Category Archives: Microfinance

Microlending

Bareeq AlBarqawi

October 23, 2012

Case Analysis – Microlending

The concept of Microfinance is relatively young and is still an evolving industry which was outlined in the case readings for the week. Although, microlending solves the issue of providing poor people in the developing world access to money, it still raises many questions. Is the process effective? Could it be profitable? Is this a sustainable model? And most important, where can we go from here?

Microfinancing is a man-power driven model where microlending institutions provide small loans to poor people in the area providing them the financial capital to begin an entrepreneurial venture in order to pay back the lender. Since there are no credit bureaus available to check their credit, lenders implemented a group lending model. This group lending model works best in rural areas because of the closeness in their community, but it is not very efficient and is flawed in theory. It relies on societal pressure which will eventually lead to these individuals in developing credit history with that microfinance institution. Ideally this is an excellent approach, but it does not account for the fact that some individuals in the group will flourish in business while others businesses may fail or grow slower and deters the group lending process. In addition, group members at times felt the need to push away from meeting regularly because they thought it was time wasted while away from their business and eventually they did not feel a need for group lending once they established their own personal credit history. In essence, the idea is a good kick start to microlending for certain communities, but that should rely on a judgment call. Not every community is cut out for this type of approach or is as close as certain communities. Also, it is a good stepping stone for borrowers, but would prove better if there was a second step they could advance to once they’ve completed group lending and succeeded in paying off their loan(s) (Economist, 2005).

Microsavings accounts are not as booming as the microfinance industry, but it is something that should have been considered way in advance of microlending. It was assumed that poor people in developing countries had no interest in saving but in reality, people on the ground attached great value to keeping their money in a safe place than hiding them in the dirt. Instead of “jumping the gun” and pushing the loans and debt process on these people, they should first experience what it’s like to save, how to do it, and why. They should be taught how to manage their money before borrowing it and putting themselves in debt and risk. Baby steps are key here (Economist, 2005).

The whole premise of microlending started with the idea of “doing good.” But has it become exploitive and manipulative? Some microfinance institutions are transitioning from non-profit to for-profit business models and operating as they would in the West. They are drifting away from charitable donations and looking for long-term capital from investors and big banks. With this type of business drive and acumen, it is quite surprising that these investors and microfinance companies did not fill in the gap between the people and microfinance; training and development. People on the ground are in a situation where they borrow money they are not normally accustomed to having and must now begin a business to begin to pay that back, but where do they start and what do they do? They need financial and business experts and incubation centers to develop their critical thinking skills and aid in becoming an entrepreneur.

Having this type of training, along with microlending, seems to remedy the issues that arise on the ground in this field. Companies such as SKS Microfinance are doing exceptionally well following their for-profit model and have the backing of foreign banks and have turned a philanthropic effort into a business/corporate one. Many are now trying to follow suit, but when SKS implemented simple accounting practices given the little electricity India gets and having their borrowers pay a set amount every week with no change involved shows that if you go for the issues or problems directly then you see some real progress. Knowing that, providing the people avenues to succeed with these newfound funds would be ideal and will probably be something we see in the coming years (Bellman, 2006).

Microfinance has economically developed the regions of the developing world but there is still so much more to be done. When you see how SKS Microfinance has a default rate of less then 2% then you know that they are onto something. However, this is still a young industry and many more improvements will come but seeing the direction it is headed reveals that it will eventually play a much larger role in economic development and business ventures while bringing corporate and foreign investors to the region as we have seen with Citigroup. In addition, foreign companies may have limitations in the way they run their businesses in such countries which is why we are now seen starting partnerships with microfinance institutions such as Citigroup and SKS Microfinance (Bellman, 2006).

The impact of foreign capital on microlending effectiveness is that it provides microlending institutions more capital to do business and not relay on charitable donations, but at the same time we question if it’s ethical? Based on the “green model” in the comparison between Wall Street and the borrowers on the ground in developing countries, foreign investors gain a large margin of profit in comparison to those this system is supposed to help. It questions the ethics of working to do good but then pocketing most of the capital rather than reinvesting back into the region. Given that the region still has more growing to do, the question of intent comes into play when foreign investors could re-invest in the region to fix the gaps in the microlending business especially with consideration to small business management education and the lack of it.

