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Is microfinance a public good?
I don't believe so, but Jonathan Lewis, CEO and founder of Opportunity Collaboration and Microcredit Enterprises does. He passionately argues in this Huffington Post article today that it is unacceptable that microfinance institutions seek to make profits and ask the poor to pay dearly for their own futures. He contends that microfinance should be no different than education, health care or even roads that are public goods. These are expected to generate long term returns to the society and it is outrageous for investors to expect profits on their investments.
"The most radical and startling economic development driver for microfinance programs is the expectation that they must be profitable or -- in economic development terms -- sustainable. This is not a standard typically used for other public goods and services.
Most anti-poverty programs -- from health clinics to water projects to schools -- are budgeted with long-term external subsidies, donations, grants and in-kind assistance. As public goods, it is expected that the long-term community benefits deserve underwriting by taxpayers or donors.
Neither Silicon Valley companies in California nor destitute truck drivers in Cameroon are expected to capitalize their own roads with private investment repaid from private economic activity. Public sector investments of $1.00 in United States roadways generate $6.00 of economic activity and the indirect return in jobs, taxes and quality of life improvements is deemed sufficient.
In contrast, microfinance funders expect the poor to bootstrap themselves into profitability. If local microfinance programs don't increase microloan interest rates to at least cover costs, development funders and commercial markets soon look away."
I like him but have great difficulty agreeing with this point of view. He even doesn't like to think microfinance is about access to finance. In simple terms I believe it is nothing but making finance accessible to the unbanked. Hence, like any service offered for individual benefit microfinance also should be done in responsible and sustainable manner. Moreover there is hardly any evidence in developing countries that grant funded programs have produced satisfactory results.
What do you guys think?
"The most radical and startling economic development driver for microfinance programs is the expectation that they must be profitable or -- in economic development terms -- sustainable. This is not a standard typically used for other public goods and services.
Most anti-poverty programs -- from health clinics to water projects to schools -- are budgeted with long-term external subsidies, donations, grants and in-kind assistance. As public goods, it is expected that the long-term community benefits deserve underwriting by taxpayers or donors.
Neither Silicon Valley companies in California nor destitute truck drivers in Cameroon are expected to capitalize their own roads with private investment repaid from private economic activity. Public sector investments of $1.00 in United States roadways generate $6.00 of economic activity and the indirect return in jobs, taxes and quality of life improvements is deemed sufficient.
In contrast, microfinance funders expect the poor to bootstrap themselves into profitability. If local microfinance programs don't increase microloan interest rates to at least cover costs, development funders and commercial markets soon look away."
I like him but have great difficulty agreeing with this point of view. He even doesn't like to think microfinance is about access to finance. In simple terms I believe it is nothing but making finance accessible to the unbanked. Hence, like any service offered for individual benefit microfinance also should be done in responsible and sustainable manner. Moreover there is hardly any evidence in developing countries that grant funded programs have produced satisfactory results.
What do you guys think?
Tags: for-profit, microfinance, non-profit, public good
Views: 21
Replies to This Discussion
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Permalink Reply by Tom Murphy on -
I am personally torn when it comes to the profit vs nonprofit debate amongst MFIs. In the long term, I have no question that MFIs must become for profit institutions. If successful, they will become the equivalent of local banks here in the US. The question is how they should currently look and what will that do to ensure future growth and sustainable practices. I won't venture to put an opinion out there because I am still trying to learn more. To me, there is something attractive about providing the services at a nonprofit level and gradually transitioning to for profit. However, I recognize that I get to say that from outside the industry and will limited knowledge.
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Permalink Reply by Sasidhar Thumuluri on -
Tom - I also agree that there are merits being non-profit and serve vulnerable communities but when scale is the name of the game when it comes to covering unbanked population then one would have to think of at least sustaining the business and plough back the capital, if not make huge margins. Even large NGOs talk about sustainability when it comes to planning their programs because it brings accountability and stewardship into play which is good for all. Now coming to Microfinance in particular, I think one way to manage the expectations of for-profits is by allowing some large successful ones to become small banks which come under greater scrutiny of regulators. When deposits are raised there would be less need to depend on private equity and costly debt which should result in low interest loans to clients and sustainable business at reasonable margins for MFIs. Does it make sense?
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Permalink Reply by Tom Murphy on
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Makes perfect sense. Again, I get to be idealistic with my thoughts. I think we can agree there there is a lot more fine tuning that needs to take place as to how to provide the best services possible that will create sustainability for those using the services as well as the institutions that provide the services.
The idea of shifting to small banks sounds like a good one to me. Do you have any suggested articles/resources that address this idea?
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Permalink Reply by Sasidhar Thumuluri on
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Sure. Here is a discussion I posted several days ago on some excellent ideas that could shape the future of finance in developing countries. In the comments section you'll see another article posted that makes a strong case of small banks in India. Here is the link from a leading Indian newspaper on Raghuram Rajan's case for small banks. Although the arguments are Indian in tone I think the principle applies to most developing countries with similar exclusion issues. Let me know what you think.
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Permalink Reply by ERIC NUTSU on -
Hello Sasidhar, the challenges the poor and low income earners face in the fight to survive day by day is better experienced first hand than read in a report or article. Unfortunately those who wear the shoe are the only ones who know where it hurts most. And ironically, it is those who do not know what it is to be poor that make policies concerning the welfare of the poor.
Nothing is wholly good or bad. Microfinance can do the public good, it can do the public bad too. It is the character and integrity of all involved that makes the difference ( remember the root cause of the global economic and financial crises?) If the service delivery is people oriented, it can be sustained. I also think adapting these programs to the target clientele based on what works there and is familiar to them will make MF work better. It is no good bringing a MF program that works in Chennai over to Lagos thinking it will work the same. It usually doesn't- from experience.
So I think, if the integrity index of the MF program and its operators is above board, the clientele will naturally respond; provided the initiators go the extra mile to adapt these programs to the needs and circumstances of the targeted poor and low income earners.
So potentially, MF is good, can be better; for it meets needs the conventional financial institutions cannot meet.
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Permalink Reply by Sasidhar Thumuluri on
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I believe when you say "social enterprise" you mean "social business as defined by Prof. Yunus". In general terms social enterprises do seek profits as much as social good, if not more. Prof. Yunus's concept of social business sounds great in theory but we are yet to see them in reality. Grameen Bank is a good example but it is a not easy to replicate as you can see none of the MFIs in the world look anything like GB in terms of institutional structure.
I agree that microfinance is not a "public good" but not because it does not do any "good" but because I think microfinance just serves individual needs of capital either for consumption or productive purposes which is similar to banking. Banking cannot be considered a "public good" since it is a service that is sold to individuals to meet specific needs. Claims of impact of microfinance on economic development and society at large is at best consequential and difficult to derive direct causality. On the other hand education, health, transportation etc., serve greater ends beyond individual needs. Macro-effects and positive externality of a well educated society, healthy population or a good road network are far greater and significant than microfinance. That is why I think while the latter qualify as "public goods" and should be largely addressed through public funding by governments, the former should be categorized as a "private good" and should be largely provided by market. Makes sense?
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