Microfinance

What Do I Think of Microfinance? Pt. 1

This is part one of a two-part post on microfinance. Through Kiva and Negros Women for Tomorrow Foundation, microfinance became my entrée into this world.  I knew very little about microfinance prior to finding Kiva, other than what I had seen on an episode of Frontline highlighting the company’s early Read more…

Microfinance

Saving as a Group

The following is a guest post by Gemma North, an associate with Saving for Change, a community finance program run by Oxfam America. ?In 2009, I worked for a microfinance institution called CREDIT in Cambodia.  On a field visit, I met a borrower who sold clothing and knick knacks to Read more…

Microfinance

Microfinance Documentary: “To Catch a Dollar”

In an example of the relatively smallness of the world, a new documentary called “To Catch a Dollar” about the Grameen Bank and Muhammad Yunus’ good works has just been released. I hadn’t heard about it before, but my old man sent me a link yesterday to a news outlet called wickedlocal.com. As it turns out, the director, Gayle Ferraro, hails from my hometown of Westwood, Massachusetts, a small suburb located 20 minutes south of Boston, on exit 16B off I-95. I urge everyone to go out and see the documentary, support Muhammad Yunus in his struggles right now, and support my hometown of Westwood.

Yunus founded the original Grameen Bank in Bangladesh in 1976, operating under a more basic but similar microfinance system for poor women in rural areas, who used small loans to generate income for themselves -- by buying a goat to sell its milk or purchasing yarn to use for knitting salable scarves, for example. Such microloans have proven widely successful, and through its decades in operation, Grameen has established centers in more than 40 impoverished nations around the world. The launch of its U.S. counterpart in 2008 marked a new experiment in microfinance: Can a system that works so well in rural pockets of developing countries be effectively applied to America's urban centers? To Catch A Dollar explores this question, following the bank's early days in the Bronx. (more…)

Development Economics

The Battle for the Soul of Microfinance

Microfinance is going through some major growing pains right now, hitting its first major challenge since it hit the mainstream in 2005 after Muhammad Yunus won the Nobel Peace Prize.  The “silver bullet” of poverty alleviation that brought credit to those previously thought unworthy of a loan has seen an onslaught of criticism for failing to deliver on the lofty goals that its evangelists believed it could achieve (lesson: don’t overpromise). Studies have shown that the impact of providing credit to poor women does not have a dramatic effect on poverty alleviation, and the success stories, at least in recent months, have been trumped by tales of aggressive loan-recovery tactics and suicides among poor borrowers in India.  Portfolios of the Poor, a book written by four development economists with a healthy skepticism about the transformative effects of microfinance but optimism about its marginal impacts, showed that access to credit is actually less important than savings – access to a safe place to keep your money. The big schism in microfinance since 2008 has been about where to get the money for operations.  On one side, there is a group that believes microfinance must always focus on serving the needs of the poor and resist temptation to exploit borrowers with overly-exorbitant interest rates (I say “overly” because interest rates are, well, exorbitant).  This camp, led by Muhammad Yunus, the spiritual and, until recently, actual leader of the Grameen Bank, condemns a profit motive.  Instead, microfinance institutions (MFIs) should charge interest rates that will cover expenses and will finance expansion efforts.  In other words, MFIs should be financially and operationally sustainable, but nothing more. Proponents of the other side believe that, for microfinance to achieve its true potential and reach the billions of poor people without access to credit, it must tap into the vast financial coffers of the capital markets.  To do so, microfinance needs to become attract investors with, at the least, a hybrid model focused on financial returns and social impact.  There are still only a handful of MFIs of adequate scale to access the same type of capital that a normal company might access, at commercial rates. (more…)

Development Economics

Impact Investing: Venture Capital for Do-Gooders Takes Off

The other day a friend put me in touch with a friend of his who had just moved to Accra.  She works the Acumen Fund, a social venture capital fund that invests in promising  entrepreneurs in developing countries.  The use of the adjective "social" is a bit misleading, in the sense that the companies are purely for-profit and do not need to have an explicit social motive guiding the business strategy.  What distinguishes them is the market they serve, termed the base of the pyramid, or BoP for short.  The name is derived from C.K. Prahalad's books "Fortune at the Bottom of the Pyramid." These businesses typically serve the poor in some way.  Acumen has invested in agribusinesses and businesses in healthcare, water, and energy.   The broader term for the modus operandi of Acumen Fund and other investment funds is "impact investing." The unfailingly reliable Wikipedia describes impact investing as "an investment strategy whereby an investor proactively seeks to place capital in businesses that can generate financial returns as well as an intentional social and/or environmental goal." It is a relatively new concept, and it has taken off in recent years. So we met up at one of the many Lebanese restaurants in town for a drink and talked about all things development.  There aren't too many impact investors operating in Ghana, or West Africa in general.  A few local private equity firms and some U.S.-based venture capital funds are the only ones I have come across.  But it is the next big thing in development, which, in general, tends to driven by fads and has an often-changing flavor of the month.  For a few years, microfinance was the darling of the donor communities, as Dr. Muhammad Yunus took that Nobel Peace Prize and ran with it.  But now, microfinance is experiencing its own serious growth pains in its biggest and most dynamic market, India, and has been criticized for being, at best, ineffective, and, at worst, actively counterproductive in alleviating poverty.   (more…)