Number 16
Zoom
September 2005
THE COMMERCIAL MODEL
FOR MICROFINANCE
AND ITS EFFECTS ON SOCIAL
INCLUSION
Overview
◗ Microfinance has its origins
in NGOs
◗ The commercial approach
is developed and imposed
◗ Impact of the «commercial»
approach
◗ Case Studies
• Chile: NGO’s shift
towards banks
• Bolivia: an attempt to
replace NGOs with private
financial funds
• Ethiopia: a marked
commercial approach
◗ Conclusion
microfinance
Introduction
Viewing it as one of the main instruments to reach the
Millenium Development Goals, the United Nations designated
2005 as the International Year of Microcredit.
Every day more decision-makers and public and private
institutions are interested in a sector that has manifestly gener-
ated growth and development. Currently, 80 million people have
access to microfinance services. Those who are now excluded
from the service have shown their potential to start business in
25 years helped by appropriate financial services.
At the same time, however, there have been growing con-
cerns about the recent commercial orientation of microfinance.
This new commercial approach is based on a competitive market
that runs the risk of hiding the reasons why microfinance was
created and developed in the first place.
During a seminar held in Brussels in March 2005 the Belgian
cooperation (1) organised a workshop about the common points
and compatible aspects between the commercialisation of micro-
finance and social inclusion. This issue of “Zoom Microfinance”
attempts to further develop this debate.
http://www.dgcd.be/FR/index.html
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microfinance
Microfinance has its origins
in NGOs
It can safely be assumed that NGOs
«invented» the concept of microfinance
for a simple reason: as an attempt to fill
the massive gap left by private banks
(for whom poor people represented both
an uninteresting and expensive mar-
ket) and development banks (hampered
by a policy to reduce public expenses).
Initially, NGOs focused primarily on the
social and economic impact on their cli-
ents (commonly called beneficiaries), yet
largely neglected institutional sustain-
ability.
The commercial approach is
developed and imposed
In the last decade, the so-called «com-
mercial» approach has become the rul-
ing paradigm for microfinance, claiming
to be the best way to manage it. We can
understand the historical and ideologi-
cal reasons behind this belief. However,
we must ask ourselves about the conse-
quences that this approach can have on
microfinance, particularly when it comes
to social inclusion.
To this end, it is worthwhile to reflect
for a moment upon the meaning com-
monly assigned to «commercialisation»
and «social inclusion».
The characteristics of the former concept
are highlighted in numerous documents.
For some, commercialisation implies the
will to transform microfinance insti-
tutions into entities that function and
think like a bank and have a legislation
and ruling entities typical to the finan-
cial sector. For others, the key element
of commercialisation is seeking competi-
tion. Although we accept the relevance of
both theories, we believe that the main
element of what we call (or criticise as)
the commercial approach of microfi-
nance is the will of some organisations
to cover all their costs or even the will to
generate profit. In fact, certain organisa-
tions tend to focus excessively on their
own financial management and therefore
neglect their social mission. Despite this
evidence, it is important to avoid abusive
generalisations.
As for social inclusion, there are numerous
interpretations given to this concept. Below
are two radically different theories.
 A minimalist approach considers that
the fact of creating a microfinance
organisation increases access to sus-
tainable financial services through the
granting of new or existent services
(for example in the informal sector)
at a lower price for the borrower/
saver. Therefore, there is an immedi-
ate social impact. In fact, reducing
the borrower’s/saver’s financial fees
liberates an income that can be used
for a different purpose (food, health,
education...).
 According to the second approach,
that we define as «maximalist
approach» the improvement of the
social situation can be measured in
obvious improvements in the fields
of health, education and culture or
through the participation in the proc-
ess of democratic representation.
Impact of the «commercial»
approach
In the light of these two theories, what
could be the impact of the commer-
cial approach for microfinance? Before
answering this question we need to
have a clear idea of the advantages and
drawbacks derived from an approach
focused on «covering costs and generat-
ing profit».