Tying it all together, the process of microlending is ethical if viewing it in an ideal circumstance, but ethical people are not always involved. Lenders can manipulate and pressure borrowers to take out loans at interest rates that spike up in the future and now the borrower is unable to repay or foreign investors are making more money off the hard work of those on the ground. We cannot ignore that these things are happening. The ventures that need further advancement are microsavings accounts, credit bureaus, small business management education, and insurance products because these are the gaps missing in the microlending process (Bajaj, 2011). For example, when a rural lender in Indonesia, BRI, was failing, they transitioned into a bank for the poor and introduced a government-guaranteed savings account with no minimum deposits and now they have around 30 million savings accounts (Economist 2005). We hear success stories which makes us believe this is working, however that is not always the norm. Just as SKS Microfinance fixed what they saw wrong in the system, this process needs fine tuning and being that it is a fairly new and young industry, we are in the hopes that this is the direction they will be headed. The four main areas that require attention in this field are “culture, products, funding, and the cost of operations” and with the ventures outlined earlier, once these are addressed is when real social change can take place (Economist, 2005).

Microfinance Example – Measurement

Kyle Dumont

Microfinancing has been a significant development in the field of social entrepreneurship not only because it has demonstrated proof of concept that social ventures can be big business, but also because it has highlighted what a challenge merging the worlds of profitability and social progress can be. Just ask Hugh Sinclair, author of Confessions of a Microfinance Heretic.

Hugh argues that the challenge is one of transparency. Like the subprime lending crisis, Hugh believes that predatory practices are unavoidable where the motivations of the lenders aren’t aligned with the motivations of the lendees. While I agree that transparency is certainly important, what I wanted to explore was the misalignment, rather than the issue of transparency and regulation. After all, why is there a misalignment in the first place? Weren’t these organizations founded on the premise of providing un/underserved constituents with the financial means to better themselves and their communities (Check out Grameen’s website which is chock-full of social impact lingo and yet we’ve read the controversy surrounding them. Yes, the accusations leveled at Grameen are considered by many to be frivolous, but the criticisms of microfinance as a viable industry are still relevant). I wanted to consider the question of how do organizations go astray and whether microfiance institutions (MFI’s) can effectively protect their mission internally.

The so-called “lean startup revolution” is the work of silicone-valley veteran and organizational evangelist Eric Reis. While the concept is innovative in its application, the premise of the Lean Startup is essentially a repurposing of the scientific method. If you don’t tie what you are doing to something measurable, there is no way to systematically progress. In this regard, social ventures are no different from other companies. As we discussed in class last week, determining the ultimate social impact of a project or scheme can be a challenging undertaking for companies, but it is essential for social ventures, especially those that are inherently vulnerable to corruption.

The relative importance for MFI’s to implement a metric-based approach is something that I came across in a publication by Kiva. There, Kiva professes that increasing success and subsequently, the increasing competition, threaten to pull microfinancing firms further from their social missions. To their credit, MFI’s have been aware of this weakness and established the Social Performance Task Force (SPTF) in 2005 and the Microfinance Information Exchange (MIX) in 2009 (for those interested, the MIX site is a treasure-trove of MFI data). One graph from their publication, Defining responsible financial performance: how to think about social performance, struck me. The graph, Development goals and outcomes tracking, shows the discrepancy between MFI’s who recognize that tracking social impact is a critical part staying aligned with their social mission and those that actually track outcomes. The drop-off is troubling. While it is certainly important to recognize as an institution that social impact tracking is important, the proclamation strikes me as hollow if it isn’t backed up with any tangible effort to measure social impact. As long as MFI’s continue to operate in this fashion, I would expect that we will continue to see evidence of questionable business practices in the microfinance industry and criticism from analysts.

