Early microfinance pioneers created the sector with the aspiration to improve poor people’s lives. There were huge swathes of “white space” where low-income households had little or no access to formal finance. This challenge, in turn, demanded sustainable and scalable models for delivering adequate financial services to poor people.
This is the essence of the double bottom line in microfinance: a social commitment to benefiting clients married with a financial commitment to operating profitably. In the long run, these two objectives do not contradict each other: doing right by all stakeholders is the only long-term sustainable business solution. Over time, the market should reward retail providers that adequately protect clients’ interests, affirmatively treat them well, offer a product line responsive to their needs, and deliver good value for money. In the short run, however, tensions can arise.
Tensions are evident in the microfinance sector— in the recent repayment crises, local microcredit markets suffered from overly rapid growth, resulting in loss of credit discipline, multiple lending, and instances of over-indebtedness. There were powerful social and financial reasons to scale up quickly, and investors were eager to back this rapid expansion. In retrospect, however, we see that lenders in these markets—and indeed in the microfinance field as a whole—may have overestimated the demand for credit. Saturation occurred more quickly than expected, particularly since microcredit institutions often competed for market share in the same client segments and areas rather than reaching out to less served areas. Internal systems, including controls and staff development, failed to keep pace with growth. Regulation did not permit these nonbank providers to offer other services, such as deposits, that would have improved both the customer value proposition and provider risk management. Other mechanisms that could have helped manage the growing risks, such as effective credit information sharing systems, were not in place.