Everyone should be able to access common banking services at any time. But the reality looks bleak: Around two billion people worldwide cannot open a current account or get a loan – not to mention savings or insurers.
In developing countries, this means that around half of all households are cut off from the financial system. People lack opportunities to make a living or to secure their harvests, for example from droughts. Retirement provision is an outright absurd thought.
The infrastructure is particularly lacking in rural areas. The nearest bank is many kilometers away, and the offers are often completely unknown. Consumer protection is practically non-existent. In order to enable access to reliable loan and savings options, the infrastructure and stable institutions must be built on-site. Microfinance is an instrument to implement this project.
Avoid historical mistakes
The granting of small loans is not enough. Local contacts who know the regions and what is actually necessary are needed for a reasonable basic offer. That is why microfinance funds refinance microfinance institutions worldwide.
In order to avoid damage to local end customers, some banks have developed bank-specific investment guidelines. For example, Good Credit Bank sets up an investment advisory board that defines positive and exclusion criteria and monitors compliance with them.
The microfinance institutions themselves have to meet minimum customer protection requirements. In addition, the fund management carries out checks on the saturation level of the credit supply on-site. As part of the due diligence, it reviews the working methods, credit conditions, economic stability and future viability of the microfinance institutions.
African growth market
Microfinance is a growth market and developments vary from region to region. There is currently no reliable data for all relevant countries. The already large markets in Asia and Latin America are considered to be very saturated and have significantly weaker values than in previous years.
A focus will be on Africa in the near future. Due to the current global political events, the need for the establishment and expansion of financial structures there is particularly great. In addition to the political risks, there are great opportunities – above all due to technical progress: Hardly anyone on the African continent has a computer or landline connection. In contrast, cell phones are widespread.
A Kenyan mobile phone company launched a cashless payment system in 2007. In 2014, it already spoke of 14 million customers and had expanded its offering to several countries. The first providers that specialize in mobile loans and digital peer-to-peer offers are already on the market.
What is still missing are institutes and networks that feel committed to protecting customers; who feel responsible towards the customer and strive for long-term support.
The further development of microfinance offers is in full swing. The goal of technical assistance is to make the work of microfinance institutions more professional. Through employee training, advice, knowledge exchange or the provision of technical systems, processes should be made leaner, faster and more customer-oriented.
Advice, savings, insurance & more
In addition to basic financial services, customers in emerging and developing countries use microcredit to finance entrepreneurial activity, agricultural goods or for training and further education, to improve the housing situation or to refinance emergency loans from informal sources.
The replacement of horrendous interest expenses often makes everyday life easier. In terms of customer protection, the microfinance institutes work transparently and offer advice: they issue detailed redemption dates and impart know-how for business developments.
An example from the portfolio of a microfinance fund shows its importance: When Ecuador was hit by a severe earthquake in spring 2016, many people lost their homes, businesses and thus their livelihoods. Taking out another loan for the repair was often out of the question.