Cell phone provision of microfinance products and services

Case Analysis – Microlending – Jason Bonner

Cell phone provision of microfinance products and services

There are three major issues in microlending; Availability of funds, administration costs, and of course, the high risk associated with dealings at the bottom of the pyramid. Using cell phones as a provision of microfinance products and services, though still in its infancy stage, has proven to be an effective means of addressing the most prevalent issues. Elimination of these major hurdles can and will open the door for future growth in microlending as well as help millions more climb out of poverty.

The first major issue in microlending is the availability of capital. While there are billions of people that are at the bottom of the pyramid that can benefit from small loans, they are just that, small, leaving the profits minute as well. This does not attract many large financial institutions or investment firms simply because the profits are more attractive elsewhere. Much of the finances available to the microlending industry originate from charities and philanthropies. As stated by Stephanie Strom and Vikas Bajaj, there has long been debate over whether social enterprises should be turned into giant commercial operations that can use the money raised to provide even more loans to the needy rather than relying only on charitable donations. Issues arise as what starts as a social enterprise to help the poor gradually becomes big business in search of profits. The line gets blurred between doing right by the people and doing right by investors wanting higher profits. Many proponents of microlending believe it may be possible with the correct regulations and business plan, but being in its infancy stage still, that has yet to be determined. Making the microfinance industry more attractive and stable will open doors for increased capital availability. This can be achieved by lowering risks and costs associated with establishing and servicing micro loans through the use of cell phone communication.

Costs are a major factor when dealing in microfinance loans. The main reason for the high cost of microfinance loans is the high transaction cost of traditional microfinance operations relative to the loan size. This increases interest rates from 30% to 300% and possibly higher, depending on risks involved and late fees and penalties. Moneylenders are frequently accused of artificially inflating rates leading to increased poverty, the exact opposite of what this social enterprise was designed to achieve. Lack of regulation has been raised as an issue but with the many different requirements of the many different areas of poor throughout the world make designing a consistent and stable system near impossible. In developed parts of the world, the credit system has a credit rating system. This enables financial institutions to base rates on past credit performances. In undeveloped parts of the world, there are no such systems. Organizations like Accion, a network of financial institutions based in Boston and Washington, DC, started their microfinance endeavor with solidarity loans made to groups of poor people, believing they would provide a stable arena for loan acquisitions because the receiving members would keep each other honest for repayment. This system also backfired as members of groups receiving loans would often grow their businesses at different rates leading to some members covering other members’ debts. Again, communication breakdown can be blamed as the major issue leading once again to the use of cell phone technology as an answer.

The risks involved in microfinance are extreme. It is very difficult to see how lending money to those with none can be beneficial or profitable, especially in small amounts across large areas. This is the main reason for slowed industry growth. There have been few success stories in microfinance, but none that offer a complete answer or a business plan for future profitability and sustainability. Many of the success stories, like ProCredit and Grameen Bank, frequently face problems in new territories due to culture differences and or simply need more capital but are unable to acquire more investment. Among the few shining stars, there are many dismal microlending institutions that exploit the poor offsetting any good done by those that are successful, drawing much criticism in the world. The main problem stems from trying to make money off the poor. Turning a charitable organization into a for-profit company is an exercise in futility. This was proven by SKS Microfinance and its issues with going public and what to do with the profits from doing so. The only beneficiaries should be the poor that are being helped. Trying to justify a paycheck quickly turns the entire outlook of this young industry from caring to greed.

Communication can be the game-changer in the microfinance industry. The cell phone industry has exploded among the bottom of the pyramid as the poor realize the benefits of cellular technology and the often lifesaving information that can be had easily as explained by David Lehr in his article “Dialing for Development.” Cell phone technology keeps people in touch with one another and this model can be used to bridge the gap between moneylenders and the BOTP. A company called Zidisha is currently attempting the use of cell phones in its microlending business model. The average Zidisha borrower pays only 8.02% in annual interest and fees, dramatically reduced as compared to the current averages. Much of the savings are in administration costs. Zidisha puts borrowers in direct contact with lenders eliminating many middlemen all of whom used to pocket a percentage. Risks are also dramatically reduced by creating a Facebook-esque environment where borrowers are in steady contact sharing stories of success and failures for others to learn from. Risk is also diminished further because of a rudimentary credit history formed by the peer-to-peer network that can be followed by lenders similar to feedback ratings on EBay for buyers and sellers. Through the use of cell phones and its increased communication, Zidisha has effectively eliminated two of the three major issues facing the microfinance industry. Through its continued success, the third issue of acquiring more capital to lend should naturally fall into place as time goes on and the business model proves itself profitable and sustainable.

