The Past and Future of Innovations in Microfinance

Abstract:     
The microfinance industry carries every sign of an innovation in its take-off phase. The various aspects of the microfinance innovation were developed in the 1980’s, twenty years later the industry experiences a phenomenal growth rate, and it has diffused to most developing countries in the world. This review paper looks at microfinance as an entrepreneurial activity in its own right, contributing to the development of small and medium-sized firms in developing countries. We trace the innovations in microfinance, for instance group lending, loans to women, and their financing, and we ask whether the business model implied is sustainable once diffusion has gone far, competition enters, and customers enter higher income levels. The analyses indicate that to fulfill the tasks in the longer term, microfinance must manage the transition from idealism to regular business activity in order to fulfill the microfinance promise of financial sustainability and outreach. In this regard the microbanks can learn from the 19th century savings banks that adopted a pragmatic attitude in expanding their missions to serve better-off clients alongside the poor and developed professional banking procedures in order to assure their long term survival.

Keywords: Microfinance, Innovation, Women, Small Loans, Group Lending

JEL Classification: G21, G29, M19, O16, O31

Accepted Paper Series