A recent Economist article, Time to take credit, critiques the philanthropic supporters of microfinance for focusing on the slower-growing, profitable, larger microfinance institutions (MFIs) instead of supplying capital to the entrepreneurial startup MFIs who are pioneering access to microfinance in areas which are un/underserved.
Why are they doing this? Well, for one thing it is less risky. These MFIs are making impact with increasingly little risk to the investors so it is easy to provide a “good report” on social return. In some cases, these funders invested in microfinance when it was unproven (and risky) and they haven’t moved on. It is hard for philanthropic investors to know when it’s time to leave and move on to the next challenge even when their “children” outgrow them (and more importantly, their mission.)
There are two major “elephants in the room” with microfinance: (1) less than 20% of people who qualify and could benefit from microfinance have access to microfinance services; and (2) in most situations, most MFIs are effectively quasi monopolies which limits the quality of microfinance products and services available. The only way to materially impact these issues is to support entrepreneurial efforts to start/expand small MFIs much like the venture capitalists make risky investments in new business ventures in other industries.
One organization which is focused on the venture investing model is Unitus. Unitus is willing to take risk in order to dramatically accelerate small MFIs with entrepreneurial leadership teams to bring access to microfinance to underserved markets and to create microfinance products (loans, insurance, savings, etc.) which serve the working poor. We need more investors like Unitus which are taking the risk to bring the redemptive power of quality microfinance services to those that need them.
Please post comments about other organizations who are taking this venture capital approach to microfinance.