Microfinance: What the Future Holds

Once a tiny, obscure segment of the nonprofit world, microfinance now commands the attention of a wider audience. Today the simple idea of making very small loans to poor entrepreneurs in the developing world is attracting business investment and is being recognized by the Nobel Peace Prize committee.

"Microfinance has gone through incredible transformations, from something that was pioneering work of a few nonprofits to financial products deployed in massive numbers to alleviate global poverty," says Senior Lecturer Michael Chu, who with Professor V. Kasturi ("Kash") Rangan cochaired the HBS-ACCION Program on Strategic Leadership for Microfinance, an Executive Education custom program held for the first time last April at HBS. "We are standing at the threshold of a decade where whether microfinance fulfills its promise will depend on how the leaders of microfinance institutions cope with change," observes Rangan.

While traditional financial markets have focused on established channels of investment, microfinance provides evidence that there is a potentially viable business in providing affordable financial services to the several billions of people who live at or below the poverty line. A November 2005 survey of microfinance conducted by The Economist pointed to the success of microfinance institutions, and the interest among big banks to join their ranks, and concluded, "Microfinance may have started as a niche business, but the chances are it will soon be micro no more."

Since 1961, ACCION International has helped people work their way out of poverty. ACCION partners with more than 30 microfinance organizations throughout Latin America, the Caribbean, Asia, and Africa. In the last 10 years alone, its affiliated programs and partners have made more than $7.6 billion in microloans to more than 4.1 million people. The HBS-ACCION program grew out of a recognition that the leaders of microfinance organizations need new skills to meet the challenges their industry is facing as it enters its next stage of development.

Taking advantage of HBS's management expertise and ACCION's proven track record, the six-day program attracted 61 microfinance leaders from 33 countries. Chu and Rangan collaborated with ACCION International's President and CEO Mar'a Otero and Senior Vice President Beth Rhyne to design a curriculum that would provide high-level management and leadership training to the microfinance industry's CEOs, executives, and key sector protagonists.

The custom program responded to the need for professional education resulting from tremendous growth in the industry. "The heads of microfinance institutions around the world aren't getting a lot of support to help move their organizations forward," notes Rhyne. "These are the leaders in microfinance, and they are going to take the organizations to the next level. They are going to create the future of the whole industry."

"In a world where 3 billion people live on less than $2 a day, it is not enough to help 1,000 or even 100,000 individuals. Our goal is to bring microfinance to tens of millions of people—enough to truly change the world."

—ACCION International

Program participant Hennie Ferreira, CEO of Microfinance South Africa, came to HBS with a deep understanding of the critical and complex needs of poor people in his native country. "The challenge in South Africa is to effectively integrate markets from two economies," he says, adding that the HBS-ACCION program greatly exceeded his expectations. "The HBS learning model, the quality of the faculty, and the setting came together to help us reconsider our paradigms and to think as leaders and strategists."

As the field of microfinance increases in size and complexity—including market entry of more traditional financial institutions—the leaders of the industry are faced with the need to refine their business strategy. The HBS-ACCION program, which will be repeated in 2007, addressed issues such as how to succeed in a highly competitive market, how to maintain a social focus in a commercial setting, and how to reach new business segments. "Success in the last decade has been driven by the ability of microfinance institutions to manage operations well—tapping into capital markets and then deploying that capital in very large numbers of small transactions," explains Chu. "In the next decade these institutions will need to go from operations to managing strategically under conditions of very rapid change."

Chu's expertise on the topic comes from firsthand experience. As former president and CEO of ACCION, he helped launch several microcredit financial institutions and regulated banks throughout Latin America. While Chu and Rangan collaborated with other HBS faculty to develop the curriculum (see below), ACCION worked on finding the right mix of participants.

"The participants were a very savvy group," says Chu. "They are all managing institutions that are very successful by both social and business measures. Most of these practitioners have a lot of experience, including international exposure," he observes. "The program was a real opportunity for HBS to contribute to the understanding of microfinance and to be a contributor to the fulfillment of its promise."