Summary:Are there business opportunities in the developing world?
This is the crucial question that will determine the success of international microfinance, a growing financial industry offering capital access to citizens in the developing world.
The four panelists responded with a resounding "yes," citing a pragmatic, profit-oriented approach to microfinance based on self-interest and promising returns for investors rather than social responsibility alone. High interest rates, quick turnover, and payback rates hovering around 98 percent — far higher than most commercial banks — all make microfinance a very attractive investment option.
But if microfinance makes good business sense and good ethical sense, why hasn′t it been embraced my mainstream investors? A number of factors scare them away, not least of which is the common belief that microfinance is little more than philanthropy for "do-gooders." The four panelists vehemently disagreed, arguing that charity and international aid have both failed in alleviating global poverty.
"If it′s philanthropic, it will fail," stated Stewart Paperin of the Open Society Institute. Money donated by international aid organizations actually allow badly run businesses to survive. Microfinancial institutions, by contrast, rate potential lenders using a credit rating system based on basic cash flow. "We are in the business of building good businesses," explained Craig Cohon of Globalegacy.
The microfinance industry as a whole is growing at 30 percent annually but there is still an enormous unmet demand. "There is a huge market for microfinance, because the vast majority of the world is poor and wants these financial services," said Cohon. It is estimated that currently microfinance institutions are meet only 5 percent of the total world demand. In other words, microlenders are looking to tap into an enormous financial market, and they are combining "profits with social mission," according to Prisma Microfinance′s David Sattherwaite.
The industry cannot truly take off on a massive scale, however, until the thousands of existing microfinance institutions scattered around the globe begin to consolidate. Once the lenders with better business practices begin to absorb the less efficient ones, they will achieve economies of scale, and be able to provide better services in more locations. Until this maturation of the industry occurs, mainstream investors will remain jittery about putting their money there. Another pitfall is that microlenders are not rated by uniform systems such as Standard and Poors. Finally, there must be better transnational diversification — banks lending in more than one developing country — to better insulate them against economic shocks that can occur and cause large numbers of defaults.
If these improvements can be made, investors will look with increasing favor on microfinance, which has risen as a parallel and more efficient lending alternative to the Bretton Woods institutions. In fact, microfinance offers a paradigm shift on how we perceive the world′s poor.
Moderator Betsy Zeidman summarized the combination of ethical and business benefits of microfinance: "Investors can now view the poor not as a problem, but an investment opportunity."
