mainstreaming of microfinance is still in its early stages, and significant amounts of long term growth capital and
capacity building efforts are needed to support the growth of commercial microfinance.
Aavishkaar Goodwell addresses this need.
The growth of the microfinance sector is still mainly dependent on funding by CSR programs of banks, insurance companies and corporations, development aid and government support, and soft money and donor grants. These sources are not able to keep up with the pace of growth of the sector.
Capital markets and commercial banks are able to finance the growth, but they require a market rate of return and they are weary of the risks in this emerging sector. The market demands robust MFIs that can scale up quickly and operate on a sustainable and profitable basis. Goodwell develops those MFIs and supports their growth and integration into the mainstream financial industry.
