Can Microfinance End Poverty?

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?