Microfinance Institutions, a lifeline for the 1.7 billion people in the world, are today, looking to grow to bigger heights. Since its inception, microfinance institutions have brought a great deal of change in the lives of the underprivileged through microloans. In the process of being a remarkable agent for development, they too have been evolving on the side, with many MFIs now having grown into big entities in its own right.
Having worked alongside these institutions for the last 23 years, we at Southtech understand the past practices, growing trends, and future direction of the microfinance industry fairly well. In such scenarios, where MFIs have met considerable growth, a natural progression follows, and evidently, an increasing number of them look to metamorphose into the next level, i.e., Microfinance Banks.
Microfinance Banks: striking the right balance
Generally, MFIs run to support the poor by helping them prepare for rainy days, while bringing in enough back to cover the operating expenses and further add to its lending pool.
Microfinance Banks, much like the microfinance institutions, are essentially community-based banks that provide financial services to those from low socio-economic backgrounds, so that they too can stand a chance at a better life.
So what is the difference between a Microfinance Institution and a Microfinance Bank?
A Microfinance Bank is a bank for the poor, licensed under the national banking authorities. Unlike MFIs, a microfinance bank follows strict regulation that promises stability and prevents fraudulent operations, much to the benefit of its borrowers. It is basically a formalized version of microfinance institutions that exercises financial discipline and sustainability. Driven by social impact, they are ALSO profit-oriented.
Imagine a total win-win for all parties involved.
If you are working in an MFI, you are aware of the shortcomings of microfinance institutions very closely. Hence, Microfinance Banks represents an upgraded version of Microfinance institutions.
A Bigger and Better Financial Institution for the Poor- Need of the Hour
If you are an MFI that is yet to transition to a Microfinance Bank, know that it is an inevitable change that you will eventually have to face down the road. Microfinance Banks, or Microbanks as some may call it, embraces the commercial approach to cater to the underserved population. The profitability that comes with the transformation, in turn, further helps to reach out to more people at the grassroots level.
While more advanced in some countries than others, the commercial microfinance industry is now emerging in all major regions of the world. So why is it gaining popularity and more importantly, is it necessary?
Every big thing has a humble beginning. Likewise, there comes the point when you have made enough impact to no longer be classified as an MFI or NGO as you slowly begin to qualify as an entity capable of being more than just that. While some of you may find it a burden or unnecessary, know that there are huge perks as well as responsibilities involved with the move, the impact being that much more.
So Why Should You Transition to a Microfinance Bank?
GAIN ACCESS TO COMMERCIAL FUNDS
Sourcing capital as NGOs can be limiting and difficult. However, transforming to a Microfinance Bank opens up new and massive investment opportunities.
If you are going to register as a Microfinance Bank, following specific guidelines and regulations will be a mandate upon you. For instance, microfinance banks will have to provide special extensive MIS reports to the management and banking authority, one which leaves no room for manipulation.
Such transparency is required when applying for external funds while registered under the national banking authority. So even though stringent, this means you hold better chances of gaining access to capital with local and international investors.
The capital can come from different sources:
- Investment firms that focus on social activism, so meeting the end-goal of financial inclusion is paramount to their investment while keeping profit in mind.
- International aid programs funded by various governments
- Crowdsourcing from offline and online sources by small individual contributions, sometimes providing loans with zero interest.
Secure a Sustainable Venture
As a registered microfinance institution, you are already familiar with the microcredit regulatory authority. More so, if you are among the ones that are making considerable development in the microfinance sector, then you are also aware of the looming pressure from these regulatory authorities to transform into a bank.
However, more often than not, this is a good pressure, as it presents an excellent long-term opportunity. When you are a financial institution that is regulated by the national banking authority, client protection will be paramount.
To ensure this, you will take all the necessary steps required to secure such a position. A proper management structure with efficient operational processes is needed to have a long-lasting impact. By bringing in discipline into the strategies and implementation, it helps to put a check and balance system in place, which will indirectly help to impart confidence among any potential clients.
As a financial institution, when you can build upon that trust, you will automatically attract new customers. This, in turn, helps to bring long term sustainability within the organization.
Become More Inclusive With Your Offerings
Microfinance borrowers need more than just microloans. They have the same requirements as any affluent member of commercial banks do, such as savings and insurance, no matter how small the amount. Keeping in mind the target group, microfinance banks offer similar financial services and products, such as microloans, microsavings and microinsurance.