In order for microlending to survive and continue offering a way out of poverty for the bottom of the pyramid, communication is the key factor and cell phone use will be the tool used to achieve that. The BOTP has already embraced the technology and has enjoyed many benefits derived from information that would otherwise go unknown. To use this technology even further in microlending is the logical next step for this industry. It lowers risks by opening up communication channels and adding transparency. It cuts costs by eliminating middlemen and paperwork associated with loan origination and collection. And it will attract more capital as the technology is spread further among the BOTP, showing that microfinance can be both profitable and charitable.

 

 

 

 

References

 

Abbott, K. (2012, July 10). A Microfinance ‘Heretic’ on How to Fix the Industry. Retrieved from http://www.businessweek.com/articles/2012-07-10/a-microfinance-heretic-on-how-to-fix-the-industry.

Bajaj, Vikas. 2011.  15 years in, microcredit has suffered a black eye.  The New York Times, Business, Thursday, January 6.

Bellman, Eric. 2006. Invisible Hand: Entrepreneur Gets Big Banks to Back Very Small Loans. Wall Street Journal, May 15, 2006.  pg. A.1.

Easton, T. 2005.  The hidden wealth of the poor: A survey of microfinance.  The Economist, November 5th: 1-10.

Lehr, David. 2008.  Dialing for development. Stanford Social Innovation Review, Fall: 44-49.

Microfinance’s Latest Challenge: Cutting Back on Over-indebtedness Among Its Poorest Clients (Dec 07, 2011) Knowledge@Wharton. Retrieved from http://knowledge.wharton.upenn.edu/article.cfm?articleid=2895.

Rozas, D. (2011, July 5). Microfinance without the MFI? Zidisha tests the boundaries of microlending methodology. Retrieved from http://www.financialaccess.org/blog/2011/07/microfinance-without-mfi-zidisha-tests-boundaries-microlending-methodology.

Strom, Stephanie & Bajaj, Vikas, 2010.  Wealth and controversy in microlending.  The New York Times, Friday, July 30: B1 & B6.

Microfinance Example

Kiva.org is a non-profit organization started in 2005 that connects borrowers with lenders around the world. They act a conduit to for lenders to get funds to borrowers via their website through Field Partners. These field partners are local institutions with different business models including microfinance, social entrepreneurs, schools, etc. Field Partners can receive credit lines from Kiva that range from $20,000 to $2 million depending on meeting Kiva’s minimum requirements and the due diligence performed [3]. The one items that binds together partner commitment is the double bottom-line.

 

Individuals are offered the opportunity to choose the person or group they would like lend money. They can lend as little as $25 to borrowers. These loans are typically to help small businesses in undeserved and impoverish areas. Borrowers don’t expect to get paid interest for these loans. Kiva organizes loans into sectors from Agriculture to Wholesale with the main concentration of loans focused on Retail. [2] Since 2005, they have helped lend over $368 million with a repayment rate of close to 99% [1].

 

This approach set the stage for “for-profit” competitors. Let’s take Microplace.com as an example. Microplace offers you an opportunity change the world, while at the same time diversifying your investment portfolio. They are of creating a sustaining, scalable organization that can hit their bottom-line while appealing your yours. They are specifically attempting to siphon charitable donations that citizens would make to investing in impoverished areas. The main difference between the two is that with Microplace, you get interest on your loan.

 

Microfinance is not just limited to helping those in need. It’s popped up in helping the Americans who could use funds for inventory, infrastructure and to consolidate credit card debt. Proper.com has offered $418 million since inception with a rate of return of 10+%. [5] They have the same business model as Microplace, but have zero focus on helping poverty. They position themselves by asking why the big banks should be making all of the profit. Joe Average should be in on it as well. Prosper’s main completitor, Lendingclub.com appeals the same way.

