What Are the Best Practices of Microfinance?

People often ask what are the best microfinance practices from our perspective as a technology solution provider. So, we thought we would discuss this matter with a short blog. Hope you will find it helpful.

Microfinance plays a crucial role in financial inclusion. It is empowering individuals and communities with limited access to traditional banking services. However, entrepreneurs often find it difficult to understand the necessary practices that can help them make their microfinance successful.

No wonder Southtech Group has been working with microfinance organizations for decades now. With this experience, we have learned many aspects of microfinancing. We have learned many secrets to the successful microfinance operation. Let’s learn the best practices of microfinance and how they can help you, too.

1. Borrower-Centric Approach

Every successful microfinance organization we have worked with or researched has a borrower-centric approach toward all their activities. And we would say this is one of the best practices of microfinance every entrepreneur should take.   

The client-centric approach is the cornerstone of effective microfinance. It helps you with a deep understanding of clients’ needs and aspirations. But why?

With deep research, you can make client assessments, and depending on that, your MFI can tailor financial products and services to address the challenges faced by individuals in low-income communities precisely. To be frank, this bespoke approach fosters financial inclusion and contributes to clients’ overall well-being.

BRAC was one of our clients, and it has a client-centric approach; we have closely monitored it for more than two decades.

Successful MFIs also keep everything very transparent. This transparency further builds trust between microfinance institutions and their clients. Clearly communicating financial terms, interest rates, and associated fees cultivates an environment of openness.

Therefore, if you want to make your microfinance successful, make your operation as client-centric as possible.

2. Social Performance Management (SPM)

Another best practice of microfinance is Social Performance Management (SPM). What is that?

Well, you may already know that microfinance goes beyond financial metrics. Beyond finance, it assesses and enhances the broader social impact of interventions as well.

But what is it?

SPM is a systematic approach with which MFIs evaluate how their initiatives contribute to the well-being of clients and their communities.

Through SPM, microfinance institutions measure the effectiveness of their programs. They check how they are addressing poverty alleviation, women’s empowerment, and community development.

This includes assessing improvements in clients’ income levels, education, healthcare access, and overall quality of life. SPM also involves monitoring the social and environmental sustainability of the projects.

How do they do it?

Well, MFIs analyze factors such as increased self-esteem, improved decision-making abilities, and enhanced social capital within communities.

The SPM practices help MFIs to align their goals with broader social objectives, ensuring a positive and sustainable impact on the lives of the underserved populations they serve.

Today, most of the MFIs do this critical yet crucial work with the help of technology solutions.

3. Responsible Lending Practices

Responsible lending practices come third on the list of best practices of microfinance. It is an integral part of the ethical and sustainable operation of microfinance institutions.

We should inform you that from BRAC to PGMF-Myanmar, from RDRS-Bangladesh to Northern Lending Corporation, Philippines, every one of these successful microfinance organizations practices ethical lending. They are some of the successful microfinance organizations we have worked with. And we have closely observed them.

We have observed that conducting thorough client assessments is a fundamental step in their process. It involves a comprehensive analysis of the financial capabilities, business potential, and repayment capacity of clients.

This careful evaluation ensures that loans are disbursed to individuals who can realistically meet their repayment obligations.

In microfinancing, indebtedness is another critical issue most institutions face. But this happens due to the lack of responsible lending.

The best practices of microfinance are to evaluate customers and establish reasonable loan limits that align with the client’s ability to repay without compromising their financial stability.

This can simply prevent borrowers from falling into a cycle of debt. And finally, fostering financial resilience instead.

So, if you want to have a smooth micro-lending operation, make sure you follow the principle of responsible lending practices.

4. Diversified Product Offerings

How diversified is your microfinance? If not, you need to diversify your lending operation and make your microfinance product design right for success.

Diversifying product offerings is essential for every business. According to our findings, we consider it one of the best practices of microfinance you should follow.

Diversification is not only necessary for financial products; it goes beyond that. Successful microcredits provide an array of financial products such as savings accounts, insurance, and financial education.

This diversified microfinance product fosters a holistic approach to financial inclusion. For example, savings accounts encourage a culture of financial resilience, allowing clients to safeguard their funds.

Insurance products help them deal with risks associated with unforeseen events, offering a safety net for vulnerable households.

Financial education programs, on the other hand, empower clients with the knowledge and skills to make informed financial decisions.

So, adapt to product diversification and cater to diverse needs to ensure your microfinance institutions remain responsive to the unique challenges faced by your clientele.

5. Technology Integration

Last but not least, technology integration is one of the best practices of microfinance to transform your organization. It brings efficiency and speed to your work.

From small to big, most of the successful MFIs are trying to leverage technology solutions such as Core Banking Solutions (CBS) to streamline their operations.

Let’s take BRAC as an example.

BRAC is one of the largest microfinance organizations in the world. But they did not come this far for nothing. They leveraged technology along with many other best practices of microfinance.

BRAC used Southtech’s core banking solution, Ascend Financials, from 1996 to 2020. With the help of the automation, they were able to optimize their operational cost. According to our estimate, they saved $11 million in just 2020 from stationary and operational expenses because of Ascend Financials.

Similarly, according to our case study of PGMF-Myanmar, one of our former clients also leveraged Ascend Financials and saved a significant amount of money from their operation.

With technology, you can now facilitate various financial transactions, from simple transfers to more complex loan disbursements and repayments, by integrating mobile banking and branchless banking into your system. 

Additionally, technology enables real-time tracking and monitoring, enhancing transparency and accountability in financial transactions.

Furthermore, technology solutions promote financial inclusion by reaching clients in remote or underserved areas. Mobile banking, online platforms, and digital payment systems empower clients, providing them with convenient and secure access to financial services. It can go on and on.

To conclude, if you want to succeed in your micro-lending business, you need to follow the best microfinance operation practices that successful MFIs follow. By following those, your microfinance institution can contribute to the sustainable development of the communities they serve while maintaining financial viability. Hope you have got your answer and these tips will help you make your microfinance successful in the coming days.