I do not beleive that the market is going to satisfy the need for financial services of the rural poor in Africa, it is just too expensive to provide intially though when MFI’s reach a certain size it becomes more economic. A very exciting development in Afria is the advent of mobile phone banking which may radically lower the cost of delivering MF.

Oikocredit have just received permission to sell their shares, which yield 2% p.a., in th UK. They are setting up their first UK support association with which I am involved. Anyone interested should contact. uk.southwest.sa@oikocredit.org

The surprising thing to me is how difficult it is for an individual or service club (such as Rotary) to invest in microfinance (rather than simply donate). Oikocredit seems to do a good job, but has no UK representation apparently. I’d expect considerable individual / service organisation microcredit funding to be forthcoming if investments of say €1000 or $1000 were easier to make.

http://www.unitus.com/wwd_accelmodel.asp

The sums you mention are relatively small compared
to the sum of foreign aid and charity.

Which is pretty small compared to the wealth of industrial nations.

We do know a lot of top down aid goes to corrupt officials and waste. So simply getting money into the bottom is something. If they stimulate so economic activity it is a multiplier, and millions of small bets may prove better than a big one.

I don’t think that the industrial countries have shown that useful credit tools develop for the poor. Interest rates at check cashing places and the like are often excessive. This is even truer in the third world. Many small vendors pay as much as 40% per month. This guarntees reduced incomes and little savings while the traditional feudal elite continues.

I’m not sure it’s accurate to characterize the Omidyar-Tufts Microfinance Fund as a microfinance subsidy. It was founded through an individual endowment from Pierre and Pam Omidyar, who are university alumni (not through the Omidyar Network), and is intended to kill two birds with one stone: funding microlending programs and generating income for the university. From the President’s statement on their website :

We hope the Omidyar-Tufts Microfinance Fund will demonstrate that microfinance can be commercially viable, and in the process draw additional capital into this market. This fund clearly demonstrates that it is possible to do well by doing good. We expect Pierre’s innovative idea to empower millions of people in developing nations – and to generate significant income to Tufts as the microfinance investments produce returns. Fifty percent of the investment income from the Omidyar-Tufts Microfinance Fund will be available for Tufts to use in support of both our faculty and students. The remaining income will be reinvested in microfinance. We expect to use the returns generated by the Fund to create a loan forgiveness program for graduates pursuing careers in public service, to create a funded internship program for students working in the non-profit sector, and to support additional investments in financial aid. Faculty will also benefit from this program with additional support for their teaching and research.

In terms of institutional arrangements: “The Omidyar-Tufts Microfinance Fund will be invested solely in microfinance initiatives. An independent supporting organization controlled by a Board of Trustees will have fiduciary responsibility for investing the funds with the expectation of risk-appropriate financial returns.“

So at it’s heart, this is should be seen first and foremost as a major endowment gift to Omidyar alma mater with a creatively earmarked investment strategy rather than a microfinance initiative implemented through a university (which is also accurate, but represents the means rather than the end). However, it is a good indication that Omidyar firmly believes in both the development effectiveness and commercial viability of microfinance initiatives, and might be interested in funding an analysis of “best practices” to guide the investment of his endowment funds. But this the only charitable recipient (as opposed to commercial beneficiary) is Tufts.

Bankers, accountants and economists do often use the same words with slightly different meanings.

We can in fact make cheaper tractors and computers. By reducing or ignoring labour and environmental protections, for example.

Still, the point that I got from the Economist survey was that micro-finance was just at a possible tipping point, going from being something that only worked with public (or philanthropic) subsidy to something that might actually be profitable on its own. Examples like ProFund and ProCredit.

I regard methods of organisation as a technology just as much as light bulbs or solar panels are. So I’m not surprised that in their early days they require subsidy. It is, after all, a consistent criticism of free markets (and one I partially sign up to)that they do not provide sufficient incentives to invest in basic research.

Whether Governments are in practice any better is an argument for another day.

The cost of assessing potential borrowers isn’t exactly an “overhead” (as you put it). It is the core of the business. Doing it well and cost-effectively is what makes a lending business succeed. If the “overheads” are too high, then this isn’t a profitable business selling to poor people.

I agree that it would be good if it could be done cheaper. I also wish we could make cheaper tractors and computers. But I don’t think that government and philanthropic subsidies to make this cost go away is going to help us find a solution. Which other businesses whose costs are too high to be profitable in poor countries should we subsidize? How will the existence of firms that continue to operate despite being unprofitable create the space for potentially competitive firms to develop cost-effective techniques which would enable them to enter and operate profitably in these low unit value but large volume markets? The existence of inefficient incumbents living off subsidies is not generally thought to be the ideal way to create a vibrant private sector market.

The banking regulation point is a good one. I didn’t have much faith in the Economist Survey, which seemed to me to be sketchy on facts, but if it is true that (in some countries) the costs are increased by unnecessary banking regulations then we should work hard to get those regulations changed. That is more economically efficient, cheaper and more sustainable than subsidizing the businesses that bear the burden of those costs.

What is striking is how quickly the notion of “bottom up” development has gone out of the window. There is a need for judicious intervention to help financial services work better, and allow the poor to benefit from them, as there is to support so many other sectors of developing countries, from skills to seeds, from credit to transport, from communications to energy. I am not at all convinced by the sales pitch made by many advocates of microfinance that subsidizing microfinance is “bottom up” whereas subsidizing transport or training is “top down”. All these sectors are essential complements to enable a healthy private sector to emerge and prosper. My instinct is that governments (and donors) should focus, at least at first, on the markets in which public goods need to be provided, or market failures need correcting, before moving on to markets which the private sector should be able to sort out itself, if given suitable space to do so.

Owen

Which leads to the “risk” comment. It isn’t as the FT says, risk which is the problem. It is overheads, the cost of assessing potential borrowers. If you want to lend someone $300 and it costs you $150 to evaluate the loan then your interest charges are going to have to be very high.

That’s where I’d like to see the subsidies go, into the design and development of low cost methods of doing that work. Which of course requires funding people to go and try it out.

Very much the same as the oft identified “investment gap” for small companies in advanced nations. It’s horribly difficult to find equity finance in the $10k to $500k area, for exactly the same reason. The overheads of investigating the plan mean that the return must be very high. It isn’t the risk, it’s the assessment of risk if you wish.

Now this was something that we (partly) solved ourselves a few generations ago. Via the Friendly Societies and so on. Raising the funds to be lent from the savings of the local community, paying those who administer them something around the average local income and lending the money within that community.

It’s at this point that the Economist survey is worth careful attention again. For those who are indeed trying to do this on a profitable basis find their costs hugely raised by banking regulations (in many places ) better suited to large scale finance.

Owen replies: Right. My worry is that by subsidizing it, we make it less not more likely that the industry will become more efficient. That, after all, is what we think about subsidy and protection for most industries – firms don’t become competitive until and unless they face the chill wind of competition.

This strikes me as further evidence that we should not be thinking about left vs right, capitalism vs socialism, or market vs government…. rather top down institution building vs the facilitation of emergent outcomes. A subjectivist, cultural approach to development economist will help.

Examples exist of available micro-finance being ignored by developing entrepreneurs. Instead of using macro institutions to flood the market, the institutions that these people are trying to create should be allowed to flourish.

The best way we can support people to release their hidden capital is to let them make their own choices. Even though micro-financing has the air of micro policy, when it’s being advocated and stimulated by a macro organization it becomes a contradiction.