On Friday, I attended the Chicago Microfinance Conference at the University of Chicago Gleacher Center, located magnificently on Michigan Avenue, just off of the Chicago River.
http://www.chicagomicrofinance.com/
The topic of the conference was
Competition and Collaboration, and the purpose of the gathering is to "bring together practitioners, academics and emerging industry leaders to advance the strategic debate of the future of microfinance." The organization was represented by reputable universities:
Kellogg School of Management,
UCLA, University of North Carolina,
University of Chicago IRIS Center - University of MarylandThink Tanks and Policy Groups:The Mix,
Boulder Institute of Microfinance Some of
the world's largest organizations that implement and financially support microfinance around the world:
Grameen Foundation,
Opportunity International, ACCION International, ShoreBank, Green Microfinance, International Finance Corporation, Blue OrchardYou may be surprised that
Morgan Stanley, Oracle, AIG, IBM, and other global corporations were in attendance. Why, you may ask, thats exactly what I'd like to try and explain. Before I begin, though, I'd like to inform my readers on some terminology that I've found commonplace in discussions on microfinance and global development.
Terms:
The Bottom of the Pyramid http://en.wikipedia.org/wiki/Bottom_of_the_pyramid In economics, the bottom of the pyramid is the largest, but poorest socio-economic group. In global terms, this is the four billion people who live on less than $2 per day, typically in developing countries. The phrase “bottom of the pyramid” is used in particular by people developing new models of doing business that deliberately target that demographic, often using new technology.
Social Entrepreneurhttp://en.wikipedia.org/wiki/Social_entrepreneurshipSomeone who recognizes a social problem and uses entrepreneurialship principles to organize, create, and manage a venture to make social change... A social entrepreneur assesses success in terms of the impact s/he has on society. While social entrepreneurs often work through nonprofits and citizen groups, many work in the private and governmental sectors.
Patient Capital
http://www.sustainabilitydictionary.com/p/patient_capital.php
Investment strategies that provide social and environmental returns in addition to financial returns with an emphasis on returns over the long-term. While a longer investment horizon and/or a smaller financial return may be inherent in individual patient capital investments, neither of these conditions are required of patient capital investments.
Philanthrocapitalismhttp://www.alliancemagazine.org/free/html/mar07e.htmlIt is a new way of doing philanthropy, which mirrors the way that business is done in the for-profit capitalist world.
Moving forward, allow me to explain what is happening with the microfinance industry, the challenges, and the opportunities.
The microfinance industry has been said to have a demand of $300 Billion dollars, and during the conference one speaker said that that estimate was understated. There is not a $300B supply; there is not a fraction of that. Its not interesting, though, to acknowledge that we're not meeting that demand, but what is interesting is seeing who the new players are. Yes - Morgan Stanley and AIG are interested in microfinance. There is a growing interest in banks, hedge funds, and equity groups to invest in the bottom of the pyramid. The reason is not simply to "do good", but equally, to make a profit. Unfortunately in microfinance, there is not a massive fortune to reap, but meager returns. Corporations and organizations have stated a 5% (at best) return after the cost of operations. What is the largest issue facing microfinancing today? Scaling up.
Small banks in developing countries simply cannot make enough $100 loans to cover their cost of operations, and ensure a profit that cause global financial institutions take notice. There are two logical answers to reducing the cost per transaction, either make fewer, larger transactions OR scale up. Since microfinance is in one sense a philanthropic effort, and in another a capitalistic one (see: philanthrocapitalism), the first option of making larger loans may not be adequate. The reason being that if an MFI (microfinance institution) gives larger loans, then in one sense, they become a bank, they are no longer serving the "poorest of the poor." In my opinion, that is not an issue, banks giving loans of $1,000-$5,000 instead of $100-$500 are growing with their entrepreneurs, and hopefully with the country at large. I would rather see MFI's graduate to banks, and make room for new MFI's, than MFI's stay MFI's and graduate their entrepreneurs to banks. BUT - since not all are along the same mindset, then our only option is to "scale up."
Scaling up is the concept that encompasses C.K. Prahalad's "Fortune at the Bottom of the Pyramid." This is the hope for the developing world - that their microfinance institutions, their business can amass a large enough customer base that sustains their operations. It is definitely the minority of MFI's that have achieved this scale, but those that have the scale and the reporting systems in place can now approach large Western investors.
The future of the microfinance industry is still uncertain, but it is my hope that more Western investors will be attracted, for both the financial and social gains. If you forget the social gains, you are a bank. If you forget the financial gains, you are a not-for-profit, and not sustainable. Microfinance must live at the nexus between the two.
