Guest Post: The Major Leagues of Microfinance
Guest blogger Matt MacGregor is a second year Masters Candidate at the Fletcher School, studying development economics and international environmental resource policy.? A native of Little Compton, RI, USA, he has consulted on savings-led microfinance programs for Catholic Relief Services in Guatemala and El Salvador, and on sustainable development initiatives for Planet Tech Associates in Boston, MA.? He has also worked in health development for the Timmy Foundation in Ecuador, and taught high school political science courses in both Boston and Costa Rica.
By Matt MacGregor
Reporting from Microfinance: The Next DecadeMicrofinance has reached the major leagues. ?
That was the conclusion posited by Kim Wilson, a lecturer in international business and microfinance at the Fletcher School, during her introductory speech at the “Microfinance: The Next Decade” event on November 2nd.? Hosted by the Fletcher School’s Center for Emerging Market Enterprises and prompted by the recent financial success of the Compartamos initial public offering (IPO), the “Dialogue” served as a forum for public debate between distinguished academics, practitioners, and leaders in the microfinance field.? The topic: What role can and should international capital markets play in expanding the scope of financial services for the poor?? If the Compartamos IPO and the enormous profits it generated for investors is a watershed, what are the implications for the well-being of the billions of people around the world who still lack access to formal financial services? ?
A wide variety of influential actors in the microfinance community assembled for the conference.? New players (like Inshan Ali Nawaz of First Microfinance Bank and Raven Smith of the American International Group), faced off with heavy hitters (ACCION Executive Director Maria Otero, Harvard Business School professor Michael Chu, and Director of the Omidyar Network Jim Bunch). In addition, some of microfinance’s earliest pioneers (Malcolm Harper, former Chairman of Basix and Director of M-Crill and Professor John Hammock, former Executive Director of ACCION) were in attendance, giving the day’s activities both an interdisciplinary and inter-generational feel. ?
Wilson’s assertion that microfinance has just begun to reach its financial prime was reflected in the overall tone of the “Dialogue”?a tone that stressed the positive implications of microfinance’s newfound ability to tap into the vast financial resources of capital markets, alleviating poverty through profit.? Harvard’s Michael Chu outlined the four keys he believes are essential to widespread poverty alleviation: scale, permanence, efficacy, and efficiency.? The only thing that society has ever known that can deliver on all four, noted Chu, is the profit motive.? And when this profit motive attracts trillions of dollars from the capital markets, even the billions of the Omidyars and Gateses pale in comparison. ?
According to Chu, “The idea that you can tap into the trillions of the capital markets and invest in commercial ventures to affect poverty is the best news the poor have received in thousands of years.”? Many of the panelists agreed.? Somak Ghosh, President of Corporate Finance and Development Banking at Yes Bank in India, praised Compartamos as a successful model of what microfinance could be.? He noted that the Compartamos success story has the potential to bring more investors into the game, helping to improve competition, lower interest rates, and offer better products to the poor. ?
Some of the panelists, however, were not so sure.? Malcolm Harper, former Chairman of Basix and editor of a new book entitled What’s Wrong with Microfinance, stirred up the discussion with references to Karl Marx and the dark side of the Compartamos IPO?profiteering.? Although admitting he supported the idea of bringing increased access to financial services to the poor, Harper noted that the excessive profits generated by the Compartamos IPO are a cause for concern.? Making the poor pay excessively high interest rates for financial services, he remarked, is like charging the thirsty high prices for water.?? If the goal of microfinance is to alleviate poverty, should we not be more concerned with the impact financial services have on development than with the rate at which they are reaching scale? ?
Perhaps a forthcoming study by the MIT Poverty Action Lab?an organization known for doing serious impact evaluations?on the Compartamos experience will help shed light on what effect high interests may have on client well being.? Until then, Harper noted, people who make a lot of money out of the shortage of financial services will still be considered good guys. ?
Throughout the early discussions, the limelight remained squarely on one of today’s chief protagonists?Compartamos co-CEO Carlos Danel.? For his part, Danel defended the IPO and his management of Compartamos, arguing that profit and poverty alleviation do not operate in a zero sum game.? Effective and efficient businesses can generate returns while helping the poor; microfinance institutions that receive capital market investments can remain accountable to both investors and their clients.? Citing interest rates that have been decreasing for each of the past five years, Danel argued that Compartamos has focused its efforts not on a profit maximizing model, but on a growth maximizing model.? This is what he sold to investors, and this?scale–is what he believes will help make microfinance a real force in poverty alleviation. ?
Noting that he had left a successful career in the private sector to found Compartamos (originally as a NGO), Danel argued that there are a wide variety of avenues that can be pursued.? The Compartamos model and “going to the capital markets” is simply one of them.? “I am very satisfied in what we have done,” he said, “because we do believe that we are making a difference in other people’s lives?You can like it or you can criticize it, but for God’s sake, do something.”? Nods from many of the participants on stage indicated that they seemed to agree. ?
