FINCA International CEO on the future of microfinance

The microfinance industry is evolving and traditional microfinance institutions are searching for new ways to remain relevant as telecommunications operators, payment companies and other new industry competitors take on the business of spreading credit to the world’s poor. So what does the future look like for microfinance and what does it mean for the rest of the global development community? Smartphones, credit scoring, new agent networks and big data could make microfinance professionals even more productive in years to come, according to Rupert Scofield, president and chief executive officer of FINCA International — one of the world’s most prominent MFIs. “We are in the middle of what I would call the second great disruption,” Scofield told Devex. The first great disruption, he explained, took place 30 or 40 years ago when MFIs “broke open the global financial system,” and provided millions of the world’s poor with access to microloans and the potential to boost their businesses and livelihoods. But now, traditional MFIs are vying for their place in a changing global landscape. “We’re competing against the whole world,” the FINCA chief said. “I mean everybody is doing microfinance.” Scofield explained that when his organization first began in the mid-1980s, competition was limited to banks, nongovernmental organizations and loan sharks. Today, telephone companies, payment companies and even utility companies are “trying to figure out how to put credit into the hands of low-income people all over the world.” With a laugh, he admitted that a friend and colleague from the International Finance Corp. recently referred to traditional MFIs like FINCA as “the walking dead,” while others “patronizingly refer to us as ‘legacy microfinance organizations.’” The challenge now for FINCA and other traditional MFIs is to stand up to this sentiment that traditional microfinance is losing its once undeniable status, and to show the world’s poor that while technologies change and new actors emerge, MFIs are still a relevant resource. Staying relevant Cellphones have changed the way money moves. The introduction of vast mobile networks created a “new global infrastructure that didn’t exist before,” Scofield said, adding that even in the poorest countries there is widespread access to mobile phones. This allows people to make payments on loans, withdraw savings and even pay other individuals all through a mobile device. FINCA’s chief executive called it a “revolution” and said that no one in the microfinance industry has really figured out a winning business model that responds to the mobile phone breakthrough. Traditionally, MFIs work through a team of on-the-ground credit officers who go out into communities and gather loan payments from borrowers in person. Now, Scofield and his peers are asking if MFIs can or should adopt a business model that puts aside human-to-human contact. “We think it’s important to maintain those relationships,” he said, adding that if clients borrow more than $20, it becomes too risky to carry out transactions through virtual payments and credit scoring. But FINCA and others are experimenting with some innovative ideas to keep their organizations afloat. For instance, FINCA is pushing forward biometric fingerprint scanning to allow more borrowers without national IDs to access their accounts and therefore receive and repay loans. They are also working with data and credit scoring companies on larger loans in order to verify a borrower's capacity to pay. Scofield has embraced the need for new ideas and new models, but acknowledged that change in a firmly established industry is far from simple. “It’s kind of scary in many ways, because change is hell,” he said, noting that changing the way things have been done for so long isn’t always popular. In addition to drawing out new business models, traditional MFIs are partnering on a working group intended in part to promote responsible microfinance and protect against investors making a fortune at the expense of the poor — something the industry has come under fire for in recent years. The Microfinance CEO Working Group encompases officials from 10 international organizations that promote microfinance in some capacity, including FINCA, BRAC and CARE. “We are pushing a client protection program, which we called a smart campaign, where we basically train our employees not to overindebt the client, and we agree to standards of performance where we take into account the repayment capacity of our clients, whereas many predatory microfinance organizations don’t,” Scofield said. The group is also sponsoring the creation of a new law that if approved “would require all financial institutions — nonbank and bank — as well to adopt these client protection principles.” Looking ahead Despite changing technology, the evolution of microfinance, and the difficult task of keeping the traditional MFI relevant, Scofield is optimistic about the future of the industry. If traditional players can leverage the technology and find the right partners, the FINCA chief believes there is potential to “grow dramatically faster” than they did using their “people-based” business model. While people will still remain an important part of the microfinance business model, he expects they’ll be more productive in 10 years’ time as they’ll have even greater access to new tools such as smartphones, credit scoring, agent networks and big data. Scofield also forecasts higher client-employee ratios, adding that while today in Nicaragua there are about 550 clients per credit officer, “I could see it going to a thousand … or more.” While change is necessary and the industry may be in flux, traditional MFIs today are still experiencing growth and are still needed by their clients, Scofield pointed out. Indeed, FINCA is evolving with the industry and is looking to hire young professionals with a variety of specialized skills, including in solar energy, health care, education and, of course, those with a background in telecommunications or “alternative delivery channels.” What do you think about the future of microfinance and traditional MFIs such as FINCA International? Let us know by leaving a comment below. Read more international development news online, and subscribe to The Development Newswire to receive the latest from the world’s leading donors and decision-makers — emailed to you FREE every business day.