Crossing the Boarder – Microfinance Institutions that Invested in the SME Credit Market

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Crossing the Boarder – Microfinance Institutions that Invested in the SME Credit Market

The microfinance industry today is about much more than microcredits now that new financial products have been incorporated to this sector. The new structure of the microfinance sector, as well as other financial institutions, has become more complex. In fact, many non-governmental organizations and foundations have evolved to become regulated financial institutions or private companies. The microfinance companies now find themselves immersed in much more competitive markets, consequently finding it more difficult to keep their traditional customers who have grown up with them and who now demand more comprehensive offers of products that are better adjusted to their new conditions. This includes larger size of sales and assets, hence granting SME credits provides the opportunity to generate new revenues that cover the higher costs in microfinance that have passed regulations. However, the capital requirements, organizational structure and information that typically demand regulation, end up making the operation more expensive. Many microfinance institutions have chosen a strategy to “cross the border” by offering SME credits, which can be considered a fast and efficient way in growing your portfolio without large increases in operating costs.

This study derived from the hypothesis that most of the microfinance institutions that have decided to enter the SME credit market have considered their decision to be a “natural step”, for which there was no significant need to make structural or methodological adaptions when it comes to credit and risk. Regardless of the reason for “crossing the border” (whether a strategic decision, or a next step in “natural growth”), 86% of the microfinance institutions analyzed in this study claimed to have defined some sort of strategy to compete in the new niche market. It could be argued that “crossing the border” with the best clients is not only having a positive social impact, but it is also profitable for microfinance when combined with operative efficiency and using existing resources. However, it is crucial to recognize that each of these credits pose a greater risk to the organization and that adequate preparation process, including self-assessment of the advantages and disadvantages of microfinance are essential.

Written by: Georgina Vazquez, Lizbeth Fajury & Alex Silva (Calmeadow). 2015.