MICROFINANCE
BAROMETER 2018
IN PARTNERHIP WITH

9th Edition

MICROFINANCE AND PROFITABILITIESContent
PAGES 2-3
KEY FIGURES OF FINANCIAL
INCLUSION IN THE WORLD
PAGE 4-5
KEY FIGURES OF FINANCIAL
INCLUSION IN EUROPE
PAGES 6-7
KEY FIGURES OF FINANCIAL
INCLUSION IN FRANCEPAGES 8-9
SOCIAL PERFORMANCEEDITORIAL
Profitability: though essential to microfinance, this concept is complex
to grasp in a sector that holds social impact as its rationale. Should
microfinance be profitable? If so,
can it be socially responsible? Can
it remain true to its aspirations andcontribute, through financial inclusion, to lift nearly 2 billion people
without access to banking services
out of poverty? Between reasonable interest rates and sufficientprofitability, what is the proper balance for Microfinance Institutions(MFIs)? What resources to financethe development of the microfinance sector?

© Baobab Group

PAGE 10-16
SPECIAL REPORT “MICROFINANCE
AND PROFITABILITIES”

Financial sustainability is important:to fulfil their mission and develop
their services to customers while
ensuring their economic viability,
players in the sector must not only
cover their costs, but also generate profits. Profitability, however,cannot be reduced to its financial
dimension. On the contrary, it isnecessarily multifaceted. Actors in
the microfinance sector operate
not only with clients, but also withinlarge societies and systems. The positive impact of microfinance on borrowers and on communities must
therefore be taken into account,
while negative externalities need tobe measured and integrated into impact assessments and cost-effectiveness calculations as well.
As the sector continues to grow,the Microfinance Barometer 2018chooses to address the issue of

profitability and its multiple aspects. From the presentation of major trends in the sector in France,
Europe and the world, to the analysis of microfinance actors’ business models, to a spotlight on theimpact of new technologies on the
profitability of microfinance, thisissue questions our conceptionsof profitability and mobilises investors, MFIs and experts to explore
ways in which financial and social
returns can be complementary andmutually beneficial.
Fighting financial exclusion mustremain a priority and microfinanceremains one of the tools to achievethat goal. It is neither «good» nor“bad” in itself: it responds to a realneed for inclusion of the most vulnerable people. Its impact depends
on how it is operated: properly implemented, microfinance can havea real positive impact for the populations at the base of the pyramid.
In this respect, positive examples
are many, as this Barometer testifies. These initiatives demonstratethat financial profitability can bereconciled with positive social impact and, it is our hope that hey caninspire traditional economic andfinancial actors.
We wish you a pleasant reading.

vvv

KEY FIGURES OF FINANCIAL INCLUSION | WORLD
Eastern Europe and Central Asia

World Total 201755% 45%83%$7.2 B$114 B142

Top 100 MFI
76%

981

139 M

2015 : +13.4%
2016 : +9.6%
2017 : +5.6%

2015 : +8.6%
2016 : +9.4%
2017 : +15.6%

62%2015 : +0.7%
2016 : +8.1%
2017 : +12.4%

46%

8%

92%

224

83.8 M

2015 : +19%
2016 : +13.4%
2017 : +6.6%

2015 : +45.6%
2016 : +23.5%
2017 : +24.2%

Africa160

6%2015 : +1.9%
2016 : -0.6%
2017 : +3.5%

6,8 M

2015 : +6.9%
2016 : +2.3%
2017 : +0.4%

65%2015 : +14.8%
2016 : +9.2%
2017 : +18.1%

Portfolio size

Number of borrowers

94%$19.1B
150

33%

Number of MFIs reporting to the
MIX

66%

East Asia and Pacific

35% 65%$9 B$49.8 B
23.4M

2.6 M

2015 : +6.6%
2016 : +7.1%
2017 : +11.4%

2015 : +9.7%
2016 : +3.2%
2017 : +13.5%

South Asia

$27.9 B

40% 60%66%

2015 : +6.9%
2016 : +3.1%
2017 : +1.1%

59%$1.6 B

Latin America and Caribbean

275

2015 : -0.6%
2016 : -2.5%
2017 : -2.3%

Middle East and North Africa

30

34%

2,8 M

2015 : -19.7%
2016 : -11.1%
2017 : +6.5%

19.2 M

2015 : +6.7%
2016 : +8.0%
2017 : +10.6%

77%

Proportion of rural borrowers(consolidated data for year 2016)

Source: See methodology.

17%
Other MFI
24%

Microfinance’s global figures in 2017 : mixed pictureAt the end of 2017, MFIs
reached an estimated 139
million low-income andunderserved clients with loans totaling an estimated 114 billion dollars.
These levels represented a growthof 5.6% in total borrowers and 15.6%
in loan portfolio. While the loan portfolio growth was stronger than the2016 results (plus 6.2 points), expansion in outreach to new borrowers
slowed by half in 2017 compared tothe 9.6% growth experienced in 2016,
representing a rising average loanbalance per borrower.
The overall loan portfolio remains
just as concentrated in leading global
institutions as in prior years. The 100
largest institutions (ranked by loan
portfolio) account for 76% of bothborrowers and loan portfolio (sameas 2016), putting their reach at 87
billion dollars in loans for 108 million
borrowers.
Despite this slowdown in outreachto new clients, some MFIs are already positioning themselves to takeadvantage of an increasing digitaluser base with mobile money. A
2017 MIX survey of MFIs showedthat 61% were deploying alternative
delivery channels to reach clients,
ranging from agents and ATMs tomobile phones. Of that total, 40% had
already developed mobile money
channels and a further 20% were inpilot testing. Additionally, according
to GSMA’s 2017 State of the Industry Report on Mobile Money, mobile
money access and usage grew atdouble digit rates.

2

MICROFINANCE
BAROMETER 2018

Focus on regions
South Asia continues to lead global outreach, accounting for nearly
two-thirds of global borrowers (60%).
That being said, the region’s growthin borrowers has slowed for a second year, going from 13.4% in 2016
to 6.6% in 2017. This result is overshadowed by significantly slower
growth in the region’s largest market,
India, as fallout from the November
2016 demonetis
ation decree.
Demonetisation withdrew over 80%of the value of currency in circulation
and unsettled MFIs’ cash-based disbursement and reimbursement businesses. As a result, borrower growthslowed from nearly 20% in the prioryear to 5.8% in 2017.
Despite a slowdown in Cambodia,
one of its lead markets, East Asiaand the Pacific led regional growth in2017 with 10.6% growth in borrowers
and 18.1% in loan portfolio. Indonesia, the Philippines, and Myanmar all
experienced an increase in borrowers greater than 15%. In Cambodia,
on the other hand, the cooling effects
of an interest rate cap from March2017 led to an estimated 5% decline
in borrowers by the end 2017.
Countries in Eastern Europe andCentral Asia faced another challenging year in 2017. After a year ofcontraction in 2016, the loan portfolio
grew in 2017 at 6.5%, an increase
from the -11.1% of the previous year,
but the borrower base contracted by
2.3%. The stricter regulatory norms
applied in 2016 in Azerbaijan and Ta-

jikistan that resulted in some MFIs’
licenses being revoked continued
to dampen outreach in 2017. While
Tajikistan experienced small growthin borrowers (+2.8%), the Azerbaijan borrower base shrank by over aquarter in 2017, and the loan portfolio
by 15%.
In Africa, overall outreach to borrowers remained largely flat between 2016 and 2017, growing by
0.4%, with a similar trend in theloan portfolio outstanding (+3.5%).
Several countries in West Africa,such as Benin, Senegal and Mali,
experienced single-digit growth inborrowers. In East Africa, Kenyan
MFIs faced a challenging environment for lending in 2017, withprolonged elections contributing

to uncertainty and an interest rate
cap announcement that put a brakeon lending; the combination resulted in a contraction of the borrowerbase by over 18% during 2017.
Finally, growth in Latin American
and the Caribbean, the largest regional portfolio by portfolio value(44%), slowed considerably in 2017,
registering just 1.1% aggregate
growth in borrowers (comparedto +8.1% in 2016). Two of the largest markets, Mexico and Peru,
experienced opposite trends: thetotal borrower outreach in Mexico
shrank by 3.8% and Peruvian MFIs
increased their client base by 9.5%.

Top 10 countries by number of borrowers
Rank

Country

Borrower FY 2017
& growth since
2016

Loan portfolio
FY 2017(dollar)& growth since
2016

1

India

50.9M (+5.8%)

17.1B (+26.3%)

2

Bangladesh

25.6M (+3.5%)

7.8B (+17.0%)

3

Vietnam

7.4M (+2.8%)

7.9B (+18.9%)4

Mexico

6.8M (-3.8%)

4.4B (+5.5%)

5Philippines

5.8M (+16.3%)

1.3B (+17.5%)

6

Pakistan

5.7M (+25.9%)

1.8B (+39.6%)

7

Peru

5.1M (+9.5%)

12.6B (+17.0%)

8Brazil3.5M (+1.1%)

2.6B (+2.7%)

9

Colombia

2.8M (-0.7%)

6.3B (+5.6%)

10

Cambodia

2.4M (-4.7%)

8.1B (+21.6%)

Source: see methodology.

KEY FIGURES OF FINANCIAL INCLUSION | WORLD
Focus on clients
The results of the World Bank’s Global Findex for 2017 highlights how the
MFIs reporting through MIX Market help increase access to financial
services for excluded groups, including women. According to the Global
Findex data, global account access increased from 62% in 2014 to 69% in
2017, yet the gap between account access for men and women remained
unchanged at 7%. This gap in access is mirrored in MIX Market data,
where regional differences also appear.
South Asian MFIs remain squarely focused on serving women, as many
have done since inception, with 92% female borrowers. South Asia is also
the region that saw the gap in account access between men and women
decrease the most, from 18% in 2014 to 11% in 2017, at the same time that
overall account access went up to 70%. The women-focused outreach of
the surveyed MFIs clearly contributes to that improved access.

At the other end of the spectrum, MFIs in Eastern Europe and Central
Asia serve a majority of male clients: only 45% of their borrowers are
women. The gender gap has increased from 3% to 6% despite overall
growth in access of 7 percentage points.
Rural clients, including smallholder farmers, also constitute an important excluded segment served by MFIs. Many regions have a strong
focus on rural outreach, including Africa, East Asia and the Pacific,
and South Asia, which have two-thirds or more of their clients in rural
areas. In contrast, MFIs in Latin America remain strong urban actors,
with just a third of their borrowers in rural areas. Within the region, only
countries in Central America stand out for having 50% or more of theirborrowers in rural areas.

