Looking back on 20 years of microfinance investing and the opportunities ahead
We had the pleasure to interview Normunds Mizis, Chief Credit Officer at BlueOrchard, on the development of the microfinance industry, the challenges and opportunties that lie ahead, and the role of technology.
Normunds, you have been working in the microfinance industry for almost three decades. How has the industry changed in the past 20 years?
Normunds: In the past two decades key developments characterizing the industry are the emergence of microfinance investment vehicles (MIVs), specialized asset managers, and plethora of private and public investors who are interested in supporting micro-entrepreneurs and poorer households through investment in wholesale microfinance funds capable of generating high-quality assets and social and commercial returns for socially-minded investors. For the emerging MFI industry, it meant the introduction and enforcement of prudential performance standards through loan covenants set by lenders and MIVs and professionalization of operations, management, and governance to be able to comply with requirements mandatory to access commercial funding. Combined, these factors allowed the microfinance industry to grow at a pace that was not possible before. Most developed institutions have been able to obtain right to accept public deposits in many jurisdictions and have been mandated to comply with enhanced prudential and performance standards in return.
What are in your view the main achievements of microfinance?
Normunds: Undoubtedly, for me, the most important achievement is a significant expansion of access to formal sources of financing for poorer segments of the population across emerging markets and a diminishing role of loan sharks in the financing landscape to those who have been considered unbankable by other types of formal financial institutions. The microfinance industry has also played an extremely positive role in providing financial education to their clients and creating opportunities for more economical operations of microenterprises and better management of household budgets leading to social and economic benefits of MFI clients.
Where do you see opportunities as well as challenges for MFIs in the coming decade?
Normunds: Opportunities and challenges will be specific to regions or jurisdictions and will depend on the stage of development of respective microfinance sectors. In environments where there still are larger numbers of unbanked populations, the key challenge will be overcoming hurdles that have prevented delivery of financial services to such communities and populations and reach out to those still lacking access to financing while opportunities will lay in taking advantage of these market gaps. In the markets where access is much more even and services compete, the challenge will be avoiding mission drifts and maintaining and developing a competitive edge and client base which may depend to a large degree on taking advantage of available technologies.
What role will new products and technology play in the future of microfinance?
Normunds: Both will be essential for institutions to remain relevant and products to be competitive. However, deployment of technology and technology-based products will remain uneven across the industry and geographies and pace will depend on two main factors – infrastructure and education of clientele. Very traditional microfinance institutions primarily using group lending methodology will have limitations in introducing and distributing sophisticated technology-based products. Markets with higher penetration of financial and internet services among the population, including in rural areas, will see significant growth in technology-based products. In the case of the latter cashless transactions will become more and more prominent increasing the safety and efficiency of financial services.
What has been BlueOrchard’s significant contribution to helping develop the microfinance industry?
Normunds: As a pioneer in commercializing wholesale lending to microfinance institutions BlueOrchard has created and introduced the microfinance asset class to private investors. These efforts have contributed to the significant mobilization of private capital by BlueOrchard for the benefit of the microfinance industry and the emergence of other asset managers supporting the industry and creating a multiplier effect. In the past 20 years, BlueOrchard has disbursed almost USD 8bn to microfinance institutions and the BlueOrchard Microfinance Fund (BOMF) is today not only the oldest but also the largest commercial microfinance fund in the world.
If you would have to choose only one most memorable experience from the past 20 years, what comes to mind?
Normunds: It will have to be my visit with microfinance borrowers in the Piura region in Peru a few years after devastating floods in 2017 that saw many businesses destroyed and unfortunately also lives lost when River Piura burst its banks following heavy torrential rains. Clients of Caja Piura told us story after story of devastation with tears in their eyes describing losing business and private assets and damage to their private and business premises. When their stories came to the debt they had with Caja Piura on top of their losses all of a sudden faces lit up and a glimpse of smile descended on their faces. One after another they described their meetings with loan officers who had come to visit their places of residence or business right after the water had subsided to inquire about how they could help. It came as a surprise to Caja’s clients to learn that their debts had been canceled as Caja Piura had taken out insurance for such potential climate risks and that the loan officers were there to discuss their financing needs to help restart their business and restore livelihoods. This to me is a testimony to social responsibility and impact that microfinance industry and true microfinance institutions embrace and the benefits and care that microfinance clients receive from the sector expanding well beyond access to credit.
Thank you, Normunds, for sharing your views and insights with us.