The question of subsidy: ?
Buried in the discussion of Compartamos? impact was also the issue of subsidy.? If Compartamos has proven that money for microfinance can be raised in the private sector, what does that mean for philanthropy? ?
Some of the panelists, including the Founder and CEO of MicroRate (Damian von Stauffenberg) took the traditional view on subsidy, arguing that it allows for inefficiency and discourages the “internal struggle” within businesses to constantly evolve, adapt, improve, and lower costs.? von Stauffenberg noted that the intervention of development organizations into microfinance?particularly International Financial Institutions (IFIs)?may be dangerous, and could decrease the probability that microfinance will become a mainstream player in the long run. ?
Guy Stuart, however, a professor at Harvard’s Kennedy School of Government, was not so certain.? The Grameen Bank, he argued, is an institution that has received significant subsidy.? But it has a lower operating cost than the much less subsidized Compartamos, providing evidence to the contrary in the efficiency argument. ?
Despite Stuart’s and von Stauffenberg’s differing points of view, they reached a relative consensus on the role subsidy can play in ?trailblazing? new areas?helping organizations take risks that might ultimately benefit the client.? Perhaps subsidy could fund MFIs that wish to offer additional services to their clients that focus on more holistic development (education, health, etc) or perhaps business development services for the MFIs themselves.? Jim Bunch of the Omidyar Network summarized this point of view, noting that “subsidized capital should enter where nothing else exists. Where there is a clear public common good and a chance to be the first into the snow to blaze the trail.”? Some of the present subsidies, the participants acknowledged, were doing just the opposite?forcing capital markets into riskier investments and allowing charity to take the easy road.? What is needed, they noted, is soft, patient capital for risky investments into unknown territory.?? ?
As for crowding out, Guy Stuart of the Kennedy School was the most articulate.? Noting that Muhammad Yunus has recently pushed for the creation of more and more ?social? ventures that would challenge traditional investment and traditional business models, Stuart argued that competition between the social markets and the capital markets may not be a bad thing after all.? Let them compete, he said, and maybe the client (or in the case of microfinance, the poor) would be the better off as a result.? Where Stuart did have concerns, however, was where subsidy may crowd out the provision of saving services for the poor.? Savings, he argued, is where microfinance should now turn its focus.? Helping the poor gain access to formalized savings services so that they can manage risk on a daily basis is the next vital step in a now vibrant movement.
The Future: ?
The emphasis on the savings side of microfinance was particularly important to the final panel of the day, which focused on identifying what lies ahead.? The panelists acknowledged that, until now, credit has been the norm–and in many cases, the only option.? Moving forward, what is needed is a more holistic package of financial services for the poor, focused on savings, insurance, and credit.
Beyond providing savings and other services for the poor, the panelists argued for an improved regulatory framework within which microfinance can operate?a framework that would help standardize the industry and improve the protection of its clients.? Mr. Ghosh of Yes Bank saw a powerful role for NGOs in this arena.? In his view, NGOs could carve out a new niche, morphing from providers of cheap capital to major forces in the push for an improved regulatory and fiscal framework that would facilitate private sector participation. ?
This improved regulation, argued Professor Chu, should focus on three questions: How to protect (clients), how to promote (microfinance services), and how to draw the line on acceptable profit levels.? An improved regulatory framework, added Maria Otero (The Executive Director of ACCION) would help make microfinance part of the financial mainstream.? This, in turn, would mean improved services for poor clients. ?
Otero also stressed the role advances in technology could play in helping microfinance reach the poorest of the poor, particularly in rural areas.? And when asked what she thought may be something that could burst the microfinance bubble, Otero was clear: poor, misplaced government intervention.? Using the example of her native Bolivia, Otero argued that ?populist? approaches to microfinance that make financial services for the poor unprofitable have the potential to ?wipe out? the industry.? Promoting competition, Otero argued, is the only real way to get prices down.? And, ironically, the case in point for the impact of competition on prices is Bolivia itself. ?
In the end, it seemed, the future of microfinance will be a product of two mutually beneficial forces: the creative energy required to build new financial products that more efficiently meet the needs of the poor, and the ability to find the right sources of investment to finance them.? Given the Compartamos IPO, the second force may be the easier of the two.? As Sally Dungan, Tufts University’s Chief Investment Officer and the point person for Tufts? 150 million dollar microfinance fund (a gift provided by EBay Founder Pierre Omidyar), noted: “If someone told you that you had to invest 100 million dollars in the fasting growing market in a service that everyone needs, what would you do?” ?
If there was one conclusion to take away from the conference, it seemed to be that many of the participants in the ?Dialogue? would indeed invest.? And (barring a few reservations), that this would be a good thing for the poor.?