Is There a Trade-off between Profitability and Reaching Poorer Clients?

Microfinance, or financial services for the poor, can be profitable. The Autumn 2007 issue of the MicroBanking Bulletin includes data from 415 self-sufficient MFIs. The average return on assets for this group is 4.2 percent, which compares favorably to commercial-bank returns. Indeed, there are grounds for hope that microfinance can become attractive to mainstream retail bankers.

At the same time, some worry that an excessive concern for profit in microfinance will lead MFIs away from poor clients to serve better-off clients who want larger loans. It is true that programs serving very poor clients are somewhat less profitable than those reaching better-off clients, but this may say more about managers’ objectives than an inherent conflict between serving the very poor and profitability. MFIs serving the very poor are showing rapid financial improvement. Microfinance programs like ASA in Bangladesh and XAC Bank in Mongolia have already demonstrated that very poor clients can be reached profitably: both institutions had profits of more than 20 percent of equity in 2007.

There are cases where microfinance can not be made profitable, for example, where potential clients are extremely poor and risk-averse or live in remote areas with very low population density. In such settings, microfinance may require continuing subsidies. Whether microfinance is the best use of these subsidies will depend on evidence about its impact on the lives of these clients.