The other side of Microfinance

I attended a seminar on microfinance and that seminar has widened my knowledge horizon. I agree with what Prof Muhammad Yunus said "it's a business with social objective". Microfinance is doing business to fulfill the social objective(s). I thought social objective is the primary reason of the whole thing and business is there to facilitate the sustainability. However, this seminar painted the landscape of microfinance - a general view and the details of India, Cambodia and Pakistan.

I have heard about Grameen and I guess it could be 80% of the effort spent on the social objective and 20% on business. Grameen is known for improving the social status of women in Bangladesh. I think the Grameen Bank and the founder Prof Muhammad Yunus were awarded Nobel Peace Prize for the social objective but not the business. I did have a chance to hear such social-orientated businesses from India in that seminar. In such not-for-profit Micro Finance Institutions (MFIs), the biggest loans are about USD 200 and the interest rates are pretty low (can't remember the figure though).

On the other end of the spectrum, there are some organizations with 80% of the organization runs for business and 20% social objective. The speakers from Cambodia and Pakistan talked about their for-profit microfinance organizations. The Pakistani entrepreneur (I didn't say social entrepreneur) explained the smallest ticket (the smallest loan) is USD1500, and the interest rate is 40%. Don't be surprised. He is also working towards a social objective "providing access to finance (off course to the poor)". Anyway, people who do not have access to finance (i.e. they can't take loan from other banks because their loan is too small or they do not have enough property or something to put as guarantee) can get loans, run their own business and make money. Hmmm...

I think both forms of Microfinance are there for their own reason - sarcastically, one to spoil the poor and the other to make money between the investor and the lender.

Microfinance is so popular in India that some signals of "bubble" are already been seen. In some small towns, there are more MFI's than the poor. Thus some people took 3 to 6 loans and fell into the debt trap. I am sure there are people who took big loans from for-profit microfinance operators and fell into the business failure too. It is scary but true that there are always, always and always traps around us, even in the microfinance.

Despite various points of view on microfinance, all the four speakers agreed the poor need micro saving as mcuh as they need the loan. That is a new knowledge for me. But it seems so logical. Even if someone can make a small USD10 equivalent of money, no bank will accept this peanut. Thus they do need access to the banking facility as well. Another point is that microfinance by itself will not elevate poverty. Then, what should be the complementary? When I receive the invitation email for this seminar, I was thinking "which one is more effective in helping the poor - finance or human capital empowerment?" However, I walked out of the room with a different understanding "it is both - finance AND empowerment".