Pardon the interruption from the series on domestic entrepreneurship issues for a quick blog on international entrepreneurship.

I write this with a bit of caution, as the last thing that I want to do is to dampen anyone’s interest in microfinance.  Microfinance is now, and for my money, always will be, a remarkably effective way to alleviate worldwide poverty.

BUT, I think that it’s important that donors/funders/investors understand the current climate for microfinance so that they can be very smart with their giving and as always, (but more difficult to do than you’d think) do no harm.

When we were on the DurhamCares trip to India we visited several different economic development programs.  It was during one such visit, in Chennai, that I actually started to think that a microfinance bubble might be imminent, at least one that would impact many urban environments where microfinance institutions (MFI) have become quite popular.  The Director of the program we visited lamented the loss of some of their best borrowing groups to competing MFIs.  In some cases, he had trained and nurtured savings groups for more than 2 years, steadily increasing the amounts that these women borrowed from him as they proved through their business models and repayment history that they could service larger amounts.  These women (this MFI, as most do, lent primarily to women) had received important training on subjects from extending credit to customers to the basics of marketing.  Now, in one day, a new loan officer from a new organization would come in and offer the women double the amount that they had previously borrowed.

These women often jumped at the chance to double the amount of money that they could borrow as they eyed more and more things that they might do with an increased sum of money.  In some cases this money was spent on their business, in some cases for weddings and in others the purchase of consumer goods.  Studies have also shown that there is a disturbing increase in the number of poor who have multiple loans to different MFIs, in some cases taking the proceeds from one loan to pay off another.  In other words, these women are subject to the same temptations and challenges that MANY OF US have experienced with easy credit, not any different from what so many American have witnessed and experienced with credit card debt, and yes, with easy-to-come-by mortgages.  The question, of course, is what will be the long term impact of this “easy credit” as each dollar borrowed more than the one before has a lower incremental benefit, of course, and with it a lower chance of being able to produce the income needed to pay it back.

Now if it was just a US-based telecom guy throwing out some concern, I’d likely take all of this with a grain of salt, but these concerns have been shared by others that I’ve talked to in the MFI industry as well.  Most also have particular concerns with cities like Chennai where MFI saturation has reached such a point that the vast majority of the poor are served, often times with multiple loans.

Ok, so what to do with this information/opinion?  The most important thing is to NOT stop investing in MFIs (pardon the double negative here, it just makes the point better).  The key is to invest a bit more smartly, and as with any investment (as all of our charitable giving/investing should be) research the organizations and ask the right questions.

Some questions you should ask include:  are MFIs operating in environments underserved or is current demand met by existing supply? what percentage of the MFI’s customers have multiple loans?  What percentage are in urban areas?  Does the charity permit direct funding to rural initiatives? What type of training programs does the MFI run and how frequently?  Of course, it’s also great to visit these institutions in the field.  While this seems daunting, DurhamCares trips (http://www.durhamcares.org/index.php/trips)  cost less than $1,500 and only involve 3 days out of the country and focus on some great MFIs.

Remember, 80% of the world’s poor DO NOT YET have access to microfinance funds and desperately need it.  That is 400 million entrepreneurs!

The rural poor generally and many selective pockets of the urban poor [consider HUGE urban centers like Brazzaville, Bangui, etc.] are vastly underserved by this amazing program that provides dignity rather than dependency, and a hand up rather than a hand out.  However, serving the rural poor is often less attractive due to political and economic instability and are often not as profitable as serving the urban poor in more stable economies.  The reason for this has much to do with the operating expenses of fielding a caseworker.  For instance, a rural caseworker might visit a small fraction of borrowing groups during the day as in urban areas.  This obviously drives up the operating costs of distributing and administrating the loans and conducting trainings.

Many MFIs targeting rural or less “attractive” urban pockets may not be profitable now or ever and as a result don’t receive much money from the international “for profit” private equity funding sources, and therefore are very much in need of outside donations (to an operating fund) or investments (to a loan fund typically returning 3-5% net to the investor).  In fact, while urban MFIs might make 10-20% to the bottom line (part of the reason that money is now chasing them), many rural MFIs might lose 20%.  BUT, another way of looking at a loss of 20% is to think that such an operation is 80% sustainable.  Compare 80% sustainability with the 0% sustainability that so much of our international giving and aid has gotten, and even poorly performing microfinance (if administered correctly in the field characterized by serviceable loan amounts and good training) looks like a Godsend.

So PLEASE consider microfinance as a part of your overseas funding!  It’s very much needed and can be amazingly effective for all the reasons listed above.  But, go in armed with questions that you should ask, with eyes wide open, and with a prayerful heart.

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Note:
Noticeably absent from this short piece is any information related to another component of microfinance:  SCA (Savings and Credit Associations) promote savings among groups of poor people, facilitating interest rate savings (as groups of savings often meet bank minimums for initial deposit) and lending to each other out of their shared pool.  These groups are not susceptible to the same bubble and are a very worthy recipient of your attention and investment.  For the best that I’ve seen check out the Chalmers Center www.chalmers.org), as a great institution dedicated exclusively to the training of lay workers in the field in SCA.  Also Hope International, (www.hopeinternational.org) is a MFI that strongly advocates SCAs in addition to the more traditional lending practices that they do.  Since their approach addresses both financial AND spiritual poverty as a Christ led organization, they work more relationally with clients in mostly underserved countries like the Congo and, in my opinion, are better suited to weather any correction that takes MFIs to something less than 100% sustainability.