Microfinance Market

Market Overview

The global Microfinance Market size was valued at USD 213.68 billion in 2022. It is estimated to reach USD 524.84 billion by 2031, growing at a CAGR of 10.5% during the forecast period (2023–2031).The involvement of governments and financial institutions in emerging and underdeveloped countries in providing financial services to enable entrepreneurs to execute their ideas opens up new prospects in the microfinance industry, stimulating market growth.

Microfinance is a financial service industry that provides banking and financial services to those who lack access to regular banking institutions, typically in underserved and low-income regions. Microfinance's major purpose is to reduce poverty and promote economic growth by giving financial resources to individuals frequently excluded from traditional financial systems.

Microfinance market share is expected to grow at 11.3% CAGR in light of the increased pressure on governments in emerging nations to create jobs to support economic growth. The involvement of governments and financial institutions in emerging and underdeveloped countries in providing financial services to enable entrepreneurs to execute their ideas opens up new prospects in the microfinance industry.

Market Dynamics

Global Microfinance Market Drivers:

Financial Inclusion Initiatives

Financial inclusion initiatives include government policies, international programs, and financial institutions' attempts to provide disadvantaged and low-income groups with inexpensive and needed financial services. These measures help to shift the Microfinance market trend. The Pradhan Mantri Jan Dhan Yojana (PMJDY) of India PMJDY, launched in 2014, is one of the world's largest financial inclusion initiatives. It sought to provide every Indian household with a basic savings bank account, insurance coverage, and various financial services. The campaign successfully brought Millions of unbanked people into the official financial system.

Similarly, while not a government effort, Kenya's M-Pesa, launched by Safaricom, changed financial inclusion in Kenya. This mobile money network lets consumers send and receive money, pay bills, and access other financial services via cell phones, even in locations with minimal banking infrastructure. M-Pesa is an excellent illustration of how technology can promote financial inclusion. According to the World Bank's Global Findex database, the percentage of individuals with an account at a financial institution or through a mobile money service climbed from 63% to 71% globally between 2017 and 2021. Financial inclusion policies have not only increased access to financial services but they have also made it easier for microfinance companies to operate.

Global Microfinance Market Restraints:

High-Interest Rate

The industry has been divided over the high loan rates charged by microfinance institutions (MFIs). While these rates are frequently required to cover operational expenses and risks involved with lending to low-income clients, they can occasionally cause borrowers to be concerned about affordability and prospective financial difficulties. According to a CGAP analysis, interest rates charged by microfinance institutions can vary greatly depending on geography and type of lender. In some circumstances, annualized interest rates on microloans might surpass 30% or even 50%.

According to the World Bank's Global Findex database, many low-income individuals in developing nations are willing to pay high-interest rates for borrowing when other options are limited. The problem of excessive microfinance interest rates is complicated. While high rates are frequently required for microfinance institution sustainability, reconciling financial viability with consumer affordability remains a concern. These issues are expected to hamper the microfinance market growth.

Global Microfinance Market Opportunity:

Digital Transformation

The adoption of digital technology to increase the efficiency, reach, and impact of microfinance institutions (MFIs) is called digital transformation in microfinance. This shift includes digital payments, online loan processing, mobile banking, and data analytics, among other things. Tala is a fintech startup that uses digital technology to make microloans available to underserved communities in various nations, mainly in Africa, Asia, and Latin America. Tala assesses creditworthiness and disburses loans swiftly using smartphone app-based lending algorithms. According to data from the GSMA, the mobile industry group, mobile phone penetration has increased significantly in emerging countries.

Globally, there will be over 5.4 billion unique mobile customers by 2022, with a strong increase in Sub-Saharan Africa and South Asia. According to the Global System for Mobile Communications (GSMA), registered mobile money accounts will reach 1.6 billion by 2022. Digital transformation not only increases the accessibility of microfinance services to underserved people but also improves operational efficiency, lowers costs, and allows for better data-driven decision-making.

Regional Analysis

The global microfinance market analysis is conducted across North America, Europe, Asia-Pacific, Middle East Africa, and Latin America.

