June 10th, 2009

The Microfinance Market Today

Posted at 6:00 AM ET

Alex Bernhardt, Assistant Vice President
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The groundbreaking efforts by pioneers in the microfinance industry have already begun to yield substantial returns. Today, more than 150 million people worldwide have access to microcredit, the industry’s flagship product - roughly equivalent to half the population of the United States. From the perspective of microfinance institutions (MFIs), this growing market has been successful, as well. Loans are being repaid, and many lenders are generating profits, as you saw in last week’s article with Grameen Bank. It’s clear that the foundation for microfinance has been established … but there is still plenty of room for growth. After all, 2.6 billion people — over 40 percent of the world’s population — still live on less than USD2 per day and more than 2 billion remain “unbanked” (i.e., without access to traditional financial systems).

An exceptional rate of growth has brought the microfinance industry to its current size. In 1997 — only 12 years ago — slightly more than 13 million people had access to microcredit. The market nearly doubled by 2000 and registered a tenfold increase by 2006. Few markets have grown as quickly in such a short period of time.

Even considering the industry’s profound recent rate of growth, there remains plenty of room for more. If we assume (somewhat conservatively) the total market for microfinance product purchasers (excluding children and the infirm) consists of about 1.5 billion people, market penetration is only around 10 percent. While the immediate potential to generate profits from this untapped space is enormous, the development of financial capabilities amongst customers at the bottom of the socioeconomic pyramid (BOP) will also create a platform for future wealth generation, which in turn will create the need for more robust financial services. Put simply, today’s low-income client will be tomorrow’s middle-income client. Companies entering the market now have a unique opportunity to build brand loyalty and familiarity with BOP customers as they move up the socioeconomic ladder. This will likely yield substantial long-term opportunities — especially for early movers — which will result in market preeminence as targeted economies develop.

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Gaining access to the target market for microfinance clients, of course, is not easy. Significant barriers exist, particularly the absence of an enabling infrastructure. Without the necessary technology and institutional knowledge in place, it would be quite difficult for most commercial enterprises to generate an immediate return on microfinance investments since the micro market has several unique distinguishing characteristics which call for entirely different operational approaches and business models.

This problem is particularly vexing for insurers and reinsurers looking to get involved in microinsurance, given the lack of historical data necessary to inform traditional underwriting and capital management decisions. In general, for commercial enterprises to succeed in the micro(re)insurance space, some of their fundamental views regarding risk management and underwriting will need to change. Essentially this means a new discipline — “micro risk management” — will need to emerge, but that’s another subject for another day.

View all articles from the Perspectives on Microfinance series >>

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