Traditional microfinance models have been steadily evolving as institutions across the sector work to modernize their operations through digital tools. While the pace of change varies, most organizations are striving to adopt advanced technologies in line with their resources and strategic goals.
Driven by rapid technological progress and shifting client expectations, the industry is increasingly focused on innovative solutions to remain agile and relevant in a changing landscape.
Last March, Accion Advisory and risk leaders from 16 microfinance institutions gathered in Bogotá for RED Accion’s second risk leaders forum to exchange experiences and perspectives on the challenges and opportunities facing the industry. RED Accion is a network of inclusive financial service providers across Latin America working to reach and uplift underserved communities with responsible financial solutions. The forum became a key space to address strategic topics, including innovative credit models, digital transformation, cybersecurity, and climate and environmental risk management.
Three cross-cutting themes emerged that reflect the microfinance industry’s current priorities:
- The use of artificial intelligence (AI) and alternative data to enhance risk analysis.
- The integration of climate and environmental risk as a strategic pillar for sustainability.
- The need to strengthen tools to accurately assess clients’ repayment capacity.
Here are a few key insights and reflections.
1. Artificial Intelligence and alternative data optimize risk management decision-making.
In an increasingly dynamic financial environment, institutions face the challenge of innovating without compromising the rigor of their analysis processes. In this context, the strategic use of technologies such as machine learning, natural language processing, and image analysis opens new possibilities to improve the accuracy of credit decisions and develop more personalized strategies.
Luis Merchan of Accion Advisory: Reduce risk, enhance inclusion.
Use cases involving segmentation, propensity analysis, and customer loyalty show that these tools not only optimize risk management but also strengthen trust and relationships with clients. However, their adoption presents important challenges, from the availability and quality of data to the need for adequate budgets, internal capabilities, and effective change management.
Currently, Accion is exploring sentiment and image-based models to enhance credit decision-making and strengthen segmentation and customer retention strategies. For the microenterprise segment, it’s key to incorporate diverse alternative data sources, such as photos of the business, customer comments, customer service interactions, purchase history, or Google business profile rating, to complement traditional data from credit bureaus, payment behavior, and demographic information.
Moreover, there is ongoing debate about how to balance automation with human touch – especially in microfinance, where the role of the credit officer remains essential. Past experiences have shown that fully digital models are not viable in all contexts. The key lies in designing solutions that consider the customer’s digital maturity and complement the work of the credit officer, placing the focus on adding value to client relationships.
The great challenge for institutions is to integrate these technologies strategically and sustainably. We are continuing to work with our partners to seize these opportunities without losing the essence of the microfinance model.
2. Climate and environmental risk is reshaping how institutions operate.
The increasing frequency and intensity of extreme weather events highlight the vulnerability of communities and productive sectors, particularly in rural and agricultural areas.
Institutions are beginning to adapt their methodologies to integrate these risks into their credit analyses through new evaluation tools, insurance mechanisms, and contingency planning. This is no longer optional – it is necessary to ensure the financial sustainability of institutions and the resilience of their clients.
Despite some progress, significant barriers remain, including a lack of structured information, difficulties in measuring impacts, and a shortage of internal technical capacities. Overcoming these requires a strategic vision that prioritizes environmental management as a core part of the business model.
A notable success story is Accion partner Banco Contactar, a Colombian bank, in agricultural financing with a specialized approach. Their case demonstrated how loan officers’ knowledge and client relationships, combined with a robust environmental and social risk management framework, can significantly enhance the positive impact on smallholder farmers and their communities.
The call to action is clear: Microfinance institutions can lead the transition toward greater sustainability, provided they mobilize the necessary resources to plan, develop, and execute this vision.
Flower farmers Jhony and Elizabhet Carrasco in Cochabamba, Bolivia, clients of Accion partner BancoSol (photo credit: Accion).
3. Assessing repayment capacity must take a more holistic and innovative approach.
Assessing clients’ repayment capacity remains a central challenge, particularly in contexts where informality and cash-based income prevail. The lack of income traceability limits access to credit for many potential borrowers.
To address this reality, institutions must move toward more holistic and innovative approaches that combine new data sources, digital tools, and standardized methodologies. The goal is not only to reduce risk but also to enhance financial inclusion and improve customer loyalty.
More accurate assessments help prevent both over-indebtedness and the exclusion of clients who could be served with appropriate products. They also contribute to reducing client attrition by allowing institutions to design offers that better match clients’ real situations and needs.
Optimizing repayment-capacity assessments, therefore, impacts not only portfolio sustainability but also the ability to expand services to traditionally underserved segments.
A Roadmap Toward Holistic Risk Management
This event was more than just a space for exchange. It was an opportunity to strengthen collaborative networks and chart a common roadmap toward more strategic, innovative, and client-centered risk management.
At Accion Advisory, we continue to work closely with institutions around the world to tackle these and other sector challenges, leveraging cutting-edge technology, global learnings, and tailored solutions.
Luis Merchan is Senior Risk Manager at Accion Advisory, which works with partner organizations on serving the financial needs of low-income people and businesses in emerging markets. A version of this article was published previously at accion.org.
Topics: Modeling, Data, Innovation