Microfinance: How Big Can Micro Get?

To profit or not to profit? That is the question. Whether it is nobler to make microloans with donor money or with investor capital is being hotly debated in the development community these days.

The question surrounds Compartamos, which means "let's share" in Spanish, and whether its principals -- known as the two Carloses -- should be sharing the spoils of their microlending institution cum commercial bank. According to a study cited in the New York Times, Compartamos enjoyed a 19.6 percent return in the 4th Quarter.

Part of the issue is profit, but another is about shareholder return. Will shareholders or investors keep the best interests of the poor in mind? Or are the interests of the poor better served by the donor community, who have typically funded microfinance?

For the record, among the largest shareholders in Compartamos are Accion Gateway Fund (Accion Gateway Fund L.L.C), IFC (International Finance Corporation), Oikocredit (Oikocredit), PROFUND (ProFund International, S.A.), Triodos-Doen Foundation (Triodos-Doen Foundation). Not exactly cutthroat capitalists.

There is certainly a need for more capital. According to a Deutsche Bank study, cited by The Times, "the global demand for microfinance loans [is] about US$250 billion, 10 times the amount that has been lent."

Banco Compartamos went public last year in an attempt to gain access to a broader capital market rather thank rely on the limited pool of philanthropic capital. That got the attention of Wall Street and drew some ire from more traditional microfinance institutions.

Some of the criticism stems from the roots of microfinance as a tool for eradicating poverty. A play like Compartamos seems to take microlending in a completely different direction, which, to some, strays from the mission.

But the question remains, is there room for traditional banks and other lending institutions to offer financial products for the poor?

What if Compartamos had not started as a non-profit (it was founded by a Catholic social action group called Gente Nueva, according to the Times), but had started with a different approach?

It seems like microfinance is feeling some growing pains. Some 20 years after the concept first sprouted -- and only two years since one of its originators, Muhammad Yunus and Grameen Bank, won the Nobel Peace Prize for the innovation -- its best practitioners have demonstrated it works. Now others want in the game.

I suspect there has to be room at the table for players like Compartamos, as well as commercial banks and other investors, alongside the small "mom-and-pop" shops and the Kiva.orgs, the latter of which connects lenders directly with borrowers through an online interface. The problems of poverty -- extreme as well as low- and mid-level -- are just too great to be limiting approaches now.

As I've argued before in this blog, the poor need better access to the full range of financial services -- and they need it now more than ever.

We need to remain vigilant as big institutions enter this space or we may end up with something like the mortgage crisis on our hands. We don't want people, as microfinance consultant Charles Waterfield told the Times, "making obscene profits off poor people."

But who decides when micro gets too big to be called micro any more?


For more on this issue, read the New York Times article by Elizabeth Macklin, "Microfinance Success Sets Off a Debate in Mexico."

Microfinance: Microcredit Isn't Perfect and It Isn't Enough to End Poverty

"Making loans and fighting poverty are normally two of the least glamorous pursuits around, but put the two together and you have an economic innovation that has become not just popular but downright chic," writes James Surowiecki, on the Financial Page of last week's New Yorker. "What Microloans Miss," is another in a recent spate of articles decrying the hype around microcredit (see my earlier post on another such article from the Stanford Social Innovation Review last summer).

Microcredit is neither perfect nor a panacea. That's a given, but to claim that the vogue around is more hype than real progress seems a tad overdone.

"This vogue has translated into a flood of real dollars," writes Surowiecki, "institutional and individual investments in microfinance more than doubled between 2004 and 2006, to $4.4 billion, and the total volume of loans made has risen to $25 billion, according to Deutsche Bank. Unfortunately, it has also translated into a flood of hype. There’s no doubt that microfinance does a tremendous amount of good, yet there are also real limits to what it can accomplish. Microloans make poor borrowers better off. But, on their own, they often don’t do much to make poor countries richer."

