The Commoditization of MFIs

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It still surprises me when I run in to people who don’t know what an MFI is.

MFI is the acronym for microfinance institution. An MFI is a business organized on humanistic principles to ensure the innovation of credit is reaching remote communities still reckoning with primitive technologies—the rural BOP.

Some MFIs are for-profit, and some MFIs are non-profit (legal technicalities). More than one claim to be growing a niche called social business, operating on the non-loss, non-dividend model outlined in Mohammad Yunus’ 2010 book “Building Social Business.”

Classic microfinance is becoming a commodity. Operating on the well-worn tracks laid by Bangladeshi pioneers, from a market perspective microfinance has remained anorexically risk-free despite exceedingly generous portions of revenue.

Time bombs like the SKS blowout exist, but the community learns fast and a pointed attention to the flow of capital into starved markets is the new base line. But what next?

Bangalore’s Rang De has switched the Kiva model on its head by disbursing its own funds directly to clients. CEO Ram NK adds another priority to the mix: engaging its social investors with community events.

LA’s InVenture, offers robust professional support to coach microentrepreneurs through the “missing middle” into growing businesses.

San Francisco’s Kiva, the original P2P web platform for microcredit, stepped into Bangladeshi export Grameen America’s territory, by disbursing corporate capital to American SMEs. Just last week it tweaked the time-honored Grameen trick of “social collateral” by entrusting in-house trustees to disburse directly in far flung markets.

MFIs are innovating in several directions, all blue ocean territory. MFIs operate in market contexts unexposed to any form of modern organization beyond government. Organizations like the Indian government, or the Kenyan government, or the Colombian government.

Private sector innovation has begun eroding political influence over the culture of the disenfranchised BOP. Private sector innovation is market refining a new social bargain to coordinate behavioral awards. A meritocracy superimposed over a cronyistic wasteland.

This is a positive step. MFIs with the most appealing bargain will enjoy populations of customers that only Internet companies have been able to boast of till date. Remembering the Andhra Pradesh flameout, this bargain must appeal to the government as well.

Successful vertical integration is anybody’s game, but the cultural barriers to entry internationally are formidable. The disenfranchised of Earth harbor authentic relics of ancient civilization, isolated and dispersed. There has been symbiosis between countries like India and Bangladesh, but South America, Africa, and Europe remain largely the purview of homegrown specialists.

MFIs must be able to effortlessly speak the language beneath the language if they harbor serious global ambitions. Lessons gleaned from MFIs will be invaluable for other industries seeking market share on this dark side of the moon.