Put Microfinance Out to Pasture?

We've just endured the worst financial crisis in a century, while microloans to the poor have held steady as the world's most viable lending investment with a 98% repayment rate. Still, microfinance has gotten so much bad press lately, for corruption from within (field officers or government workers skimming profits) and greed from without (IPOs and venture investors), that it loudly begs the question: Has its field day come and gone?

It began nobly, when Dr. Muhammad Yunus inverted everything he'd learned in economics school in 1976 Bangladesh, audaciously passing out $27 to 42 village women with nothing but collective chutzpah to back them. They built inventories, earned profits, paid back their loans, and birthed a phenomenon that would change the world. Yunus became known as the father of microfinance, won the 2006 Nobel Peace Prize for his radical faith in human potential over material collateral, shared the wealth in developing countries all over the world, and then in 2008 brought the microfinance model into the U.S. via Grameen America.

And it is a noble idea. Microfinance has self-determination and egalitarianism built into its fundamental formula; it's an equal-opportunity "ladder," as Ingrid Munro of Jamii Bora in Nairobi, Kenya calls it, that provides not charity but business opportunity for poor beggars, peddlers, farmers, and entrepreneurs to "climb up themselves" out of systemic poverty to reach comfort or success, each to her or his ambitions.

However, nothing noble survives the tarnish of the human touch. The surging growth and popularity of microfinance (to over $60 billion in assets, noted the New York Times April 13) has led to such quick-profit IPOs as Compartamos, CARE, and SKS earning fortunes for the wrong end of the pyramid, and higher interest rates (according to Yunus, anything above 10-15% over cost of the loan makes an MFI no better than a "loan shark") have edged 75% of the world's over 1,000 MFIs out of the humanitarian spotlight and into the shyster shadows.

It's just too late to go back to the virtuous beginnings of the idea. We know now that point-to-point microlender Kiva cannot guarantee direct connections any more than can MicroPlace (eBay) or others, because precision gets lost in the real-life process of moving a $25 loan and monitoring its use. We know that providing financial services to 4 billion people (those living on less than $2/day/World Bank) has staggering market and profit potential, so now players with a range of intentions will enter the game, hoping to score their fortunes and look good doing it.

Perhaps you could say that it's taken a long time, 34 years, for this idea to run amok, and that now we must rally to regulate and evaluate, rein it in.

Or maybe this moment holds opportunity too, for those who wish to exterminate poverty, to cease complaining about the success of microfinance and simply adapt. Fact is, microfinance has spread like wildfire. It's proved rampantly triumphant, not just in numbers but in social benefits such as increased health, education, and human rights. Much of the inherent benefit of microfinance will occur no matter where or how it's delivered. . . . The rest can be achieved through the same innovation with which it began.

So maybe the time has come to put benevolent microfinance out to pasture, accept the competition the market has brought, and get back in the race of good ideas that thrive in a world where the contagion of capitalism has become an epidemic. Cell phones equipped for mobile banking, electronic devices that bring a range of financial and educational resources into remote areas without roads or electricity, rugged products from Internet kiosks to crank-powered laptops to malaria nets and water filters, can serve billions of people not yet reached with micro-services.

Let's get back to the profoundly liberating principles on which this country was founded, and get to work on out-smarting the competitors -- i.e., the "loan sharks" and commercial investors who still care only about their own financial gain. They will be left behind, because their thinking is outdated. It's not just noble, it's more fiscally lucrative to preserve health, promote education, provide safety and civil rights to our customers.

Now we can shift, says Brigit Helms in her book Access to All, from a supply-driven approach at throwing charitable dollars at a small portion of need, to a demand-driven approach of providing a broad range of insurance, loans, savings, and remittance services via both existing networks--bank, postal, and retail--and not-yet-invented products that generate power, convey data, and link markets in remote corners of rural and urban communities. As Chris Dunford suggests, we can employ technology to reach the ultrapoor in remote rural areas with more than loans -- savings circles, holistic education, and health care services for clients and their families.

Myself, I do not work for any MFI, but I have donated to microloans for nearly two decades, first as a graduate student and new mother who wanted all parents to be able to provide for their families, later as a high-tech investor rolling my profits into philanthropy.

The dollars I donate, along with those from JP Morgan to Grameen, Mastercard to CGAP, Nike to Freedom from Hunger, and Gates Foundation to everyone ($38 million pledged in 2010, as reported by Microfinance Focus), all came from the shark-infested waters of competitive capitalism. So let's not accept venture funding and then turn around and decry it. Let's not lament that we are in the game; let's win it. Yes, the industry ought to self-regulate, as Yunus challenges; and certainly we must take better care to protect borrowers against all fraudulence.

However, like women's emancipation and affirmative action, microfinance was never meant to last forever, but to provide a stepping-stone to inclusion. Next step: resources for all, balanced by healthy market competition to get the best of the bottom of pyramid. Eventually, microfinance will lumber out to pasture, peacefully retired. That doesn't mean all poverty will magically disappear or that our planet will suffer no more ills; it does mean, I deeply hope, that all global citizens can exercise their inalienable right to life, liberty, and the pursuit of happiness.

Suzanne Skees runs a small international development nonprofit from her kitchen near San Francisco, California, and writes on innovative solutions to poverty.