In developed countries, access to finance is largely taken for granted. But in low-income economies, financial participation is still highly underdeveloped. Even today, more than 1.7 billion people around the world count as unbanked1 – the majority in Asia-Pacific and Africa.2
Microfinance – which are small-scale loans from as little as USD5003 and other basic financial services – can play a critical role in increasing financial independence of these underserved individuals, improving financial inclusion and stimulating broader economic growth.
COVID-19, soaring inflation and rising energy and food insecurity threatens to send 75 million to 95 million more people into extreme poverty this year.4 That makes helping the unbanked a greater priority than ever.
Yet, providing help to these communities is in some ways more difficult than ever.
“Banking has become more regulated and risk averse,” says Karby Leggett, Global Head of Public Sector and Development Organisations at Standard Chartered.
“As a result, some communities have lost access to finance while others have moved even further away from ever getting it.”
Here’s how microfinance can reverse the swing of the pendulum, supporting fairer access to finance and bringing about a more sustainable, inclusive global society.
Impact of microfinance in emerging markets
The global microfinance market is estimated to be worth USD186 billion this year, and is expected to exceed USD300 billion by 2026, according to market research publisher StrategyR’s Microfinance World Market Report.5
Asia-Pacific is the biggest regional market today, accounting for 42.5 per cent of all microfinancing, the report says. And it projects that the region will make up more than half of the global total in 2026, with China’s growth pushing the market to USD160 billion.
Standard Chartered partners with many microfinance institutions (MFIs) in the region, including India’s leading MFI, Fusion Microfinance, as part of its efforts to lift participation in underserved communities.6 Fusion has 3 million active customers in rural and semi-urban areas, and manages USD1 billion in assets. Many of its borrowers are local entrepreneurs, most of them women.
“Our responsibility is not restricted merely to financial support, but also to building borrowers’ capability to manage their financials on their own,” says Fusion Founder and CEO Devesh Sachdev.
“We run various financial literacy workshops and community development programmes as part of the UN Sustainable Development Goals to make this possible.”
Multilateral development banks and development finance institutions can also play a key role.
In Indonesia, Standard Chartered has begun working alongside the Asian Development Bank (ADB) to support Indonesia’s PT Mitra Bisnis Keluarga Ventura, another leading MFI that’s making a positive impact. PT Mitra Bisnis Kelurga offers affordable financing to 1.5 million underprivileged women in rural and semi-urban areas, helping to raise their living standards and reduce income disparity.7
Challenges for microfinance
Micro loans from Fusion and PT Mitra Bisnis Keluarga may be small in size but the impact is huge. Such loans have boosted household income for 7 in 10 recipients and improved living standards for 9 in 10 users, according to recent research from global impact measurement company 60 Decibels.8
But microfinance does not come without challenges.
Innovating financial solutions to overcome complexity
The first is complexity. Each country and scheme face different regulations, interest rates and existing lending structures, while the importance governments place on financial inclusion can vary significantly.
This means that there is no one-size-fits-all model. Each country requires a dedicated and idiosyncratic approach.
That makes it hard to scale microfinance programmes because what works for one country won’t necessarily suit another.
“The bespoke nature of microloans, their size and market run counter to the normal way of working for commercial and investment banks, which are more accustomed to offering standardized products at scale - including credit - institutional and corporate clients,” notes Karby. “We need to balance the desire for maximum impact with the specialized nature of microcredit.”
Innovations such as syndication can help resolve this dilemma. A syndicated loan is financing provided by a group of lenders rather than a single entity.
By forming a syndicate, lenders can distribute their risk which may be too much for an individual institution to take on.9
The same applies to securitisation, where MFI assets are pooled and sold together with tiered levels of risk to match investors’ appetite. The securitisation model holds great potential but is still in its infancy.