The advantages of such approach can be
summarised in two essential points:
 Firstly, this approach envisages a
strong growth of services supply. In
fact, a financially autonomous and
sustainable organisation has an eas-
ier access to capital markets and can
design saving programmes that do not
entail a high risk for savers. Given the
gap that still exists globally between
the supply of microfinance services
and the potential demand, this point
should not be underestimated.
 Secondly, when we carry out sus-
tainable cases of microfinance in a
market, sooner or later competition
will emerge. In the case of healthy
competition (i.e. with an appropri-
ate supervising and regulatory body)
the quality and cost of services will
improve. Therefore, competition can
lead to more efficiency.
The possible shortcomings of the com-
mercial approach for microfinance can
be summarised in the following four
points:
 The exclusion of certain beneficiaries
(generally the poorest);
 A tendency to use a unique type of
«best practices» to the detriment of
local adaptations and innovation;
 the risk of overly high fees imposed
by commercially oriented organisa-
tions acting as monopoly/oligopoly at
the local level (a perfectly likely case
despite the little research up to date);
 The risk of losing sight of the original
mission, targets and processes in the
framework of ill-willed competition.
Taking these points into account, is it
possible to talk about a link between
«commercialisation» and «social inclu-
sion»? The answer depends on our inter-
pretation of the theories exposed above.
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microfinance
According to the minimalist theory, the
commercial approach of microfinance is
an essential aspect to improve the situa-
tion of clients/beneficiaries. However, in
the «maximalist» approach, the impact
studies are more widely accepted and
upon certain circumstances the com-
mercial approach of microfinance could
jeopardise the beneficiaries’ social inclu-
sion.
Once we accept such hypotheses we can
make the following recommendations:
 In a case of a «classic» supply of micro-
finance services (according to the cur-
rent practices), i.e. when beneficiaries
are close to the poverty threshold (but
are not the poorest), when credits are
granted for working capital or small
investments, short or medium-termed,
using well known methodologies in
areas with a sufficient population
density, it makes sense to favour the
commercial approach since it is bet-
ter suited to respond to the larger
demand.
 In the opposite case, when the organi-
sation offers a «specific» supply that
differs from common practices, i.e.
working with the poorest, using new
or hardly known methodologies and
products, at a longer term and in less
populated areas, it makes sense to
favour a non-commercial approach
since we cannot think that such sup-
ply could be permanently adopted by
commercially focused organisations.
Given the current state of microfinance,
we believe that many different approaches
can coexist based on a great variety of
organisations. It would be a mistake to
underestimate the «moral» objections
offered by the commercial approach (they
are even understandable). Likewise, it
would be equally wrong to overestimate
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microfinance
such a model and consider it as the only
possible reference...
Case Studies
Public authorities and international
cooperation organisations have 5 main
reasons to favour a commercial approach
in microfinance.
 It entails growth in the sector (it pro-
vides services to more people excluded
from the classical financial system),
perceived as one of the most impor-
tant instruments to fight poverty and
foster development.
 Consequently, access to financing
becomes more democratic (at least in
the figures).
 They believe that commercial micro-
finance will help reduce the depend-
ency on international cooperation.
 They assume that the commercial
approach to microfinance would mul-
tiply innovations (develop new prod-
ucts and services).
 Finally, if the institutions’ owner-
ship (by the shareholders) is clearly
defined, the governing and control-
ling bodies will be improved. These
two elements are currently considered
to be the most important risk factors,
whereas the credit risk is generally
controlled by microfinance institu-
tions.
The workshop organised by the Belgian
cooperation analysed the situation in
different countries: Chile, Bolivia and
Ethiopia.
Chile: NGO’s shift towards banks
In the first half of the 90’s, the return
to democracy in Chile was marked by
important flows of international coop-
eration that enabled the implementation
of a real policy of State support to micro
enterprises. NGOs played an impor-
tant role in this context. During this
stage there was hardly any competition
between microfinance institutions.
Since 1995 international cooperation has
diminished considerably. Many NGOs
disappeared or were put into liquida-
tion and banks emerged as the preferred
intermediaries to access financing of
micro activities.
The banking sector shows clear advan-
tages that generate higher operational
and financial returns:
 it recruits experienced and qualified
staff;
 it has an incentive policy for the
staff;
 its credit methodology is based on an
evaluation of the payment capacity
and moral standards;
 it has an extended network of branches
(a valuable installed facility)
 it has important means to invest in
technology and publicity (included
the State subsidies).
Most NGOs showed exactly the opposite
profile: insufficient number of activities,
motivated but poorly paid teams and
insufficient size.
From then on, banks have represented
80% of the market. This is a logical evo-
lution taking into account the different
factors at stake. However, it also entails
important limitations:

 banks normally demand stricter
access conditions than NGOs, espe-
cially with regard to customers’ sen-
iority; and they sometimes exclude
sectors considered to be «risky»;
 there has been a shift in micro enter-
prises that benefit from credits: they
are more consolidated and the aver-
age amount of credits is higher;
 Operations are practically restricted
to urban areas and commercial activi-
ties.
Bolivia: an attempt to replace NGOs
with private financial funds
The creation of Private Financial Funds
(PFF) (2) in public companies in Bolivia
was designed as an alternative to replace
many NGOs and foundations that dealt
with microfinance. However, only 7 PFFs
regulated by the Banking Commission
were created and many NGOs are still
operational and implement self-regula-
tory mechanisms.
Despite the low number of entities, the
PFF’s scope is very significant as shown
by the reference figures (end of 2004):
a $ 415m credit portfolio (5 times the
volume of many NGOs) for 253.000
customers with a high quality portfolio
(3.6% delays after one day); $ 264 m in
savings shared among 295.000 small
savers and a substantial capital return
(15.38% in 2004). All these facts turn
the sector into one of the most attractive
for investors in a country generally con-
sidered to be immersed in a permanent
crisis for many years...
The Bolivian experience is illustrated by
the FIE with 76.000 customers, of which
60% are women.
What conclusions can be drawn from the
Bolivian case?
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microfinance
Private financial funds show the follow-
ing advantages:
 high transparency level (monthly fig-
ures accessible on the Internet)
 an increasing scope, at least in urban
areas and rural areas densely popu-
lated, with a network of 232 agen-
cies;
 diversification of services (mainly col-
lecting savings, one of the essential
objectives of the reform);
 important refinancing offered by
banks and government securities;
 a tendency to decrease interest rates:
on average, regulated institutions
went from 30% per year in dollars
in December 1998 to about 22% in
December 2004;
 a strong female presence among cus-
tomers.
There are, however, a few important
limitations:
 PFFs’ good performance and return
is sometimes achieved to the detri-
ment of opportunity costs for clients:
closing down rural agencies, reduced
opening times of non central agen-
cies, increased demands for material
guarantees...
 Rural activities are largely neglected:
only 5.6% is earmarked to agricul-
ture and livestock farming activities.
 PFFs still struggle to find private
investments, which is rather surpris-
ing taking into account their financial
performance.
Finally, the upwards evolution in the loan
amount poses one question:
Is it, as some claim, a sign of a shift
towards slightly wealthier customers,
(2) Private Financial Funds were the object of an in-depth
analysis in a previous issue of Zoom Microfinance (7):
The Private Financial Funds -Bolivia;
available at www.sosfaim.be
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microfinance
or does it show that these entities can
accompany their customers’ growth?
Ethiopia: a marked commercial
approach
Ethiopia(3) is an interesting case: in 1996
a law was passed that compelled micro-
finance institutions to adopt a company
status. At the same time, public authori-
ties set out conditions to diminish the
purely commercial character of the
activities.
At the end of 2004 the sector included
21 institutions; it reached more than one
million users and showed a 32% growth
in one year. Real competition emerged,
mostly in the capital, Addis Abeba.
All agents use similar terms to refer to
their mission and all highlight the impor-
tant balance between commercial and
social aspects. In this federal country,
the main institutions have a regional
scope: several regional governments are
also shareholders, although this remains
nonetheless dominated by local NGOs.
There is also controversy about unfair
competition supposedly led by MFIs
with high public participation against
entities built on purely private capital.
The regulations try to facilitate the crea-
tion of a MFI: the minimum capital is
low (approximately the equivalent of
18.000 €). However, foreign investors
cannot participate in the capital of a
MFI, since the capital is 100% owned
by national citizens.
The regulations also set out several meth-
odological limitations, like a cap for the
credit. Excluding exceptional circum-
stances, this cannot exceed the equiva-
(3) The microfinance sector in Ethiopia was discussed
in a previous issue of Zoom Microfinance (14): The
Regulation of Microfinance Institutions, available at
www.sosfaim.be
lent of 450 €. All MFIs must only work
with solidarity guarantees.
Approximately 10 years after the reform
was implemented, we can draw the fol-
lowing conclusions:
One achievement was the consistent
reduction of irregularities linked to sub-
sidies. At the same time, the number
of users has increased greatly and still
increases regularly.
Fostering savings is also one of the most
prominent achievements: it represents
43% of the credits volume and increased
significantly in 2004 (more than 30%).
The better performance of MFIs, and the
sector’s transparency have also allowed
to mobilise national and international
refinancing.
However, there are still some difficulties:
the capital remains mainly in the hands
of NGOs that helped creating MFIs.
Sometimes the liberated capital is too
weak compared to the transactions vol-
ume (less than 1%).
Contrary to the Bolivian case, there
has been an increase in interest rates.
Originally, the authorities fixed an
obligatory rate of 12.5%, which did not
correspond at all to the sustainability
conditions of the institutions. Currently,
the interest rate fluctuates between 16%
and 24% per year.
The obstacles to the credit methodology
can be perceived as positive and nega-
tive: whereas it ensures a certain respect
of the target group (especially in terms
of poverty), it does not necessarily entail
growth of certain customers, particularly
micro enterprises.
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Conclusion
Imposing a commercial model has cer-
tainly had a positive effect on microfi-
nance, as it improved access to financing
(increased number of customers and
loan amounts). This movement is more
remarkable in the most populated urban
and semi-rural areas.
However, the commercial approach does
not meet all the conditions to become
the only model to be encouraged by the
sector (often referred to as microfinance
industry). More delicate situations (iso-
lated rural areas, conflict or post-conflict
areas) clearly require «corrective» meas-
ures to a purely commercial approach to
prevent the creation of a new generation
of people excluded from financial serv-
ices.
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microfinance
well as the physical and cultural proxim-
ity.
If we manage to keep these qualities,
which are also an important form of
social inclusion and combine them with
the generally recognised advantages of
the commercial approach (quick decisions
when granting credits, quick response in
case of a crisis, strict performance level
conditions...), a financial cooperative
can benefit greatly from the commercial
model, as long as it assigns to its mem-
bers a real role in strategic decision mak-
ing procedures.

