Microfinance is justly seen as a savior for millions around the world. As of 2007 it’s estimated that over 16 million of the world’s poorest benefit from the small extensions of credit that the over 7000 global microcredit organizations channel. The volume of loans now approaches some $25 billion, including an increasing share of direct peer-to-peer loans through sites such as Kiva, Microplace and MyC4. It’s primacy role in economic development and poverty alleviation was perhaps best showcased by the awarding of the 2006 Nobel Peace Prize to the father of microfinance, Muhammad Yunus, the founder of the now-famous Grameen Bank.
At the time of the award, the Norwegian Nobel Committee noted that, “Micro-credit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions…Yunus’s long-term vision is to eliminate poverty in the world. That vision can not be realised by means of micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit must play a major part.”
But building at the bottom of the economic pyramid has it’s limits. Indeed, microfinance can enable millions to survive where and when they could not previously. But as James Surowiecki, author of The Wisdom of Crowds, points out in his recent editorial in the New Yorker, there are definite limits to how far microfinance can go in enabling economic development.
He writes,
“What poor countries need most, then, is not more microbusinesses. They need more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation. In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare, thanks to a lack of institutions able to provide them with the capital they need. It’s easy for really big companies in poor countries to tap the markets for funding, and now, because of microfinance, it’s possible for really small enterprises to get money, too. But the companies in between find it hard. It’s a phenomenon that has been dubbed the “missing middle.”
Filling this missing middle, usually neglected by both domestic and international lending sources, has come to be termed “meso-finance” and aims at enabling SME’s to grow and subsequently expand their employment bases. One of the means of doing so is taking a Prosper/Zopa like approach to peer-lending, and aggregating small loans into $10,000 + amounts for entrepreneurs in the developing world. Evidently there are some significant risk issues that accompany the extension of such credit but with the right local structures in place, Web 2.0 lending might just offer meso-finance the channel it needs to extend the credit that small business owners the world over desperately want.
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That sounds like an excuse for people willing to wait for meso-finance, instead of helping to those in extreme poverty.
I rather continue at…
http://www.kiva.org/lender/fernandoylet
Comment by FernanDoylet - April 7, 2008 12:52 pm
Hi Fernando, I don’t quite understand why it’s an excuse to wait? Isn’t it rather a means of ensuring that we not only help people escape from extreme poverty but subsequently allow a continued path along the development ladder?
Comment by DH - April 7, 2008 2:08 pm
Meso-finance…I’m with ya James.
The need is definitely there, but the motivation for people to give in much larger sums will require some kick ass campaigning. And not everyone even knows about Kiva yet, so we’ll need some good fortune on our side to hit the magic missing middle. Our U.S. VC’s could use a CSR angle!
Comment by Qui Diaz - April 8, 2008 12:00 am
Let me start out by stating, that I truly fancy both Kiva and Microplace!
Below is my viewpoint on Meso-finance and how we (I am Co-founder of MYC4) deal with this crucial lever in development, here goes:
“Market gap: the missing middle”
Despite its limitations, microfinance in Africa is growing rapidly and offers significant potential for the poorest of the working poor. As is the case with entrepreneurship, most businesses in Africa are initially funded by money from friends and family. Once they start to show some success, microfinance institutions may be an option for some growth capital, typically to finance working capital such as stock. For those who do not have access to fair microfinance institutions, loan sharks are a common source of funding, often triggering a new cycle of poverty driven by perpetual debt. For those lucky few that are able to grow their businesses beyond the start-up phase, few – if any – real financing options exist to scale the business to the next level. Indeed, most microfinance institutions cap their maximum loan sizes to EUR 2,000 or less. Even the largest MFIs rarely lend more than EUR 10,000 leaving most established SMEs with no real market options for funds to grow their businesses further.
This is where MYC4 is already having the greatest impact. The primary reasons why MFIs do not make loans of these sizes have to do with regulatory or operational limitations, typically related to concentration of risk and limited share capital. However, because MYC4 loans represent a distributed risk to investors, and because the loans are made off balance sheet by the local MFIs or banks, these SMEs no longer need to be excluded from the financial sector, and their growth can thus be financed successfully through MYC4. The same financial institutions which were forced to turn them away previously can now act as a pass-through for MYC4 funds, and successful entrepreneurs need no longer be turned away.
As many of these are businesses with proven track records and a prior history of borrowing, credit risk may in fact be lower than with typical microfinance loans. What’s more, as this is a glaring gap in the market due to friction in financial sector regulations and capitalisation, MYC4 can operate comfortably in this space in all countries, working through existing leading financial institutions, without disrupting or distorting markets in a negative way. The unbanked, defined here as successful entrepreneurs “stuck in the middle”, too large for MFIs and too small for banks, can now be reached and financed through MYC4, earning investors a fair return, becoming the engine of growth they are known to be, creating jobs and generating profits and tax revenues for local governments.
See you on http://www.myc4.com
Comment by Tim Vang - July 4, 2008 5:57 am
[...] Herman’s blog noted that in addition to microfinance, social lending in larger amounts is needed for small to [...]
Pingback by Microfinance Plus - Beyond the MicroBusiness - August 18, 2008 10:31 pm
It seems that the richer the country is, the rarer the micro-businesses are.
Small companies, merger and acquisition, that’s the way they will evolve.
Comment by commodity calendar - August 25, 2008 3:02 am