 

Microfinance looks to have followed the path of disruptive innovation. They first began meeting the needs of undeserved markets such a countries in poverty or where the big banks would not play. Over time, the success of organization such as Kiva made the microfinance business model look scalable and profitable. Some like Microplace, replicated this model for the double bottom-line. Others, like Prosper.com, saw that this model could serve existing loans and non-customers and scaled their products out over the Internet. Microfinance is probably getting close to the mid-point on the “S” curve and still has a ton of room to grow with sustaining innovations and new competition. Microfinance looks like it’s here to stay.

 

 

 

References

[1] http://www.kiva.org/about

[2] http://www.kiva.org/lend?sortBy=random

[3] http://www.kiva.org/partners/info

[4] https://www.microplace.com/howitworks

[5] http://www.prosper.com/welcome/how_it_works.aspx

Microfinance Example: Microfinance vs. US Subprime Market

Is the microfinance industry facing the same dangers as the subprime market?  Many factors played a part in the collapse of the economy in 2009, but none so much as the collapse of the housing market.  The importance of the housing market to the overall state of the economy can be cited in the Fed’s efforts (1) to strengthen the housing market through the latest round of quantitative easing.  Now that we see the importance of this sector of assets, we must also look to the cause of it initial demise in order to ensure that history does not repeat itself.  Loose lending is that root cause (2) and for years individuals and businesses were allowed to borrow beyond their means until such time that the bloated and unrealized growth of the housing market turned south with every failed loan that came to be realized.  The exponential rise of microfinance in the emerging markets of the world closely resembles the early stages of US housing market trend(3,4) and the world is beginning to see that just as many Americans were left worse off by ill-begotten subprime loans, so too are those individuals at the bottom of the pyramid (5).  Some say that the programs of microfinance meant for social and economic improvement have simply introduced a new burden to the already downtrodden.  The major differences between the subprime US loans and microfinance EM loans are the default rates and the interest rates and these differences may be microfinance’s saving grace.  If we examine the average subprime rate pre-financial crisis we see as high as 17% (6) on amounts typically greater than $100,000 which are tied to real assets and defaulted at rates higher than 15% (7).  In contrast, microfinance loans range as high as 65% (8) on small amounts with small terms that are tied to any number of tangible or intangible assets and are defaulting at rates as high as only 3%.

From a high level, the rise of microfinance could be viewed as a microcosm of the financial crisis, however, if we examine the differentiating factors, we will see that microfinance has more factors keeping it afloat than the subprime market did.  Even though predatory lenders and lax regulation may lead to individuals entering into borrowing positions that are unsuitable, the culture of many EMs find the idea of default reprehensible and the communities of the troubled individual will often do what they can in order to support a delinquent borrower.  Contrarily, the US borrower rarely has such a close knit relationship to the community and US laws and regulations make bankruptcy and foreclosure filing a viable alternative to paying.  Microfinance institutions also have a well diversified lending pool from everything from unsecured to any number of different real assets such as animals, appliances, machinery, and real estate.  A downturn in one asset class will not affect the others thereby alleviating the risk of collapse.  On the other hand, the subprime market downturn affected all real estate throughout the entire country which in turn accounted for an extreme decline of all financial institutions’ equity holdings.  As a result of downturn, government and institutional regulations were established to ensure that borrowers fit the parameters of the lender thereby lowering risk of default.  Default and delinquency were drivers of the economic crisis, and, while the risk of dramatic economic collapse may not exist at the same level in the EMs due to the diversified underlying assets and the percentage microfinance loans in overall bank loan portfolios, enhanced regulation should still benefit the EM consumer especially in a time when, like America, EM delinquency rates are on the rise (9).

