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Loan Shark or Micro-financier?

Dawn Wolfe | Friday 4th September 2009

314459212_6e5c900920_t Responsible micro-lending seemed to have perfected the union of sustainability and finance. The provision of credit and counseling to poor women has acted as a springboard for families working towards a better life. It's hard to envision an investment strategy for maximizing social gain with as direct an impact on the lives of entrepreneurs born into a life of abject poverty. When microcredit pioneer Muhammad Yunus was awarded the Nobel Peace Prize, the harmonization of sustainability and finance as a method to combat poverty seemed complete.

As microfinance has grown in stature, however, there has been a shift away from its non-profit, charitable roots. For-profit microfinance institutions and private equity groups are now wading into a space traditionally dominated by groups like Accion International, various projects of the World Bank, and Yunus' own Grameen Bank. When Banco Compartamos, a Latin American microfinance institution, launched itself as a publicly traded equity on the Mexican stock exchange in 2007, the commercial model of microfinance took a leap forward.

So how is commercial microfinance shaking out? According to an August report by the Wall Street Journal, the entrance of private equity funds and foreign investors has created a credit bubble in at least one town Indian town. Household debt in India from microlenders has grown five fold since 2004 and women have started taking out new loans to pay off the old. A vicious cycle is taking hold. Mr. Yunus himself has said he is "nervous" by the big commercial bank trend in microcredit.

I agree heand we who care about sustainable finance-- have every reason to be disturbed. Motivating organization and individuals to do "good work" requires incentives in many cases. When incentives in microcredit put profitability over serving customers, the mission is fundamentally altered and the results will be too.

For those out there in the JustMeans community working directly in the microfinance field, I'm hoping you can comment here on how to ensure sustainability remains central to the model.

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Dawn Wolfe | Posted: 10 September 2009

Hi Kelly,
I really appreciate you taking the time to provide this insightful comment and the advance the discussion. Like Peter's efforts around "Community Analytics", I would love to learn more about the metrics you've identified for ranking the social value of different lenders. This is crucial work--and I agree a critical tool for supporting "micro-finance done right".

Kelly Evans | Posted: 9 September 2009

I've been working on a platform to support a new format of micro-finance, so I've thought about this a lot. One thing Yunnis has said about social business is that it can be competitive with primarily profit driven business. And the Grameen Bank and the 1000s of groups who've followed it's model certainly qualify as social businesses.

However, mirco-finance, when done right, is amazingly profitable, and safe. If it's done right, in the sense of benefiting the recipient, the only difference between a profit version, and social business version, is how much of the proceeds are recycled to further social goals. If it's done wrong (as in driving people in to perpetual debt), it's unsustainable. In the latter case, it's not good for anyone.

So, I think one of the most useful tools we can provide are for social ranking, oversight, and qualifying the value different lenders offer. That's one aspect of what I'm making.

Dawn Wolfe | Posted: 9 September 2009

Hi Peter,
I'd love to learn more about Community Analytics and how you are accounting for non-financial value. Quantifying social impact is something I grapple with frequently.

The profit motive is the incentive that will spread sustainability beyond the charitable sector. In many cases the business case is clear--treat employees better and their work improves, increase efficiency and consume less energy to save $. The challenge is to get profit seeking entities to look beyond short-term profitability to what will sustain them in the decades to come.

Regarding microfinance--it is migrating between the worlds of charitable work to profit seeking work, both of which have the potential to be "good work". What are the sustainability incentives we must clarify for microfinance to maintain its poverty reduction mission at the core?

joan lockwood | Posted: 5 September 2009

Peter the whole manufacturing and financial owrld as it stands now is slowly metriculating to another plane, but is a baby bathwater scenario.

Why is greed so prevalent even in the helping professions?
IMF and it's loans come to mind
Doctors and fraudulent billing comes to mind
There is so much "business as usual" our babies are drowning in the bathwater

Peter Burgess | Posted: 5 September 2009

Dear Colleagues

In my view ... for what it is worth ... we have a baby and the bathwater problem! The positive value of microfinance, I would argue, is way more than the negative.

As a professional in the accounting field, I like to use numbers ... but I am well aware of their limitations. Being profitable helps an organization to be sustainable and stay in business ... but profit does not mean that the organization is doing much of value. A good school may not be profitable ... but it is doing something of value. So with a microfinance organization. The numbers most people are using to assess microfinance performance are inadequate ... mainly about money performance and little about social impact.

The system of Community Analytics (CA) we have developed puts social impact at the center of the system ... uses money to account for profit ... and a concept of value for those things that are meaningful but are not money.

Happy to answer any questions.

Sincerely

Peter Burgess