True enough. What microloans accomplish best may be a way to provide a safety net for poor people in countries where access to credit and financing is limited. Muhammad Yunus, the "godfather of microfinance," saw the innovation as a way to help poor people escape the usury of moneylenders.

"But can microcredit achieve the massive changes its proponents claim?" ask Karol Boudreaux and Tyler Cowen in "The Micromagic of Microcredit," their recent essay in The Wilson Quarterly. "Is it the solution to poverty in the developing world, or something more ­modest -- ­a way to empower the poor, particularly poor women, with some control over their lives and their ­assets?"

Boudreaux and Cowen make some good points, many based upon their own experiences in Africa and Asia, and their essay is worth reading in full.

"Most microcredit banks charge interest rates of 50 to 100 percent on an annualized basis (loans, typically, must be paid off within weeks or months)," write Boudreaux and Cowen. That's not as scandalous as it ­sounds -- local moneylenders demand much higher rates. The puzzle is a matter of basic economics: How can people in new businesses growing at perhaps 20 percent annually afford to pay interest at rates as high as 100 ­percent?

"The answer is that, for the most part, they can’t. By and large, the loans serve more modest ­ends—­laudable, but not world changing."

The authors report that "in the Tanzanian capital of Dar es Salaam, Joel Mwakitalu, who runs the Small Enterprise Foundation, a local microlender, told us that 60 percent of his loans are used to send kids to school; 40 percent are for investments. A study of microcredit in Indonesia found that 30 percent of the borrowed money was spent on some form of ­consumption."

In the end, the authors surmise, "the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such ­life­saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead."

Microcredit provides access to financing to which traditional "informal sector" people do not have access. Banks typically will not loan to the informal sector. Microcredit may even help poor people save more rather than get out of debt, by increasing their asset base -- a family with a cow that provides milk, natural fertilizer and biofuel or helps plow the fields is better off than a family without a cow.

Boudreaux and Cowen explain that "microcredit is making people's lives better around the world. But for the most part, it is not pulling them out of poverty. It is hard to find entrepreneurs who start with these tiny loans and graduate to run commercial empires.

"The more modest truth is that microcredit may help some people, perhaps earning $2 a day, to earn something like $2.50 a day. That may not sound dramatic, but when you are earning $2 a day it is a big step forward. And progress is not the natural state of humankind; microcredit is important even when it does nothing more than stave off ­decline."

Even Yunus, whose latest book is about a new innovation he calls "social business" doesn't claim microcredit is enough to eliminate poverty.

What Surowiecki argues for is greater investment in small- to medium-sized businesses (SMEs). He, like Aneel Karnani, who wrote the SSIR piece to which I referred above, argues that "businesses that can generate jobs for others are the best hope of any country trying to put a serious dent in its poverty rate. Sustained economic growth requires companies that can make big investments -- building a factory, say --and that can exploit the economies of scale that make workers more productive and, ultimately, richer."

Some others seem to agree, as Surowiecki points out, that "what poor countries need most, then, is not more microbusinesses. They need more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation."

SMEs represent the "missing middle" that "require backers who want to invest in companies rather than just lend to them."

Recently this missing middle got a high-powered group of such backers: Google.org, the Soros Economic Development Fund, and the Omidyar Network have launched a new US$17 million Small to Medium Enterprise Investment Company in India "to create job opportunities and spur greater economic participation for a larger segment of the population."

And this is a good thing. For as Jake de Grazia, formerly of PlaNet Finance China, writes on his blog, A More Perfect Market, "all communities are going to need more than just microfinance. Maybe the ideal more is the nurturing of SMEs and the creation of jobs."

"The real issue," as Boudreaux and Cowen conclude in their essay, "is that we so often underestimate the severity and inertia of global poverty. Natalie Portman may not be right when she says that an end to poverty is 'just a mouse click away,' but she's right to be supportive of a tool that helps soften some of poverty’s worst blows for many millions of desperate ­people."