  1. http://moneymorning.com/2012/10/15/qe3-will-give-rebounding-homebuilder-stocks-an-extra-push/
  2. http://www.newgeography.com/content/00369-root-causes-financial-crisis-a-primer
  3. http://www.economist.com/node/16702063
  4. http://dailyreckoning.com/when-realtors-become-waiters/
  5. New York Times.  “15 Years In, Microcredit Has Suffered a Black Eye.” [Class Reading]
  6. http://www.mindfully.org/Reform/2007/Subprime-Lending-JEC25oct07.htm
  7. http://www.calculatedriskblog.com/2009/11/mba-forecasts-foreclosures-to-peak-in.html
  8. The Economist. “The Hidden Wealth of the Poor:  A Survey of Micro Finance.” [Class Reading]
  9. http://blogs.cgdev.org/open_book/2010/02/grameen-bank-which-pioneered-loans-for-the-poor-has-hit-a-repayment-snag.php

Case Example-The Poverty Alleviation Fund

Case Example-The Poverty Alleviation Fund

Background:

The Poverty Alleviation Fund (TPAF) is a non-political, non-sectarian, U.S. non-governmental organization with its headquarters in Cambridge, Massachusetts.[1]TPAF was founded in 1998 by Arthur Holcombe to provide microcredit, health education, employable skills training and other assistance to enable Tibetans in China to improve their incomes and general well being. [2]

Microfinance:

TPAF has a micro loans program between 1,000-2,000 RMB ($155-$310) to help increase household incomes for over 3,000 poor rural in Lhoka and Nakchu Prefecture.[3] There has been a 99% payback in Lhoka Prefecture and a 95% payback in Nakchu Prefecture. To qualify, the local Tibetan had to reach some requirements. The loans are provided to woman grouped into small five members. Each member has the responsibility to manage the credit and payback all the loan principle and interests. When the group pays back the loan, each member will qualify for a larger loan. In Nakchu Prefecture, the loans are provided to groups of families. The reason is that individual nomad families have not been prepared to take on personal debt. (Sandeep, Jiyeon, Marc, 2005)[4]The government officials and women leader have been trained to help the Tibetan learning more about the repayment and credits.[5]As follow:

    TPAF has the same disadvantage of lacking collateral and data like other microloan.

TPAF’s business model is similar to the Grameen Bank’s model in 1973. When Grameen Bank first start “micro” loan, “the group member were required to monitor each other at weekly meetings, applying varying degrees of pressure to ensure repayment. As loans were repaid, people were allowed to borrow more.”[6]

The reason that Lhoka Prefecture’s repayment performance is better than Nakchu Prefecture’s might be the Lhoka Prefecture is agriculture and animal husbandry mixing zone while the Nakchu Prefecture is pure pastoral area. The people in Lhoka might have a more stable agricultural harvest than pure animal husbandry, which make increase their ability to repay their loans. The other reason might be the size of the loan. The size of the loan in Lhoka is around $36-181, while Nakchu’s size is around $1,205-9640. The larger amount of repayment might be more difficult to repay which cost the lower portion of repayment performance. The organizational structures in the TPAF offices might have influence on the repayment but I have not found any reference about the organizational structures in TPAF.

Alleviating Poverty

TPAF has also introduced projects that help alleviate poverty. In Nakchu and Lhasa area, over 1,000 students have been training to study veterinary medicine, cooking, tailoring, automotive maintenance, carpet making, Tibetan art drawing and driving.[7] In addition, TPAF is working with about 35 groups of artisans from across Tibet to improve the quality and marketability of their traditional products. As part of this project, an Ancient Art Restoration Company building in the Barkor area of Lhasa has been refurbished and turned into an emporium where artisans can sell their products to tourists.[8] This model might be better because training programs provide the opportunities for the people improve their skills and by working together with the microloan, which the interests of the loan is only 3%.

TPAF’s program in Tibet was successful not only because the microloan business model but also because Tibet has great potential in tourism. The QingZang railroad project was finished in 2006,which connected Lhasa and Xining and shorten the time traveling to Tibet to 25 hours. Before that the only two ways to enter Tibet are by car and by air. The airport was built in 1966, however, there are very limited flight was running. Driving to Tibet will also take too long and the condition of the road is unpredictable. The railroad had brought many tourists to Tibet. The demands of traditional food, medicine, and art crafts are huge.