Focus on the profitability of microfinance institutions
Profitability of microfinance by region
Underpinning the growth in services are the business models and operating
environments that shape institutional performance. As stressed out in theoverall growth in 2017, MFIs faced increasingly challenging environments
over the last couple of years, leading to slower growth in outreach. Reflecting this difficult context, the global portfolio at risk (PAR) exceeding 30 days
increased, going from 4.7% in 2015 to 7.2% in 2016.
The contraction in loan portfolio recorded in Eastern Europe and Central Asia
also appeared in business performance. On average, these MFIs generated
losses (-1.1% return on assets) as delays in repayments increased by 50%
compared to the prior year (15.7% PAR > 30 days). Azerbaijan and Tajikistan
were particularly struck with portfolio quality problems and MFIs in bothcountries registered negative returns on assets, at -8.8% and -1.0% respectively.
MFIs average performance ratios in 2016 (consolidated)
20.9%

Portfolio yield
Operatingexpense ratio
Portfolio at
risk 30 days
Return on
equity11.1%
7.2%

ers impacted by the withdrawal of large quantities of cash during demonetisation. Despite these challenges, Indian MFIs managed to earn 2.6% returnon assets for the year ended March 2017, down slightly from the prior year.
Latin America and the Caribbean, the largest region by loan portfolio base,also witnessed the most stable institutional performance. Some markets, like
Mexico, experienced a small rise in portfolio risk (up to 9.4% by end 2016), due
in part to its extensive exposure to consumer lending (>20%), and connectedto the small contraction by MFIs from their lending portfolios in 2017. In othercountries, like Bolivia, Colombia and Peru, the stable environment allowed
MFIs to maintain similar portfolio risk, operating efficiency and returns as in
the prior year.
Looking ahead
After a challenging year in 2017, MFIs in many markets are revisiting their projections for growth1. In countries where borrowers outreach shrank in 2017,
such as Kenya and Cambodia, MFIs that once projected optimistic growth in2017 foresee little or no growth in 2018. Behind these projections are expectations for tougher business environment in 2018. MFIs cite both competition
from other MFIs and new entrants and a more difficult macroeconomic environment as primary factors limiting their growth this year, and early data fromMarch 2018 indicate that these projections are more realistic than in 2017.
1 These projections come from MIX’s Barometer Forecast surveys conducted on MFIs in 17 countries
every quarter.

12.6%
BLAINE STEPHENS
CHIEF OPERATING OFFICER

African MFIs earned overall positive returns (3.1% return on assets) with low
portfolio quality (14.5% at 30 days). The positive returns were achieved, inpart, from a large deposit base generating a low overall financial expense
ratio (3.6%) and a portfolio earning the highest yield of any region at 26.6%.
South Asian MFIs’ performance is buoyed by strong productivity and efficiency generated from a business mode which relies on group-based methodologies, allowing MFI staff to serve several clients in one setting. These MFIs
spent an average 25 dollars per borrower, one-third of the operating cost of
the second most efficient region and one-tenth of the most costly one. This
low operating cost allowed them to clear the highest average profits (3.5%
return on assets) while managing an average yield (21.2%). In addition, MFIs
from the region registered the highest financial expense ratios (6.4%), resulting mainly from their dependence on external borrowers (40% of their total
funding). For Indian MFIs, profits remained at regional norms despite thestrong uptick in repayment delays (up to 14.5% by March 2017) from borrow-

MIX

Methodology
Calculations are based on data provided by financial service providers through MIX Market (http://
www.themix.org/mixmarket). MIX makes every effort to collect the data from the dominant actorsof each market to ensure visibility into each market but does not collect data on every actor in
every country.
Total figures for borrowers and loan portfolio as of FY2017 are based on data provided by 981 institutions. For FY2017 data, we have considered data for all institutions that have reported through MIX
Market for any period in 2017, including of March 31, 2017, June 30, 2017 July 16, 2017, September
30, 2017, and December 31, 2017. Where institutions reported annual figures for FY2016 but not fora date in 2017, those FY2016 figures were used to calculate the estimated total outreach for 2017.
Growth figures for borrower and loan portfolio values for FY2016 and FY2017 are based on a balanced panel data from the set of institutions that have provided both data fields through MIX Market for each of the fiscal years from FY2016 and FY2017.
Client segment, funding data, and institutional performance data come from MIX’s Global Outreachand Financial Performance Benchmark Report – 2016 and represent results from FY2016 for 774
institutions.

MICROFINANCE
BAROMETER 20183

KEY FIGURES OF FINANCIAL INCLUSION | EUROPE
The untapped potential of microfinance in EuropeM

icrofinance has become a growing sector of activity in Europe
over the last years. It still carries an important growth potentialconsidering the impacts of the current low economic growth
on disadvantaged and impoverished populations and the need to ensure
their social and financial inclusion. The rapid increase of self-employment
and enterprise creation makes the role of microfinance even more important, since microenterprises – which make up 92% of the total number ofEuropean enterprises – must overcome many obstacles, first to be created, and then to find the financial resources they need. In this respect
there remains a significant, yet unmet, demand from financially excluded
microenterprises and self-entrepreneurs.
Trends in microlending activity and outreach
Number of microloans distributed
during the year
800 000

Value of microloans distributed
during the year
2,5

600 000

633 1732

664 000€ 2.07€ 1.86

Billions

494 781400 000€ 1.5711

200 000

0

2015

2016

2017

0

2015

+17%

+24%

3.16 B euro

993 182

Gross Microloan
Portfolio Outstanding

ActiveBorrowers

Growth 2015-2017

+21%

2017

2016

Growth 2015-2017of institutional diversity, the range of actors that provide microloans in
Europe is wide: mostly Non-Governmental Organisations (NGOs) – themost common legal type adopted – followed by Non-Bank Financial Institutions (NBFIs) and Credit Unions/Financial Cooperatives. In terms ofsocial objectives, increased access to financial services emerges by
far as the main mission pursued by MFIs across Europe. However, thistrend is less pronounced in Western Europe where the job creation mission stands out as almost as important as financial inclusion (see p.6).
Preliminary results confirm that business microloans – that support
self-entrepreneurs and microenterprises with loans up to 25,000 euros– are still by far the main financial product that MFIs offer in Europe,
followed by personal microloans. These latter cater to critical needs ofvulnerable clients such as rent, education and personal emergencies,
as well as employability investments. Beyond microloans, the main financial products offered by MFIs are larger business loans (e.g. morethan 25,000 euros to microenterprises and small and medium enterprises) and savings, in line with the previous survey results (2014-2015).
It is worth underlining that the scope of the microfinance sector in Europe is not limited to the provision of financial services to people excluded from the traditional financial markets. Available data show that a
growing number of MFIs (almost 70%) offer much-needed non-financial
support to their clients, and constitute a crucial and distinctive featureof MFIs in the European landscape. In the majority of cases, these services are internalised by MFIs and mostly delivered in the form of oneon-one coaching, consulting, mentoring or in group sessions (workshops, seminars, etc.).
Support to the development of the sector+25%

Overall, these figures depict a huge potential demand for microloans
across Europe. They also show the dynamism of a sector supporting a
growing number of vulnerable clients and microenterprises thanks tothe combined offer of bespoke financial and non-financial services.

A recent study commissioned by the European Microfinance Network(EMN) and Microfinance Centre (MFC) to evers & jung1 assessed a total
market potential for business microcredit of 2.7 million loan applications
in EU-28 that results in a total volume of 17.4 billion euros in potential
demand for microcredit in 2016. This estimate highlights the need for accessible small business loans from actors in the banking and non-banking sector, including alternative finance providers like peer-to-peer platforms or grey market lenders. The recent development of microfinancein Europe hints that this sector is increasingly addressing the needs ofself-employed individuals and existing microenterprises that are still excluded from traditional banking services.

Despite the positive results achieved, MFIs in Europe still need adequate public and private support to ensure a wider outreach to theunderserved, to constantly improve their institutional capacity and to
be able to stay at the forefront of social and technological innovation. In
order to deliver on its mandate to improve social and financial inclusion,
the sector needs financial instruments (e.g. guarantees, senior loans,equity), grants for technical assistance and pilot projects, and subsidies
to increase the accessibility of the services to the most vulnerable clients. These types of instruments are considered vital in the future of theEU support to the sector for the post 2020 period.

A growing sector

1 Assessing the European market potential of business microcredit and the associated funding needsof non-bank MFIs, evers & jung, 2017.

As revealed by the preliminary data of the EMN-MFC Survey Report
2016-20172, the microfinance sector has been steadily growing over recent years. In 2017, the surveyed Microfinance Institutions (MFIs) disbursed almost 700,000 microloans with a total volume of over 2 billion
euros. Overall in 2017, MFIs reported almost 1 million total active borrowers, with a gross microloan portfolio outstanding of 3.1 billion euros.
When considering a six-year time span (2012-2017) these indicators
reach a growth rate upwards of 50%3, confirming the dynamism of the
microfinance sector in Europe.
Apart from that continuous development, the new data available confirm the persisting heterogeneity of the microfinance sector. In terms

4

MICROFINANCE
BAROMETER 2018

2 157 MFIs surveyed from 28 European countries. Full study to be released in December 2018.
3 Calculation based on a subset of 34 MFIs that replied to the last 3 waves of the survey...

NICOLA BENAGLIOPOLICY AND RESEARCH OFFICER
EUROPEAN MICROFINANCE NETWORKKEY FIGURES OF FINANCIAL INCLUSION | EUROPE
Microfinance in Europe, a profitable sector?
less risky than their traditional client
base! That being said, there still aremany micro and small enterprisesthat do not meet banks’ criteria, andhere lies the biggest social challenge for the sector. Yet, due to a cost
structure that is totally different fromthat of banks, MFIs are required tooffer higher rates, particularly when
non-financial support is provided. To
cope with this situation, MFIs must
be innovative and even consider
strengthening bank-MFI relationships to ensure the sustainability of
their missions.

