Courtesy of FINCA Guatemala
When Muhammad Yunus piloted a group microlending methodology with rural women in Bangladesh in 1976, his intention was clear: to lift people out of poverty. Since, microfinance has outpaced all other sectors in attracting impact capital over the years. Today, the sector is estimated at $178.84 billion worldwide and projected to reach $496.90 billion by 2030. As the sector matures, MFIs face new challenges and opportunities in the next phase of growth.
In the last decade at Deetken Impact, we invested nearly $50 million in financial inclusion in Latin America and the Caribbean (LAC) and provided tailored technical assistance to numerous leading MFIs in the region. From this work, our team has recognized three prominent microfinance sector trends that will shape the future of the industry and drive sustainable economic growth: digitization, regulation, and impact measurement.
Microfinance Sector Trend #1: Digitization
While digitization isn’t new, the COVID-19 pandemic accelerated its adoption. We witnessed the rapid development of digital financial services, with the share of adults making or receiving digital payments in developing economies growing from 35% in 2014 to 57% in 2021.
Over 80% of Northern Central American MFIs surveyed in a recent report claim to have made significant progress in this area, defining “digital” broadly to include front of customer experience apps, tech-driven back-end processes, and upgrades to core systems. We saw an increased adoption of digital wallets such as Tigo Money, as well as new apps and software being layered onto existing third-party tools such as WhatsApp and chatbots.
One Deetken Impact portfolio company, Pro Mujer Argentina, responded quickly to the pandemic and developed an end-to-end digital customer solution including digital transfers, online support, and a WhatsApp-based training.
Pro Mujer Nicaragua launched the “Crédito Ágil” product that uses machine learning to provide financing to women with little credit history. They also developed a Digital Wallet platform that facilitates a number of transactions including sending and receiving remittances, service and credit payments, and online purchases, all from their mobile device.
Fundación de Apoyo Comunitario y Social (FACES) in Ecuador began using WhatsApp Business as a credit application tool and to improve customers’ satisfaction. They also continue digitizing the credit advisors’ work with institutional mobile apps for assessing customers’ applications. These actions have ameliorated disbursement times, increased the information flow at real time, and reduced workload.
All of these adaptations have enabled microfinance institutions across Latin America and the Caribbean to be more efficient and effective while deepening impacts for their beneficiaries. Yet, today, of the MFIs surveyed that recently made significant digital changes, nearly half would not repeat them because of limited budgets, poor sequencing and selection errors.
Institutions must continue to digitize to remain relevant, but it is critical that they develop a long-term and comprehensive vision of how to use digitization across their business model – including digital solutions for data management, portfolio monitoring, team management, and other internal processes that are much less visible, but are critical to driving efficiencies that can improve the bottom line.
Courtesy of Insotec
Microfinance Sector Trend #2: Regulation
MFIs increasingly recognize that clients often need more than just credit to grow their businesses and improve quality of life. To diversify their product offering, many MFIs are becoming regulated institutions that are licensed and supervised by their country’s financial authorities. Regulation brings many benefits for the institutions as well as the clients, including the ability to diversify sources of capital, greater transparency, stronger regulatory oversight resulting in improved risk management practices and governance, strengthened consumer protection, and the accelerated adoption of gender equality policies. This makes it easier to reach economies of scale, along with less capital requirements and greater financial leverage.
Regulated entities can also access government subsidies for their loans in affordable housing, home improvement, education, green projects, and women’s empowerment, as well as potential rescue packages from the country’s central bank. For many, regulation allows MFIs to split functions with a non-regulated, not-for-profit entity that is often tasked with providing education programs, healthcare services, and financial literacy campaigns that can more easily attract donors.
Importantly, regulation enables institutions to offer savings products alongside traditional loans to more holistically meet a client’s long-term economic needs. Saving enables individuals and families to weather economic shocks and invest in their wellbeing, such as in higher education, medical needs, and housing improvements, bolstering economic resilience.
Deetken Impact Alternative Finance Fund II recently provided catalytic capital to INSOTEC, an Ecuadorian MFI serving primarily smallholder farmers and microentrepreneurs, to facilitate the regulation process. The investment helped finance the acquisition of Banco FINCA in Ecuador, a regulated institution; today named Banco Amibank S.A., thus setting them up to expand their offering to meet clients diverse financial needs. For instance, prior to the acquisition, INSOTEC noted that some clients needing savings products and digital transfers were leaving to go with other institutions that could offer them that one-stop solution.
It is important to note that regulation is also a long and expensive process that can stifle innovation if the country’s regulator is too risk averse. It may require hiring expensive advisors during the regulatory process and increase the fixed cost of the business. Nonetheless, offering microloans alone may no longer be enough to truly contribute to a clients’ holistic economic growth. MFIs must evaluate which regulatory status works for them and enables them to reach long-term financial and social objectives.
As microfinance outpaced all other sectors in attracting impact capital over the years, investors and other stakeholders are increasingly demanding deeper impact measurement and reporting. MFIs are now called to move beyond short-term quantitative outputs, such as the number of clients served, to data-backed outcomes that measure if and how their products and services drive positive changes in their clients’ businesses, lives, families and communities. Because financial inclusion is considered a key enabler to improve economic and social wellbeing and prosperity, MFIs must measure progress in key areas such as clients’ business growth and resilience, income and savings, quality of life including investment in health and education, and economic empowerment, resources and agency.
