Loan Shark or Micro-financier?

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 he—and 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.