Reevaluating the For-Profit Microfinance Business Model

For-profit microfinance, a relatively new concept with a history of less than 20 years, has faced significant scrutiny. As the managing director/CEO of a for-profit microfinance bank for over five years, serving more than 40,000 clients and disbursing over $20 million in microloans, I have arrived at a conclusion: there is a strong need for realignment, if not a completely different approach, to for-profit microfinance.

While the idea of achieving a double or triple bottom line sounds promising, in practice, it proves to be exceedingly challenging. Recent crises in India and the troubles of microfinance banks in Nigeria illustrate the difficulties associated with balancing profit and social good. Families, particularly vulnerable women, have been trapped in overwhelming debt, partly due to the push for profit and rapid growth.

The Limitations of For-Profit Microfinance

The for-profit model offers a unique advantage for institutions in accessing capital markets. However, the experience with capital market funding reveals its limitations. This funding is often short-term and fluctuates based on market sentiment, making it incompatible with the long-term, stable, and predictable capital flow required by microfinance. This requirement is sometimes referred to as patient capital.

Some microfinance institutions, which have become publicly listed companies, are also showing significant institutional weakness. The race to profitability and growth can stretch the institutional framework to its breaking point. In such situations, there have been reports of serious abuses against borrowers. Sometimes borrowers are encouraged to take multiple loans, or field officers overlook basic risk factors in borrower evaluation for the sake of numbers.

The Potential Harm of Capitalism Over Social Good

The ultimate losers in these scenarios are the borrowers. The limits and potentially harmful effects of capitalism over social good are evident. This is not to say that for-profit microfinance cannot be successful; however, the current model often fails to deliver the desired balance.

What stands out are the more mission-driven institutions, such as Accion International, Finca, and Grameen, which have a seemingly working model that combines the advantages of for-profit and social microfinance. These non-profit microfinance institutions showcase a balanced approach that prioritizes sustainability over short-term gains.

Conclusion and Reflection

While the for-profit model has not demonstrated significant impact, the focus on social missions and sustainable development has produced positive outcomes. As these institutions have shown, there is a need for strong reflection to promote and sustain a model that has proven effective. The path forward is clear: a model that balances profit with social good, driven by a commitment to long-term success rather than short-term growth.