September 30, 2008
For-Profit Microfinance Efforts Under Scrutiny
The ability of commercial microfinance institutions to fight poverty is under renewed scrutiny because of the current financial crisis.
While subprime housing loans — loans made to people who don’t have long credit histories and documented earnings — triggered the market meltdown and the collapse of several venerable investment banks, Daniel Gross, a writer for Slate magazine, says the poor need greater access to credit.
“What the world needs right now is more subprime lending — a lot more of it,” writes Mr. Gross.
To be sure, the journalist was supporting the growth of microcredit, but others have derided any comparison between subprime lending and microloans.
Last week during a World Business Forum meeting, Muhammad Yunus, the Nobel-Prize-winning founder of the Grameen Bank, said the subprime market failed for one reason — greed.
According to Felix Salmon, a blog writer for Portfolio magazine, Mr. Yunus went on to question all loan businesses serving the poor that seek to make a profit. “Breaking even, said Yunus, was a great idea,” writes Mr. Salmon.
Based on problems a Mexican bank has had with mixing profit with microfinance, writes Mr. Salmon, “for the time being, I’d keep the idea of for-profit philanthropy in the ‘not proven’ category.”
However, the moderator of the World Business Forum’s session, Matthew Bishop, an editor at The Economist magazine and co-author of Philanthrocapitalism: How the Rich Can Save the World, disagreed with Mr. Salmon’s conclusions.
On a blog that promotes their book, Mr. Bishop and co-author Michael Green write that a diverse source of funds — nonprofit, government, and commercial — are needed to get microfinance to reach the world’s poor.
“As we report in the book,” they write, “Pierre Omidyar, the founder of eBay turned philanthrocapitalist, calculates that meeting the needs of all the potential poor borrowers would require about $60-billion and that ‘there is not enough nonprofit and aid capital in the world to get microfinance to the scale it could achieve.’”
(Read The Chronicle’s interview with Mr. Bishop and Mr. Green. A paid subscription is required to view the article.)
What do you think? Does microfinance need both for-profit and nonprofit supporters?
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I am always excited when I see nonprofits take a new approach. I think the more partnerships that for-profit and nonprofit can do the better off both industries will be.
Jason Dick
www.ASmallChange.net
— Jason Dick Sep 30, 10:21 PM #
ComplianceTech, a provider of technology and business intelligence for consumer lending institutions and government agencies, has released an industry report that says, in part, “Contrary to popular belief, low-income borrowers had only 149,173, or 7.57 percent, of 2006 subprime-rate loans. The report also concluded that the majority of subprime-rate loans were originated in predominantly-White geographic regions (areas representing census tracts less than 30 percent minority).”
— Larry Bostian Oct 1, 01:52 PM #
The increasing interest in microfinance as a profitable investment opportunity is a trend that we should follow with interest and hope – but also with caution. On the one hand, greater commercialization holds tremendous promise for closing the demand gap that currently exists and expanding microfinance services to the over one billion of the world’s poor who have yet to benefit. However, we at Women’s World Banking have also seen a disturbing byproduct of commercialization, which is that as MFIs make the transition from nonprofit to for-profit institutions, the percentage of women being served relative to men is decreasing. As we enter a new chapter of microfinance—where MFIs have IPOs with increasing frequency and commercial players will out-invest philanthropic organizations—we must take care not to lose focus of the original social mission of microfinance. As we enjoy the benefits that commercialization brings, we must also take pains to maintain the balance of the double bottom line.
Women’s World Banking (WWB)
www.swwb.org
— Mary Ellen Iskenderian, President and CEO of Women's World Banking Oct 3, 05:05 PM #
I do not see the connection between Micro Credit systems and Sub prime lending for housing.
Sub prime lending was a business for business sake-a market was identified and a tool to tap it was created. Everyone in the system got a commission on convincing a person or a couple that they could indeed afford a really nice house all the way down to the fast talking salesperson who knew that when interests went up they would even make more.
Micro Credit as it was created is not based on identifying a potential profit center as a business model. One of the biggest challenges is preventing profit taking by facilitators and the corruption they bring to deal. After all it is normally the corruption in the developing nations that hold the people back from achievement in the first place.
Using Sub Prime lending models as a way to help the poor in developing nations is not likely to work. You could consider all the loans to African and South American countries as Sub prime due to the special conditions under which they were granted. For the most part there was no honest profits made with the reduced pay back or totally forgiven loans. As a result both areas of the world have be come holes in the earth that money was thrown into and the largest banks made profits helping to hide the money all the while the ordinary persons living conditions deteriorated to even lower levels.
— Doug McKay Oct 6, 04:48 AM #