About Microfinance spoke with Asad Mahmood, Managing Director, Global Social Investment Funds, Deutsche Bank, about key issues and challenges of microfinance today.

Asad Mahmood: Challenges for Microfinance

Asad Mahmood: Challenges for Microfinance

“I think that what is most needed in microfinance today is innovation, collaboration, and customer orientation.”


Q: As you envision, what do you believe are the key elements (issues, challenges, etc.) of microfinance for the next 10 years?

AM. I believe that one of our biggest issues in microfinance is that we have not been focusing on customers, and that there has been too much emphasis on making money from microfinance. We need to identify products to meet customers’ needs, and to recognize that finance is not the only thing that will solve issues of poverty. Invariably microfinance clients have social needs (e.g. a roof over their heads and proper nutrition) as well as access to financial products such as savings. The goal of social finance should not be to just maximize profits.

The microfinance industry has to reassess itself because it has moved on since it began several decades ago. High interest rates can no longer be charged as in the past. We have to come up with more innovative approaches for microfinance. The industry has to be more customer-centric, and not just focused on making money.

We should seed a Think Tank, comprised of academics, NGOs, private and public sector participants, to figure out how to best deal with the poor, and come up with new and innovative models. We should all work collaboratively to find the best model(s) for microfinance going forward.

Q. It has been estimated that some US$25 billion to US$50 billion will be needed to support microfinance in the next few years. Where do you expect such funds to come from? And, who are the key players at present?

AM. Both the private institutional sector and the retail sector are potential sources for capital if we could show institutional and individual investors that microfinance truly benefits the poor. Despite the multitude of academic research, the quantifiable achievements of microfinance haven’t really been demonstrated. The exact impact of microfinance on poverty remains uncertain. Furthermore, negative media coverage of microfinance [relating to the Indian (Andrah Pradesh) situation, and highly visible IPOs in India and Mexico] have tainted the industry.

Q. What is the critical role for the investment community in microfinance?

AM. The investment community should seek balance – a middle road – between profitability and social goals for the poor. Investors should demand customer protection, along with transparency, accountability, and reasonableness (on profits).

Q. What really works in microfinance — for you personally? As microfinance has been on the scene for several decades now, what are the achievements that microfinance can claim?

AM. One of the greatest achievements of microfinance has been the breaking down of mental models of poor people. In the past, helping the poor was viewed as a charity. But microfinance has shown that introducing business methods to poor people is a viable approach. Millions of people now come to MFIs (globally) seeking loans and other financial services. As microfinance has gained acceptability by clients, investors and the general public, the industry needs to question the models being used. Are they still relevant and are the needs of the poor being sufficiently/efficiently addressed? In response, microfinance is now starting to look at other areas such as education, housing, financing solar energy products, etc.

There are also major fundamental changes in microfinance. Technology is enabling lower cost delivery of services to customers, and providing greater transparency.

Q. How would you address the role/function of microfinance vis-a-vis impact investing?

AM. Microfinance is the mother of social impact investing. The mistakes made in microfinance should form the basis for ‘lessons learned’ because impact investing could encounter the same problems as microfinance. There is a lot of idealism and exaggeration in impact investing. There is a disconnect between reality on the ground and potentiality of impact investing. First, we should define ‘impact investing’; is it building roads and bridges? There is a lot of puffery; some people working in impact investing have never made an investment. While some research reports claim that impact investing is a trillion dollar sector with billions of profits to be made, the reality on the ground is much different and it is difficult to place even small amounts of money in profitable social ventures that are viable.

We are sitting at a glorious time in human history. These decades will be pivotal. In summary, I think that what is most needed in microfinance today is innovation, collaboration, and customer orientation.