More on Microfinancing: Credit to World’s Poor

“Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.” — Niccolo Machiavelli

Much has been written about microfinancing since Muhammad Yunus won the Nobel Peace Prize this year. In the latest issue of The New Yorker, Connie Bruck takes a different angle with a comprehensive piece on the debate between “pure do-gooders” and “profit-minded do-gooders” in the microcredit world.

She specifically focuses on the views of Pierre Omidyar of eBay fame and fortune. As typical with The New Yorker, it is a lengthy article (11 pages) but worth all the time it will take you to read it. You can locate it online at this link. I highly recommend it.

Omidyar believes that microfinance is about equal access to capital. When he first met Yunus, “He was struck by Yunus’s statement that the poor are natural entrepreneurs, essentially because their business activities are a matter of survival. By giving them the tools, you unleash the entrepreneurial instinct.”

“As much as Omidyar admired Yunus’s belief that anyone, provided the means, can become self-sufficient — even successful — he has a different idea about the future of microfinance. Yunus is now seen by Omidyar and many others as the archetypal founder, too wedded to his original vision. In recent years, younger and nimbler players have been taking microfinance — their preferred term — toward the idea of building a fully commercial, profit-making sector.”

The article continues, “The debate is about much more than purity of motives. The Yunus faction worries about ‘mission drift,’ saying that, as the drive for profitability increases, only the so-called ‘less poor’ (as opposed to the very poor) will qualify for loans. On the one side, there are the people saying, essentially, we want to be Citigroup for poor people.”

“But, on the other side, we’re saying, we didn’t start this to become a bank. We started this to end poverty. So we’re going to experiment with all the different ways, profitable or not, that we can work with our constituencies — who are our customers, not our shareholders. If your core mission is to provide a channel out of desperate poverty, it creates a different set of questions than if your mission is to create a global market in microfinance futures.”

“Hyperbole distorts the debate on both sides. Muhammad Yunus speaks eloquently about eradicating poverty, but some advocates of commercialization argue that microcredit burdens the very poor with debt, and that the less poor are the only appropriate customers. Since relatively few rigorous studies on the impact of microfinance have been completed, ideology tends to dominate.”

“Jonathan Morduch, a professor of public policy and economics at New York University’s Wagner Graduate School of Public Service, who has studied the field for more than a decade, said that there is clear evidence that microfinance can help the very poor, but he added that credit alone is not a panacea.”

“He emphasized the success of groups that combine lending with other initiatives, such as education and health care. And although the lives of individuals have improved, loans to the poor have not yet had a demonstrable effect on aggregate poverty levels. The boldest claim for microfinance — that it can single-handedly eliminate a large share of world poverty — outpaces, by a long distance, the evidence accumulated to date.”

Do you want an abbreviated view on the debate that will take less time to digest than getting through The New Yorker article? Check out this post along with its videos/newscasts links at FinanceProfessor.com.