O

riginally created in emerging countries, microfinancehas strongly developed inEurope. This might be surprising,
given that European countries arecharacterised by an efficient banking system and by generous welfare
states. Yet demand continues togrow. In 2015, 747,265 European clients received microcredit for a total
amount of 2.5 billion euros1. Despite
this boom, microfinance institutions(MFIs) are struggling to guarantee
1
theirsustainability because of uncertain profitability (high operating
costs, downward trend in interest
rates, inability to collect savings, etc.).
The situation is however very different between Western and Eastern
European MFIs, the latter being traditionally more profitable. After thefall of communist regimes, microfinance was introduced in Eastern Europe where the banking system was
defective. Today, the microfinancesector is very dynamic and mature,
to such an extent that some MFIs,
pushed by private investors, have
evolved towards a much more commercial than social business model.
There, profitability is driven mainly
by an increase in interest rates andconsumer credit.
In Western Europe, the sector isyounger – with the exception ofFrance – and shows an undeniable societal return, but is also very
dependent on public and private
subsidies. According to a European
survey by the European Microfinance Network, the average Return
On Equity (ROE) in Europe rose from
2.8% in 2014 to 5.7% in 2015, but thisincrease is mainly driven by Eastern
Europe MFIs (3.6% in 2014 and 7.7%
in 2015). In Western Europe, ROE
actually remains negative (-0.4%
in 2014 and -2.7% in 2015). Out of 98
MFIs analysed, 43 achieved operational self-sufficiency, of which only
7 are in Western Europe, while thebest performing are based in Eastern
Europe.
To evaluate this East-West gap, ananalysis was carried out on some
30 MFIs, all clients of CoopEst, aninvestment fund dedicated to social
microfinance in Central and Eastern
Europe. Since 2006, and with thecontribution of socially responsible
investors (notably Crédit Coopératif
and the European Investment Fund),CoopEst has been supporting this
sector with senior and subordinateddebt. The analysis is based on the
average ROE of the MFIs in the portfolio and their cumulative net income
over the 2013-2017 period.
By the end of 2017, the 29 MFIs in theportfolio showed an average ROE of
13% and a cumulative total net profitof 23.9 million euros. However, ROE
has been decreasing since 2016,
although it is still above 6%. The net

profit of the MFIs in the sample, remains positive but also demonstrates
a downward trend. While the profitability of the majority of CoopEst’s
MFI clients remains positive, downward pressure can nonetheless be
witnessed, even though their social
impact is growing. By 2017, these
institutions had contributed to thecreation or maintenance of 67,765
jobs and the creation of 2,595 newbusinesses. Even in Eastern Europe,
this negative correlation between
profitability and social performance
exists.

The future of microcredit in Europe strongly
depends on the abilityof committed investors to provide affordable financial resources.

While European MFIs struggle tofind a balance between social andfinancial performance, a decline intheir profitability threatens their viability. The future of microcredit inEurope therefore strongly depends
on the ability of committed investors(ethical and cooperative banks, socially responsible investment funds,
public development agencies) toprovide affordable financial resources to support social inclusion andjob creation even in the most remoteregions of the European Union, thus
ensuring cohesion and development.
1 Microfinance in Europe : a survey of EMNMFC Members, Report 2014-2015, European
Microfinance Network, 2016.

ISABELLE SCHILTZ
PROJECT MANAGER
INPULSE I CRÉDIT COOPÉRATIF

Two of the influencing factors forthis trend are the competition from“traditional” banks and low interest
rates. Relying on their deposit base,these banks are seduced by MFIclients who are now considered

Profitability and sustainability of MFIs in Western Europe and Eastern Europe

Eastern European MFIs

Western European MFIs

2014

2015

2014

2015

Return on equity

3.6%

7.7%

-0.4%

-2.7%

Return on assets

3.2%

3.2%

1.8%

2.1%

Operational
self-sufficiency

94.5%

92.5%

86.1%

78.5%

Source: Microfinance in Europe: a Survey of EMN-MFC Members, EMN, 2016.

MICROFINANCE
BAROMETER 2018

5

KEY FIGURES OF FINANCIAL INCLUSION | FRANCE
Personal microcredit: a springboard to paid employment

Unlike its “professional” counterpart, the “personal” microcredit
does not have a purpose directly linked to employment as it does
not finance business creation. In France, the law states that it must
finance projects for professional integration or social integration. In reality,
the first objective has taken precedence: since 2005, 3 out of 4 microloans
have been used to finance a project to access or maintain salaried employment. The main reason certainly lies in the fact that financing a vocational
training project must be the most effective way to improve the precarious
situation of microcredit seekers. Is this assessment justified?

France are dependent on the support offered by the many associations
and credit institutions offering their services and counsel to borrowers.
Through their advice, support and selection assistance, this ecosystem
ensures that this type of loan maintains its social component. Interest
rates, which range between 2.8% and 5.5% for a loan of less than 3,000
euros, also contribute to strengthening the social dimension of personal
microcredit.

In 2013, Caisse des Dépôts conducted a study of the impact of personal
microcredit. Interestingly, this study found that when borrowers pursued
a professional objective, two thirds saw their situation improve or be preserved. However, the extent of the results varies according to the applicant’s initial situation: borrowers who were employed at the time of therequest carried out their project in a sustainable manner in 72% of cases (keeping the current job, accessing improved professional conditions,etc.); those who were unemployed at the time of the request are only 55%
more likely to have observed lasting success.

Number of guaranteed personal microcredit (SCF)
distributed in France per year
20000
17 58315000

15 01715 10520142015

16 02212 871

11 870

10000

What about the impact of personal microcredit on the standard of living ofborrowers? Here again, there is a positive effect: borrowers with a vocational training project see their average monthly wage rise from 771 euros
when they apply for a microcredit to 881 euros at the time of the survey (thetime between the two ranges from 6 months to 5 years).

5000
0

2013

2012

2016

2017

Source: Caisse des Dépôts.

Widely recognised, these positive effects of the personal microcredit inProfessional microcredit

T

he Social Cohesion Fund’s (SCF) support to the professional
credit segment is channeled towards the following mechanisms:• Allocation of State funds pooled under the Guarantee Solidarity Fundfor Female Entrepreneurship and Inclusion (FOGEFI)• Support for the guarantee activity of the “Loi Galland“ and territorial
funds, managed by France Active• Support for enterprise creation networks• Interest-free loan (PTZ) since January 2017, formerly, “Nouvel accompagnement pour la création et la reprise d’entreprise” (Nacre).
In 2017, the SCF which is integrally funded by the State and the Ministry of Labour, Employment, Vocational Training and Social Dialogue,
allocated 18.8 million euros to these various guarantee programmes.
9.1 million euros were allocated to the FOGEFI and “Loi Galland” guarantee lines and 1.7 million euros were used to partially cover support
costs. The remaining 8 million euros was used to guarantee PTZ interest-free loan.
Through these funds, the SCF has helped finance the creation, takeover or development of nearly 24,800 very small businesses (VSBs) or
social enterprises, including 21,387 beneficiaries of a bank loan guarantee (or similar). These guarantees are distributed in the following
way: 20,732 VSBs, 655 social economy organisations, and 5,475 beneficiaries of PTZ.
In 2016, the impact of professional microcredits guaranteed by the SCF
on employment amounted to 35,432 jobs created or consolidated in thefollowing areas: bank or non-bank guarantees, mostly during creation
for VSBs and mostly during creation and consolidation for social economy organisations. This figure is slightly down on the previous year.

6

MICROFINANCE
BAROMETER 2018

Number of guaranteed professional microcredits(SCF) distributed in France per year
25000

22 56120000
16 31316 1502012

2013

19 07419 02620152016

17 600

15000

10000

5000

0

2014

2017

Source: Caisse des Dépôts .

19,468 jobs were generated in the VSBs sector, including 8,662 thanks
to bank guarantees (notably linked to female entrepreneurship) and10,806 thanks to non-bank guarantees such as Adie’s. In the social
economy sector, the number of created or consolidated jobs amounted to 15,964. In addition, entrepreneurs benefiting from PTZ reported aforecast of 7,492 jobs created. Taking into account a 38% coupling rate
in 2017 of PTZ files with an SCF guarantee, it can be extrapolated that
more than 40,000 jobs were either created or consolidated thanks tofinancial support from the SCF.
ECONOMIC DEVELOPMENT & SOCIAL COHESION DEPARTMENTCAISSE DES DÉPOTS GROUP

KEY FIGURES OF FINANCIAL INCLUSION | FRANCE
Microcredit in France: social work or profitable operations?

THE FRENCHMICROFINANCE
PARADOX“A

F

s opposed to developing countries, nomicrofinance provider in France balances its accounts solely on the basisof the financial income from this activity.”1 This is theconclusion drawn up by the International Labour Office in 2015, which paraphrases the analysis madeby the General Inspectorate of Finance five years
earlier. As an example, and despite an operational
efficiency that is undisputed, two thirds of Adie’s
resources come from public funds or private generosity2.

Based on this analysis on the nature of microcredit
in France, the Caisses d’Epargne and their partners
defend a hybrid economic model based on the action of both solidarity and private operators – be they
associations or banks – and on public financing able
to bear part of the cost of risk, as well as the cost of
borrowers’ support. In this respect, the Social Cohesion Fund (SCF), endowed by the State and managed
by the Caisse des Dépôts et Consignations, plays animportant role as it covers a significant proportionof microcredit in France and partly finances support
networks (see p.6).

In France, looking for financialbalance would mean strongly increasing the microcredit interest
rates above 30%, which would
be socially unacceptable.

One borrower out of two claims
that the granting of a personal microcredit helped improveor protect his/her professionalsituation.

In France, looking for a financial balance would
mean srongly increasing the microcredit interest
rates above 30%3, which would be socially unacceptable. The performance of microfinance providers is
not challenged. Indeed, comparative studies, and inparticular the European Microfinance Network survey, show that the operational efficiency of French
players is among the highest in the world4.However,
the income generated by the distribution of microcredit barely covers a quarter of their expenses.
How can this imbalance be explained? Firstly, thenarrow demand for such products, compared tocountries like Bangladesh, limits economies of scale.
Secondly, targeting clients that are excluded from
employment and often in precarious situations involves an individual support and represents difficult
to absorb costs. In Spain, one case stands out: Caixa
Bank’s Microbank has frequently been given as an
example of profitable microcredit. But it should bepointed out that Microbank’s grant awarding process is based on remote scoring of files which areprocessed charge free by more than 500 partner organisations. Basically, this amounts to outsourcing
some of the operational costs.

