Social innovations and institutional challenges in microfinance

Abstract

As a tool of development, microfinance represents an extremely complex landscape. As distinct from commercial finance, microfinance is development finance - finance for the creation of longer-term social and developmental value (i.e., social profit). Thus, its focus is to blend values, to re-cycle money to multiply social impact. The international policy debate, influencing the development of the sector, has been dominated by two schools - the development school and the finance school. The field has grown through innovations flowing into the sector from both traditions. The first wave, with the most original fundamental social innovation in the form of a new social design for solidarity lending through groups, did create new economic and emancipatory space for the poor women. With the entry of commercial capital, microfinance grew with a new momentum driven by a new logic, but with a change of heart changing its focus from the clients to the institution and its sustainability, giving rise to a second wave of innovations in institutional development, market development, product development, and technology development. However, commercialization and its focus on institutional sustainability led to a mission drift. Driven by distorted market logic and a uni-dimensional narrow economism, it has run into a deep crisis today with a reputation risk, as hard questions are raised about the credibility, ability and intention of the MFIs to serve the poor. Microfinance is now disintegrating as a compelling tool for poverty alleviation. The present crisis creates an opportunity for a third wave of innovations for MFIs to grow to maturity as blended value organizations, moving from efficiency to effectiveness, and to produce credible results in terms of social impact, to achieve ever higher social returns on investment. Future innovations should be driven by the need to create institutions which cost less, perform well, and produce impact.