The question, really, is not whether microcredit is enough, but rather how can we provide the full range of financial services to the poor to which most of us have access?

Microfinance: Plural India Focusing on Micro-Small-Medium Enterprise Development

I had lunch today at TERI with Shivendra Sharma, formerly of PlaNet Finance and now Founder of Plural India, which will include a consulting group, foundation, and educational services for small, medium, and microenterprises.

The purpose behind Plural is "to stimulate new markets by reducing information asymmetries and creating conditions conducive for open-market approaches to work in an inclusive manner."

At PlaNet Finance India, Shivendra was the brainchild behind Small Change, the magazine dedicated to connecting microbusiness stakeholders globally and highlighting the diversity of the microeconomy.

Now with Plural he's launched a monthly eMagazine called Pluralist. The first issue came out today and focuses on the emerging influence of commercial banking and finance institutions in the microfinance space. To obtain a copy, write Shivendra at: shiv@pluralindia.in

In December, Plural announced the first distance learning course in Microfinance, called "Microfinance Passport." Microfinance Passport is a four-month course for those interested in the emergent field of microfinance. You can learn more about the course by following the smart link above. The first series is now completely subscribed, but they'll be offering a second round in the summer.

Microfinance: Muhammad Yunus on The Colbert Report

Mohammad Yunus gets the Colbert treatment, while promoting his new book, Creating a World Without Poverty. He was a good sport...

Microfinance: Silicon Valley Microfinance Network Hosts Calvert Foundation & eBay's MicroPlace

I wish I lived in Silicon Valley, if only to attend the meetings of the Silicon Valley Microfinance Network (SVMN). Better still, perhaps someone should start a Greater Philadelphia Microfinance Network. Any takers?

Meanwhile, I can live vicariously. SVMN is sharing slides from their meetings on their web site. Here is a link to slides from the November 5th SVMN meeting, featuring Shari Berenbach from the Calvert Foundation, and Karl Wiley from eBay’s MicroPlace: SVNM Meetings

Microfinance: CNN Interview with Mohammad Yunus

CNN's Talk Asia features an interview with Muhammad Yunus, who received the Nobel Peace Prize in 2006 for his pioneering work in microcredit. Readers of The Green Skeptic will be familiar with Yunus and the Grameen Bank he founded, which brought financial services to the poor, and which as of September, 2007, has 7.31 million borrowers, 97 percent of whom are women.

His main points:

"Women have a long-term vision, she wants to move up to something."

"It's not Grameen Bank came and told them to do that; it is in their hearts."

"We developed a system which doesn't need collateral, guarantee, legal."

"We citizens, we individuals, are capable people addressing social issues."

Read the full interview here: Talk Asia

Microfinance: PBS NOW on When Good Microcredit Goes Bad

This Friday, PBS NOW's Enterprising Ideas series puts microfinance under the microscope in an episode about the Mexican company Compartamos. A NOW producer flew to Bangladesh to talk to Muhammad Yunus about why he believes Compartamos is doing great damage to the microcredit movement he pioneered.

Compartamos is a microfinance company that once lent small sums of money to poor, indigenous Mexican women to start businesses. Today it's a for-profit bank with more than 600,000 clients in Mexico. NOW interviews people who passionately believe their lives have been transformed by the loan they received from Compartamos.

NOW airs at 8:30 p.m. on Friday nights. Check your local listings.

The Harvard Business Review also features a look at Microfinance this month - and that look also offers a warning to "Beware of Bad Microcredit."

Microfinance: Silicon Valley Microfinance Network Seeks Executive Director

The Silicon Valley Microfinance Network (SVMN) is looking for a strong, entrepreneurial leader with a passion for microfinance. The Executive Director will be tasked with taking this new organization to the next level, from a growing start-up organization to a robust, professional network. The Executive Director will be responsible for the overall strategic vision of the organization as well as the day to day management. Reporting to the Board of Directors, the Executive Director will start at 25% time, increasing to a larger role as SVMN’s activity base grows.