The government’s recent decision to re-establish andsustain a grant of 20 million euros per year to the SCF,
against 14 million euros in 2018, should help to boost
the activity. More than an expense, the State’s allocation to the SCF is a socially profitable investment,
if we refer to studies that have proven the positive
impact of microcredit on borrowers and society. For
example, one borrower out of two claims that the
granting of a personal microcredit helped improveor protect his/her professional situation. Rather than
opposing concepts of “social” and “profitable”, microcredit in France thus combines both, provided
that we consider profitability beyond its strictly financial dimension.
1 Le microcrédit en France et en Europe en 2030, Bureau International duTravail, 2015.
2 Le microcrédit, Inspection générale des finances, 2009.
3 Programme d’action et budget de l’Adie, Adie, 2016.
4 Microfinance in Europe : a Survey of EMN-MFC Members, European
Microfinance Network, 2016.

CEDRIC TURINI
HEAD OF CSR DEPARTMENTFEDERATION NATIONALE DESCAISSES D’EPARGNE (FNCE)

rench MFIs are among
the most efficient in EUrope in terms of economic andsocial efficiency. Yet, none
have been able to become
self-sufficient. Some figuresbehind this paradox:3%

The annual interest rate of microcredit in France, the lowest
in Europe1.

30%

To reach financial balance,
French MFIs should increase
their interest rate up to 30% or
more1.

0.17

Each euro lended by French
MFIs costs on average 17 centsin operational expenses. This
number, particularly low for European MFIs, demonstrates the
economic efficiency of French
MFIs2.

27

The operational self-sufficiency ratio, which evaluates MFIs’
financial independence is 27 in
France. Through their activity,
French MFIs therefore cover
only 1/4 of their expenses2.

1 Data from the 2016 study of the
EMN“Microfinance in Europe : aSurveyof
EMN-MFC
Members”.
2 Data from the 2014 study of the
EMN : “Overview of the microcredit
sector in the European Union. Brussels: European Microfinance Network”.

MICROFINANCE
BAROMETER 2018

7

SOCIAL PERFORMANCE
The challenge of microfinance: being responsible to be sustainable, being profitable toremain responsibleWe all have heard it before: “Youwork in microfinance? Isn’t thatmaking profits off the backs of poor
people?” The unspoken premise is that making
profit in microfinance is bad. While the formulation is way too simplistic, who among us hasn’t
grappled with feelings like the anti-Robin Hoodat times?
Of course, we know reality is much more nuanced. Scaling up financial services that aim
to reduce the vulnerability of the poor, excluded
and the marginalised, calls for business models
to develop, evolve and innovate. The dominantfunding model is nowadays based on debt andequity (compared to subsidies of yesteryear),making profitability, or the very least operational self-sufficiency, a minimum requirement.
Profits in microfinance or BoP businesses are
not a bad thing, provided they are serving theirsocial mission and their target population. Ultimately this is what makes microfinance different from other forms of finance. Robust financial performance is a means to an end, it isn’t
the end itself.
Easy enough to say. But how easy is this tomeasure? How do you tell the difference between an institution that drives its financial performance to reach a larger goal versus one thatis simply driven by numbers? What counts as“justifiable” profits? How high is too high?
Thanks to years of broad consultation, answers
to these questions and to the overall responsibility of the microfinance sector towards its
clients and its staff have emerged in the formof the Universal Standards for Social Performance Management. These Standards form aset of core business practices adopted in 2012

Average SPI4 score by sub-region, from the highest
to the lowest

Rank

Subregion

SPI4 score(average)1

Asia (other)

74.8%

2

South America

70.5%

3

Europe andCentral Asia

70.0%

4

Caribbean

65.2%

5

Central America

64.0%

6

Middle East andNorth Africa

61.5%

7

South East Asia

61.2%

8

Sub-SaharanAfrica54.1%

Source: CERISE database - 2018.

8

MICROFINANCE
BAROMETER 2018that includes the Client Protection Principles,
and which provides guidance to microfinanceproviders on how to balance financial and social performance. By adopting the Universal
Standards, microfinance providers ensure that
their management systems – their policies, procedures, training, internal controls – are built
to achieve their social mission. It doesn’t mean
losing sight of strong financial performance andprofits, but rather making sure profits serve themission.
CERISE-SPI4 is the social audit tool thatallows financial providers measure themselves
against the six dimensions of the Universal
Standards (and the optional “Green Index” asa seventh dimension). Used by over 300 MFIs
around the world, CERISE-SPI4 assesses towhich extent the social mission is integrated
into strategy and operations. It measures how
clients’ needs and feedback are taken into account in designing and delivering products. It
looks at whether clients and staff are treatedresponsibly. And in dimension 6, SPI4 analyses
how well the provider balances its social andfinancial goals.

Microfinance should be profitable (to last), socially responsible (to make a difference inpeople’s lives) and environmentally aware (to build resiliency to climate change).
The standards under this dimension explore, forexample, how growth rates are set. Are they set
to generate maximum returns, or do they reflecta concern for a healthy and controlled growth,
to minimise the risk of over-indebting clients?
Are growth rates monitored, not just to see
if projections are being met, but to make surestaff are able to keep up with growth, and maintain high quality service? Evaluating a provider
against these kind of indicators helps giving aclearer idea about whether growth (and by extension financial performance) is the ultimate
goal or the means to an end.
When it comes to profitability, SPI4 integrates
client protection standards that assess if pricing, and therefore profits – a key driver of pricing1 – are responsible. Under these standards,
the profitability ratio Return on Assets (ROA)
is assessed against Smart Campaign-definedbenchmarks: ROA above 3% is considered elevated, and over 7.5% is high. Having a ROA overThe 6th dimension of the Universal Standards forSocial Performance Management

DÉFINIR ET SUIVRELES OBJECTIFSSOCIAUXÉQUILIBRER LESRENDEMENTS
SOCIAUX ET
FINANCIERS

TRAITER LESEMPLOYÉS DEMANIÈRERESPONSABLENORMES
UNIVERSELLES DEGESTION DEPERFORMANCESOCIALES’ASSURER DE
L’ENGAGEMENTDU CONSEIL
D’ADMINISTRATION, DE LA
DIRECTION, ET DUPERSONNEL EN
FAVEUR DESOBJECTIFS SOCIAUXCONCEVOIR DES
PRODUITS, SERVICES,MODÈLES DE PRESTATIONSET CANAUX DE
DISTRIBUTION QUIRÉPONDENT AUXBESOINS ETPRÉFÉRENCESDES CLIENTSTRAITER LES
CLIENTS DE MANIÈRERESPONSABLE

Source :The Universal Standards for Social Performance Management Implementation Guide, SPTF, Leah Wardle.

3% does not necessarily mean the provider ismaking excessive profits, but a credible explanation is needed for high ROA to be justified. For
example, profits may be diverted to an external
entity (like an affiliate NGO) that provides valuable non-financial services to clients. Profits may
be shared with clients, or be used to build up
equity, or expand an early stage institution. HighROA may be due to a high inflationary environment or high reserve requirements. But if profits
are above levels justified by the operating context and mainly benefit shareholders, then they
are not serving social goals.
Microfinance should be profitable (to last), socially responsible (to make a difference in people’s lives) and environmentally aware (to build
resilience to climate change). The Universal
Standards, the Green Index and the SPI4 audits
conducted all over the world guide providers
and their partners in finding the right balanceand progressing towards an ever more responsible financial sector to reach the bottom of the
pyramid.
1 Assessing price fairness in microfinance, Smart Campaign,
2016.

BONNIE BRUSKY
DEPUTY DIRECTORCERISE&MATHILDE BAUWIN
R&D PROJECT OFFICERADASOCIAL PERFORMANCE
Credibility, transparency and communicability: the three challenges of
the SROI approachI

nspired by the cost-benefit analysis, the Social Return on Investment (SROI) is a methodcoming from the United Kingdom, which aims
to monetise the impact of an organisation with asocial mission.

intangible contributions, for example the psychological benefits of creating a business. This exercise is hasardous, and this is why the approach
was restricted to tangible externalities that can
be clearly identified and legitimately quantified inmonetary terms.
Another important issue is transparency. The SROI
approach is characterised by simple-to-understand outputs that result from an elaborate process. Beyond the results, it was necessary to display the hypotheses and method that were used,without the latter appearing as an opaque andcomplex “black box”.

the economic benefits generated were then allocated to each of these situations and for eachyear.
The costs avoided are essentially of two kinds. On
the one hand, Adie’s action prevents a number ofentrepreneurs from switching to minimum social
benefits once their unemployment benefits rights
have been exhausted. On the other hand, income
from new businesses has led to a decrease in the
average amount of social benefits, particularly the
Revenu de solidarité acitve (RSA) the french minimum welfare benefit for the unemployed.

By quantifying the social returnachieved by an organisation
with a social mission, this specific kind of ROI is a valuable
tool to convince investors that
Economic benefits (value creation) are strongly
Finally,
communicability
requiredamethodthat
associatedCostofthewith tax and social welfare revenues:
investments are financiallynon-experts could understand, without obscuring those based on the activity of the companies creues theirprofitable, becauseSocial
they are so-cost
the multiplicity of factors that wereprofessional
included, and ated, including taxes on turnover and charges on
the inherent complexity of their quantification.
jobs created, and those stemming from charges
d fromcially impactful.
avoidedammeon the wages of entrepreneurs who have returned
microcredit
to employment. In addition to this direct taxation,
programme
In this context, Adie worked with KPMG
in 2016. the received income gives rise to indirect taxation
which is taken into account in the calculation.
A simple principle, but complex calculations

The SROI method is neither an instrument specificto microfinance nor a social impact measurement
tool. It does not produce a diagnosis and does nothelp MFIs to optimise their organisation or theirproducts. That being said, it proves extremely useful for structures resorting to external financing.
By quantifying the social return achieved by anorganisation with a social mission, this specifickind of ROI is a valuable tool to convince investors
that their investments are financially profitable, because they are socially impactful. This assimilationis the core of the approach.

The aim of this partnership was to quantify thebenefits of professional microcredit (social costs
avoided and revenues generated), and to compare them to the cost borne by investors, bothpublic and private, to ultimately measure theeconomic effectiveness of the action. This simple equation calls for in-depth calculations, inparticular for the measurement of profits.

