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Microfinance: Too Small to Matter or Ready for Take-Off?

Published by: TowerGroup

Published: Sep. 15, 2008 - 11 Pages


Table of Contents



TowerGroup Take-Aways

The microfinance sector has expanded since increased funding from individual and institutional investors has encouraged commercial banks to enter the sector and incumbent microfinance institutions (MFIs) to commercialize.

Demand for technology is coming from commercialized MFIs seeking efficiency and transparency gains and from established regional and tier 1 banks moving into the microfinance sector.

Established banks are looking to partner with existing MFIs as a way of penetrating rural areas to which they have little access.

Increased availability of funding for MFIs and regional banks is bringing down interest rates charged on microloans; credit standards are falling, causing some MFIs to fail but driving others to increased levels of efficiency.

Microfinance is emerging as an investible asset class, although the credit crunch is reducing availability of funding from both individual and institutional investment sources; microloan demand remains unaffected.

Vendors considering entry to the microfinance sector face higher commercial risk; profit potential is not high, and they should think of the sector as a long-term play.


Report Coverage

Background

Exhibit 1

Microfinance Clients Versus Underbanked Consumers

Exhibit 2

The Microfinance Ecosystem

Exhibit 3

Technology for Microfinance

Challenges and Opportunities

Exhibit 4

Exhibit 5

Summary

Abstract

Increased levels of funding in the microfinance sector is permitting greater numbers of the world's poor to access microcredit while innovative technology reduces high transaction costs that normally render the sector unattractive to traditional banks. Many microfinance institutions (MFIs) that extend microloans to the poor remain challenged by the divide between charity and growth and sustainability, but the increased funding is creating competition among MFIs, causing increasingly rapid commercialization of MFIs and driving up demand for technology. Vendors of retail financial services technology should enter the sector with caution and view the sector as a longer-term play.

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