Bringing down the cost of microloans to borrowers
Another challenge for microfinance is that the communities most in need are often subject to some of the highest interest rates. In Sub-Saharan Africa, lending interest rates exceed 45 per cent in Madagascar and Zimbabwe, World Bank data shows.10
“The idea that the communities most in need can only borrow money at high interest rates doesn’t make sense,” says Karby. The world needs to find a way to extend these communities credit at much more affordable rates.”
Fusion’s Devesh, adds, “Microfinance interest rates in India have come down over the years, but more needs to be done to help funding become even more affordable.”
Overcoming this requires a mix of education, risk sharing and technology.
The priority needs to be educating investors to better understand the industry and help them overcome their risk aversion. Investors are understandably unwilling to put their money into something they do not fully understand.
“Financial inclusion in microfinance needs to go beyond the provision of funding and services, to the education of investors to instil confidence in the industry, says Karby.”
“This can be done by taking MFIs on roadshows to meet potential investors and get them on board with the opportunities of microfinance, which allows MFIs to better sell themselves to both equity and debt investors” he adds.
Ultimately, a stronger understanding of the microfinance market helps improve the MFI’s rating and lower their cost of borrowing – a benefit that will translate directly to the end-borrower.
Sharing risk through blended finance
Another route to risk reduction is blended finance, where multilateral development banks and national-level development organisations can have a big role to play by crowding in private investors to share the risk.
Standard Chartered has been working with the ADB on a region-wide microfinance risk-sharing programme that allows the bank to do more in this space. The programme has so far awarded more than USD1 billion of loans.
Finally, increased automation, connectivity and smartphones all play a vital role in simplifying the loans process, as well as overcoming some scaling and risk-distribution issues.
Making the most of technology
Technology can reduce costs, increase efficiency and allow financial service providers to reach new clients.
Clients can now repay loans through their mobile phones, which avoids the risks of cash in transit and affords vital access to MFIs for those who cannot get to a bank branch.
Moreover, mobile technology and data analytics are facilitating new approaches to credit scoring, decision-making and underwriting.
At Fusion, technology was also the key factor in maintaining normal operations during the pandemic.
“In our business, where regular direct customer engagement is core, the tough lockdowns threatened to halt all our activities,” says Devesh.
“Fusion’s early adoption of cloud services was key to continuing to serve our customers, even when we were working from home. We also automated our field processes to ensure seamless, end-to-end processing and customer servicing, eliminating any friction.”
Beyond maintaining business as usual, Fusion’s tenacity during the pandemic has paid off: the company added 190 branches and 600,000 borrowers last year.
“The resilience of our clients, our empathetic engagement with them, and Standard Chartered’s continued support and debt funding in the last two years have helped us and our clients not only get through COVID-19, but also grow during this period,“ says Devesh.
Building sustainable growth through microfinance
To rebuild lives after the pandemic, and in the shadow of a looming food crisis, rising energy prices and inflation, there is one priority: sustainable and inclusive economic growth from which everyone can benefit.
Microloans can play a key part in this in emerging markets. This is particularly true in rural areas, where small enterprises in sectors such as agriculture need sources of financing to help them maintain operations, invest in technologies and grow their business.11
According to the ADB, in Georgia, where more than 60 per cent of people live in secondary towns and rural areas, small businesses and agricultural livelihoods can generate jobs and raise incomes;12 in Mongolia, 90 per cent of the country’s registered businesses are micro, small and medium-sized enterprises, and they account for half of all jobs. Microfinancing can help these companies create new jobs and support efforts to diversify the economy away from mining.13
The potential for microfinancing is huge, with an expected rise of more than 60 per cent in such loans between now and 2026.14
But for microfinance to live up to these expectations, the finance sector needs to make it a more mainstream asset class – and one that global investors feel much more comfortable with and confident about.
International Monetary Fund (IMF)
The Annual Meetings of the International Monetary Fund (IMF) and World Bank Group (WBG) bring together leaders from the world’s governments, banks and businesses to discuss issues of global concern, including the world economic outlook, poverty eradication, economic development and aid effectiveness.
Find out more about Standard Chartered is doing in this area and the events we are hosting onsite in Washington D.C.