The ratio of cumulative annual net gains against the costof the programme (after discounting to their current value
Four data sources were used in this SROI approach: Adie’s financial accounts, customer data the cash flows subsequently
Cost
the shows that Adie’s
from its information system, public statistics(IN- ofreceived)
SEE, CAF, etc.) and the latest study on the impact activities are profitable at 2.38
The implementation of the SROI approach is the of professional microcredit.
professional
continuationcumulatedof impact measurement praceuros per euro invested.
al netlogical
gaintices already implemented by Adie, a French association which supports and provides microcredit inFrance. In the early stages of this process, threeissues had been identified upstream: credibility,transparency and communicability.

The credibility of the SROI evaluation is assessed
according to two factors: the scope used to estimate profits and costs, and monetary valuation
principles. One can seek to monetise so-called“indirect” benefits, or even go as far as calculate

microcredit
programme
Over two cumulated years (2013 and 2014), the costThis study made it possible to reconstruct typicalentrepreneurial paths: business sustainability,
professional integration of entrepreneurs, average lifespan of non-lasting businesses, amountof social welfare benefits received, number ofjobs created, etc. Three typical situations were
quantified: sustainable enterprise, non-lasting
enterprise but employed entrepreneur, non-lasting enterprise and unemployed entrepreneur.
The incurred social costs, the avoided costs andCalculation of the social return on investment for professional microcredit

Economic
ImpactImpact
Ratio

Revenues
generated fromthe program

Social cost
avoidedAnnual net gain cumulated

Source: Synthèse sur l’étude Retour Social sur Investissement (SROI), Adie.

Cost of theprofessional
microcredit
program

Cost of theprofessional
microcredit
programof the programme amounted to 24.4 million euros,and costs avoided as well as economic benefits
were respectively estimated at 16.7 million euros
and at 45.3 million euros. This represents a social
return on investment of 37.7 million euros. The ratio of cumulative annual net gains against the costof the programme (after discounting to their current value the cash flows subsequently received)shows that Adie’s actvities are profitable at 2.38
euro per euro invested and that its cost is coveredin 14 months.
This very enriching experience can be transposed
to other microfinance contexts. For Southern
MFIs, the calculation inputs are very different, but
the reasoning principle remains the same. The
transparency effort of such a SROI approach can
only strengthen relations with investors and bringmany benefits to MFIs.
THIERRY RACAUDRESEARCH DIRECTOR
ADIE

MICROFINANCE
BAROMETER 20189

SPECIAL REPORTMicrofinance and Ptofitabilities
Are microfinance investments still profitable for investors?

H

istorically, international
funding for microfinancecame from donor organisations, including public development agencies and private
foundations. As the sector commercialised, the need to access
capital markets became crucial
for the professionalisation of microfinance institutions (MFIs),
thus paving the way for the development of Microfinance Investment Vehicles (MIVs).

and 20% of total capital is sourced
from public investors.

These independent investment
vehicles open to multiple investors and specialised in microfinance were created in order tochannel private capital to MFIs
through debt or equity. Two decades after the set-up of the first
MIVs in the industry, they still
remain the primary gateway for
private investors looking to invest
in emerging and frontier markets
mainly because of their expertiseover the whole value chain. As ofthe end of 2016, there were 127
MIVs with 13.5 billion dollars of
total assets under management(AuM) globally 1.

Net Asset Value (NAV) per shareperformance was at its peak backin 2007–2008 (i.e. 6.5% and 6.2%
respectively), declining dramatically following the financial crisis
to reach 2% on average for the
next three years (2009-2011). The
pressure on credit premia wasmainly due to the drop in money
market rates, resulting in MFIs’
demand for lower financing rates.

Despite the historical and crucialrole of Development Finance Institutions in the growth of MIVs,
these vehicles are today largely
financed by private institutional
investors, including among others: pension funds, banks andfoundations (52%). Retail investors and high net worth individuals constitute 28% of total funding

Fixed-income MIVs hedged indollars have shown a positive
performance for the last ten
years, without a negative year oreven a negative quarter. Their net
returns have averaged 3.3% overthe 2006-2016 period (see graphic
below), and USD-hedged MIVs
are estimated to represent 75% of
total MIV AuM.

In addition, increased liquidity
levels in local markets led to anincreased competition among
MIVs which put downward pressure on yields2. 2012 witnessed ashort peak (3.5%) before returns
declined again in 2013 (2.5%)
when several emerging market
currencies depreciated against
the dollar resulting in a rise ofhedging costs for local currency
funding3. Returns in the following
years continued to average 2.5%
due to political and economic crisis in several emerging markets.
Despite the decline in returns,

Net returns (dollar)

Due to the labor intensive natureof MIV business models, MIV’s’total expense ratio (see “Methodology”) did not decrease dramatically but rather, remained stable
at 2.3% on average, naturally
varying for funds with different
investment strategies.
In terms of social outreach, MIVs
on average financed 400,000
active borrowers at the end of
2016, with a important increase
throughout the years.
Overall, MIVs witnessed stable
growth and sustained profitability through several challenging
periods for international capital
markets, among others the financial crisis of 2007-2008, and thedifferent microfinance crisis that
followed, most notably in Nicaragua and India. MIVs have proved
to be a stable and resilient channel for private investors wanting
to approach financial inclusionfrom an investment perspective,
providing a de-correlated financial return along the important social component in the context of
future population growth in many
emerging and frontier markets4.

Furthermore, MIV’s can contribute towards the United Nations’2030 Agenda for sustainable development by financing the current sustainable development
gap estimated at 2.5 trillion dollar per year, most of which will
be channeled towards emerging
and frontier markets through financial inclusion schemes. MIVs
thus remain catalysts in facilitating foreign private sector capital
towards the Sustainable Development Goals, more so given theincreasing evidence that financial
inclusion has a direct impact on
outcomes such as health (SDG
3), education (SDG 4) and gender equality (SDG 5) in addition
to having an indirect impact on
broader SDGs, in particular on
growth (SDG 8), as it facilitates
the financing of small and medium
enterprises, as well as inequality(SDG 10) and peace (SDG 16).
1 2017 MIV Survey 2017 – Market Data & Peer
Group Analysis, Symbiotics, 2017.
2 Swiss Microfinance Investment Report, Symbiotics, 2011.
3 Microfinance Funds : 10 Years of Research andPractice, Symbiotics & CGAP, 2016.
4 Why Microfinance Matters to Investors, Symbiotics, 2017.

MARINA PARASHKEVOVAMANAGER RESEARCH&RAMKUMAR NARAYANANMARKETS & INSTITUTIONSSENIOR ANALYSTSYMBIOTICS

FOCUS ON : SYMBIOTICS
As one of the leading market access platforms for impact investing, over the past decadeSymbiotics, a specialised impact investing asset manager registered in Switzerland has
originated and structured nearly 3460 investment transactions worth more than 4.4 billion
dollars on behalf of 399 companies in 81 emerging and frontier markets, all serving measurable sustainable and inclusive finance objectives.

4%
3%

2%
1%

0%

MIVs’ portfolio quality remained
stable with loan loss provisions
averaging 2% of MIVs’ microfinance portfolio while loans written-off were much lower, registering 0.5% for the period underreview.

2012

2013
SMX-MIV Debt Index

2014

2015

2016

MIV Industry (Fixed Income
Funds)

2017

The company’s investor clientele, concentrated in Scandinavian and Germanic countries
in Europe (mostly Austria, Germany, Finland, Sweden and Switzerland), is essentially madeup of large banks, asset managers and institutional investors. In addition, 2018 saw thelaunch of Plumseeds.com, a Symbiotics on-line platform that enables specialised emerging or sustainable professional investors and fund managers to directly purchase microfinance, impact or local green bonds on a deal-by-deal basis, having access to both socialand credit ratings. This platform has contributed to the Symbiotics’ origination of morethan 1 billion dollar in bonds by 75 different counterparties in 32 emerging and frontiersmarkets since 2010.

Private Debt Impact Funds(Fully-hedged Funds)

Source: Microfinance Funds : 10 Years of Research and Practice, Symbiotics & CGAP, 2016 Symbiotics.

Methodology

Legal Disclaimer:This paper contains general information only. Symbiotics or CGAP is not by means of this paper rendering professional advice or services. The content of this paper is meant for research purposes, with an aim to broaden
and deepen the understanding of Microfinance Investment Vehicles. The information and opinions expressedin the text were obtained from self-reporting sources believed to be reliable and in good faith, reﬂecting theview of the authors on the state of the industry, but no representation or warranty, expressed or implied, ismade as to its accuracy or completeness. Symbiotics shall not be responsible for any loss whatsoever sustained by any person whatsoever sustained by any person who relies on this paper. It is also meant for distribution only under such circumstances as may be permitted by applicable law.

10 MICROFINANCE
BAROMETER 2018

This 10-year review of the microfinance offshore investment landscape is based on data collected throughannual CGAP/Symbiotics MIV Surveys conducted between 2007 and 2016. The article focuses on MIVs, as defined in the disclosure guidelines – namely independent investment vehicles with more than 50% of non-cash
assets invested in microfinance and open to multiple investors. Most metrics, including growth calculations,were determined using a constant dollar exchange rate as of December 2006.

SPECIAL REPORTMicrofinance and Profitabilities
A closer look: Why invest in microfinance?

While microfinance is still a young sector, it has experienced significant annual global growth in recent years, averaging close to 9%: joint
interview with Eric Campos (Head of Social and Corporate Responsibility, Crédit Agricole SA & CEO, Grameen Crédit Agricole Foundation),
Alain Lévy (Head of Microfinance for Americas and Asia, BNP Paribas) and Dominique Lesaffre (CEO, SIDI) on the profitability of the sector
and the best practices to combine economic and social performance.
have therefore implemented thesame procedures as for the othercredit lines: creation of a specificrisk policy, due diligence, draftingof a credit proposal, presentation
in a risk committee, quarterly monitoring... Our objective is twofold:to demonstrate that MFIs have thefinancial capacity to repay theirloans while respecting their social
mission towards their micro-borrowers. Finally, all our investments
are also issued in local currency.

