Microfinance Enters the Marketplace

In the past few years, powerful changes have been taking place in microfinance, setting the stage for a fundamental transformation of the field. These changes are opening the sheltered domain of microfinance, once the preserve of donors and development organizations, to the broader financial marketplace.

In a handful of countries, a competitive market is emerging in the provision of financial services to the poor. Although many or most of the institutions providing these services were created by organizations focused on development, some recent entrants have primarily commercial motivations in reaching low- income clients. These new entrants are bringing with them new skills, technologies, and comparative advantages. The competition between microfinance service providers is sparking innovation at a fast pace.

The emergence of the broader microfinance market offers several exciting prospects for those involved in development finance. It suggests that:

• The challenge of scale (reaching the enormous potential demand), may be met in the foreseeable future, as the market develops in new countries;
• Once there is a competitive marketplace in a given country, services will continue to expand with fewer or no further public subsidies;
• Low- income clients will be given a wider range of more convenient, lower cost services.

This paper seeks to describe the dimensions and the nature of the changes now taking place, with a focus on Bolivia, Chile, Paraguay, Bangladesh and Uganda, where the emergence of the microfinance market is relatively advanced-although trends described here are also evident in a number of other countries. The paper:

• Introduces new entrants, including consumer credit institutions, private commercial banks, and transforming state-owned development banks;
• Examines how MFIs respond to newly-competitive conditions and new technologies;
• Offers some reflections on the implications of these changes for clients, NGOs and other microfinance providers, governments, and donors.

[Author's abstract]