Issue 3 - What balance between financial sustainability and social issues in the microfinance sector?

Issue 3 - What balance between financial sustainability and social issues in the microfinance sector?

Editorial

  By Luc Rigouzzo, Proparco's Chief Executive Officer

Building on the success of the second issue of Private Sector and Development, which covered the topic of access to water, Proparco has chosen to devote this issue to the challenges facing the microfinance sector today.

The overarching virtue of microfinance is that in recent years it has managed to demonstrate that it is not only possible and necessary to implement services tailored to the poorest – it can also be profitable. Indeed, to quote the “Bottom of the Pyramid” concept coined by the economists S.L. Hart and C.K. Prahalad, moving into the market of lowincome populations – and serving them – may constitute “the biggest business opportunity in the history of commerce” and at the same time helps combat poverty. Microfinance would seem to embody this concept. Although it may lead to higher costs in order to reach the poorest borrowers, this can be offset by the profitability of the investments financed.
 
The microfinance sector has also often proven more “resilient” than the banking sector, particularly in crisis countries – this is, for instance, the case in the Democratic Republic of Congo. However, the current crisis has brought several systemic weaknesses in the sector to the fore and underscored the need to consolidate fundamentals, strengthen sector regulation and better control microfinance institutions’ (MFIs) quest for growth and profitability. Without these improvements, there is a real risk of client overindebtedness and the sector will develop at the expense of its poverty reduction targets.
 
I would like to extend my warmest thanks to each of our authors for their contributions which not only have the merit of challenging certain conventional beliefs – they also question the roles and strategies of all sector players. As they demonstrate, the financial capacity of investors with “social motivations” no longer suffices to meet the considerable financing needs of MFIs which are estimated at 200 billion dollars in the long term.
New sources of financing are therefore essential and private investors will certainly be playing a key role in the sector by providing the funds MFIs need to pursue their growth. However, private players must remain aware of their responsibilities and they must be regulated in order to ensure that the social vocation of this poverty reduction tool is maintained. It has now become essential to consolidate supervision and develop impact measurement. This will provide a framework for all activities in the sector and allow it to make the required adaptations, while preserving the capacity to innovate that is a cornerstone of the sector since its beginnings.