The Trouble with Microfinance...

Diverting from the path of definitions a bit, I want to muse on what I see as the trouble with microfinance.

In short, it's the same trouble I'm having these days with NGOs (non-governmental organizations) and the non-profit model in general. In short, it's donor-reliant. In most cases, microfinance has relied upon an unsustainable donor-led model.  Don't get me wrong, I have nothing against donors or the public benefit sector in which I've operated for the past 15 years.  Some of my best friends are donors.  I'm a donor.

But I also realize that you need a continuous stream of donations and donors, which means increased donations from existing donors or generating new donors to keep the enterprise going.  By its very nature, this is an unsustainable model. 

We need to figure out a way to make providing these services to the poor pay -- and not by the often exorbitant interest rates provided by informal moneylenders -- in a reasonable manner that can help formal microfinance institutions (MFIs) stay solvent and sustainable.

The other trouble with microfinance, as I've been looking into it, is that it appears to rely too heavily on credit or access to credit and not enough on a combination of savings and credit.

Think about it: what's your credit limit on your credit card? Your other credit card? Now how much savings do you have in the bank?  What stops you from going out and accessing the full extent of that credit limit right now?  Probably common sense, but I bet you also understand you will need pay the loan back one day and perhaps you want to be in a better position to get the next loan.  So you spend within your means or close to it and try to gin up enough to sock some money away too.

There's a bit of advice I once received from either Jack Bogle or The Motley Fool: pay yourself first, through savings, and then tackle your creditors.  Even Ben Franklin understood the wisdom of "a penny saved..."

But the poorest of the poor have very limited access to secure savings, which would help secure their families or businesses against risk or help them save for larger investments.  This is largely an oversight of some financial institutions.  Exceptions are Grameen Bank in Bangladesh and ICICI in India, both largely in the business of providing credit and savings to the poor.

Most commercial banks can't afford to serve the poor -- small transactions are too costly, especially for the rural poor who may be geographically isolated.  I'm curious whether increased access to the internet would bring some of those transaction costs down, just as it has helped the rural poor access information about markets for crops or handmade goods.

Still, we get back to the self-sufficiency problem. of the thousands of MFIs, according to the Micro-Credit Summit, fewer than 100 can claim self-sufficiency.  C.K. Prahalad suggests, many of the current MFIs "lack the resources to build permanent support structures of microlending, such as access to savings institutions" or they are constrained by the scalability of their operations".

Scaling up, he suggests, is a labor and time intensive way to achieve sustainability. Perhaps a better approach is to ensure that savings precedes credit.