Can Microfinance End Poverty?
- Monday, August 24, 2009, 12:30
- Debate, From the Editors
- 5 comments
Jerome Peloquin | Managing Editor-US |Microfinance Focus |
I believe the answer is, “NO,” not as it is presently structured. Present day MF has only one lending methodology, the installment loan. Although some are trying to find new models, basically the tried and true method of lending money at significant rates and collecting every week is the method of choice for many MFI’s.
Although the concept of Microfinance has been around for centuries, for most of us the Grameen 1 model of group lending tied to weekly loan payments is the first we heard about it. When Dr. Yunus went into the street took the first step on his way to the Nobel prize several decades later. Since then MF has gone trough quite a few changes. It has moved from a small group of social mission driven NGO’s who could not find the funds and resources to keep their doors open, to a global financial sector with billions in assets and major Banks seeking bragging rights as “social investors.”
Without arguing the issue of social performance, (SP) or lending trasparency (what is the effective intrest rate when I add fees and forced samings, etc?) We have the fundamental problem of trying to build a business making weekly loan payments. Such a strategy may work for a family run business, but if one would like to grow and hire others, order from vendors in bulk, or acquire any significant capital asset … then the there is a probem with what we know as commercial microfinance.
In our last month’s issue we discussed The Missiog Middle! That is the gap between the upper lending limits of the MFI and the entry level investment of social venture capitalists. The MFI is about !,500 USD and the social VC is starts at aournd 50,000 USD … that’s quite a spread, huh?
I know some micro credit lenders will loan more and over a longer lending period but, the problem is risk management! A business that grosses under 20,000 USD per year is much less stable than a 100,000 USD operation and most investors will not even go that low. Yet, if one plans to build an economy, there has to be some way to address capital needs for those in the informal economy that need capital and knowledge to expand. As you know, without significant familiy or government connections, or hard assets, local banks will simply not lend money to the poor under any conditions actually. If there is to be an economy then there must be a vibrant and growing merchant class … how will we grow sucha group of experienced business people if we cannot reach them with economic resources?
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Jerome has written 2 stories on this site.
5 Comments on “Can Microfinance End Poverty?”
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How do people in developed countries span this gap? In the US, you have to get money from friends and family to start a small business that venture capitalists aren’t interested in.
We also need to ask how many micro businesses would be viable as a larger business. Are businesses started with micro loans just part of a safety net, or are they efficient?
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Jerome Reply:
September 14th, 2009 at 5:56 am
It depends upon the profile of the borrower and their business. Most are sustenance borrowers who are pushcart, or sell from their pockets. Microfinance can be of help to them as they can buy in larger quantities and gain economics of scale. A small percentage actually have the ability and potential market to grow into a real viable enterprise. This is where the GAP in Microfinance exists. Where the end of the MF lending prevents business expansion. This is where Micro Venture Capital and the microUP model is promising.
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The point of MF is to help the unserved or undeserved gain access to financial tools/resources to move forward in life. Its ultimate goal is to graduate the poor into the formal financial sector (mainstream banks).
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Jerome Reply:
September 14th, 2009 at 5:59 am
I would agree that MF is a limited strategy and in its best form will accomplish just what you describe. Unfortunately, this is often not the case. There is no mechanism in place to build this bridge between the MF (the informal sector) and the traditional banking sector.
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I also feel , that this time MFI is not helping in alleviate poverty but at some extant they do.In north India i specially feel that money borrowed for their business always go in their consumption bucket.In some cases if borrowed amount is too much that will “open a Door for the poverty” or heavy debts for the borrower.
But MFI customer has too much debts from money lenders and from their relatives with high interest rate ,If they are taking money from the MFI and repay their old debts that cycle will help in to come out from debts vicious cycle.
And the capital which was taken from the MFI for their business was actually not invested .This time focus is on Credit and only Credit cant help to come out from poverty cycle.
We have to come out with some module of landing money that will focus on low-income and poor households, business related needs or planned Expenses needs that means we have to focus on Micro finance not on Micro credit.
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