July 4th Picnic

I took my 3 sons to the DC suburbs for the July 4th weekend. The highlight was the annual picnic in my parents’ neighborhood (pony rides, egg toss competition, blueberry bake-off). One of my parents’ friends, someone who has been around the international development scene for decades (including a stint at the World Bank), disturbed the patriotic revelry to give me her 2 contrarian cents on microfinance.

“I can’t stand it,” she started. “Half the people I know say they’re involved in microfinance. They’re driving BMWs and working in finance and think they’re changing the world.”

“But they are!” I insisted. Okay, maybe they’re not changing the world yet, but achieving global financial access requires the energy and intellect of people who know about securitizing debt, swapping currency, re-insuring risk, and developing retail innovations. The unmet demand for finance stretches wide. In many parts of Africa, less than a quarter of the populations have bank accounts of any kind, even among the entrepreneurial class. In India, the millions of newly-banked citizens are outnumbered by the millions who remain unbanked. Thus, enter the bankers. Clear the way for the BMWs.

It was too nice a day to talk shop at a picnic. So, what I didn’t say is that recent international evidence paints a far more complicated (and more interesting) picture. The evidence shows clearly that commercial microfinance is growing (thank you, bankers). But it is not, in general, reaching the poorest customers—especially outside of South Asia. Reaching the poorest customers is still the niche of NGOs and government banks. And it’s a huge niche—so big that it shouldn’t even be considered a niche at all. In fact, NGOs, Indian self-help groups, and government banks serve over three quarters of microfinance customers worldwide, despite the attention that commercial microfinance approaches have been getting in The Economist and other business publications.

It’s exciting to think about the power of unlocking the “fortune at the bottom of the pyramid” through innovative for-profit businesses: the bankers have a role. But, in microfinance at least, if that was the only available strategy, there would be no hope of soon bringing finance to many of the world’s poorest citizens. And lacking access to reliable finance is, as they say, no picnic.