The Word of the Day: Opportunity

It's impressive how much introspection, if not outright criticism, is going on in microfinance. Not long before I left London, and well after I'd submitted my resignation to Goldman Sachs, I went along to a meeting of the Microfinance Club UK held at the Barclays building in Canary Wharf. The talk was entitled "What's Wrong With Microfinance?" If I was in need of a reality check for my off-to-save-the-world ambitions, here it was in flashing neon lights.

Two gentlemen, who had coincidentally just published a book with the same title, stood forth and pontificated on their views that microfinance is really microcredit, with loans being dispensed but with few other financial services being offered. It promotes debt and often excludes the poorest whom microfinance nominally seeks to help the most. Microfinance isn't the basis for a sound economy. Women (to whom the majority of microloans go) don't create businesses, they work for themselves. [This one drew bemused laughter from the assembled.] Self-employment is just a euphemism for survival. There's too much cash pouring into the arena chasing too few real opportunities for investment. A large section of the population being unbanked doesn't mean there's unmet demand. And so it went. A GS colleague who had similarly just left our esteemed employer to join Five Talents, she on a full time basis, was sitting next to me at the meeting. Was it too late to change our minds, we joked?

So is there any foundation to the accusations? Well three months of exposure to a small corner of microfinance in just one country does not an expert make. However having spoken to quite a few of ECLOF's clients and having perused much of the learned writing of microfinance insiders, both pro and anti, the answer, as ever, lies somewhere in the middle.

Richard Posner exclaims (on the excellent Becker-Posner Blog) that "the idea of borrowing one's way out of poverty is passing strange". Furthermore, he states, "I am unaware of any historical examples of nations that climbed out of poverty on the backs of small entrepreneurs financed by credit". He has a point, but it's unfortunate that he chose to express it so starkly without considering the whole picture. Microfinance is, and should be, the provision of financial services to the poor. That is to say that as well as loans, savings and insurance products should be offered. Many institutions in the field focus on the debt and this is what is drawing much of the criticism. And it is valid. Consumer debt cannot solve the problem on its own.

The crucial goal is to provide opportunities. The poor are not just poor of cash, but generally poor of opportunity, mainly because of the view that providing opportunities to the poor is a money-losing (or at best profit-neutral) proposition. Which for some players it is bound to be mainly because they're not set up for this kind of high-cost, low-margin customer interaction (e.g. my former employer). However this is a profitable (but please, not too profitable) business if done right. Though the providers need to be constantly mindful that the goal is not simply to load up the poor with debt. Microfinance needs to be a means of assisting the poor with all of their financial needs. At times and for certain people the need will be to give them a place to keep their money other than under their mattresses. At different times and for other people the need will be for leverage to enable them to exploit a niche they see in the market. And for all of them the need should be to hold inexpensive insurance such that they aren't starting from scratch if an earthquake fells their home.