Thursday, March 05, 2009

Why Christian microfinance shouldn’t go away

Why should a nonprofit (or a Christian organization) use a business model like a bank instead of letting businesses do that? One of the trends in microfinance these days is big banks seeing the profitability of making big profits on small loans to the world's poor. Nonprofit microfinance institutions are in some places struggling to compete and stay in the market. Mexico is a great case study for big bank profits in an industry that has largely been nonprofit:

NY Times - Microfinance's Success Sets Off a Debate in Mexico

microLINKS - Mexican Microfinance: How Big Banks are Making Astronomical Profits

Why do nonprofits do microfinance? Easy. The world's poor are undercapitalized to grow their businesses and improve their welfare. Commercial banks do not make accessible loans to these poor entrepreneurs. Well, commercial banks used to not make those loans, but in some places they are beginning to see the profitability. There are a lot of poor consumers; it's a very big market. So now nonprofits are struggling to compete in some of these places where commercial banks are entering. The point is to bring in capital to stimulate the working economy of the world's poor, why does it matter if a nonprofit does it or a business does it? It still improves the lives of the poor.

Why should nonprofits compete to stay in the microfinance industry?

For one, and this is really my only one point, nonprofits can take risks that commercial banks cannot. Commercial banks enter and compete when the risks and rewards give them a green light, but when the light turns yellow, commercial banks turn back, when the light turns red, forget it. The poor are on their own. What happened to the banking industry that served poor business owners after civil war tore through Liberia? What happened to the banking industry that served poor business owners when a typhoon devastated Thailand?

It's a good thing that private sector industries bring services to the world's poor. But we cannot depend on the private sector when disaster happens. Nonprofit microfinance goes to the hard places, and it stays. If nonprofit institutions get competed out of the market, where will be the capacity when it is needed again?

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