Microfinance and Innovation: Are we reinventing the Wheel?

Friday, 27 November 2009 Leave a comment Go to comments

I had an opportunity to co-author with my ex supervisor Professor Ian Miles to write an opinion in the world magazine MicrofinanceInsights. The piece appears in the latest edition (Vol 15, Nov/Dec 2009). I quote the editorial’s comment:

Innovation: Are we Reinventing the Wheel?

In this issue, we look at different innovations—product, technology, and financial—that are adding value and efficiency to the sector. In our Commentary, Ian Miles and Yanuar Nugroho of the University of Manchester, argue that microfinance is now poised to bridge the gap between the privileged and the bottom of the pyramid, with the help of innovations that bear no resemblance to the Wall Street machinations that helped bring the global economy to its knees. In our cover story, Stephen Hodgson of Redport International and Yana Watson of Dalberg Global Development Advisors, question the nature of innovation that has taken place in microfinance to date; cite examples from the annals of financial history that could work well when applied to microfinance; and conclude that the sector might be better served if it adopts models that have been tried and tested in other spheres of finance. The issue brims with examples of innovations that work—from mobile technology in India to financial education for Mongolian teenagers to ATM-style kiosks in Georgia—and ones that don’t, such as the Business Correspondent system, which has faltered in India. In this issue’s Survey, our team polled 180 microfinance institutions about how Information & Communication Technology has influenced their work. You will also find the results of a Reader Survey we conducted in September to gauge what our audience thinks of Microfinance Insights so we can tailor the content to suit their preferences.

Below, and the attachment, is the original paper that we sent to the magazine (before the copy-edit process). If you want to read the final version appearing in the magazine, click here. If you don’t have access I will try to scan our piece and make it available here soon (so, watch this space).

Calibrating Innovations and Challenges in Microfinance

Ian Miles and Yanuar Nugroho
Manchester Institute of Innovation Research
University of Manchester

The world economy has been knocked sideways by the “credit crunch”, and much of the blame for this has been laid at the door of financial innovations. It may seem perverse, then to be celebrating and calling for more innovations in micro-finance. But there is a world of difference between the ways in which microfinance institutions are seeking to develop new ways of serving their clients, and to reach out to new clients, on the one hand – and on the other hand, the creation of smoke-and-mirrors to evade regulations and confuse investors and public authorities, that was practised by many supposedly respectable banks and lending institutions. Indeed, microfinance can be a vital tool to enable businesses and communities to survive the global economic downturn, and to grasp the opportunities that the recovery will provide. Microfinance can also help them be better prepared for future economic crises.

Microfinance can help its client companies and communities to innovate by freeing up resources: enabling them to create additional value by reducing the transaction costs of access to financial services. Microfinance may support acquisition of basic equipment; facilitate larger investments by lengthening the terms of loans; support improvement of business practices by encouraging clients to elaborate improved business plans and models and to value their resources adequately.

Download the full article here.

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