To Profit or Not to Profit

According to Mr Chu, “to roll back poverty rather than to merely alleviate it”, any solution needs to be able to reach massive numbers, deliver permanent results that can help many generations, provide continuous effort so it gets better and better at what it does, and provide continuous efficiency so it also becomes cheaper and cheaper. Mr Chu believes the only state that can offer all these four requirements is business.

From a review of a debate between the father of microfinance Mohammad Yunus and Michael Chu, former President and CEO of ACCION. Given that today’s Blog Action Day is focused on poverty, it seemed fitting to highlight this issue. 

Can we truly reach microfinance’s potential without the efficiency and scalability gains that business and for-profit models provide? Is profiting off of the poor unethical, and as Yunus argues, should we only be looking to sustain the model at the lowest possible point of surplus?

You can read the rest of the recount by Amy Rennison here at Microcapital.org.

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Microfinance Transparency charged to clear the air

The field of microfinance is hot these days – some would argue too hot, in fact. In this flurry of activity, it seems its originally intended purpose – service to the poor – is in danger of being overshadowed by the pursuit of profit. As mentioned by Prerna in her previous post, Measuring the Social Impact of MFIs:

Can the two – poverty alleviation and profit – co-exist? Certainly…[However], possibly what is required is a gateway organization that regulates adherence to universalized social performance standards by MFIs. Clearly, given the Compartamos profit model (which I think is overly indulgent), some form of social regulatory body is necessary for all MFIs.

Seems Prerna was correct in her assessment, as leaders of the fast-expanding microfinance industry are in the process of setting up a new self-monitoring organization called “Microfinance Transparency” in order to police MFIs through publication of rates, fees and other information. [Source: Microcapital.org]

This new initiative comes as a direct response to critics of for-profit MFIs as no more than loan sharks, and attempts to preserve the fragile credibility of this burgeoning sector.

If the industry doesn’t curtail abuses and confusion, it faces the prospect of government crackdowns and donor funds drying up. Since Yunus pioneered the idea of lending small amounts of money to poor people without demanding collateral, the phenomenon has spread worldwide. These days, thousands of organizations are making loans to tens of millions of borrowers—usually to help them set up or expand small businesses.

This is great news and I commend the industry for recognizing its own responsibility to its clients and investors by providing such transparency.

MicroFinance Transparency will collect information from all microcredit lenders and store it in a database on its Web site, mftransparency.org, that’s searchable via the Web by anybody who is interested. (The group hasn’t said when that information will be posted on its site.) All of the loans will be converted into annual percentage rates based on the true cost of the loans. In addition, all of the costs associated with the loan, including any additional fees charged by the lenders, will be rolled into the total. [Chuck] Waterfield [Professor at Columbia University and the impetus with Yunus, behind this initiative] says most microcredit organizations will submit their data, and, for those that don’t, the information will be collected by gathering contracts from their borrowers and crunching the numbers.

Lets hope this is one part of a larger trend to further legitimize what is fast becoming an excellent toolkit for poverty reduction. To read more about our views on this issue, click here or here.