Microfinance used to be known as a basic banking model for villages in the developing world, a universe away from the fast moving capital markets, private equity funds and giant banking and insurance groups that make up the dynamic modern financial sector. But the two worlds are now starting to converge.

New Horizons: creating value, enabling livelihoods confirms that commercial interest in microfinance is growing at an unprecedented rate. The report was released to mark a major international conference on financial inclusion hosted by the Treasury and DFID in London.

From Citigroup’s growing global microfinance business to Vodafone’s experimentation with mobile banking, a wave of innovation is transforming the microfinance sector. The report shows that this is occurring in two areas: new opportunities for international investors and financial products designed to meet the needs of the poor.

Explaining the growth of interest, Vedant Walia, co-author of the report said: “Commercial involvement is being driven by improved access to these new markets. Around 2.5 billion people are currently excluded from formal financial services, and the microfinance industry is only meeting 10% of a total estimated demand of US$300 billion. Everyone’s recognising that there’s a huge market out there.”

Speaking at the launch of the report, Chris Duffield, Chief
Executive of the City of London Corporation, said: “the walls between microfinance and the mainstream financial sector are collapsing and there is a tremendous opportunity for innovation”.

He continued “the City of London has unparalleled international expertise and has an important catalytic role to play in expanding access to finance globally”.

New investment opportunities beyond philanthrophy:

Today what was once seen as philanthropy is attracting the attention of large-scale mainstream investors who see microfinance investment as an opportunity to create social benefit whilst delivering financial return.

By using techniques common in mainstream finance such as securitisation, commercial players are creating investment propositions of interest to a wider group of investors. Examples of this include Morgan Stanley’s US$108 million microfinance bond that will provide loans to 21 microfinance institutions in 12 countries including Kenya, Azerbaijan and Mongolia. These institutions then lend the money to low-income clients in small loans of under US$200 – thereby delivering improved financial security and other social benefits.

Creating appropriate financial products:

Access to new markets isn’t the only new development. The nature of microfinance is itself changing.

Microfinance is usually understood simply as credit. But now a whole range of financial services is being developed to enable poor people to access the benefits of insurance, savings and money transfer.

Mainstream international banks such as Citigroup are seeing this as an opportunity to access new markets, often using unconventional approaches. Citibank India, for example, in partnership with Indian microfinance institutions, recently launched a savings product that
uses biometric ATMs that speak in six languages to give more people access to a savings account.

Where next? The future of microfinance:

Industry experts hope that microfinance will eventually become a mainstream asset class for investors. Although it’s too early to tell how these investments will perform, initial analysis shows that microfinance is uncorrelated to wider economic trends making it a popular complement to current portfolios.

For more information please contact business@forumforthefuture.org.uk

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