Large parts of poorest Chinese are living the remote mountainous area. Unlike Tibet, those areas were difficult to access. It might take hours walking to get to the villages. As much as they need microloan, the transportation will be very costly. The remote mountainous areas also make t education to the poor very difficult. What’s more, the land is not owned by individuals, so it cannot be used as collateral for credits.


[4] Microfinance in China & India, BalajiSandeep, Park Jiyeon, WidmerGian Marc, Insead, Economics in developing countries.  http://faculty.insead.edu/dutt/emdc/projects/Sep-Oct05/Group_E.pdf

[5] Microfinance in China & India, BalajiSandeep, Park Jiyeon, WidmerGian Marc, Insead, Economics in developing countries.  http://faculty.insead.edu/dutt/emdc/projects/Sep-Oct05/Group_E.pdf

[6] The hidden wealth of the poor, The economist, November 5th 2005, page 1

Next Steps for Microfinance

The evolution of micro-financing over the past 15 years has been evident through the inclusion of micro-insurance, savings options, growing participation by large for profit banks and the sturdy increase in the number of loans being provided to borrowers lacking access. While these strides have increased the scope and scale of micro-financing, it appears there are still significant steps necessary to realize the true benefits of this social enterprise.  Recent skepticism of micro-financing by local governments and key political and social figures are indicators of the challenges that still lie ahead in developing a sustainable structure desirable of the original vision created.

Microfinance at its inception was designed to provide access to loans and savings accounts for small businesses in poverty stricken economies that lacked access through traditional channels.  The goal of opening up channels of access was to reduce the high levels of poverty by providing people with an opportunity to start their own business and create a new source of income.   As microfinancing organizations evolved, the focus shifted more heavily to profit generation and strayed from poverty reduction.  This is evident through the types of loans being made and the still prevalent poverty in areas where microfinancing has focused its efforts. 

The geographies microfinance organizations aim to serve consist of individuals who are not familiar with traditional financial services that have become part of everyday life in developed countries. Simply providing access does not eliminate the challenges faced by developing economies and can lead to more issues than resolution.  This is apparent by the large number of individuals who seem to be generating higher levels of debt through access to loans rather than working their way out of poverty.  The major gap in microfinance services is the training, support and education necessary to allow these individuals to take advantage of the services now available to them.  Their culture and upbringing did not afford them the understanding of how to be financially stable or how to successfully run a small business.  Instead, many have viewed the loans as short term access to financial means that temporarily alleviates their poor living conditions.  While it is not necessarily the responsibility of microfinance institutions to fill this gap it is a key component to their continued success and a factor they should be supporting to enable their cause.  This support, in conjunction with the appropriate infrastructure and governmental regulations, are essential to allow individuals in developing countries to maximize the advantages of microlending.

In addition to the need for training, local governments play a significant role in the success or failure of microlending.  This point is supported in the NY Times article “15 Years in, Microcredit Has Suffered a Black Eye”, in which the prime minister of Bangladesh, activists and politicians in Nicaragua, Pakistan and Bolivia have turned their backs on microlenders encouraging borrowers to default on loans.  Government support and the existence of the necessary regulations and infrastructure to support this type of financial structure are vital to achieving microlenders mission.  Without this, the efforts of these organizations are undermined by political figures who feel insignificant and threatened.  On the contrary, microfinancing organizations should be focusing their efforts on developing the necessary coalitions and communication channels to garner support for their efforts.  If they are able to demonstrate to the government organizations the benefit of microlending to their economy and to their political efforts, social enterprises are more likely to gain the needed support. 

As discussed in the article “Cultivating your Ecosystem” it is important to identify the four environmental conditions affecting social entrepreneur’s efforts and then create the proper structure to enable those efforts in the defined environment.  The microlending industry took into account the geography, economics, markets and social fabric of the environments they entered but failed to fully evaluate the government and administrative structures of the markets they operated in.  While microlending organizations have some work to do they are still a very prevalent part of third world economies and their efforts are instrumental in helping entrepreneurs get their businesses up and running with the goal of reducing poverty.  With a better understanding of the roadblocks, microfinance institutions can better position themselves for success by establishing the appropriate relationships and communication channels.