By most accounts, the modern microfinance movement began in Bangladesh more than 25 years ago, with the official opening of Grameen Bank in 1983. This institution and its revolutionary “double bottom-line”, “social business” practices remains 95 percent owned by its poor clients and has had lasting effects on the microfinance industry and on economic development efforts in general. Grameen Bank was profitable for 22 of its first 25 years of existence and has helped 65 percent of its clients’ families to exit poverty. On a broader scale, this effort has demonstrated that a microfinance institution (MFI) can be successful in fulfilling both aspects of its twofold mission: turning a profit and achieving social good via combating global poverty.
Grameen Bank was founded by Muhammad Yunus, who, along with Grameen, won the Nobel Peace Prize for his microfinance-related poverty alleviation development efforts in 2006. He is generally considered the father of modern microfinance and has dedicated his professional career to combating poverty around the world through financial inclusion. In line with this goal Dr. Yunus has fostered a new approach to financial services which intends to provide emerging economies and their substantial poor populations with access to the financial infrastructure and resources readily available in more developed nations. From its roots in Bangladesh, Grameen Bank has grown into a substantial international presence, with over USD1 billion in assets and cumulative loan disbursements of more than USD7.5 billion by year-end 2008.
“Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights.”
Moreover, Grameen’s focus on the massive market at the bottom of the socioeconomic pyramid has spawned a number of other related social-business platforms, such as Grameen Shakti, an energy company, and Grameen Danone, a consumer products firm. Grameen Bank also recently established a microfinance firm in the United States called Grameen America, which is responsible for lending to poor customers in the United States. The first branch office was opened in Queens, New York and other office openings are currently in the works.
The Grameen Network now consists of more than 20 separate companies, all with the shared vision of improving the lives of the poor. The Grameen brand has done more than survive - it has grown aggressively in some of the world’s most challenging markets. While mainstream financial institutions often lament the difficulty in accessing capital or gaining new market share and cite an inability to reach clients sans collateral and with unreliable spending patterns, Grameen Bank overcame such concerns and attained profitability with remarkable speed.
Today, Grameen Bank is only one of several players in the growing microfinance space. Increased competition and the promise of incredible new market opportunities has witnessed the creation of a variety of alternative microfinance business models. The various prevailing approaches to microfinance can be divided in many ways, though such organizations can perhaps be best distinguished by their central corporate mission. Within this framework, three main institutional types exist: double bottom-line, nonprofit, and profit-maximizing.
- Grameen is a double bottom-line company. Under this model, the microfinance institution seeks to generate profits while also lifting people above the poverty line. Each goal is equally weighted and performance is judged primarily through the achievement of the nonfinancial mission. Such organizations are often member-owned, so that each participant has a stake in the company itself rather than just the services it provides.
- Other MFIs are purely not-for-profit. Many such organizations are affiliated with religious institutions, are community-based or otherwise social-mission focused and concentrate on maximizing the societal impact of the capital they deploy. By virtue of their business plans, they are also often reliant upon donor capital for support.
- The third model of MFI is more closely aligned with that of financial institutions in developed economies. Profit maximization entails what the expression implies: the company measures success purely through the financial earnings it commands. Many such “commercial” MFIs have raised significant amounts of capital through IPOs or by attracting interest from private-equity investors.
Each approach to executing microfinance has its benefits. Companies focused on profit maximization, of course, cite profitability as the most likely method of ensuring long-term enterprise sustainability. Nonprofits, on the other hand, though subject to sometimes capricious donor support, have the benefit of maximizing the deployment of capital for the fulfillment of their missions, without having to address the demands of earnings-driven shareholders. Double-bottom-line companies are of course hybrids that blend the advantages of for- and nonprofit business models to achieve their various ends.