Lindsay Clinton, Beyond Profit
This is the second post in a three week long series from Beyond Profit and Triple Pundit that will explore innovative business models aimed at tapping the bottom of the pyramid (BoP) market.
There is a high probability that if you are compelled by the concept of impactful business, you’ve had a romance with microfinance. Perhaps your relationship began with Muhammad Yunus and his book, Banker to the Poor. Or maybe Kiva caught your eye. Whatever it was that you found attractive, you’re bound to have had some rough times during your romance, as well. The excessively, profitable IPO of Compartamos and recently SKS in India, the stories of overindebtedness, and inflated interest rates: it’s enough to make any reasonable person wonder if the relationship moved too fast.
As we’ve learned more about microfinance over the last decade, we’ve started to see that it is not a panacea for all poverty ills, and that the model for scaling microfinance has inherent flaws. These “complicating factors” have turned off many people, who have subsequently moved onto less sullied development solutions. But, we shouldn’t throw the baby out with the bathwater.
Microfinance has tremendous value in its ability to provide financial access to the poor, but it also offers unprecedented opportunity to engage a significant proportion of developing country populations. Microfinance institutions (MFIs), through their loan officers, have built one-on-one connections with millions of poor women and men in developing countries. These “high touch” relationships have developed through years of weekly interaction, and are one of the most valuable outputs of the MFIs. Just as Coke or Kraft have developed brand equity, which is represented as a financial value in their accounting books, MFIs have developed a different kind of equity, based on their connections to a subset of customers that few companies have ever been able to access.
The networks and relationships fostered by the microfinance sector over the last three decades should be valued by businesses and development experts. They are an integral means of providing value to the poor—not just through the provision of finance, but by giving them access to products and services, individual rights, and in some cases, employment opportunities. Below are several ways that the networks built by MFIs can be used to build opportunity and access for the poor.
Direct Partnership between Businesses and MFIs: Partnerships forged directly with MFIs have enabled microinsurance, solar providers, water purifying companies, and mobile operators to grow their customer base, while providing microfinance borrowers with previously unavailable products and services. This sort of partnership is straight out of the playbook of major companies like Nokia and Unilever. Most often, these partnerships work because of the relationships fostered by loan officers with the borrowers, and give companies access to customers willing to hear about a new product or service.
MFI as Relationship Broker: As described above, while offering new products to borrowers makes an MFI’s relationships stickier, it can also slow down the provision of credit to new borrowers. As a result, some MFIs are very selective about the partnerships they forge. However, there is another way. A new company is testing out a model to leverage MFI networks, without burdening loan officers. Frontier Markets, currently operating in India, has created relationships with select MFIs and hires and trains its own salespeople to go along with loan officers and make a targeted sales pitch after group meetings. Selling much-needed products like inexpensive sanitary napkins for women, Frontier Markets gives global companies an unprecedented opportunity to market to a new customer which may have been too difficult to make contact with in the past.
MFI as First-Mover: The value chain can function in other directions as well. MFIs could potentially benefit financially from the data they have collected about previously unidentified or unacknowledged people. As governments start to realize the importance of universal identification of all its citizens, they should look to MFIs who have boots on the ground to provide data. Take, for example, International Land Systems (ILS), a company that is working with Sinapi Aba Trust, an MFI in Ghana. With support from USAID, ILS and Sinapi Aba are collecting vital information on many of the organization’s borrowers. Could that data be provided to borrowers for extralegal proof of identity or land rights? Or could it be used to create formal government documents? MFIs are sitting atop a load of personal data, and the possibilities for revenue generation are there for entrepreneurial minds to explore.
Borrower as Producer: Last, but not least, borrowers, who are often entrepreneurs or producers of artisanal goods and products, can use the microfinance network to access new buyers. In fact, on the flip side, companies that are keen to find ready labor should look no further than MFIs which have a pool of people who are often ready and able to work. Because of their long-term, and often constant relationship with an MFI, this labor pool has a huge potential to be reliable and sustainable.
To look at the microfinance sector only as a means to provide financial access to the poor is short-sighted. There are many businesses that can be launched using these networks and their reach. The challenge is getting over the notion of microfinance as an end in and of itself.
With these business opportunities available, our romance with microfinance has only just begun.