Evolution of Microfinance

Microfinance has needed to grow and survive as a reliable business which reaches many people. The reason there was explosive growth was because the businesses were able to evolve. Many MFIs realized that since they had such small costs that once mass produced they would be able to provide more services. One trend is that these institutions rely more heavily on credit lending than other services like deposits and insurance. The reason is that regulations are lower for credit and the cost of doing business for credit is simpler. Charging higher interest rates is more likely to work when associated it with the loans than a low risk deposit. This has led to higher profitability for loans than if the MFI focused more on savings.
Another trend has been that of solidarity lending which has reduced costs and allowed for larger loans. Since many of the people taking out loans originally were only allowed small amounts this did not lead to as much profits. Once villages and larger groups were formed then they were able to take on more risk and be more profitable to the MFI. This trend is also able to happen because social pressures are needed for people to pay back their loans. One MFI called Pro Mujer does not end it’s group meetings until all loan delinquencies are fixed. This has also created more pressure on the group members who are able to pay back loans and might have more money to cover poorer group members. These factors are important to MFIs since they are able to serve the poorest and also the less poor. Individual loans work better for the less poor while the poorest are more prone to the group loans.
Frequent payments are a method that MFIs have adapted to better gauge the risk of their customers. Since many times it is difficult to know the full extent of a customer’s financial history it is better for the MFI to gradually receive the payments. However, the frequent payments can create problems if the borrower doesn’t have enough to pay some of the loan periods. They then might try to borrow from a family or friend which reduces their likelihood of payback to the MFI. This is a another reason MFIs focus on the group lending since everyone is paying attention to the financial transactions each member is making in the village. The focus on women is another trend that many MFIs have followed to increase their profitability as a business. Women usually invest in things that will pay back weekly amounts where men might take on longer term or risky investments. The group lending with women is especially important since they value their reputation highly. The women also are able to have some freedom by attending these meetings if they live in a restrictive society. This gives them more opportunities to make sure they are paying back the loans on time and that the other women are attending each meeting.