While the theories behind microfinance services have been around for centuries, as a practice, it was only seriously institutionalized beginning in 1976, thanks mostly to the work of the Bangladeshi-American economist Muhamed Yunus. Though there was significant initial resistance to the idea, major institutions such as the United Nations, World Bank, and International Monetary Fund now recognize the unique role of microfinance services in nation-building. Microfinancing also sees widespread support throughout most of mainstream academia and across different political divides.
Unfortunately, many smaller local financial institutions such as retail banks are noticeably less enthused. Up until recently, offering micro-lending services did not make much sense for more profit-oriented institutions, leaving these services to smaller, socially conscious financial enterprises.
However, thanks to developments such as the improvement of banking software and related systems, the idea of retail banks servicing the microfinance market is more feasible than ever. With their better technology, larger scale, and wider reach, retail banks may potentially tap into this previously challenging market as a source of revenue and future high-value customers.
Here are just a few of the reasons why microfinance may hold the key to unlocking growth for retail banks.
1. Lower Operating Costs for Microfinance Programs
Up until fairly recently, running microfinance programs simply wasn’t a priority for most retail banks. The relatively high effort to return to older microfinance models back in the 1990s and 2000s made these kinds of projects less appealing to larger financial institutions, most of whom would rather rely on more profitable medium-to-large enterprises as a steady source of revenue. When presented with options on how to use resources, it was simply a better, safer bet for larger lenders to lean on these types of customers.
However, the advent of better banking software has dramatically reduced the cost of catering to microbusinesses and solo entrepreneurs. Lower operating costs enabled by new tech have since allowed more and more banks to justify running a microfinance program by finally giving these institutions the bandwidth they need.
2. Current High Demand for Microfinance Services
Even without taking today’s lower operating costs into account, retail banks should still consider running a microfinance program or adding more resources to existing ones simply because of the skyrocketing demand for microcredit services.
The past generation has seen the democratization of information on a scale never before seen. Thanks to better internet connectivity and social media, would-be entrepreneurs and microbusiness owners now have access to a near-infinite knowledge base as well as interactive discussion boards populated by their peers. This means that today’s generation of entrepreneurs are far savvier to the benefits, drawbacks, and other implications of microfinance, driving up the demand for these types of services.
With so many people looking into creating or developing their own business, the booming demand for microfinance services is becoming increasingly difficult for retail banks to ignore.
3. Improved Profits and Cash Flow
The same innovations in banking software that have lowered operating costs have also made addressing the microbusiness market more profitable than it’s ever been. Retail banks looking to maximize revenue and earn life-long clients are already leveraging their microfinance programs for these reasons. Not only does it now make short-term financial sense for retail banks to address this market, but there are also long-term benefits to a more intense focus on microfinance.Â
When considering the lifetime value of clients, a retail bank’s microfinance program can be a way to introduce borrowers into its conventional finance programs, building a foundation for better profits and cash flow years down the road. Microfinanciers that deliver good services are in a good position to effectively develop long-term relationships with promising clients, who may be less likely to seek out other banks for regular financing as their businesses evolve into more profitable enterprises.
4. More Reliable Payments and Disbursements
The better automation, security, and AI on modern banking software have made it easier for retail banks and other financial institutions to give previously underserved customers like microbusiness entrepreneurs the service levels they deserve.
As soon as a legitimate client is in the system, they can depend on predictable loan disbursements without having to go through excessive red tape. These improvements also make loan repayments easier, ensuring fewer problems for both the bank and borrower alike.
Should Your Retail Bank Consider Expanding Its Microbusiness Program?
While every lender’s situation is different, at the very least, they should look into the demand and feasibility of offering microcredit services. Current trends in entrepreneurship as well as the availability of new technology have drastically reduced the risks and barriers to entry in this market.
With only so many medium-to-large businesses in any given locality, it’s well worth it for retail banks to consider microfinance programs as a means to improve growth and revenue, in both the short and long term.
