Microfinance’s Midlife Crisis
Monday, March 1, 2010
From humble beginnings, microfinance-a system of providing tiny loans and savings accounts to the poor-has grown into a global industry attracting the interest of large multinational banks.
But the commercialization of the industry has sparked a fierce debate. Profit advocates highlight improved access to foreign capital and expertise; traditionalists say microfinance companies are in danger of becoming little better than predatory moneylenders.
There is little doubt that microfinance is now big money. In 2008 it attracted $14.8 billion in foreign capital, up 24% from the previous year. For the first time, the majority of the money came from private investors-including pension schemes and private-equity funds-rather than governments, according to the World Bank.
This deluge of private capital has freed many microfinance institutions from their reliance on donor funding. As a result some have switched from a not-for-profit strategy to a money-making business model. But there are concerns that such institutions are becoming distracted by the need to reward investors. Some microfinance banks have generated returns on equity of 50%; others have flooded the market with poorly structured debt.
Maya Prabhu, head of philanthropy at U.K. private bank Coutts & Co., who advises wealthy clients on investments in microfinance, says: “There’s a definite risk of new shareholders switching microfinance institutions’ mission from alleviating poverty to chasing volumes and profits.”
Marilou van Golstein Brouwers, the head of microfinance investments at Triodos Bank, says the influx of so much private capital into microfinance is a mixed blessing.
On the one hand, private capital helps finance the growth of the sector and expand its reach. “At the same time, if the mission of microfinance institutions is only to maximize profit, then the social goal of helping people out of poverty is not reached,” Ms. van Golstein Brouwers says. “The problem is that a lot of the new private investors in the sector see it mainly as a way of making a lot of money.”