As an MFI, if you want to improve financial inclusion, then you would want to up your game and offer all-inclusive financial services. Microfinance Bank is a medium that strives to do just that.
Moreover, by issuing only credit, you are limiting the scope of your organization’s growth as a result. So by mobilizing savings, you can instead add to the capital. Instilling a sense of self-commitment, this helps to serve the target market better. You are addressing and humanizing their needs that no other commercial banks or MFIs do and are ultimately ensuring financial inclusion for the masses.
Go Beyond Just Lone Borrowers
Sure, you have been helping a considerable section of your microfinance members transition from ultra-poor to poor. A lot of who have gradually gone on to find ways of becoming self-sufficient by starting their own SMEs. Hence, there is a growing demand and a potential to offer larger loans to this segment of the market, who are looking to borrow loans as big as BDT 50, 000!
Studies have shown time and again that financial inclusion leads to increased GDP for a country’s economy. For a nation to become more prosperous, we need a much larger number of SMEs. Extending capital to SMEs also helps in the spreading of wealth across a vast number of people. The goal remains to eliminate abject poverty from society. Hence the objective now should be geared towards helping microentrepreneurs transition to be SME entrepreneurs.
Just have a look at Indonesia:
Indonesia has one of the fastest-growing Microfinance industry in the world, where MFIs and banks provide a significant amount of microcredit loans to mostly small and medium enterprises as the majority of businesses in Indonesia are SMEs. SMEs in Indonesia, primarily based in the rural areas are therefore a huge contributor to the nation’s economy.
BRI (Bank Rakyat Indonesia)
A leading Micro bank, Bank Rakyat Indonesia (BRI) teaches us the power a Microfinance Bank holds. As the first bank ever to provide commercial financial services to the underprivileged, BRI showed the world that it could in fact be profitable. BRI has been an integral part of Indonesia’s financial system, catering to SMEs.
BRI’s micro banking system has been profitable for the past 18 years!
However, Is the Transformation Viable?
Operational costs account for more than 60% of an MFI’s revenue and is the main challenge when making microfinance business model sustainable.
Initially right after transformation, like with any business, the results are discouraging, but if you look at the bigger picture, returns follow in the long run.
A study by World Development on 66 transformed MFIs reports the following results:
It is important to highlight here how other external factors, too, can make a difference in the success of a microfinance bank.
A 2015 study in the journal Development Studies Research analyzed the Bangladeshi microfinance market. It reported that financial literacy and a scalable business planning are strong determinants when it comes to the effectiveness, and subsequently, the success of such financial institutions. Therefore, increasing awareness, digitization, and flexible repayment rates are a few fundamental approaches that are essential when looking into the long-term impact.
We cannot possibly talk about Microfinance banks and not mention Grameen Bank. As a pioneer of microfinance and in Bangladesh, it needs no introduction. Going strong since 1983, let the data speak for itself to clear any doubts about the sustainability of such models:
What is the best way to reduce the operational cost?
There are two main goals that you will wish to fulfill- Firstly, you would want to enable financial inclusion and secondly, you want it to be profitable. To achieve these, you will inevitably shift your focus on bringing down the operational costs, and when we talk about improving banks’ operational efficiency, technology plays a huge part.
We understand the idea of an organizational transformation can be overwhelming. Therefore, if you are an MFI or a big NGO looking to make that big change, here are just some of the key points to keep in mind.
- Go for a robust automation. If you are running a big NGO, you are already dependent on a software that is enabling all the transactions and operations. Imagine a software that could also help you transfer all that data and open a Microfinance Bank overnight. Sounds too good to be true? It’s possible.
- With diverse financial services offerings, you can be rest assured that you will attract new members to your bank; and with an increasing number of clients, you will eventually have to go for branch wise expansion. Such expansions means the transfer of thousands of portfolios from one branch to another. You want to be able to double down without the hassle of spending hours of time and energy on it. Here, the ease of scalability must be taken into consideration.
- Worried about how to provide accurate reporting? Without access to the right data, any Microbank would fail. A 360-degree reporting tool is thus a must-have that can provide you with dynamic and highly customizable reports on the bank’s and client’s performance. This will help ensure you are moving in the right direction.
If you think a transition to a Microfinance Bank for you is inevitable and are having doubts whether you are well-equipped to take on the change, then look no further. At Southtech, we provide for you just the right kind of automation needed for someone in your position. If you are not already using it, you can now, and if you are, then you know that you are halfway already there!
Click here to find out how Southtech can help you transition from an MFI to a Microfinance Bank.