Microfinance institutions have experienced huge growth in recent years. It is estimated that they reach around 150 million clients, two-thirds of which are considered to be poor. However, this growth has more to do with the number of institutions than with expanded reach. Microfinance as a platform is probably not as extensive as, for example, a utility-based platform, but it certainly has distinctive advantages. First, it typically reaches poorer areas, where utility grids or mobile phone networks may not exist. Second, the platform is extremely flexible, and evolves on the basis of the changing production and distribution of products. Third, it lends the support and legitimacy of a tried and tested business model that serves the poor while being financially sustainable.
The information generated in microfinance platforms is usually of good quality and includes payment histories and other types of financial information. However, these platforms tend to be quite zealous in defense of their information, since it represents its source of competitive advantage. As a result, incoming firms who may want to associate with the platform often find it very difficult to have any control over the platform itself.
Microfinance organizations, due to the nature of their client base, have in some cases developed agricultural and business services to help their borrowers efficiently invest in and manage their assets. Moreover, they are excellent partners for facilitating access to basic goods and services, such as health and nutrition products. Furthermore, some microfinance companies have already associated themselves with household retailers to try to offer products at preferential prices. Those organizations that are more advanced in offering these additional services have been termed "second generation" microfinance institutions.
A version of this posting, co-authored with Manuel Bueno, was published on the NextBillion blog.