What motivated your respective organisations to invest in
microfinance?
Alain Lévy (AL): BNP Paribas has
been active in the sector since1989. Within the Group, the microfinance department does notfollow a traditional commercial
approach. Even if we practice afair margin on our operations, ourobjective is mainly social because
it requires us to finance 350,000
micro-borrowers by the end of
2018. It is an opportunity to contribute to the social development
and the financial inclusion of fragile populations in countries where
we work.
Dominique Lesaffre (DL):SIDI’s mission is to support the socio-economic integration of marginalised populations by focusing
on the “social return” of its action.
More specifically, SIDI aims at
sustaining, developing and improving the supply of financial andnon-financial services, particularly in underserved areas (countries
in crisis, rural areas, Sub-SaharanAfrica). For this reason, we support the institutional, economic
and social consolidation of local
MFIs.
Eric Campos (EC): We are not investors but operators. The Foundation was created by Crédit Agricole in association with the Nobel
Peace Prize Laureate Professor
Yunus to fight poverty rather thaninvesting in the fight against pov-

erty. This is a major difference.
We were created to take part in
the process of eradicating poverty alongside other actors. For thispurpose, we put into place a wide
range of actions all of them conceived with a common objective:
the quest for impact maximisationand sustainability of our interventions.
How do you manage financial
risks in your microfinance activities?
EC: There are several types of risk:
the most common ones refer tothe counterparty risk, the currency risk and the interest rate risk.
Our approach focuses on protecting our partners by adapting thestructure and nature of our financing according to their activity. We
work with MFIs whose grant loans
almost systematically in local currency, in order to avoid exposure
to currency risk. We lend at a fixed
rate to protect our clients from
regular fluctuations. Regarding
counterparty risk: after setting up
our financing, we monitor and anticipate it by using key indicators.
For this purpose, all necessary information is provided by our partners on a quarterly (sometimes
even monthly) basis.
AL: For our part, we have conducted a lot of internal education to
explain to the bank’s staff that microfinance is not a philanthropic
activity but a social business. We

After several years of investment,
what is your assessment of the
microfinance sector? Has it been
profitable for your organisations
to invest in this sector?
EC: The microfinance sector is ayoung sector that has experienced
many improvements in social andfinancial performance mostly driven by private actors. For instance,international standards have beenenacted by practitioners gathered in the SPTF, an associationin charge of encouraging the
production of new standards forassessing social performance.
For its part, the Foundation has
recorded a positive net result. It
has supported and financed morethan 60 microfinance institutions
with a demonstrated high level ofsocial performance management.
We currently operate in more than
30 countries and partner with local
MFIs that serve approximately 3.5
million beneficiaries. Therefore, it
is entirely possible for an institution to be financially sustainable
at the same time that it generates
a relevant social impact.
DL: After 35 years in the sector,
SIDI is satisfied with the results of
its investments on the structuringof local institutions, and therefore
on the quality and sustainabilityof services provided to the population. For example, Amret inCambodia, and Centenary Bankin Uganda, two MFIs that we havesupported and for which we were
the founding shareholder havesince then become profitable andefficient leaders of their respec-tive markets. It is also worth notingthat our internal rates of return on
microfinance investments, loans
and equity investments combined
are positive. This confirms that it
is possible to fulfill a strong social
mandate while being profitable.
How can we ensure that social
performance is not sacrificed on
the altar of profitability?
AL: Profitability is necessary in the
sector given that it implies sustainability. For the MFIs in our portfolio, we ensure that the searchfor profitability is consistent with
their social mission. During field
missions, we check interest rates
and visit villages to discuss MFIs’
practices with micro-borrowers.
We have also set up a technicalassistance program by deploying
CERISE’s SPI4 social performance
analysis tool. After training them,
we send pairs of executives on thefield for a week to analyse MFI’s
social performance.
DL: If social accountability is notjust a shallow concept to satisfy
CSR needs, and if it meets MFI’s
strategic objectives instead, thensocial performance has its rightful place and does not need toconform to the standardisation
currently observed, which tends
to reduce the ability of institutions
to define their strategic priorities.
Under this condition, social performance can even become oneof the bases for financial profitability as it might lead to lower
costs (customer loyalty, reduction
in PAR, staff turnover, etc.).
INTERVIEW BY
BAPTISTE FASSIN
PUBLICATION OFFICERCONVERGENCESMICROFINANCE
BAROMETER 201811

SPECIAL REPORTMicrofinance and Profitabilities
The illusory inevitability of Social Impact (and why trade-offs matter...)S

ince the dawn of the commercialisation of microfinance nearly two decadesago, investment in microfinancehas been made on a widely-accepted premise: investors will receive a“market rate” financial return, whilepursuing a socially-motivated strategy. This premise is so widespreadthat it has taken on the allure of allgroupthink, becoming an accepted
truism, without necessarily beingtrue.
The double-bottom line – the equal
focus on financial and social return – can be deceptive. The dilemma is that while financial return has
a clear target, social return is more
nebulous. What social return is really being promised? Is serving acertain segment of clients enough?
Do additional products need to beoffered? What about financial education?
There are cases that call for difficult
decisions and real choices. Consider: many social investors measure
impact by the amount of money
invested, even though their funds
may often stand in competition
with locally-raised deposits, whichthemselves are at least as sociallybeneficial as credit. By undermining their investee’s incentives toraise local deposits, well-meaning
investment may lead to reduced –and even negative – social returns.
Or consider interest rates. Largeloans tend to have lower rates
than small loans, often while generating higher profits. A MFI thatmoves upmarket to serve wealthiercustomers will appear to deliver
both higher financial return (bigger
profits) and social return (lower interest rates). But this is specious:the “double” return is achieved byshifting away from Bottome of the
pyramid populations, the precise
target population that the institution was set up to serve in the firstplace.
A simplistic retort is to invert things– that only when investors are willing to lower their financial returntargets can they be reassured ofhaving achieved positive social return. This, too, is wrong. Countlessexamples show that even well-intended charity causes more harmthan good.

12 MICROFINANCE
BAROMETER 2018

Unsurprisingly given
its dual mission, themicrofinance sector
has in fact been at theforefront of developing real-world social
return metrics.
Picking the high-hanging fruit
The truth is that ensuring social
return is difficult. Delivering a true
double bottom line is possible, but
requires dealing with the complex
uncertainties hidden behind thatnebulous social return. What social
mission is the institution trying topursue, and is it actually succeeding in doing so? Who are its clients?
Are the institution’s services truly
offering what is needed, and is theinstitution effective at separatingcases where it does good, fromthose where it actually does nothing, and even causes harm?
Despite these difficulties, recent
efforts to analyse and evaluate thecomplexity of the double bottom
line are encouraging.
Unsurprisingly given its dual mission, the microfinance sector has
in fact been at the forefront of developing real-world social return
metrics, encapsulated by the workof the Social Performance Task
Force’s around the SPI4 tool (seep.8). Such tools have contributed to the emergence of a class ofcommitted social investors thatrecognises the true complexity andnecessity of the double bottom line
and has invested in and focused on
measuring not only financial but
also social “profitability” in an empirical manner.
The outcome of these efforts has
been to show that financial and social returns can be complementaryand mutually beneficial. Increased
focus on Social Performance Management (SPM) can improve efficiency, allow for lower margins,
reduce staff turnover and deepen
the organisation’s understandingof its clients’ needs, giving it a competitive advantage that is difficult
to duplicate. This can then support higher financial profitability.

Meanwhile, a strong social focus
may lead investors to new markets
that others assume unprofitable. In
many ways, a strong SPM focus isreminiscent of the 1950s-60s Japanese manufacturing revolution pioneered by W. Edwards Deming: investing in a metrics-driven system
can yield long-lasting returns, inthis case, both social and financial.

Investors that believe
in an illusory automatic link between
financial profitability
and social impact are
more likely to take social impact for granted.
Humility and incentives: understanding why social impact matters
Above all, social responsibility requires humility. Setting the goal of“outreach” without recognisingmarket capacity and realistic limits can lead to an excess of evenwell-designed products. Credit inparticular has this risk: too muchcredit is often worse than no credit
at all.
Humility also comprises willingness
to think about demand-driven and notjust “we-know-best” supply-driven
solutions. But doing that requires serious, long-term investment in SPM
capabilities that only committed social investors are willing to make.

Beyond humility, from a behaviouralperspective it is the incentives thatmatter. Investors that believe in an
illusory automatic link between financial profitability and social impact are more likely to take social
impact for granted. This pernicious
syllogism – a. I am funding microfinance; b. microfinance is Good;
therefore c. I am doing Good – hasdominated the narrative since theindustry’s beginning. But in reality,
the experience of MFIs around theworld shows that financial profitability is the easier threshold to clear;
it is the “doing good” that is muchthe harder part.
Ensuring social impact demands
investment, attention, monitoringand evaluation and, sometimes,
tradeoffs in financial return. Thatbeing said, the very fact the question is asked – not just in the Barometer, but in boardrooms industry-wide – illustrates how far wehave come.
DANIEL ROZASSENIOR MICROFINANCE EXPERT&SAM MENDELSONFINANCIAL INCLUSIONSPECIALISTEUROPEAN MICROFINANCE
PLATFORM (e-MFP)

SPECIAL REPORTMicrofinance and Profitabilities
Under what conditions can an MFI be profitable?

At the very heart of the business modelof microfinance institutions (MFIs) lies
the question of their profitability. In order
to be profitable and assist its clients the microfinance sector must find the right balance between
financial return and social impact. This is particularly important given the nature of micro borrowers who are very often considered as economically unprofitable and too risky by traditional banks.
To enable the greatest number of entrepreneurs tohave access to their services, MFIs have made aneffort in terms of enhancing efficiency and rationality: the current average global cost of a microfinance loan is 120 dollars, against more than 150
dollars 10 years ago. Despite this effort, nearly halfof the MFIs in the world are still not profitable. Can
they become even more effective?
With an average effective annual interest rate of
25% at the end of 2017 (this rate was still 28% at
the end of 2015), the price of microfinance services (cost of credit) remains significantly higher
compared to traditional banks.
The operational costs (mostly human resources-related) are much higher in microfinance
whereas the amount of each loan is usually very
low. Need for intensive support of clients, modest
amounts of repayment – often made in cash – andexamination of credit files all lead to higher expenses. Meanwhile, central banks’ demand forcompliance has also increased. Together, thesefactors help to explain why more than two thirdsof the credit cost is allocated to cover operational

expenses. Despite an excellent credit risk in the
sector, the price of financing remains relatively
high at more than 8.8% on average. It may evengo as high as 20% in some countries due to significant currency hedging costs.
Finally, despite MFI’s continuous improvements
in internal processes and attention regarding thequality of their portfolio, the cost of risk in microfinance remains above 2% and has even slightly increased over the past 10 years. This is explained by
the greater fragility of clients and countries where
microfinance institutions operate (high risk of insecurity or high macroeconomic risk), but also by
the institutions’ own weaknesses, notably in termsof governance, human resources, internal control,etc. The simultaneous control of all these factors(operating expenses, refinancing expenses andcost of risk) is therefore essential to guarantee theprofitability of an MFI.
However, it is interesting to note that MFIs with agood social performance tend to show good financial results as well. This demonstrates that these
two approaches are not opposed, they are rather
very complementary.
Being more efficient means that institutions must
be able to adapt to new digital challenges in orderto face the increased competition as well as the
emergence of new players. In this case, efficiency
may also include adapting to the new challengesof financial inclusion and the diversified needs ofclients (access to improved housing, green energy,savings, etc.).