Privatisation has also been questioned.

We have seen that microfinance has flour-
ished mainly due to the disengagement of
public development banks. In a certain
way, the commercial approach supports
this trend. But at the same time, public
and pseudo public institutions, both at
the local and international level are big
investors in commercial MFIs and apply
the rules of privatisation to public funds
initially earmarked for development
cooperation.

Finally, one reflection of the PAMECAS

network in Senegal during the workshop
organised by the Belgian cooperation:
Commercial MFIs are, by definition,
controlled by few shareholders and users
are not involved in the governance.
In this intervention the advantages that
commercialisation represents for a mutu-
alist network were also highlighted.

The mutualist status has some advan-

tages, such as people’s appropriation of
the institution and its social control, as
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microfinance
This issue of Zoom microfinance has been written by Marc LABIE (Centre de Recherche
Warocqué, Université de Mons-Hainaut) and Marc MEES (coordinator of support services
to SOS FAIM partners).
Il is largely based on the input of the two authors at the March 2005 seminar organised by the
Belgian cooperation in Brussels, and also on presentations given at the workshop by Valérie
DE BRIEY (Responsible of research at CERISIS-UCL) for Chile and member, as well as Marc
Labie, of GRAP OSC (Group of Research to Support Politics – Civil Society Organisations),
by Pilar RAMIREZ (President of the Private Financial Fund FIE in Bolivia) and by Mamadou
TOURE (General Director of PAMECAS in Senegal).

SOS Faim and microfinance

SOS Microfinance has been working for several years in the microfinance field and supports
different partners involved in this sector in Africa and Latin America. As with all development
tools, we have to analyse the aims, models and implementation conditions of microfinance.
With this frame of mind, SOS Faim edits “Zoom Microfinance”. You can find publication
and download it in French, English and Spanish on the website of SOS Faim Belgium: www.
sosfaim.be.

Past issues of Zoom microfinance tackled:

 impact studies – Zoom microfinance nr. 8 and nr. 11
 interest rate policies – Zoom microfinance nr. 9
 investment credits – Zoom microfinance nr. 10
 microfinance experiences in conflict zones – Zoom microfinance nr. 12
 the efficiency of microfinance in reducing poverty – Zoom microfinance nr. 13
 the regulation of microfinance institutions: the Ethiopian experience – Zoom microfinance
nr. 14

Apart from Zoom Microfinance, SOS Faim publishes another newsletter, «Farming Dynamics»,
which deals with the challenges faced by agricultural producers’ organisations and farmers’
organisations in their development. You can also find this publication and download it in
French, English and Spanish on the website of SOS Faim Belgium: www.sosfaim.be.
Responsible editor : Freddy Destrait, rue aux Laines 4, B 1000 Bruxelles

SOS Faim – Action pour le développement

Rue aux Laines, 4
B-1000 Brussels - Belgium
Phone: 32-(0)2.511.22.38 – Fax: 32-(0)2.514.47.77
E-mail: info@sosfaim.be - Site: www.sosfaim.be
SOS Faim – Action pour le développement,
Résidence «Um Deich» bloc C, 9, rue du Canal
L-4050 Esch-sur-Alzette - Grand Duchy of Luxembourg
Phone: 352-49.09.96 – Fax: 352-26.48.09.01
E-mail: info@sosfaim.org - Site: www.sosfaim.org

«Zoom Microfinance» is produced with the support of the Direction générale de la Coopération interna-
tionale de Belgique and the Ministry for Foreign Affairs in Luxembourg.