Asia-Pacific Dominates the Global Market

Asia-Pacific is the most significant global market shareholder. India, Bangladesh, Indonesia, and Vietnam are the primary nations in the market's regional growth. Among these countries, India possesses the world's largest microfinance industry. Government attempts to encourage MSMEs (micro-small-medium businesses) and the presence of many microfinance institutions are the primary drivers driving market expansion in India. For example, the Government of India announced a collateral-free loan for MSMEs worth around USD 30 billion to offset losses caused by the COVID-19 pandemic. The role of financial institutions in India in rolling out microfinance plans for low-income loans propels the country to the forefront of the microfinance sector. This expansion can be ascribed to a boom in government efforts to reduce poverty and improve the population's standard of life, which has become a key trend in microfinance.

Furthermore, most people live in rural locations where regular financial services are unavailable. As a result, microfinance has become increasingly important in delivering financial services to this neglected demographic. 

Europe is anticipated to Grow over the forecast period. Europe is a large market for microfinance, with Germany, the United Kingdom, and France contributing significantly to industry growth. This is due to the growing relevance of microfinance in encouraging financial inclusion and entrepreneurship, which has resulted in the formation of microfinance institutions and supportive legislative frameworks. Microfinance banks, non-governmental organizations, cooperatives, and social enterprises, among others, provide financial services to individuals and small businesses, emphasizing social impact and sustainable development.

In Europe, the regulatory framework for microfinance differs by country. Some countries have dedicated microfinance legislation and regulatory organizations, whereas others incorporate microfinance within broader financial regulations. While Europe's microfinance sector is not as large as other regions, it is growing thanks to the efforts of players such as regular banks, specialized microfinance providers, and impact investors. The emphasis continues to be on increasing financial inclusion, fostering entrepreneurship, and meeting the financial needs of marginalized people across the continent.

In North America, microfinance institutions abound, including community development financial institutions, credit unions, and nonprofit organizations. These organizations provide microloans, business training, and other financial resources to small enterprises and low-income individuals. The key countries driving demand for microfinance in the North American region are the United States and Canada. With the formation of microfinance institutions and the participation of numerous stakeholders, the sector has grown gradually over the years. Furthermore, these countries make significant investments to empower neglected groups, decrease poverty, and promote economic development. Beyond providing credit, the emphasis includes capacity-building programs, financial education, and mentorship. Traditional banks, community development financial institutions (CDFIs), credit unions, nonprofit organizations, and fintech startups comprise the North American microfinance market. Each sector helps to increase financial access and meet the needs of underrepresented communities.

Additionally, CDFIs are important in assisting underprivileged communities in the United States. According to the OFN, CDFIs sponsored approximately 70,000 small firms, including microenterprises, with more than USD 222 billion in loans and investments. In recent years, North America has seen the rise of fintech businesses that aim to assist marginalized people with affordable and accessible financial services, such as microloans. These digital platforms use technology to simplify loan processes and reach a larger client base.

Segmental Analysis

The global microfinance market is segmented based on type, providers, and region.

Type is further segmented into group and individual micro-credit, leasing, micro-investment funds, insurance, savings and checking accounts, and others.

Group and individual microcredit is the major service type in the market.

Group and individual microcredit

Group microcredit entails making small loans to groups of people, usually in a community or village, who are jointly liable for repayment. Peer support and social collateral are frequently encouraged in group lending schemes, which can improve loan repayment rates. On the other hand, individual microcredit makes tiny loans to individuals without the necessity for group membership. Borrowers are personally liable for repaying their loans.

Leasing

Microfinance leasing is granting access to critical assets and equipment via lease arrangements. Clients can use assets such as farming equipment, trucks, or machinery without incurring upfront costs.

By providers, the segment can be further bifurcated into Banks and Non-banks.

Banks account for the largest market share.

Banks

Traditional banking institutions, including commercial banks and, in some situations, specialized microfinance banks, provide microfinance services. These banks may offer a broader range of financial goods and services than microfinance. Banks often have established infrastructure, deposit access, and regulatory monitoring. In addition to typical banking services, they frequently provide microfinance services. BancoSol in Bolivia is an example of a bank that provides microfinance services and traditional banking services. It offers a diverse clientele, ranging from individuals seeking microloans to larger organizations requiring commercial banking services.

Non-bank

Non-bank suppliers of microfinance services include a wide range of institutions that are not typical banks. Non-governmental organizations (NGOs), microfinance institutions (MFIs), cooperatives, fintech startups, and other entities working on financial inclusion may fall into this category.

Recent Developments

• June 2023- JPMorgan Chase made additional commercial and philanthropic commitments to help address the housing affordability gap in Washington, D.C., and beyond.
• September 2023- BNB, MDS, and the RN government work together to increase microcredit and social inclusion.