> Posted by Tyler Owens, CFI Staff
The current era of financial services for the poor is marked by the growth of high-tech delivery mechanisms, innovative start-ups, new socially responsible investing models, and more traditional banks growing their portfolios of base-of-the-pyramid clients. Different players in increasingly crowded markets often collide in trying to win over more clients. Just one recent example is the newly public Alibaba, which has issued more than $16 billion in small loans over the last three years through its SME loan company AliFinance. The result of all this can lead one to question the role that traditional MFIs will play in the years and decades ahead. What will be their unique value proposition and how will they earn and maintain market share and the loyalty of their clients?
There is evidence that microfinance industry practitioners and stakeholders are not prioritizing questions of relevance and long-term customer retention. All too often, thinking strategically about the place of an MFI in a rapidly changing financial services landscape takes a back seat to the daily crush of competition and loan book performance. The 2014 Microfinance Banana Skins report—which is built on surveys of industry practitioners and insiders—concluded that the most urgent risks the industry faces are those of day-to-day business operations, such as credit control, competition, and management quality. The report went on to say that “longer term risks associated with the survival and evolution of the industry such as technological change, product development and funding are considered to be less urgent – and are less well defined.” It concluded that paying scant attention to long-term risks in the industry—at a crucial point in its development—may be a serious risk in itself.
Is there a certain myopia among industry practitioners and insiders who resist thinking about longer-term survival? Anne Hastings, the Executive Director of the Microfinance CEO Working Group, thinks so. “To me, the biggest threat to microfinance today is that we could be deemed irrelevant, that new players will simply bypass microfinance institutions.” she said.
If this is the case, how do we develop a long-term strategic perspective on the microfinance industry? For some leading industry practitioners, the answer is in thinking about new and innovative partnerships. To Anne Hastings, writing on this site in 2013, “the biggest threat…is refusing to collaborate, to partner with, and to learn from new players to expand our services and do a better job of reaching our clients.” Bob Annibale, Global Director of Microfinance at Citi, framed it as a matter of seeking to include other stakeholders. “It’s important to look at local banks, co-operatives, and credit unions. They go deeply into rural areas. We bring a certain experience, but it’s about bringing in the fuller banking sector and technology from other sectors like mobile phone companies to complement it,” he said.
Partnerships, although they may ultimately be the answer to sustained relevance for MFIs, bring challenges of their own. For example, partnerships often involve significant changes to an MFI’s risk assessment and management models. When an MFI fails to properly adjust to fundamental changes in operations, the results can be disastrous. A 2010 Calmeadow study on failures in microfinance noted that believing minor risk management adjustments suffice for fundamental business changes is a recipe for disaster. Additionally, if new partnerships with telecommunications firms or digital players mean new ways to exponentially increase the customer base, such growth could be destabilizing. And a 2013 CGAP article described four recurring explanations for struggling partnerships: one or more of the partners is ill-equipped or unmotivated to play its role; disagreements over the division and timing of revenue and cost; misalignment of competitive advantage, or competing interests; and regulatory restrictions.
All of this is to say that partnerships must be conducted in the right way. If microfinance is to survive a rapidly shifting landscape, incumbents must develop transparent, well thought-out, and mutually beneficial partnerships with new entrants.
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