Microfinance Looks Set to Emerge as a New Asset Class

No longer limited to third world countries, according to a new report released today by global management consultancy Arthur D. Little, microfinance is thriving as it finds untapped demand within the European market. Founded on microcredits, microfinance programs extend small loans to the world’s most basic entrepreneurs – the stall holders and craft makers selling products in the downtown area of every major city in the developing world. The new report, “Microfinance on the Rise,” reveals how microfinance institutions (MFIs), having already lifted millions of poor microentrepreneurs out of poverty in developing markets, is now being more broadly offered in Western economies, reflecting rising demand from low income customers.

According to Arthur D, Little’s latest report, conventional creditors are wary of lending to the poor as they are seen to lack collateral. The high administrative costs of offering a large number of small loans as opposed to larger loans to more secured borrowers has also kept traditional financial institutions out of microfinance in the past. However, the low income customer has been rapidly increasing its net income and is raising both its purchasing power and credit worthiness, often resulting in higher collection records for MFIs than the more conventional lending programs.

In this report Arthur D. Little explains how the microfinance approach to borrowing is moving from charitable initiatives undertaken in developing markets into a private market endeavour in developed European markets. The demand for microfinance in developed economies has been fuelled by the lower customer segment, which has been both understated and underrepresented in the past, and relies on low-cost, market-stall based economy.

“The global network of small enterprises we can observe today is a testament to the entrepreneurial capabilities of some of the world’s poorest citizens, and yet what many of these enterprises lack, is simply the access to reliable and affordable sources of credit” says Gerrit Seidel, the Global Head of Arthur D. Little’s Financial Services Practice. “As the low income customer segment continues to increase its net income faster than the average population, untapped demand for microlending will grow in both developed and developing markets, bringing it increasingly closer to the capital markets.”

For a large number of microfinance institutions, many of whom rely on subsidies from outside institutions or governments, there remains the issue of their businesses long term sustainability. Without being self-sufficient, these institutions are unlikely to ever provide microcredit to the millions who could benefit from it.

In response to this problem, Arthur D. Little’s report details the key characteristics of successful microfinance:

• Customers; success shown through a peer-lending model where each member of a group holds equal rights and responsibilities for each loan.
• Lending processes; well-managed projects that are both quick and simple.
• Organization; recruitment, training and staff retention are essential elements to a successful institution.
  

With global leaders such as Deutsche Bank and Credit Suisse having already launched a number of vehicles to fund to these initiatives, it is clear that despite relatively small current volumes, microfinance is on the threshold of emerging as a new asset class.

“Microfinance on the Rise” is now available for download at www.adl.com/microfinance

About Arthur D. Little
Arthur D. Little, founded in 1886, is a global leader in management consultancy, linking strategy, innovation and technology with deep industry knowledge. We offer our clients sustainable solutions to their most complex business problems. Arthur D. Little has a collaborative client engagement style, exceptional people and a firm-wide commitment to quality and integrity. The firm has over 30 offices worldwide. With its partner Altran Technologies, Arthur D. Little has access to a network of over 16,000 professionals. Arthur D. Little is proud to serve many of the Fortune 100 companies globally, in addition to many other leading firms and public sector organizations. For further information please visit www.adl.com