SVMN is a membership organization consisting of more than 500 people from the Bay Area (and beyond) who are interested in microfinance. The activities of the organization include networking events, an educational speaker series, a resourceful website, and opportunities to engage in the field. The mission of SVMN is to leverage the unique core competencies of the Bay area in microfinance.

This looks like a good opportunity for a strong, entrepreneurial leader with a promising new organization in an expanding field.

For more information, see the full description: SVMN Executive Director

Or apply by email: tracey@microplace.com

Microfinance: Silicon Valley Microfinance Network Hosts Kiva & Prosper

Check out these presentations by Premal Shah of Kiva.org and Chris Larsen of Prosper.com from the recent Silicon Valley Microfinance Network Meeting. Worth a look:

Kiva

Prosper

For more on Silicon Valley Microfinance Network

Social Entrepreneurs: Kiva on Oprah; Matt Flannery's Take

Over at Kiva Chronicles on Social Edge, Matt Flannery has an impassioned post in reaction to Kiva's appearance on Oprah, which is scheduled to broadcast on Tuesday. Ever wondered what it would be like to be on Oprah? How about sharing the stage with Bill Clinton? Imagine Matt and Jessica getting a two-fer. Here's a snippet of Matt's take on the taping. It's worth following the link to the full description.

We were in the audience. The show was focused on President Clinton's new book -- Giving. We assumed our seats in the front row. The President and Ms. Winfrey entered to great applause. There we were, in the front row, about arm's length away as the interview began.

We were in the 5th segment. I think that's right. The President and Oprah ushered us through 4 segments of emotional conversation and specials. I could almost touch them. Even so, it felt like I was watching a movie -- however more frightening because the characters could call on you at any time. You better be ready.

I couldn't pay perfect attention. About 45 minutes into the show, the Kiva segment began. A tape rolled highlighting Anne Brown, an artisan in Seattle who lent money to a seamstress in Ecuador. I didn't watch too closely because I didn't want to be too emotional as the biggest interview in my life would begin.

Then she called on us. Our most likely scenario was that Oprah would focus on Jessica, given that is a women-centric show. We were wrong -- she focused on me. How much has Kiva loaned so far? How does it make you feel? How long does it take for an entrepreneur to get funded? I could answer these questions in my sleep. However, they came out in slow motion. I didn't make any big mistakes. I was serviceable, not incredible. Since that time, I've replayed the answers in my head, second guessing every word. I'll probably never get the chance to address that many people again in my life. Thinking about it too much can drive you crazy.

She turned to Jess and asked about her inspiration. Jess got emotional. It was an emotional moment. She delivered a heart felt account of how we began Kiva. It was one of the more moving parts of the show.

The President and Ms. Winfrey spent the next few minutes talking about the power of the Internet and "the Kiva model." Watching this was truly surreal. If you had told me a year ago that I would watch these two people discussing Kiva in front of millions on TV, I would have laughed. I cannot tell you how ridiculous it would have seemed. It still seems imaginary.

Here's the link to Matt's full story: Kiva on Oprah

We'll be watching Tuesday.

Microfinance: Does Microfinance Really Miss Its Mark?

"Are people going to be better off sitting all day in a pineapple canning factory?" asks Liam Collins of Green Microfinance, LLC, in response to my questions about Aneel Karnani's article in this summer's Stanford Social Innovation Review, "Microfinance Misses Its Mark."

"Not everyone is," Collins asserts. "And those of us who aren't deserve access to capital in order to pursue our dreams no matter how big or micro they may be."

Karnani, professor of strategy at the University of Michigan, Ross School of Business, examines some of the failures of microfinance to argue that creating jobs not self-employment is the best way to alleviate poverty.

Criticism of microfinance is not new. The debate has been going on for decades within the development community. And no doubt some of the criticisms, especially about charging high interest rates to poor customers and questions about tracking and reporting loan repayment rates, are valid.

