The Microfinance Insider is a forum for graduate students engaged or interested in working in the field of microfinance. Through weekly posts and comments we hope to inspire students and foster the creation of a knowledge community of bloggers with a commitment to financial access and first hand industry information.

Thursday, July 24, 2008

Business at the expense of the poor?!

Probably the most promising characteristic of Microfinance is the fact that it creates win-win situations. It is this attribute which makes Microfinance such an appealing tool against poverty. Being a master student in international economics, I am definitely aware of the power of incentives. Even if you are not fully convinced of the notion of the “homo oeconomicus” and its implications for economics, you cannot reject the underlying idea of every voluntary transaction: for if not every participant draws a benefit from the arrangement, the latter simply won’t take place. I was attracted by this commercial/business approach (in international development) and decided therefore to use my summer holidays to gain insight into this expanding sector by applying to BlueOrchard - a private Microfinance Fund Manager located in Geneva, Switzerland – for a ten weeks lasting internship. The company describes the “win-win situation” on its homepage as follows:

“BlueOrchard provides innovative financial instruments and solutions for placements in microfinance, bridging the gap between capital markets and microfinance institutions. We generate profitable returns on investments while supporting the development of millions of promising small enterprises.”

At first sight this rationale seems to be a rather simple endeavour. One might even ask why it took humanity so long to reveal this mechanism. But you must be either naïve or completely brain-washed by classic economic thought to ignore several set-backs troubling this perfect picture:

Whenever I was telling friends about my internship project, the reactions I received barely covered their inherent scepticism. Casting doubt on the two-bottom-line strategy of Micro Finance Institutions aiming at social impact AND financial sustainability my typical conversational partner blamed me for the hypocrisy of my future employer: “Every cent of profit you make would be of better use in lower interest rates for the poor.” And I thought this objection was right. For even if a commercially funded MFI was able to serve the poor while breaking through: wouldn’t it be socially fairer to subsidize the grants and allow hence the MFI to lower its interest rates?

And there were more criticisms about the implications of the private sector of developed countries in microfinance: “You only serve the top-tier, those profit-orientated MFIs which cash in on the vogue and barely worry about their poverty impact.” or “Don’t tell me you choose the MFIs you’re funding with regard to their social performance.”

And little by little I saw my application for the internship more like a revealing battle for truth. I want to show to the man in the street that the microfinance sector is actually in need of private funds in order to expand and that the alternative to commercial funding is not necessarily subsidisation, but simply no funding at all. I believe that there is enough room for both types of financing because the bottleneck in this market is certainly not the demand side. But how can donors and commercial funders coexist in the same sector? While private investors are accused to lose sight of poverty impacts and to provoke a mission-drift of MFIs, the international (donor) organisations’ tendency to subsidize the financial viable microfinance-markets crowds out these investors and reduces the amount of available money on the supply side.

To put it another way: How can the microfinance sector expand without private investment and how can it guarantee its identity with them? Are commercial funders the “good” or the “bad” guy?

1 comment:

derek said...

Thanks a lot for your post. I learned a lot, I am new to businesses and I am also new to managing expenses and profit for the company. I need more input regarding this matter and reading many resources is a great help for me. thanks.

Business Expense Management