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September 2006: The Tipping Point for Microfinance

Posted on October 22, 2006

Nobel PrizeThe MicroCapital Monitor reported in their October 2006 issue that:

“we may look back on September 2006 as the catalyst month for microfinance.”

The statement was made in advance of Muhammad Yunus (check out his book if you haven’t already) winning the Nobel Peace Prize for his work in microfinance. Not only did Mr. Yunus come up with the idea for microfinance he also pioneered it into the Grameen Bank which continues to innovate and remain the gold standard of microfinance institutions. Yunus has also tirelessly championed access to credit as a basic human right around the world. Before I move on, I want to congratulate Mr. Yunus on his much deserved Nobel Peace Prize.

Yunus’ winning of the Peace Prize will draw a lot of eyes toward microfinance and, with those eyes, a lot of investment capital. This is a great thing for microfinance and something we have all been waiting for. However, MicroCapital came out with an article on October 13 that asks and important question: is the microfinance industry ready for a large influx of cash?

MicroCapital points out that only 100 of the estimated 10,000 micro-banks have the breadth and depth needed to handle a large influx of cash. The main issue for the banks is scalability since the vast majority of micro-banks are mom and pop operations that can’t take huge growth spurts. They will face problems like not being able to expand and staff up quick enough and they may not be able to find good places to put the new monies to work quick enough (kind of like what happens with VC funds when they continue to get larger and larger).

In the face of all this MicroCapital says we should expect to:

start to see melt-downs of microfinance sectors in specific countries due to over-investment, be it investments for a return on capital, or subsidies, or donations which continue to flow contrary to established best-practices.

Investors in microfinance will have to start to innovate fast to deal with the new influx of cash and minimize the melt-downs. There are already investors starting to do some creative things and MicroCapital suggests that we should watch TIAA-CREF’s equity investment, Citigroup’s fund committed to “second tier” or emerging micro-banks, and Gray Ghosts’ secondary market activity.

Technology will also be key in helping to scale up mom and pop microfinance institutions since much of the scaling problem lies in the management of the loans. With better infrastructure systems coming along and folks like the Grameen Foundation and Unitus working to implement better technology and strategy we are moving in the right direction.

Either way, we are looking at big things ahead for microfinance and there are some great people out there that are going to ensure the future is a bright one. September 2006 will be remembered as the tipping point for microfinance and the beginning of the end of poverty.

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2 Comments so far
  1. NASH October 23, 2006 1:24 am

    In india micro credit facility is evolving as a big business. But it was a great effort from this visionary from bangladesh to make it big. I am from INDIA and can see the apathy of many people who live below poverty line and can even earn 30 cents in a day. Things however are changing as many people are enjoying the micro credit facility. the local money lenders charge upto 100 percent interest per month whereas through grameen banks likes they get an interest of 35%.

  2. […] One of the other key things about microfinance that was lightly touched on towards the end of the show was the expansion of microfinance from microcredit to microinsurance and other micro financial services. Thirty years into microfinance and a Nobel Peace Prize later we know microcredit works. It is now time to bring other financial services to the poor along with microcredit. Financial services should be considered a basic human right and we are getting closer every day to everyone having access to them. […]