Components of the average interest rate (25%)
1%Financing costs
Return on assets

9%Operational
costs
Costs of risk

13%

2%

Source: Symbiotics proprietary research.

These challenges require new investments – often in significant amounts – along with institutional transformation, innovation and adaptability. This
must necessarily involve more professional andinformed governance as well as more responsible
investors. The latter must remain attentive to theneeds of MFIs by offering more diversified products and supporting these institutions in their evolution, notably through technical assistance.
PHILIPPE GUICHANDUT
HEAD OF INCLUSIVE FINANCE DEVELOPMENT
GRAMEEN CRÉDIT AGRICOLE FOUNDATION&SÉBASTIEN DUQUETFORMER CEO
OXUS GROUP& CONSULTANTSYMBIOTICS

Ensuring the profitability of microfinance in Cote d’Ivoire:a case study from the Advans GroupHow can a microfinance institution (MFI) achievesustained profitability while continuing to responsibly serve a wide range of target clients? This is
the question Advans Côte d’Ivoire, an Ivoirian MFI,
has faced since its creation. In 2017, after less thansix years of operation, the MFI achieved a returnon equity of 19%, while continuing to target Smalland Medium Enterprises (SMEs), microbusinesses,
farmers and village savings associations, amongst
others. So, what are the barriers to profitability in
the Ivoirian market and what are the keys to sucha success?
Despite the post-political crisis context, the Ivoirian economy has flourished since 2012, benefitting
small business owners, triggering a decline in poverty rates and in turn creating a dynamic microfinance market. The microfinance sector’s profitability is however under pressure due to the cap oninterest rates charged to microfinance clients (allin-rate at 24%) and strong competition, especiallyin Abidjan. Delays in the set-up of a credit bureau
to monitor client over-indebtedness have increased
the level of portfolio at-risk for some players.

To face these constraints, Advans focuses on controlling all other profitability levers, particularly operating, financial and impairment expenses. Firstly,
stronger penetration in the SMEs market and supporting SMEs clients in their growth has improved
operating efficiency. Efforts have also been madeto reduce costs through retaining satisfied clientswith a good history rather than continuously renewing the client base. Coupled with close control
of operating costs, this resulted in an operating expense over average total assets ratio of 9% at end2017, which is relatively low for an MFI also serving
rural clients (14% of total clients).
Secondly, mobilising retail deposits has helped tolower the cost of funds. Advans has developed awide range of deposit products, services and delivery channels to improve deposit mobilisation andclient service. In addition, thanks to its performanceand the attractivity of the Ivoirian market, the institution benefits from competitive borrowing rates.

an MFIs. Nevertheless, the experience of Advans
shows that, with a proper lending methodology,
based on transparency, a comprehensive set ofpolicies followed by all and thorough client assessment, an MFI can maintain a strong portfolio quality.
Key to this quality is also the financial education ofclients and staff commitment, which are essential inentrenching an on-time repayment culture.
This sustained profitability has enabled the institution to reinvest in its staff, pay dividends, and,most importantly, develop new tailored services tocontinue reaching un(der)served business-owners,
farmers, and their families.
SOLÈNE LE BLEISSENIOR INVESTMENT OFFICER&
KATHERINE BROWNCORPORATE COMMUNICATIONS OFFICERADVANS INTERNATIONAL

Finally, loan portfolio quality and loan-loss provision
remain the main threats to the profitability of Ivori-

MICROFINANCE
BAROMETER 201813

SPECIAL REPORTMicrofinance and Profitabilities
The Grameen America model: can the Bangladeshi model work in the USA?

“W

all Street does banking for theworld, but it doesn’t do banking
for its neighbours. We are here
to show there is nothing wrong with banking withneighbours.” Moving from words to action, Professor Muhammad Yunus, the 2006 Nobel Peace
Price winner, created that same year Grameen
America (GAI), a microfinance institution (MFI)
built upon the success of the Grameen Bank in
Bangladesh. His assumption at the time was thatthe Bangladeshi model could work in the UnitedStates.

party, peer pressure among the members enables GAI to get high recovery rate (recent datashows that write-off, one measure for evaluating
the risk of investment, stands at a low 0.2%).

Yet, one might wonder whether it is advisable toduplicate a model specifically designed to meetthe needs of developing countries in a developed
country. After all, how can an institution based in
the United States – a high cost country – reachbreakeven with lower interest rates and higher
operational costs?

Finally, financial sustainability is improving mainly thanks to the acquisition of new customers:
the percentage of operating expenses coveredby earned interest reached 62% in 2017. Theirambition is even higher, as they seek to reachbreakeven by 2020, which is far from impossible
to achieve, given their recent trends.

But this was the audacious gamble made by Pr.
Yunus. The methodology applied by GAI in its 20
branches is the same one as in Bangladesh: fiveurban women create a group in order to get a
micro-loan. They then pay back during weekly
meetings and also feed personal savings accounts. Even if there is no joint-liability by a third

Meanwhile, and to cover their entire operational costs, GAI mobilised grants and donations, raising 64.4 million dollars in the last 7
years. This money is used as seed capital tobring GAI new branches to scale up during
their first 2 years. This strategy is one of thereason why, as of today, 8 branches are sus-

The effective interest rate paid by customers is
18%: it is not that high considering the absence of
hard collateral and the numerous staff required
for regular meetings. Indeed, staff costs are currently slightly higher than loan income. To reducesuch operational costs, GAI is resorting to technology to improve its performance.

tainable with an average of five years for MFI
to reach financial equilibrium.
GAI is about to succeed in creating a sustainable
MFI in the USA. Its social return is already very
positive, as it has supported over 97,000 womensince 2008, helping them to build their businesses, create jobs, and build a credit history, whichis essential to rent apartments, buy cars, and getloans through standard commercial banks.
Last but not least, GAI borrowers develop theirsaving capacity, holding more than 6.85 million
dollars in savings, allowing them to build thefoundations for a better future. This case demonstrates forcefully that not only is MFIs’ successin the South replicable in the North, but that thissuccess is also a promising avenue for financial
and social performance in developed countries.
ALAIN LEVY
HEAD OF MICROFINANCE FORAMERICAS AND ASIA&
CLAUDIA BELLIGLOBAL HEAD OF SOCIALENTREPRENEURSHIP AND MICROFINANCE
BNP PARIBAS

Finding the right balance: the case of STEP, India
well-being of families they work with. To be efficient, microfinance needs to be holistic. Hence,various credits and services were integrated
in their microfinance practices: training, family
follow-up, networking and vocational training
were all developed with customers in a collaborative way, in order to accelerate and sustain
the development of families.

© STEP

Nowadays, MFIs are becoming highly professional in managing portfolio, and smart inutilising new technologies. They are more andmore efficient in reducing cost. More thanprofitability, the real issue is therefore whether
MFIs are directing this reduction in costs towards their social mission and the people forwhom they were created in the first place.

S

hould microfinance be profitable? This
question is simple, yet important: while
profitability is essential for the sustainability of the sector, it should not invite various
pernicious practices to gain maximum return.
Offering higher amount of loans to respond topeople’s needs may provide a competitive advantage and better profitability, but it is not always a good option. If poorly developed, such
behaviour might actually lead to more people
falling into over indebtedness.
STEP sees sustainability as one of its core
principles and ensuring the development and

14 MICROFINANCE
BAROMETER 2018

When STEP started to be become profitable,
it reinvested a portion of its profits to provide
new services. To respond to social issues likemalnutrition, school dropout, immunisationthat often are an obstacle for the developmentof families, family follow-up services werelaunched where people are counselled athome and referred to other specialised NGOs.
The introduction of Collection Centre is also inline with this approach as it is designed as anopportunity to motivate poor women in theirfight against poverty rather than focusing only
on repayment collection: loan officers wererenamed ‘Collector Motivators’ and centres

started delivering training and sharing information for better management of women’sbusinesses, health and social issues.
MFIs have proven that microfinance can help
mitigate social issues, but can they solve themall? Probably not. What really matters is theirability to serve Bottom of the Pyramid population. To ensure that, solutions are double
edged: on the one side, MFIs can lower operational costs thanks to new technologies. On
the other side, they can take more initiative topromote skills building services to help people
have more diversified business options. The
later point is key, considering that due to a lackof skills, people choose businesses that can beeasily started, resulting in high competition insome business sectors. This is why STEP started offering a vocational training programme.
After successful completion of the course,
women are taking loans to start businesses
with greater hope to become successful entrepreneurs.
ABHIJIT BERA
DIRECTOR OF SAMPURNA TRAINING AND
ENTREPRENEURSHIP PROGRAMMESTEPSPECIAL REPORTMicrofinance and Profitabilities© Baobab Group

When technology enters the microfinance worldT

oday, a small Chinese merchant can get a loan from the
e-commerce giant Alibaba.
Two friends from Nairobi borrow a
few euros with a text message via
their telephone operator. Alternatively, they can decide to turn to anindependent start-up that will use algorithms and big data to assess their
creditworthiness. And tomorrow,their loan may be paid in cryptocurrency.
In just a few years, the digital world
has burst into the realm of the financial services market for the Bottomof the Pyramid. Initially focused on
payments, technological innovation is
now gaining ground in microfinanceinstitutions (MFIs). If competition isnot (yet) head-on, the establishedplayers cannot imagine turning theirbacks on this phenomenon. Arnaud
Ventura, founder and CEO of Microcred, renamed Baobab in 2018 tomark this change explains: “digitaltechnologies enable us to go further
in improving customer experience.
That is why it is at the heart of ourstrategic transformation.”
The spread of phones – even smartphones – in customers’ pockets
speeds up procedures and reduces
friction, when comes the time for aclient to renew his credit, for example. “Previously, a client had to comeback to the agency, answer the samequestions and provide the same supporting documents. Today, this renewal is automatically granted to certain customers, who are notified by atext message.” explains Baobab’s
founder. The repayment goes fastertoo. In countries where mobile money
is widespread, customers pay theirbills without having to travel, thanks
to their phones. In China, it would be
via WeChat, the electronic payment
system of the Tech-giant, Tencent.
Another way to reach customers is
to develop a network of correspondents, in addition to the agencies.
“Late payments are often due to thefact that clients did not have time tovisit the agency“ says Arnaud Ventura, while deploying such a networkof correspondents. The latter are
equipped with biometric sensors tofacilitate customer authentication
and be protected against fraud.
For MFIs, it is also a question of venturing into the lands of their new competitors by developing a digital credit
offer. Baobab is for instance testing
it with its Taka credit, granted automatically on the basis of customers
credit history and savings behavior.
The latter receive a text message indicating their eligibility for a loan they
can immediately disburse via a correspondent.

