Doing Good Vs. Doing Well: Microfinance and Accessibility

microfinance lending microcredit nonprofit

A Nobel Concept

Economist Muhammad Yunus won the Nobel Peace Prize in 2006 for his work providing small loans to poor women starting small businesses in poverty-stricken rural areas. Yunus continues to offer microfinance lending services through his Grameen Foundation, a nonprofit organization committed to ending poverty.

But the Grameen Foundation is not the only group providing microcredit to people in the developing world. Various microfinance organizations have appeared in Bangladesh, India, Nicaragua, Peru, Morocco, Pakistan and other countries with large numbers of poor people. And it is not only nonprofits providing services; for-profit companies have also gotten in on the act.

microfinance lending microcredit nonprofit

A Fashionable Business Venture

Muhammad Yunus developed the concept of microfinance as an effort to 'put poverty in the museum.' He envisioned this humanitarian goal as the sole purpose of the lending practice. But entrepreneurs have embraced microfinance as a way to create financial value from helping the poor.

Vikram Akula, founder of the for-profit operation SKS Microfinance, makes small loans to people in rural India. What began as a small operation in 1998 has become a major enterprise that makes millions in loans annually with the help of foreign investment. Akula stated in a recent interview with National Public Radio, 'I don't think there needs to be a wall between doing well and doing good.'

In fact, he sees the market as being an essential force in meeting the full need that exists. According to Akula, 'By pursuing a for-profit orientation, you actually bring in capital from capital markets that's simply looking to get a return, and by doing that you actually bring in much more capital than you would otherwise.'

microfinance lending microcredit nonprofit

A Reality Check?

The Grameen Foundation is critical of the model of success outlined by Vikram Akula and other businesspeople looking to make money off of the poor. The organization contends that profits often become the primary goal in these operations - as opposed to the eradication of poverty. Grameen Foundation president and CEO Alex Counts says there must be a 'truly double-bottom-line type of activity, where the social purpose remains paramount, and the business efficiency is a means to an end.'

A recent microcredit crisis in India seems to suggest that for-profit ventures have a lot of progress to make in this regard. Massive expansion of micro-lending practices has created a climate in which many loans have been made to people with little means with which to pay them back. Whereas the nonprofit Grameen Foundation provides extensive financial literacy training and entrepreneurial support to loan recipients, SKS Microfinance and other firms have streamlined the lending process to accommodate greater growth. Many experts cite such 'efficiency' measures as the cause of current failures within the system. Tragically, political and social backlash against microfinance - perceived now by many as a way to fleece the poor - even threatens the legitimacy of nonprofits like Grameen Foundation.

microfinance lending microcredit nonprofit

What's Next?

What's ahead for microfinance remains unclear. In the wake of a $221 million bailout of struggling microlending companies in India, many people are questioning the efficacy of the practice. U.N. economist Anis Chowdhury has stated, 'Most poor people do not have the basic education or experience to understand and manage even low-level business activities.'

While it's impossible to know what the future holds for microfinance, it does seem apparent that changes are needed. Lending to those without any business knowledge or skills is likely to lead to failure and loss of capital. Because of this, creating opportunities for financial success to the poor would appear to start with providing more education. Unfortunately, many for-profit companies perceive this element of the process as a drag on the bottom line. Similar to the way the sub-prime scandal led to a market correction in the U.S. housing market, the current microcredit repayment crisis in India could serve as a watershed moment that leads to improved practices.

As Jennifer Meehan of the Grameen Foundation notes: 'To scale microfinance to its true potential - making it available to as many poor people as exist in the world - it has to be sustainable, but there is an element of responsibility. Certain parts of the industry have lost sight of its purpose. Microfinance is a means to an end: the end being reduction of poverty.'

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