Net Impact 2009: Beyond Microfinance – New Knowledge and Models for Development
Although microfinance (MF) has not been a panacea for economic development and poverty eradication at the base of the pyramid, its significant impact has prompted many to urge the MF community to expand that success by moving into “Microfinance 2.0.” This weekend’s 2009 Net Impact conference addressed this transition through the panel, “Beyond Microfinance: New Knowledge and Models for Development.”
Too much expansion or not enough?
In his opening comments moderator David Maxson, of Accion’s Frontier Investments Group, noted that MF is experiencing growing pains as it moves from 1.0 to 2.0. Microfinance investors, several represented on the panel, are witnessing a profusion of new business models as they explore ways to move beyond providing liquidity to microfinance institutions (MFIs). Even as Accion encourages these new models, Maxson asked the panelists whether the industry is moving too far, too fast or not yet far enough, fast enough.
Overall, Gil Crawford, CEO of MicroVest Capital Management, concluded that the rapid increase in the amount of money invested in MF and the degree of commercialization of MFIs has been too much, too quickly. He predicted that the recent increase in bad MF loans may be the tip of the iceberg created by an excess of easy money that enthusiasm has pushed through the MF system and warned of probable MFI failures in the near-term. Moreover, he worried that the commercialization of MFIs will lead to a bad corporate governance and corruption.
Alex Counts, President & CEO of the Grameen Foundation USA, generally disagreed and encouraged the industry to moderate the hand-wringing in which it’s currently engaged. He emphasized that waves of innovation and failure are natural and that MF has many “self-correcting elements at play.” Counts labeled recent talk of women frequently borrowing from many MFIs as “rumors.” In one Indian state in which such borrowing had been reported, a subsequent study concluded that 89% of the women had borrowed from only 1 MFI and that most of the remaining 11% borrowed from two. That said, Counts noted that, as MF grows and commercializes, each MFI must be clear about whether its primary goal is poverty alleviation or profit generation.
Henry Gonzalez, Vice President at Morgan Stanley in charge of the company’s Emerging Markets Debt Group and former founding member of its Microfinance Institutions Group, largely echoed this moderate but laudatory tone. He identified two trends as indicative of the industry’s progress: increasing numbers of MFIs starting life as for-profit institutions and increasing numbers of specialized investor funds understanding that health and education are inextricably tied to economic development. Gonzalez agreed, though, both with Counts’s caveat that for-profit or integrated models must be very clear about their goals and Crawford’s concern that they must have very clear governance.
Focus on core competencies or leverage existing network?
The discussion of MF’s commercialization naturally gave way to another critical area of transition: new products and services. Again, Crawford remained the most skeptical about using the MF platform for either distribution of consumer goods and services or for sale of consumer and small and medium enterprise (SME) financial products. Offering working capital to the working class is a very different proposition than lending money to SMEs, and that new venture often falls outside of MFIs’ core competencies. Noting, “Some very bright people are trying a little bit too hard,” he encouraged all MFIs to be able to write their value proposition on a 3×5 index card – in large font.
In the middle of the spectrum, Gonzalez argued that MFIs should leverage their existing financial structure to offer a large menu of financial products. Only after financial expansion should they evaluate whether and how to use it to distribute non-financial products and services.
Counts advocated for MFIs to expand their missions by forming mutually reinforcing institutions to touch non-financial products and services. Offering products to solve other problems of the poor through sister organizations makes the otherwise generic financial products more sticky. He further urged MFIs to continuing innovating and adapting their business models in order to expand their reach into new countries and new regions within existing MF countries.
Growing under the microscope
The tremendous enthusiasm for MF in recent years has simultaneously garnered waves of new investors and thrust the industry under the microscope. The lively conversation among these four prominent players reinforced these two issues’ interconnectedness. As investors enter the space, many seek a focus on growth and profit. As MFIs commercialize, increase their funds, and expand their product offerings, the new public scrutiny often concludes that profit motives are dictating the changes.
Many people further conclude that such motives are bad. They’re not – if the tools are still alleviating poverty. If the desire for profit encourages expansion, and expansion both tackles poverty and generates profits, MF is indeed building the powerful ecosystem for which it is praised. As the discussion highlighted, however, we must continue to push MFIs to clearly articulate their goals, delineate their governance, and demonstrate their results. Particularly as it grows, we must keep it firmly under the microscope.