Global microloan market:
development, regulation and national characteristics

The microfinance market shows significant differences depending on the region. The leaders in terms of the volume of microfinance transactions are developing countries, where microloans perform a social function of supporting low-income groups of the population.

India is a world leader in microfinance

India ranks first among developing countries in microfinance. According to Fortune India, the share of the loan portfolio of microfinance institutions is more than 39% of the total number of all loans issued in the country. The microfinance industry in India is developing on the basis of the model created by Muhammad Yunus in Bangladesh in the late 1970s.

The Indian microfinance system is characterized by social orientation, group lending and the principle of mutual responsibility. Women make up a significant portion of borrowers, which contributes to their financial inclusion. TechSci Research experts predict that the microfinance market in India will reach $46.12 billion by 2028.

Africa - A Growing Market with Digital Innovations

Sub-Saharan Africa is a global leader in mobile financial services. In Kenya, M-Pesa has pioneered mobile money transfers and microloans. More than 400 million adults in African countries are unbanked, creating enormous potential for microfinance.

In 2018, there were over 260 fintech startups operating in Sub-Saharan Africa, 80% of which were national players. Microfinance in Africa contributes to economic development by allowing people to invest in their children’s education, pay for healthcare, and grow small businesses.

Latin America is a fast growing sector

The Latin American region has shown steady growth in microcredit since 2000. There are about 22 million active borrowers in the region, with loans totaling about $43 billion. The main microcredit operations are concentrated in Peru, Colombia, Bolivia, Mexico, and Ecuador.

According to FinTech Global, investment in Latin American fintech reached a record $600 million in 2017. In Brazil, about 8 million micro and small businesses are underfunded, creating a need for microfinance services.

Developed countries: regulatory features

US - Strict regulation with regional variations

In the United States, microfinance is regulated at the federal and state levels. The Consumer Financial Protection Bureau (CFPB) develops federal rules requiring lenders to verify borrowers’ creditworthiness. Microfinance organizations are permitted in 27 states, with restrictions in 9 states and prohibitions in 14 states.

Interest rates vary by state: California caps them at 36% per annum for loans up to $10,000, while New York caps them at 25% per annum, making payday loans virtually impossible. Meanwhile, Texas and Mississippi have more liberal laws.

Europe - Tight regulation and low rates

In European countries, microfinance is characterized by strict regulation and low interest rates. In Germany, banks require borrowers to open a deposit as a guarantee, and consumer loans are provided at 7-10% per annum. In Poland, there are more than 50 microfinance organizations, microloans are issued for up to 90 days.

There are 250 microfinance organizations in the UK, with a maximum interest rate of no more than 0.8% per day. Wonga operates successfully in the UK, South Africa, Canada and Poland, using fully automated risk processing technology.

Asian Markets: Technological Innovations

Japan - Corporate Development Model

In Japan, microfinance is developing through corporate initiatives. The Japanese corporation Gojo & Company Inc., founded in 2014, is active in the field of microfinance in developing countries. The company plans to invest in microfinance organizations in Kyrgyzstan with a focus on supporting rural small and medium enterprises.

China - Government Regulation and Restrictions

The Chinese authorities actively regulate the microfinance sector. In 2017, interest rate caps for microloans were set, the procedure for providing loans was clarified, and the work of collectors was limited. China’s banking system has a three-tier structure and is completely under state control.

Islamic Microfinance: Religious Principles

Islamic microfinance is developing in Muslim countries based on Sharia principles. The main forms of Islamic finance include mudaraba (financing a business in exchange for a share of the profits), murabaha (financing a purchase in installments) and musharaka (partnership with profit and loss sharing).

An estimated 72% of the population in most Muslim countries does not use formal financial institutions. Islamic microfinance has the potential to provide access to finance to millions of Muslims who reject traditional microfinance products because they are not compatible with Shariah principles.

Countries with bans and restrictions

Some countries are introducing significant restrictions on the activities of microfinance organizations. In the United States, MFO activities are completely prohibited in 14 states. In China, the authorities are tightening microfinance regulation, setting maximum rates and requirements for checking borrowers’ solvency.

In countries with Islamic banking systems, traditional microfinance with interest rates may be restricted by religious principles, which encourages the development of alternative forms of financing.

Post-Soviet countries: development and features

Microfinance is developing unevenly in the CIS countries. In Belarus, the consumer loan portfolio for the first nine months of 2021 decreased by 5.7% due to the National Bank’s targeted policy of cooling consumer lending. In Ukraine, the size of the consumer loan portfolio increased by 15% to UAH 152.7 billion.

In Moldova, the volume of consumer loans increased by 34% and exceeded 10 billion lei. For CIS citizens wishing to receive loans in Russia, the key requirement is confirmation of the legality of their stay in the country, writes " Russian loan ".

The Role of Technology in Market Development

Digital transformation has become a major driver of microfinance development worldwide. African countries are leading the way in mobile financial services, while developed countries are investing in decision-making automation and scoring systems.

Companies are using machine learning to assess credit risks, biometrics to identify customers, and blockchain to secure transactions. This helps reduce operating costs and make microfinance services more accessible to the general population.