Chapter 1 State of Microfinance, Current and Potential Problems
1. Introduction
According to the World Bank, today, about 2.5 billion the world's working adults are lacking access to formal financial services. In developing and emerging economies, among low–income populations, about 80% of poor people are lacking access to financial services. In the formal economy, access to financial services is a critical contribution in reducing poverty, dealing with inequality, and boosting economic growth. The ability to get access to financial services is essential for people to manage their households and lives, as well as building their futures. "Increasing financial services will help low-income populations take control of their lives and lower inequalities".(1)
Poor people who lack access to regular banking and financial services need Microfinance Institutions as an intermediary to reach financial services. General speaking, there are two ways to delivery of financial services to poor households. "The first model is relationship-based banking for personal financial services. The second model is a group-based model, which involves several people gathering together to obtain access to financial services. Microfinance Institutions construct a road to service as many low-income and near low-income people as possible".(2) Those people could get small loans,micro insurance, and fund transfer services. According to "Mohammad Yunus",(3) poor people believe that Microfinance Institutions will help them get out of poverty.
"Saskia Bruysten, Sophie Eisenmann and Hans Reitz, prove that low-income populations believe that access to microfinance constructs such as microcredit will help them to out of poverty. When microfinance provides microcredit to low-income populations, you never have to advertise, because customers will come out automatically. Most importantly, most customers will ask for more loans. Although an extremely high-interest rate, they usually repay those loans because they want to keep future access to a service that they find very helpful".(4) However, "according to the Consultative Group to Assist the Poor, microfinance provides microcredit to low-income populations because poor people are even worse off with an extremely high-interest rate. For instance, when lots of microcredit borrowers are placed in a bad situation: sooner or later, it will show up as higher default rates, just as mortgage default rates did in the 2007 financial crisis. But here, most of the borrowers repays at very high rates year after year, even during the financial crisis".(5)
"Microfinance provides a financial service to poor people and poor communities, which boosts local economic development and employment. The example is becoming that microfinance helps poor people out of poverty and helps to develop the third world economies".(6) Kirsten Leikem found that household access to Microfinance Institutions reduces poverty and the poorest household can benefit from Microfinance Institutions in terms of increased household incomes and reduced vulnerability.
Figure 1 illustrates a sharp rise in the number of Microfinance Institutions from 1999 to 2014 in the world. In 1999, the number of Microfinance Institutions in the world was about 148. In 2014, the number of Microfinance Institutions in the world was about 897. From 1999 to 2010, the number of Microfinance Institutions has maintained an average growth rate of 24%. However, from 2010 to 2014, the number of Microfinance Institutions' average annual growth rate was -9%. It indicates that Microfinance Institutions in many countries still face sustainability problems.active borrowers (in million).
Figure 1: The Number of Microfinance Institutions
Figure 1 presents data on total number of Microfinance Institutions in five regions: Africa, Eastern Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa and South Asia. The data for the number of Microfinance Institutions comes from Mix Market. Source: Mix Market and author's calculation.
Figure 2 illustrates Microfinance Institutions depth of outreach. The number of active borrowers indicates whether a Microfinance Institution is able to reach more poor people who are outside of formal financial services. The figure illustrates a sharp rise in the number of active borrowers of Microfinance Institutions from 1999 to 2014 in the world. In 1999, the number of MFIs' borrowers was about 6.55 million. In 2014, the numbers of MFIs' borrowers was about 82 million. From 1999 to 2014, the world's average annual number of MFIs' borrowers' growth rate was 23%. Hence Microfinance Institutions are able to reach more poor people.
Figure 2: The Number of Active Borrowers
Figure 2 represents the number of active borrowers of Microfinance Institutions for Africa, Eastern Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa and South Asia. Source: Mix Market and author's calculation. Note: The number of
Figure 3 illustrates a sharp rise in the gross loan of Microfinance Institutions from 1999 to 2014 in the world. In 1999, the gross loan was about 0.87 billion. In 2014, the gross loan was about 70 billion. From 1999 to 2014, the gross loan has maintained an average growth rate of 35%.
Figure 3: Microfinance Institutions' Gross Loan Portfolio
Figure 3 represents Microfinance Institutions' gross loan portfolio for Africa, Eastern Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa and South Asia. Source: Mix Market and author's calculation. Note: Gross loan portfolio(in billion).
Figure 4 illustrates Microfinance Institutions' financial performance indicators. Operation self-sufficiency (OSU) has a slight increase from 1999 to 2014. In 1999, the average OSU was about 1.08. In 2014, the average OSU was about 1.22. From 1999 to 2014, the world's average annual OSU growth rate was about 1%. The OSU indicators show whether a Microfinance Institution is able to continue business without further external subsidies. When the OSU is above 1, this indicates that the Microfinance Institution is earning profits. However, when the OSU is below 1, this indicates that the Microfinance Institution is incurring losses.
Figure 4: Microfinance Institutions' Operational self-sufficiency (OSU)
Figure 4 presents data on Microfinance Institutions' operational self-sufficiency in five regions: Africa, Eastern Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa and South Asia. Data for operational self-sufficiency comes from Mix Market. Source: Mix Market and author's calculation.
Overall, figures 1 to 4 provides an overview of Microfinance Institutions:the growth of Microfinance Institutions, the number of clients served by Microfinance Institutions, and the sustainability, and outreach of Microfinance Institutions.