Microfinance: a market comes of age? Video Feature
Watch full video coverage of "Microfinance — A Market Comes of Age," a panel discussion on developments in microfinance.
Microfinance institutions have gained prominence in recent years. Offering very small loans to extremely poor clients, who have no other access to traditional credit, these institutions service more than 100 million borrowers who pay back loans with interest rates of 60, 80, even 100%, at a repayment rate that is typically as high as 98%. Success has meant that nonprofit programs are being commercialized. As that happens, there are investment opportunities, innovative ideas on how to expand the products offered and improve the effectiveness of the programs at alleviating poverty, as well as ethical questions about profiting from charging such high interest rates to poor clients.
A spirited but collegial panel discussion, organized by the New York City Chapter of the SOM Alumni Association, on the future of microfinance took place at the Yale Club of New York on January 30, 2008. The event built on an article in Q2 and explored recent developments in the microfinance market. Panelists represented academic, nonprofit, and forprofit perspectives. Much of the conversation focused on the ways microfinance institutions and projects blur those boundaries.
Deb Burand, former-executive vice president of the Grameen Foundation, said that microfinance is ultimately more than just a financial transaction, since the aim is to provide resources that let people move themselves out of poverty. She also underscored that current practices are changing quickly. Many of the institutions that do the lending were initially supported through donations but have begun to be financed through commercial sources. “It’s not on/off. These organizations have to live with both for a time,” Burand said.
Much of this commercial interest comes because the model of lending small amounts of money to fund micro-businesses has proved itself with loan repayment rates that far exceed other forms of credit, such as credit cards in the United States.
Christian Novak, executive director of the Microfinance Institutions Group – Debt Products at Morgan Stanley, discussed the opportunities Morgan Stanley and other large firms see by bringing scale to the sector.
Mary Ellen Iskenderian ’86, CEO of Women’s World Banking, said the reason microfinance has caught fire in recent years is because it has created a successful and sustainable process for institutions and those receiving loans. For many microlending organizations the key challenges have been how to keep up with multiple years of 40% growth.
Dean Karlan, assistant professor of economics at Yale, outlined the need for data-driven assessment of outcomes. “There are lots of win-win opportunities in microfinance,” he said, while also warning that too much reliance on anecdotal evidence may reduce the effectiveness of lenders. Karlan said that though the repayment rates are very high, few micro-businesses are growing into small- or medium-sized businesses. He suggested that a better range of services might improve the rates of growth. He cited one project that increased overall profitability by including business classes as part of the package offered to clients.
Iskenderian described efforts to include health services and savings support in certain situations as valuable products that accomplish dual goals of alleviating poverty and sustaining the institutions.
Microfinance gained a great deal of visibility in 2006 when economist Muhammad Yunus and the Grameen Bank, which he founded to provide microcredit, were jointly awarded the Nobel Peace Prize. The 2007 IPO of the Mexican company Banco Compartamos, with a high valuation based at least in part on 100% interest rates charged to clients, raised questions about the ethics of profiting on microlending.
The panel was introduced by Charles Alsdorf ’93 and moderated by Nelun de Silva Wijeyeratne ’87. They were also the principal organizers.
By Ted O'Callahan