Microfinance

Originally developed as a solution to provide credit to poor households, microfinance has grown rapidly over the past two decades and has now been established and globally recognized as a major supplier of micro credit to the neediest members of our global society. At present, there are approximately 10 thousand microfinance institutions providing micro credit services to over 160 million customers around the world.

Microfinance has emerged as an effective strategy for addressing poverty and empowering the poor by providing critical survival tools to its borrowers. Access to credit facilities provided by microfinance institutions allows the rural poor to increase their incomes, build their asset base, mitigate unexpected natural disasters and develop small businesses. In general, the ability to access capital allows for those living at or near the poverty line to progress both economically and socially and improve not only their own families but also their communities. The sustainable value proposition of microfinance and recent successes have lead to increased interest from a variety of local and international capital providers looking to allocate a significant amount of funds to this asset class. In recent years, the sector has experienced increasing interest from traditional and more exotic sources of funding including foreign investors, development agencies, non-governmental organizations, and foundations as well as various types of commercial investors.

As the microfinance sector rapidly grows and matures, microfinance institutions (MFIs) increasingly find themselves facing competition for business as well as for funding. The increasing competition from new entrants such as commercial banks, large corporations and international investors is putting pressure on existing practitioners to improve their operating models in order to remain as viable enterprises. In order to stay competitive and profitable in this changing landscape, MFIs must strive to institutionalize their business practices. Strong leadership and well defined financial and operating strategies will form the cornerstone of an MFI's ability to develop effective risk management systems, stronger corporate governance, qualified management teams, and greater transparency into their businesses and lending operations. Enterprises that successfully rise to the challenge of strengthening their corporate infrastructure and social attractiveness will be very well positioned to seek additional capital from existing stakeholders and to attract new investors as large amounts of local and foreign investments flow into the sector.

CSFI's recent survey on risk in the microfinance sector (Microfinance Banana Skins 2011), echoes the view that microfinance institutions are facing significant credit, reputational and operational risks. Credit risk remains the number one concern for microfinance industry given the lack of credit bureaus and transparency into the borrowers' credit history and ability to repay their financial obligations. Without sufficient tools to assess the creditworthiness of borrowers, microfinance practitioners absorb the risk of client over-indebtedness as a result of more widely available funds.

In some cases, institutions also find themselves challenged by weak corporate governance and inexperienced management teams. Lack of professionalism and technical expertise leading to poor internal controls, ineffective strategies, and mismanagement of increasingly important areas such as risk, product development and technology will present significant obstacles to business development and attracting foreign investment for institutions that do not address these issues.

Vital Corporate Advisors' team of highly qualified professionals focuses specifically on the needs and challenges of the microfinance industry. With our concentrated focus, we believe that we can have a profound effect on our MFI clients as they grow and transform their enterprises into sustainable and profitable institutions. We aim to strengthen the microfinance sector by working directly with MFIs to assist them in a wide range of domains such as developing their management skills, improving their risk management, developing strong financial plans, assisting with borrowing and equity investments and building operational plans with clear strategic visions for the next five to ten years and beyond.