REASONS FOR SUCCESS

Microfinance institutions have developed a business model tailored to providing?

Microfinance institutions have developed a business model tailored to providing microfinance services that has generated strong asset quality and profitability.

  • Microfinance portfolios have exhibited strong asset quality, due to:

  • Close lender / borrower relationships, allowing institutions to closely monitor credit quality

  • Increasing loan amounts: borrowers can access larger loans if payments are made on time

  • Short loan maturities

  • Underwriting assessment based on micro-business’ cash flow generation and not on collateral

  • Microfinance is less intertwined with the global capital markets than emerging market banks:

    • MFIs tend to have favorable liquidity positions, with short-term assets and longer-term liabilities

    • More stable funding from international development institutions

    • Favorable liquidity position (short-term assets and longer term liabilities)

  • MFIs adopt a transparent and flexible business model:

    • Assets consists primarily of basic and proven loan products

    • Lower financial leverage compared to banks

  • Microfinance is a profitable business model:

  • Interest rates generally higher than traditional banking to cover higher administration costs - Still much lower than informal lenders (i.e. loans sharks)

  • Strong demand for microfinance products allow for steady growth in client outreach

  • Use of technology to streamline processes and reduce costs associated with small loan size

    • i.e. Branchless Banking, PDAs to collect and distribute information, etc.