Bridging the Divide

11 October 2010 at 06:00 2 comments

As the concept of microfinance has become more widely known, it has grown to occupy a strange space between business and philanthropy. For loans to be effective, they need to be repaid. To encourage clients to repay, loans must be seen as partnerships rather than charity. Many MFIs work hard to ensure that their operations operate as legitimate businesses; yet going public, as SKS and Compartamos have done, spurs outrage from critics. If these MFIs have a duty to shareholders, they argue, how can they also have a duty to reduce the poverty of their clients?

So which is it: business or philanthropy? CGAP’s microfinance blog recently published an interesting article arguing that microfinance is a financial tool just like any other, not as holy as it seems. From its roots with Muhammad Yunus and Grameen Bank, however, the end goal of microfinance is to bring about social change and uplift the working poor. Perhaps these are arguments for where microfinance should be, but where is it really?

Returning to the bare-bones definition of microfinance – offering financial services to low-income individuals – shows that rather than an “industry” per se, microfinance is more of a toolset. Any toolset can be used in a variety of ways, so it makes sense that microfinance can be used as a means to generate profit (i.e. sustainability) for businesses or to enable social change. Certainly it’s nicer to think about using these tools to help others, and microfinance has become popular because of this potential for impact. But with the pressure for MFIs to be sustainable in the long term, it’s easy to see the tendency to adopt a business mindset. (For those that are wary of capitalist forces, there are many good arguments that I won’t go into here for how focusing on the bottom line can actually benefit clients and achieve social benefits in the long term.)

There is clearly a wide spectrum ranging from the original Grameen model to publicly-owned companies, with MFIs scattered across it. Though microfinance isn’t the only toolset being used in the space between business and social impact – other models include “patient capital” used by investors like Acumen Fund – it helps to demonstrate the difficulties of straddling the gap. Interests and methods can become blurry. Another interesting question is: can an entity really exist in this space? Or will the vacuum of competing interests between the two necessarily force an institution to choose sides?

My time as a fellow has introduced me to many hard working individuals dedicated to the social mission behind their jobs. I believe that microfinance can be used to achieve real social change and that it is doing so in many cases. Microfinance is not young, but it still has a long way to go to carve out its space. As interests become more complex, I hope that MFIs will find a way to bridge the divide between these camps.

So what do you think – where is microfinance now? Where should it be? How can it get there in the future?

EB Moore is a KF12 working with Local Enterprise Assistance Program (LEAP) in Monrovia, Liberia. Despite having studied microfinance, she still finds a new perspective on it daily. If you want to learn more about this whole microfinance thing, get involved by becoming a lender on Kiva!

Entry filed under: KF12 (Kiva Fellows 12th Class), Liberia. Tags: , , , , .

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  • 1. Fehmeen | Microfinance Hub  |  16 October 2010 at 11:34

    There’s a lot of debate over whether commercialization is acceptable in microfinance, and I recently wrote a blog series about it too. It’s a gray area from beginning to end, and the only thing that makes it acceptable is if MFIs maintain a strong focus on social performance and at the end of the day, there are very few tools to measure this angle.

  • 2. V.Rengarajan  |  11 October 2010 at 19:18

    There is a lot of difference between the terms ‘ finance ‘ and ‘ micro finance ‘ The ultimate goal of Micro finance is for poverty reduction . If MF is treated ignorantly as a mere financial tool without attaching any of its ethical (holy) values, it will facilitate only sustaining the poverty . Probably it will support the supplier/institution which provide finance as money lender for their growth at high social cost of the poor.
    If this trends continues it would take another millennium to make a dent in poverty canvas

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