Microfinance: For Community or for Gain?

Microfinance—a system of small loans and money services geared toward small businesses—has been heralded as a bold new financial frontier, opening up a wealth of opportunity to those otherwise unable to obtain a loan. This attention is not without good cause; microfinance groups provide a valuable service to, for example, small businesses that are ineligible for bank loans.

However, as the microfinance industry grows, there appears to be a schism along two lines: one firmly rooted in its socially responsible core, and another capitalizing on the global tightening of credit to expand using more traditional business models. To learn more about this, Big Think spoke with Jonathan Morduch, Professor of Public Policy and Economics at the NYU Wagner Graduate School of Public Service.

“There is a very powerful narrative that you really can have it all,” said Morduch, “and there is something of a conspiracy of players, both from the more socially-driven side and from the more commercially-driven side, that they all come together under one tent — a vision in which there is really no trade-off in approaches.” He added, “I think we are seeing more and more the fact that they really are different worlds, with some gray area in between.”

“There are organizations that are very mission-focused and are reaching customers that are harder to reach,” said Morduch. These microfinance lenders largely lack the hallmarks of traditional business viability. They have negative returns on equity or assets and are subsidized in all sorts of ways.  He added, “We judge them by their making a difference in people’s lives.”

Such mission-oriented mircrofinance includes Grameen Bank (founded by microfinance guru and Big Think expert Muhammad Yunus) and the lending platform Kiva, a company and Web site through which people can make loans in increments starting at $25—largely to small businesses in developing countries.   So far, over 470,000 users have funded part or all of a loan through Kiva, totaling over $150 million dollars and reaching over 200 countries.  Over 82% of these loans were made to female business owners and entrepreneurs.

“There is another group of institutions that are unapologetically commercial,” said Morduch, “but they’re not reaching the same kind of audiences.” This group includes SKS Microfinance, which had its IPO Wednesday, as reported by the Associated Press, with the aim of raising $354 million. According to reports, the company’s public offering has been met with concern that its social investment interests will now cede to shareholder interests.

Microfinance in the U.S. is currently a small share of the lending industry.  An article in the New York Times yesterday outlines the role of microfinance in the U.S. with the story of a small business owner who received a $6,500 loan from the Opportunity Fund, a California-Bay-Area firm that has partnered with the portal Kiva.org.  It is too early to determine if the growing U.S. microfinance industry will favor the near-philanthropic mission-oriented model or if it will seek out large-scale funding from investors, from banks, or from taking the company public.  In a twist, one source for funding now for small-loan firms in the U.S. are banks that are not making the small loans to begin with. By partnering with mircolenders, large-scale banks meet Community Reinvestment Act (CRA) requirements that allow them to branch out into new communities.

In perhaps the keenest evidence that microfinance is poised to go mainstream, Yunus will appear as himself in an October episode of on a television program The Simpsons, according to a press release.