Microfinance in the short & long term

It’s been a matter of some curiosity to me that the debate over for-profit vs. non-profit microfinance has remained quite vociferous over the past few months, even whilst more balanced views of the social role played by microloans have been gaining acceptance. It’s clear that a good deal of the heat generated by this particular debate is attributable to the inclusion of market-based anything – as Amanda recently wrote, “people conflate ‘market’ with ‘unfair and exploitative’ all the time,” which is obviously a sensitive issue when one is talking about banking with the poor.  But then, MFIs by their very nature – even non-profit ones – are committed to helping clients participate in business and markets. A purely market-based critique falls a bit short of explaining all the differences between the two sides.

I was thinking about this when I read Matt’s recent post on arbitrary deadlines in development.  The most insightful observation was that it’s “highly likely that the types of policies we should implement when thinking about poverty for the next 100 years differ significantly from those we would use when thinking about poverty for the next 20, or 5 years.”  And this, I think, goes straight to the heart of the microfinance debate: there is often a temporal mismatch between the effective goals of for-profit MFIs and non-profit MFIs.  For-profit MFIs, whose clients appear to be on average less poor than those of non-profits, fit into an economic space where real growth at least seems possible over the long run.  Non-profit MFIs, on the other hand, are often better suited to meet the immediate consumption-smoothing needs of poorer clients, rather than long-term investment needs.  The goal that one prioritizes probably indicates where one stands on the for- vs. non- debate as well.

This temporal perspective also goes a long way towards explaining certain criticisms that each side has launched at the other.  For instance, among the various non-profit complaints about the Compartamos IPO is the valid criticism that poor clients who are left behind by a privatizing MFI may not have access to another financial institution.  The subtext is, is short-term harm to poor people worth longer-term growth for their descendants?  Conversely, one also finds criticisms of non-profits for funding small businesses that fail to generate jobs or economic growth – an interesting moralizing critique of MFIs that use their capital inefficiently, and perhaps help fewer people than they ultimately could in the long run.

I am, of course, generalizing to some degree about the characteristics of for-profit and non-profit MFIs.  This is based on my current understanding of the debate, but I wouldn’t wish anyone to accept this uncritically, as I’m sure there’s a non-negligible number of MFIs out there for whom these descriptions would be wrong.  (I’ll even point to the first one myself – FINCA-DRC is a for-profit institution that’s quite committed to small group lending with women, which is a short-term consumption-smoothing tool if ever there were one.)  But the larger take-away here is that we as practitioners need to look more closely at the temporality of economic growth and poverty reduction, and discuss our allocation of resources between the short and long terms more explicitly.  I’m guessing there’s a place for both types of MFI in most, if possibly not all, markets.

3 thoughts on “Microfinance in the short & long term

  1. The Class Act only covers $50.00 per day of home care and you have to pay into it for five year at a premium I belive is over $100.00 a month. So don’t get your hopes up for long term care coverage in the Health Reform Act. Long term care insurance is still the safest option for protection.

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  2. Hi Richard,

    Thanks for the comment! That’s quite interesting to hear about the microfinance market in Peru – most of my experience is in the African context, so it’s illuminating to see how microfinance behaves in other markets. I’m glad you’re reading along!

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  3. Excellent comment Rachel. Last week I published a history of microfinance in Peru, rated the world´s best microfinance business environment for second year in row by the Economist Intelligence Unit. In Peru, all credit models have grown strongly but growth of the the market, minimalist and individual loan credit model has easily trumped subsidised, extreme-poverty targetted programs, like Finca Peru. NGOs like CARE evolved into commercial banks. Like cheap mass-produced shoes and clothing, there is a huge benefit for the poor at almost zero fiscal cost, but upscaling is strong and whether the poorest quarter of the population will ever be reached is an open question. Your proposal for a clearer temporal formulation of the options is an urgent need.

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