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Microfinance market driven by the increased focus on untapped markets

Press Release   •   Aug 23, 2013 11:07 BST

The microfinance market has been forecast to increase at a compound annual growth rate (CAGR) of 16.61% through 2016, driven by the increased focus on the untapped markets, and the formation of credit bureau for microfinance institutions.

The end of 2012 sees new clouds on the global economic horizon. The Eurozone's structural problems remain unsolved. The United States is emerging only slowly from the crisis. Added to this, there are signs that growth is flagging in the BRIC countries (Brazil, Russia, India, and China).

However, to consider the overall outlook as uniformly bleak would be a big mistake. Most developing and emerging economies are a bright spot in an otherwise gloomy landscape.

To properly assess the growth and stability of regional micro-finance markets, it is crucial to take account of the way the overall economic environment is developing. While debt investors, unlike their equity counterparts, generally do not feel the effects of swings in the economy, in the medium term there is a close correlation between demand for refinancing on the part of microfinance institutions (MFIs) and consumer demand, a measurable economic factor stemming from the households served by MFIs.

Microfinance is a form of financial services for entrepreneurs and small businesses lacking access to banking and related services. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group.

Due to the recent financial crisis in India and Mexico, many MFIs have altered their legal structure and turned into companies to float their equity and bonds to be able to generate more funds. This was nothing but a consequence of their high dependence on donors and low sustainability.

Lately, MFIs are undergoing the phase of Mission Drift wherein they are moulding their social objectives to become financially sustainable. This has given the expected results and has enabled MFIs to become sustainable.

Developing and emerging economies remain attractive. According to the International Monetary Fund (IMF), average GDP growth in the 15 most important microfinance markets will increase from 4.7% to 6.2%.

Besides South and East Asia, the most powerful growth is coming from microfinance markets in Africa. One of the main drivers here is technological progress (e.g. payment transactions via cell phone).

The low income segment, which is the main focus of MFIs, is still largely untapped. Tapping this large unbanked segment is proving to be a tremendous growth driver for MFIs. With the market maturing at a gradually increasing rate, there is a growing demand for credit products.

For more information on the microfinance market, see the latest research: Microfinance Market

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