Commercialization of microfinance: profitability and development impact

Microfinance

The Commercialization of Microfinance: What is it? Who is it Profitable to?

My travels around the world have allowed me to see, first hand, the discrepancies between the rich of the Western world and the poor of developing countries. In the West, a certain attitude seems to accompany wealth, that is, the attitude that wealth should be kept by the person who earned it, and little should be shared. In the East, however, even the poorest were willing to share what they owned, take risks, and stretch what little they had. Perhaps this is what makes them good entrepreneurs. Perhaps, it is this reason why the women, who are traditionally tasked with the job of making ends meet, seem to be excelling as entrepreneurs in many of these underdeveloped countries. For instance, women have been able to get microfinance loans to start such small businesses as a village pay-per-use telephone company.

But while the surge of support that once rallied behind microfinance is still there, to a degree, it does not rally without reservation. While the anecdotal stories regarding the successes of microfinance are abundant, no data or study has actually backed up the widespread success of microfinance; no empirical study can determine whether or not this type of lending program is making a difference in macroeconomics. Furthermore, while more and more people have gained access to microfinance in some of the world's poorest locations, all of the world's most impoverished have not been reached by any means (Coleman 2005). In fact, only one microfinance institution has remained viable in Pakistan since 2003 (Katz 2008).

Of course, microfinance has been growing and changing since it was first implemented. This, at least, suggests that it is an elastic and malleable force that could be shaped into the savior of the world's poorest as the years go on. About 34 years ago, microfinance was developed by Dr. Mohommed Yunus and some of his followers in Bangladesh. Yunus thought that making small loans to some of the world's poorest would allow them to support themselves and build their country's economy based on the high rate of repayment. Indeed, Microfinance loan repayment is at around 100%, and the demand for it is staggering, according to Maria Otero of the Council on Foreign Relations ("Microfinance" 2008). Soon, microfinance would come to encompass more and more, including more financial services for the poor, such as savings accounts, money transfers, insurance, and other services. But as microfinance exploded, so did hopes for its success, which some, like Coleman (2005), believe were overzealous, now casting a poor light on microfinance because it has not lived up to these high expectations (Coleman 2005).

Yet another controversy surrounding this issue has been recently introduced, and that is the commercialization of microfinance. According to Otero ("Microfinance" 2008), at the end of the 1990s to the beginning of the 2000s, many of the nonprofit organizations that had been working as microfinance institutions became banks and other for-profit groups. For instance, BrancoSol in Bolivia, a non-profit lending institution, had five for-profit competitors within ten years. The for-profit competition even encouraged the banks to make their products better and better available ("Microfinance" 2008). Although competition and for-profit microfinance services have so far developed institutions that were to the advantage of the poor, this may not always be the case. The fact remains that microfinance still needs to reach millions more people, and Otero suggests that the current microfinance model cannot do that ("Microfinance" 2008). In addition, as for-profit institutions come into the microfinance market, Otero wonders how the customer can be protected. That is, will for-profit organizations exploit the poor people coming for microfinance loans in order to earn more money, or will the competition encouraged by these for-profit groups be enough to reach wider and build deeper in terms of the developing world economy.

Brief Review of Literature

Literature on the topic of microfinance is vast and varied. Coleman (2005) argues in her defense of the concept that it may have simply fallen short of its one-time advocates' lofty goals. Furthermore, she states that improvements could be made to the current structure of microfinance. For instance, she states that microfinance institutions must realize that some people are not cut out to be entrepreneurs, and these are the ones that most often default on their loans. Microfinance institutions, she suggests, should screen applicants using a test of business concepts and should offer aid, not loans, to those who do not have them (Coleman 2005). The commercialization of microfinance would provide for this, as companies making money off of loans usually try not to lend to those who will not pay the loans back.

For commercialization to happen effectively, however, O'Neil (2005) discusses Marilou Uy's, the financial sector operations and policy director for the World Bank, three steps to successful commercialization: "the down-market entry of commercial banks, microfinance institutions becoming more commercially oriented, and the establishment of partnerships between corporations and specialized microfinance institutions" (O'Neil 2005). In order study the success of this commercialization, which Uy says must be done following a three-fold path, the Asian Development Bank ordered several reports, which focus on the success and extent of commercialization in certain countries. Charitonenko and Rahman (2002) found that "negative perceptions of commercialization" were one major challenge to microfinance commercialization in Bangladesh (p. 9). Similarly, Charitonenko and Afwan (2003) found that commercialization of microfinance institutions in Indonesia still suffer from misconceptions about for-profits taking advantage of the poor. In addition, they found that commercialized microfinance institutions have not, as of now, reached all demand. In the Philippines, however, Charitonenko (2003) found that "there is a growing realization that commercialization allows MFI's greater opportunity to fulfill their social objectives of providing the poor with increased access to an array of demand-driven microfinance products and services" (p. 9). Finally, when looking at South and Southeast Asia as a whole, Charitonenko, Campion, and Fernando (2004) found that negative perceptions of commercialization, leading to negative realizations through subsidies, were seriously impacting the ability of microfinance organization to privatize (p. 81). Thus, current research suggests that mixed attitudes toward microfinance and commercialization are currently preventing commercialization from taking place. I aim to provide some hard, quantitative data regarding commercialized microfinance institutions in order to displace some of this mystery.

Methodology & Conclusion

Thus, I aim to provide real, quantitative data by choosing two microfinance institutions to study. One of these institutions will be a private, non-for-profit organization, while the other will be a for-profit, commercialized institution. A close comparison regarding treatment of clients, interest rates, services offered, loans dispersed, and money earned will allow me to point to the institution that does the best job managing clients and boosting the economy.

Thus, microfinance was an ingenious institution, but controversy and expansion have brought it to the time of assessment. This thesis will help dispel certain rumors about microfinance, especially dealing with its commercialization.

Charitonenko, S. (2003). Commercialization of Microfinance: The Philippines. Asian Development Bank. Available from, the Asian Development Bank. Web Site: http://www.adb.org/microfinance

Charitonenko, S. (2003). Commercialization of Microfinance: Indonesia. Asian Development Bank. Available from, the Asian Development Bank. Web Site: http://www.adb.org/microfinance

Charitonenko, S., Champion, a., and Fernando, N.A. (2004). Commercialization of Microfinance: Perspectives From South and Southeast Asia. Asian Development Bank. Available from, the Asian Development Bank. Web Site: http://www.adb.org/microfinance

Charitonenko, S. And Rahman, S.M. (2002). Commercialization of Microfinance:

Bangladesh. Asian Development Bank. Available from, the Asian Development Bank. Web Site: http://www.adb.org/microfinance

Coleman, I. (2005). Defending Microfinance. Retrieved March 21, 2009, from the Council on Foreign Relations. Web Site: http://www.cfr.org/publication/7774/defending_microfinance.html

Katz, R. (2008, April 17). The Commercialization of Microfinance: The Good, the Bad, and the Ugly. Retrieved March 21, 2009, from Next Billion: Development Through Enterprise. Web Site: http://www.nextbillion.net/blog/2008/04/17/the-commercialization-of-microfinance-the-good-the-bad-and-the-u

Microfinance: Business or Charity." Retrieved March 21, 2009, from the Council on Foreign Relations. Web Site: http://www.cfr.org/publication/16490/microfinance.html

O'Neil, M. (2005, June). University of Chicago and Northwestern Conference on the Commercialization of Microfinance: A Practical Look at the Future. Retrieved March 21, 2009, from the United Nations Capital Development Fund. Web Site: http://www.uncdf.org/english/microfinance/pubs/newsletter/pages/2005_06/news_chicago.php