“It is a small, short-term and flexible
credit. It is used to meet urgent needs
arising from the irregular income ofour customer profile. It is a productthat could not exist in a traditional
physical distribution model”, asserts
Arnaud Ventura. The MFI claims that
100,000 Taka loans were granted during the one-year pilot in Senegal andis working to extend it to all its operating countries. It is also preparing
to distribute it via partnerships withphone operators. It is a gamble: while
the MFI knows its own clients perfectly, it will not know those it would
attract via these partnerships. “Thiswill be an issue for our repayment
rate, but there are ways to limit therisk,” says the executive.

Such will be the challenge in the coming
years: to find the rightrecipe so that these
new technologies reinforce the social impactof microfinance, by
making it accessible to
the greatest number.

Digital technologies are increasingly
being used to optimise MFIs’ management processes. Smartphones allow loan officers to monitor their customers’ portfolio without having to go
to the agency. Tablets connected tothe central information system makeit possible to fill in a loan application
directly and to photograph supporting
documents. This reduces back-office processing time and information
loss. “Technology will have a strong
impact on reducing our operationalcosts,” predicts Arnaud Ventura. To
the point of lowering microfinanceinterest rates while remaining profitable? “In theory, yes”, says Baobab’s
founder. “But we are only at the beginning of the work. To date, it has
mainly enabled product innovations
in payment and emergency credit. If
tomorrow it also facilitates the collection of savings, it will lower financing
costs.”Such will be the challenge in the
coming years: to find the right recipe so that these new technologies
reinforce the social impact of microfinance, by making it accessible to thegreatest number.
SÉVERINE LEBOUCHERJOURNALISTFOR REVUE BANQUEMICROFINANCE
BAROMETER 201815

SPECIAL REPORTMicrofinance and Profitabilities
Blockchain and microfinance: hype or promise?

In April 2018, 73 people in Sindhupalchowk, Nepal, received 583,000
Nepali Rupees (approximately
5,500 dollars) using Sikka, an application funded and created by World
Vision’s Nepal Innovation Lab. This
was like any other cash transfer in adisaster-striken country, but for one
invisible detail. The World Vision teamdeveloped a contract using blockchain
technology1 and based on the Ethereum exchange protocol, allowing users
to exchange their token2 on the Ethereum main network via SMS, where theuser’s wallet is associated to their mobile number.
Blockchain-enabled transactions forfinancial inclusion have attracted
enormous attention by promising features such as payments tracking, lowcost secure ledgers maintaining an
account holder’s transactional history,
and trustless systems where third-party intermediaries are no longer required. The ledger also serves as acredit reporting mechanism, but evenmore importantly, the system does not
only connect borrowers to lenders, but
in fact connects all borrowers and all
lenders on the same network.
In Brasil, Moeda, a fintech company,
demonstrates precisely this. It raised
20 million dollars to build a marketplace for peer-to-peer payments,
microfinancing of digital loans andcrowdfunding through fiat-pegged dig-ital tokens3. Part of the funds supported a revolving fund for social impact
investments, including a 50,000 dollars
pilot loan to a cooperative farm in rural
Brazil, one of the first denominated in a
cryptocurrency – Moeda’s tokens.
Most of the magic of blockchain is
made possible by smart contracts4:
computerised transaction protocols
that execute terms of a contract. In
theory, it means that there is less needfor intermediaries, reducing the overall
cost of financial transactions. Given
that microfinance’s social mission isparticularly correlated with its financial cost, if this cost reduction is translated into lower interest rates (or better
services), then blockchain technology
and microfinance have a promising future together.
Putting the technology to the test
The first experimental demonstrationsof a private blockchain in microfinanceaccount data recording was in 2016. It
is notable that initial experiments weredeveloped in areas with high demand
for microfinance services and for easier access to banking services such as
Myanmar and Somalia, and that someof the fastest scaling projects, such as
BitPesa, are from emerging countries.
Today, financial inclusion is one of themost mature applications of blockchain, but – as shown in the graphbelow – around half of the existing

Time frame for proof of impact of the blockchain technology
Financial inclusion

The reason this process takes so longlies in blockchain’s disruptive nature
itself. Blockchains are extremely complex technologies with high economic
barriers to entry. In addition, in this new
system the blockchain code becomes
law, hence, vulnerabilities and mistakes comes with a price. Despite thepromise of a secure new world, early
prototypes have been subjected to cyber-attacks and fraud as shown by theover 1.2 billion dollars in cryptocurrencies stolen so far5. The challenges become even more complex when dataprotection principles and frameworks,
such as the General Data Protection
Regulation 2016/679, come into play, assome core blockchain features suchas immutability and lack of on-chainaccountability are hardly compatible
with the direction taken by European
regulators6.
In conclusion, while possibly not being
the long-awaited revolution for microfinance, blockchain presents fascinating innovations and creative mechanisms that could substantially improvethe existing tools and strategies, given
the establishment of adequate normative and ethical boundaries.
1 Blockchain is a type of distributed ledger for
maintaining a permanent and tamper-proof recordof transactional data. A blockchain functions as adecentralised database that is managed by computers belonging to a peer-to-peer (P2P) network.
2 Crypto tokens represent a particular fungible
and tradable asset or a utility that is often foundon a blockchain.

Land rights

3 Southeast Asia’s Blockchain Opportunity, 2017.
4 Smart contracts are self-executing contracts
with the terms of the agreement between buyer
and seller being directly written into lines ofcode. The code and the agreements contained
there exist across a distributed, decentralised
blockchain network.

Philanthropy, aid, and donors
Health

5 Hackers emptied Ethereum wallets by breaking
the basic infrastructure of the internet, The Verge,
2018.

Agriculture

6 Is Your Blockchain Business Doomed?, Bloomberg News, 2018.

Democracy and gouvernance
Energy, climate and environment

0%

initiatives are not expected to impact
their beneficiaries before 2019, andover 30% will not actually show proofof impact before two years.

20%

40%

60%

Time Frame for Proof of Impact:

0-6 month

6-12 month			

2 years +Unknown

80%
1-2 years

Source : Doug Galen, Blockchain for Social Impact: Moving Beyond the Hype, Stanford Graduate School of Business.

16 MICROFINANCE
BAROMETER 2018

100%

GIULIO COPPIINNOVATION FELLOWINSTITUTE OF
INTERNATIONAL AFFAIRSFORDHAM UNIVERSITYZÉROIN PARTNERSHIP WITH

WITH TECHNICAL SUPPORT FROM

Thank you to the members of the 9th Microfinance Barometer : Adie (Thierry Racaud, Adrien Gizon); Advans (Aurélie de Fonvielle, Katherine Brown, Solène
Le Bleis) ; BNP Paribas (Claudia Belli, Alain Levy) ;CERISE (Bonnie Brusky) ; Crédit Coopératif (Bruno
Dunkel, Cyrille Langendorff, Isabelle Schiltz, Ony
Razafintsalama) ; Crédit Municipal de Paris (Sandra
Bythell) ; Entrepreneurs du Monde (Abhijit Bera) ;ESC Dijon (Djamchid Assadi) ; e-MFP (Gabriela
Erice García, Gemma Cavaliere, Sam Mendelson,
Daniel Rozas) ; Fédération nationale des Caissesd’Epargne (Cédric Turini, Shahina Mohamed) ;Fondation Grameen Crédit Agricole (Eric Campos,
Killian Grippon, Philippe Guichandut, Carolina
Herrera) ; Groupe Caisse des Dépôts et Consignations (Frédéric Levet, Sébastien Poidatz) ; Fordham
University (Giulio Coppi) ; MIX Market (Mohita
Khamar, Blaine Stephens) ; Oikocredit (Gaël Marteau) ; Réseau Européen de la Microfinance (Nicola
Benaglio) ; Séverine Leboucher ; SIDI (Laurent Chéreau, Dominique Lesaffre) ; Symbiotics (Sébastien
Duquet, Angélique Pittet).
Convergences:
Rachid Baid, Lucille Betrancourt, Marie Bonraisin,
Baptiste Fassin, Sébastien Géronimi, Alexis Hemar,Maïlys Piral, Sarah Plot, Emilie Poisson, Fanny
Roussey, Estelle Teurquetil, Carine Valette.
Microfinance Barometer 2018 / Convergences.
Editorial conception : Carine Valette, Baptiste Fassin
Graphic conception : Baptiste Fassin
Printing : Imprimerie Centrale de Lens
About Convergences:
Launched in 2008, Convergences is the firstplatform for thought, advocacy and mobilisationin Europe to promote the Sustainable Development Goals and the development of a world“Zero Exclusion, Zero Carbon, Zero Poverty.” Its
mission is to organise debates, mobilise thoughts
and actions, spread good practices and encourage the co-construction of partnerships and innovative solutions.
Convergences relies on more than 200 partner organisations represented within its working groups
to co-organise the Convergences World Forum,
which gathered more than 5000 participants
every year, to write studies and publications, andto organise events throughout the year.
For further information: www.convergences.org
Copyright Convergences August 2018 – Convergences, 33 rue Godot de Mauroy, 75009 Paris– France // +33 (0)1 42 65 78 85
For more information: contact@convergences.org
or www.convergences.org