Recent discussions in microfinance theory point in different directions in regard to measuring success, both for the bank and for its clientele. For local banks invested in supporting local communities, the balance between “doing good” and “paying the bills” is always in play. Here are two perspectives.
In 1990, Mexico’s Jose Hernandez launched “Compartamos” (“Let’s Share” in Spanish), a microfinance institution geared to supporting Mexico’s poor. In 2000, the company elected to shift from non- to for-profit status but maintained its focus on the low-income borrowers and their consequent high-interest loans.
The company raised international eyebrows, however, when it issued a 2006 IPO that brought in $458 million dollars, $150 million of which was paid to the company’s top executives. Citing the Deutsche Banks’ estimate that global demand for microfinancing sits at about $250 billion (ten times the amount already in circulation), bank executives commented that, “microfinance will help more poor people by tapping the boundless pool of investor capital rather than the limited pool of donor money.” Their optimism seems to be bearing out. Compartamos has expanded into Guatemala and Peru, and serves more than 2.5 million clients.
Conversely, at the 2013 Penn Microfinance Conference, keynote speaker David Roodman asserted his opinion that existing research fails to support the theory that microfinance alleviates poverty. Roodman, a theoretical mathematician, is a Senior Fellow at the Center for Global Development. His comments suggested that the current data does not prove that microfinancing alleviates poverty, but that there are many more factors not yet included in the analysis.
Instead, his analysis of microfinance data indicated that lenders who offered services beyond just loans, and who made strategic decisions about who received the loans in the first place, would have more impact in the long run. He made four specific recommendations:
Do not lend to the poorest of the poor because they may be unable to repay the loan;
Shift from a focus on credit to a focus on savings and insurance. This allows people to grow their personal financial portfolio, and use it for themselves over time;
Reduce costs through investment in technology, to streamline systems and improve productivity, and
- Expand available service menus to provide a wider selection of financial tools.
These two seemingly divergent perspectives illustrate some of the challenges faced by financial institutions considering how best to serve their local community: Go big? Seek commercial investment (and reap potentially huge profits?) Or expand services and products (assume more risk) to be more responsive to the needs of the customers? Either way, creating and supporting financial services for low income populations allows microfinance institutes to “do good” no matter what the financial return may be.