A Proposal for Sustainable Development through Microfinance

A Proposal for Sustainable Development through Microfinance

The following proposal synthesizes from the history of the microfinance industry, particularly its successes and failures, a model for developing a sustainable microfinance initiative. Central to this synthesis is the analysis of the strengths and weaknesses, challenges and opportunities, and characteristics of three well-managed microfinance institutions (“MFIs”): Grameen Bank (“Grameen”), Compartamos, and Friendship Bridge (“Friendship”). These analyses highlight the strategic leverage points – business strategies, organizational structures, financial reporting transparency, performance measurements, and organizational objectives – that determine the success of microfinance initiatives. These strategic leverage points, in turn, shape the framework for developing a prudent microfinance initiative.

Microfinance evolved from Muhammad Yunus’s poverty alleviation strategy of microcredit – providing small non-collateral short-term loans to the poor. In short, Yunus founded the microfinance institution Grameen Bank after a successful experiment of providing loans to poor women in Bangladesh revealed the poor are capable of repaying debt obligations at a high rate and can benefit from access to credit. The high repayment rate, approximately 98% according to Yunus, meant that a commercial bank could become financially sustainable while providing loans to the poor as a method of poverty alleviation. Furthermore, access to credit provide the poor with the capability to ascent from poverty. Grameen’s rapid success lead to the popularization of microfinance’s ability to alleviate poverty and, consequently, provides valuable insights in effective microfinance business strategies,...

... middle of paper ...

...that future competition would force Compartamos to reduce rates eventually if it was egregious.

Compartamos leveraged its organizational structure to accomplish its goal of growth and financial sustainability. Compartamos’s emphasis on profitability and bank-chartered organizational structure produced high quality reporting, rapid growth, and, through its IPO, provided proof that microfinance could provide meaningful returns to investors while helping the poor. However, Compartamos’s financial success is argued to exploit the poor through high interest rates and mission drift of microfinance. These strengths and weaknesses highlight the limitations on pursuing financial performance over social impact in the industry of microfinance.

The history of the microfinance industry provides a framework for understanding why certain MFIs are successful and others are not.