Financial Inclusion

With a Steady Growth Rate, Microlending Continues to Push the Envelope for Global Financial Inclusion

MEDICI

Financial inclusion forms an integral part of the Sustainable Development Goals set by the UN. With over 1.8 billion adults around the world lacking the access to basic financial services, there is a severe need in measures enabling the unbanked to access financial services.

Microlending is one of the crucial drivers of change in the quest for financial inclusion. By serving those at the bottom of the pyramid, microlending fills a significant gap in the financial services landscape of developing nations. Microlending enables underserved groups of the population, and micro-businesses — predominantly in the rural areas — to gain access to credit to meet their financial needs.

Microfinance institutions(MFIs), in particular, are driving the charge to extend credit to the underserved/unserved population across regions. Traditional financial institutions, with their focus on high-value, high-margin businesses, on the other hand, have always found it challenging to cater to the needs of individuals at the bottom of the pyramid. The small dollar amounts, high last mile costs, and lack of financial literacy among consumers, coupled with the round-the-clock presence of the local moneylenders, have always prevented banks from providing financial services to a large segment of the population in a meaningful manner. In 2016, banks catered to only 33% of the total number of borrowers for microlending globally.

MFIs, with higher penetration into the rural segment, play a crucial role in servicing those at the bottom of the pyramid with their feet-on-the-ground approach. While NBFCs and NGOs have traditionally been at the forefront of microlending, new-age FinTech startups are now using advanced technologies to create an enabling environment for these under- and un-banked clients. Be it Kenya, Philippines, India, Mongolia or any other unbanked-population-rich country, FinTech firms have initiated the use of technology to provide alternate means of delivering financial services to the unbanked in a cost-effective way.

According to the Convergences Microfinance Barometer Statistics, the global microlending landscape has been experiencing a slow-but-steady growth. In 2016, the global loan portfolio for microlending was at $102 billion. In 2018, it is expected to reach $113.6 billion, growing at a CAGR of 5.51% since 2011. The total number of borrowers in the global microlending space was at 132 million in 2016, and is estimated to reach 151.2 million in 2018, growing at a CAGR of 8.28% since 2011.

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South Asia’s microlending industry grows at the highest pace — with a CAGR of 27.47% in terms of loan portfolio size, and 13.38% in terms of the number of borrowers. In 2016, South Asia accounted for 59.3% of the overall borrowers of microloans around the world. However, Latin America and the Caribbean topped the chart with a 41.7% contribution in 2016 in terms of loan portfolio size.

The average ticket size(loan portfolio per borrower) is the highest in Eastern Europe and Central Asia($3,000 in 2016), which, however, has decreased from $4,222 from 2011, indicating the increase in the number of low-value, personal micro-loans as against the micro-enterprise loans.

On the other hand, South Asia and Africa have seen significant growth in the average micro-loan ticket size, indicating the evolution of small business credit, and growing awareness among the underbanked community, especially with the impact of government/regulatory push(e.g., Jan Dhan accounts in India), and mobile-driven innovations(e.g., mobile money in Africa).

Diwakar Mandal

MEDICI

Diwakar is a FinTech enthusiast and an avid researcher who spends his time learning and writing about market trends, traction and disruptions in the industry. He has been active in the financial services consulting space for over four years.