The Money to be Made in Microfinance

Harvard provides an example of the claims being made about the business opportunity of lending to the poor, thirty years after the founding of the Grameen Bank.

I ran across a piece in the Harvard Business School Alumni Bulletin (Garry Emmons), The Plight of the Global Poor: Is it any business of business?  There's a sidebar to the story that includes the following:

• Amount the World Bank, world’s largest microfinance supporter, contributes annually to microfinance: $1.2 billion
• Percentage of Bank’s total lending this represents: 6
• Number of people that could benefit from microfinance services: 3 billion
• Number that currently have access to such services: 500 million

The implication here is that there is potential for a sixfold increase worldwide in the amount of microfinance activity, which would amount to a $6 billion increase just of the World Bank component. 

The article talks a lot about microfinance, yet the only charity organization mentioned is Acción International (EIN 13-2535763 Form 990), which was founded in the mid-1960s and developed its current model (using financial markets to support microlending) in the early 1990s.  The microcredit prototype, Grameen Bank in Bangladesh, was founded in the mid-1970s and continues to be partially owned by the government of Bangladesh and by its participating members (hence, no Form 990). 

We've taken a look at this segment before (Machismo and the Microfinanciers, October 27, 2006).  It would certainly be wonderful if something this simple could have such a profound effect on the life of the poor.  But I wonder: if microcredit is really so replicable, scalable and effective, why is it still at the early part of its growth?  It has proven more enduring than CB radios or disco, but it still seems like this should be a mature business after several decades rather than a growth industry. 

And with this article, like nearly every discussion of microcredit and microfinance, there is a story or two of a really successful beneficiary.  But the vast majority of participants never rise above financing a market stall, which is something, but not the stuff of economic transformation. 

Another sidebar to this article informs us that capitalism can actually increase income inequality, especially in countries with even more extreme inequalities than in the US, in which people on the lowest rung lack protections that the US takes for granted.  To drive this home to US audiences, HBS Prof. Bruce Scott draws a historical analogy of trying to deal with poverty in the South during the era of racial segregation while ignoring the impact of Jim Crow laws.  This is a point that needs to be made more emphatically in any discussion of social entrepreneurship on an international level. 

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