At Deetken Impact, as we look to our MFI investees to provide data and analysis on impact outcomes and help us to enhance our own impact measurement and reporting processes, these are the questions that guide our work:
Image description: Key components of an impact measurement system: Questions to consider as MFIs define their impact strategy, prepare to collect and analyze the right data, and utilize it to inform decision making.
MFIs are uniquely positioned to deepen impact measurement because their very business model is based on extensive data collection and cultivating client relationships. They can capitalize on existing tools and processes such as credit applications and renewals, satisfaction surveys, and meetings with credit advisors to expand data collection efficiently. Data management is equally as important, and MFIs must ensure client data is easy to access, of high quality and systematized to facilitate deeper analysis and monitoring to identify changes over time.
Data collection and management were an integral component of the Ilu Women’s Empowerment Program, in which Deetken Impact and Pro Mujer, with the support of Zigla Consulting, led technical assistance projects with MFIs in the Ilu Fund portfolio to strengthen gender-smart information systems. Through this program, we identified the need to first strengthen data management tools and processes in order to improve impact measurement.
Investees in the Ilu Women’s Empowerment Fund (Ilu Fund) provide us with some good examples for how data collection and management can support impact measurement. Investee FINCA Guatemala, for example, contributes to the data collection process for Finca Impact Finance’s pioneering Mission Monitor Survey. This annual survey collects client data across the areas of financial inclusion, living standards, income and employment, women’s empowerment and personal aspirations. Finca Impact Finance then centralizes and analyzes data, which is published online featuring user-friendly visual dashboards, such as the following:
Their methodology draws on the Poverty Probability Index (PPI®), a poverty measurement tool designed to calculate the likelihood that a household is living below the poverty line. The simple, 10-question framework is centered on basic information about the household’s makeup, education levels, housing quality, and lifestyle, enabling organizations to integrate objective data into their assessments and strategic decision-making. FINCA Guatemala monitors these indicators annually to identify and better serve clients’ evolving needs alongside impact performance.
Another Ilu Fund investee, Avanza Sólido based in Southern Mexico implemented a poverty stoplight in partnership with Fundación Paraguaya. This tool measures quality of life across six dimensions: income and employment, health and environment, housing and infrastructure, education and culture, organization and participation, and self-esteem and motivation. Scores are classified into three categories using traditional colors of a traffic light to indicate extreme poverty (red), poverty (yellow) and no poverty (green). Using mobile technology, this self-assessment provides the framework to determine a community’s most important needs, identify solutions, and define programming to eliminate poverty. With a solid baseline, Avanza Sólido will now monitor changes to these indicators going forward to see if clients experience changes in poverty levels and to determine where to direct resources.
Several Ilu Fund investees have also participated in the 60db Microfinance Index, a comprehensive social performance assessment. Driven entirely by client voices, the Index gathers quantitative and qualitative data along six key dimensions of impact, including Access, Business Impact, Household Impact, Client Protection, Resilience, and Agency.
Although many MFIs are making strides in impact measurement, the Ilu Fund’s technical assistance to portfolio companies revealed that many do not have the systems and processes in place to effectively collect, analyze and use outcome-level impact data. Among the key challenges identified, we found that:
- Although MFIs collect a substantial volume of client data, information on socioeconomic variables is limited. It is critical to incorporate questions on clients’ business performance and living conditions, not only for initial credit applications but also on a regular basis to monitor changes over time.
- MFIs tend to have multiple sources of data that vary in level of digitalization. The industry must urgently move from paper to 100% digital to facilitate data collection.
- Many key data sources are not systematized or integrated within core banking systems, making it very difficult or impossible to perform analysis using data from different departments. Institutions must consider tools like a Data Warehouse to centralize and integrate data from multiple sources and data management software to store and access information.
- Impact data is not regularly analyzed to identify trends nor to inform strategic decision-making. When analyzed, there is limited use of automation to analyze information in real-time.
- It is of utmost importance that impact data is disaggregated by gender and other relevant socioeconomic variables to provide powerful insights to inform the market strategy, such as client segmentation and product offering.
Overcoming these challenges to strengthen impact measurement capacity will help MFIs better understand their clients, analyze the impact of their products and services and inform strategic decision-making. A focus on improved data management and collection is key. We recommend that MFIs undertake the following actions :
- Identify and empower dedicated personnel with impact measurement tools and knowledge. This role is often distributed in various positions which leads to lack of accountability and inconsistency.
- Provide education and capacity–building across the team to improve data and information collection.
- Engage with subject-matter experts that can provide guidance and expertise in implementing new impact measurement strategies.
- Invest in information systems to record, digitize, integrate and analyze information across business units.
- Ensure impact measurement is incorporated in key strategic decision-making by leadership and in accountability to the Board of Directors.
Only once MFIs collect and analyze quality and in-depth impact data will we be able to affirm with certainty that this maturing sector is achieving the initial objective planted by Muhammad Yunus so many years ago: to lift people out of poverty.
The microfinance industry has evolved significantly since its inception in the 1970s. As the industry matures, microfinance institutions in Latin America and the Caribbean – and around the globe – must innovate to stay relevant, deepen impacts, and grow sustainably. Deetken Impact is proud to support and accompany a number of MFIs as they navigate digitization, regulation, and impact measurement to reach long-term financial and social objectives.