Microfinance Enters the Marketplace

The past few years have seen an acceleration in the creation of commercial microfinance programs. The demonstration effect of profitable microfinance institutions (MFIs), combined with market forces in newly-liberalized financial markets, created the conditions for this rapid expansion.

Bolivia, Chile, Paraguay, Uganda and Bangladesh are the focus countries for this paper, although the authors draw examples from other countries as well. In these countries, new commercial entrants, such as consumer lenders, commercial banks, and state banks, are changing the microfinance industry. With growing numbers of clients, service providers are now in direct competition with each other, often for the first time.

In response to commercial entry and increased competition, microfinance programs are seeking to improve services, develop new products, introduce cost-saving technology, and lower prices. While these changes can benefit the customers, they also bring risks for institutions and their clients, including the risk of overindebtedness by customers and the likelihood that not all cur rent providers will survive.

This paper considers the implications of these changes for clients and for the institutions that helped create the field of microfinance—non-governmental organizations (NGOs), governments, and donors. The authors contend that these groups will need to rethink their microfinance strategies in light of the rapidly changing marketplace.