But is the question of scale missing the point?

David Bornstein, author of The Price of a Dream: The Story of the Grameen Bank, writes, "The most common criticism aimed at the bank was that its loans were used primarily for small-scale, low-yielding activities that would ultimately lead to diminishing returns for villagers...borrowers were not 'scaling up' their activities."

Karnani suggests that funders should "reallocate their resources and energies away from microfinance and into supporting larger enterprises in labor intensive industries."

"A surer way to end poverty is to create jobs and to increase worker productivity, rather than turning to microfinance," Karnani posits.

Karnani makes some broad claims, but I'm not convinced he's made his argument.

For instance, he claims that the impact of microfinance on women may be overblown. "Overall," Karnani writes, "microcredit does empower women, but only in noneconomic ways."

But, as Bornstein notes in The Price of a Dream self-employment is advantageous because it brings "women into the income stream without the usual sacrifices required under wage-employment situations."

Karnani argues that creating jobs offers a better solution to alleviating poverty, illustrating "two alternative scenarios: (1) A microfinancier lends US$200 to each of 500 women so that each can buy a sewing machine and set up her own sewing microenterprise, or (2) a traditional financier lends $100,000 to one savvy entrepreneur and helps her set up a garment manufacturing business that employees 500 people."

I have concerns about these solutions, however. Is a wage-earner really better off than the independent entrepreneur? What happens when the woman can't show up for work because of a family illness or medical emergency? What happens to her spot on the assembly line when she must stay away from her job to tend to an issue at home? Will she need a union to help her keep her job? What about building equity versus the stability of a job in a factory?

Collins, who has over a decade of experience in development and microfinance in five continents, likens microfinance to the mortgage industry in the United States.

"Wouldn't it be easier for banks to give loans to large corporations to buy houses and then rent them out," Collins offers. "Instead we have an economy that makes getting a loan for a home easy for a large segment of the population."

For Collins, the debate really goes deeper, into economic theory. It's about "keeping things small [and] local, taking advantage of comparative advantage versus large, economies of scale and protecting industry through unfair trade practices."

So, does microfinance miss its mark? The jury is out.

As I was preparing this post over the past few weeks, I sought comments from Nobel Prize winner Muhammad Yunus and others from Grameen. They were preparing their own official response on Karnani's article and were unable to provide comments in a timely fashion. (I may continue this thread in future posts.)

I think it is safe to say that microfinance is a flawed system, but one of many effective, direct responses to help alleviate poverty. And it's too soon to be tolling the death knell for what is more than just an economic movement, but a social one as well.

"It is easier to give larger loans to larger companies to create jobs," Collins notes, asking, "does this mean a better quality of life?"

Social Entrepreneurs: Penn's Microfinance Conference

Last month, I joined my friends at Green Microfinance at the University of Pennsylvania's Microfinance Club's first conference, "Microfinance: Poverty's Macro Solution?" (A microfinance club? What a cool idea). Elizabeth Israel, co-founder and President of Green Microfinance, and Abhishek Lal were part of a panel on the environmental impacts of microfinance. GMf has been developing a set of Guiding Principles for
Microenterprise and Environment. (More on that later.)

Keynote speakers at the Penn conference included Mary Ellen Iskenderian, the CEO and President of Women's World Banking, and Alex Counts, CEO and President of the Grameen Foundation. Here's a link to an account of the conference, including main points: Microfinance 2.0

Penn's Microfinance Club also promises to provide updated materials on its website, but we know how the best laid plans of mice and men often turn out...here is the link: Microfinance Club

Social Entrepreneurs: New Updates to Squidoo Changemakers Lens!

I've updated the listings in my Squidoo Changmakers lens for social entrepreneurs, including the new, fabulous Amazon Plexo! Now you can vote for your favorite books on social entrepreneurs, microfinance and more...

Take a look and let me know if there's something I should add: Changemakers on Squidoo