Microfinance Is an Emerging Field

Microfinance is an emerging field where financial institutions in developing countries specialize in providing seed capital to entrepreneurs. These institutions are known as MFIs (microfinance institutions). The concept has existing in various forms for centuries but only recently has emerged again. Banks had traditionally not lent money to very small businesses. This limited economic opportunities for entrepreneurs, particularly in the developing world. Microfinance therefore emerged as a means for small shop owners and farmers to acquire credit with which they could expand their operations.

The idea was pioneered in Bangladesh by Mohammed Yunus in the mid-70s and has now been adopted across the developing world. Microfinance institutions spread their risk across hundreds of entrepreneurs and their loans facilitate economic development and growth by providing a functioning credit where one did not exist before. This concept provided the underlying foundation for Opportunity International, one of the leading microfinance firms today. The company has its roots in the early 1970s.

The current organization was founded by Al Whittaker, who operated a charity program in Latin America and David Bussau, who did the same in Indonesia. In 1992, Opportunity International began to experiment with microfinance as a means to facilitate economic development. The first microfinance operation was the Women's Opportunity Fund in the Philippines. The program was then adapted and expanded around the world. The next step in the evolution of Opportunity International was to form the Opportunity International Network, which now links 42 operations in 28 countries.

By 2000, OI had officially launched its own financial institutions. These institutions have grown to serve 1 million clients annually and the organization has very ambitious expansion goals. Throughout all of this, Opportunity International has maintained a focus on microfinance and economic development. The underlying theme is "opportunity," by which the mechanisms of the market are harnessed to provide economic opportunity to those who previously had no access to the financing that would help them improve their lives. Opportunity International is largely financed by private donations.

These come from both individual and institutional donors. The Bill & Melinda Gates Foundation is one such institutional donor, having given OI a grant of $24 million over five years in 2007 (Bill & Melinda Gates Foundation, 2009). As with a traditional bank, OI is also financed in part by savings. They offer savings accounts to impoverished communities that otherwise would not have access to such services. OI has savings accounts of $238 million, which helps to finance their loan portfolio.

They also have an insurance arm, which contributes more deposits that can be lent. OI markets to do different groups. One group is the donors, which are marketed to through both passive channels (website donations) and active (negotiating with institutional donors). To consumers in the countries that they serve, OI markets in a couple of different ways. They operate 17 different microfinance institutions, and market these in traditional fashion through having a presence in the communities.

At this point, OI has established a brand name and the have successfully engaged in word-of-mouth promotion. They also bring in clients through relationships with other NGOs that have more direct contact with the community through the provision of health and other services. When those NGOs recognize a need for microfinance, they direct the communities to Opportunity International. Trust Groups are formed, providing further encouragement to budding entrepreneurs. Opportunity International operates around the globe, including countries in Eastern Europe, Africa, Asia and Latin America.

There are 17 different microfinance banks in 16 countries: Albania, China, Ghana, India, Macedonia, Malawi, Mexico, Montenegro, Mozambique, the Philippines, Poland, Russia, Rwanda, Romania, Serbia and South Africa. They also serve a further five countries in Latin America and a handful more in Eastern Europe and Africa. They have insurance companies in Colombia, Ghana, Malawi, India, Mexico, Mozambique, the Philippines, Uganda, Zambia and Zimbabwe. They hope to expand their operations, adding 11 countries to their insurance arm and more microfinance institutions in other countries as well.

The clientele for Opportunity International varies by region. In Eastern Europe, the wealth level tends to be higher than in other regions, a testament to the fact that the region's economy is more developed. In this region, the focus tends to be on existing small businesspeople. In Africa, the clientele can be farmers, shop owners, or small artisans. These individuals usually have drive and skills, but do not have the capital. Opportunity International has a special focus on creating opportunities for women.

This need has arise in particular in Africa, where women have more trouble owning land and where many are left widowed due to the AIDS epidemic. There is no particular age demographic -- working adults of all ages can receive financing. Some of OI's success stories indicate that much of the clientele comes from a rural and small town background. Typically they have some interest in a business, but cannot access the financing needed to get the business off the ground.

In this respect, the clientele is no different from the clientele at other banks, except that the dollar amounts are much lower. The clientele are organized into "trust groups." These groups consist of anywhere from 15 to 40 individuals. They come together and apply for a loan as a group. This means that the group members are accountable to one another and support one another.

It also means that OI can defray the risk across a larger group of entrepreneurs, allowing for a lower cost of capital which leads to lower interest rates. One important ramification of the trust group structure is that the members are often so poor that they would have difficulty even qualifying for standard microfinance. As a consequence, Opportunity International is able to cater to all members of a society, including the poorest. This is a demographic that is relatively unique to OI.

Since the inception of its microfinance model, Opportunity International has been tremendously successful by just about every measure. In terms of growth, OI has been able to expand its operations around the globe. The organization has always had a global outlook, being formed from the combination of ventures of different continents. As a result of the global orientation, they have been able to not only develop a successful model but replicate that model all over the world.

Having a loan base of $500 million and a deposit base of $238 million make Opportunity International one of the larger microfinance organizations in the world. That they are receiving funds from major donors in eight figure amounts is testament to the strong growth, global scale and esteem of Opportunity International. Another measure of a microfinance firm's success is the loan repayment rate. The trust group model spreads risk well enough, and engenders enough community support, that the repayment rate is 98.5%.

This is much higher than the repayment rates at Western commercial banking institutions. Additionally, it indicates that the programs have been a success. Groups are able to generate enough income from their expanded businesses in order to pay back the loans. This indicates that Opportunity International's objectives of economic development are being met. Opportunity International has ambitious goals for the future. They wish to expand significantly, into new countries and with greater penetration into existing markets.

The money received from the Gates Foundation is earmarked for development of their insurance program, which they hope to double in the next few years. Additionally, they have set a goal of having 100,000,000 microfinance customers by 2015. This is a 100-fold increase over their current size. To facilitate this, Opportunity International hopes to develop stronger partnerships worldwide. Donations will need to be acquired from a wider variety of institutions and governments. The organization's operations in Eastern Europe are a key part of this plan as well.

OI's banks in Eastern Europe are its largest, and the deposits there, along with loans paid off in the coming years, will help facilitate strong growth in other regions. In the long run, Opportunity International is committed to dealing with the challenges in Africa. The AIDS epidemic is a major obstacle to economic growth.

Part of OI's mandate in the region is to provide opportunities for widows and young adult children of AIDS victims, so that one family member's death from the disease does not eliminate the economic prospects of the entire family. The organization believes that as economies and opportunities improve, a measure of stability can be brought to the continent, facilitating further growth, leading to the eventual elimination of poverty and gaining control over the AIDS epidemic. Opportunity International faces competition from a wide range of microfinance companies.

There are almost 1400 microfinance companies operating worldwide. Umbrella groups -- "partners" -- such as Opportunity International number 184. Because OI operates in so many different countries, it faces competition from a wide range of "partners." For example, in Africa there are 17 similar organizations operating. To break down the competitive landscape further, we can look at OI's largest African market, Ghana. Here there are 7 competitors. OI has just set up in Tanzania. They face 8 competitors there.

The largest country for OI overall is Montenegro, in part because there are no competitors operating in that country (Mixmarket, 2009). Thus, in any given market, OI can expect competition from a wide number of microfinance institutions.