I believe that there are some markets which are ready for commercial microfinance and others which still require a subsidized model. Some places in Asia (notably India and probably Philippines and Indonesia), some areas of Eastern Europe plus much of Latin America have the right environmental elements in place for commercial microfinance to flourish.

Other parts of Asia and most Africa and the Middle East still require subsidized models. Although another way to think about it is that they require a longer-term horizon for profitability. I think that this is the better way to think about it. We need very patient “investors” who are willing to invest for a while before they start to see positive cash flow and eventually positive retained earnings. My concern is that if we simply treat Africa with a typical international aid/development approach, it will not force the issues of having an end-game for profitability which, in my view, is the only way that these services are going to be there for the long haul.

So, whether it’s NGO’s or long-term thinking investors, I agree that Africa should not be overlooked for financial services to the masses.

The trend in the microfinance sector for funding MFIs is moving towards commercial funds becoming the preferred funding method. As this method is becoming popular and its virtues are being proclaimed, the funds to NGO-MFIs are being squeezed as international NGOs relocate funding to other sectors, believing that commercial funds will fill the gap.

However, only the top-tier of MFIs are able to manage commercial funds. These tend to be in Asia, where the microfinance sector is mature, there are large populations and the MFIs are sustainable. But in Africa where the majority of MFIs are NGO based, and the markets are not mature, they are facing this squeeze on funding.

The Microcredit Summit 2006 in Halifax put forward new challenges:
. to ensure that 175 million of the world’s poorest families, especially the women of those families, are receiving credit for self-employment and other financial and business services by the end of 2015, and
. to ensure that 100 million families rise above the US$1 a day threshold adjusted for purchasing power parity (PPP), between 1990 and 2015.

Now these challenges are achievable if the funds continue to flow to Asia. But isn’t that a little too easy?

I think that the microfinance sector now has to scale-up MFIs in Africa. But how can this happen if NGO-MFIs are having their budgets squeezed as international NGOs move their funds to other sectors and the MFIs are not able to manage commercial funds?

We need to ensure that there are specific funds established for Microfinance start-ups and scaling up of MFIs. We need a broader spectrum of funds to provide funding all the way from start-ups to commercial banks especially as International NGOs have typically fulfilled the role of funding start-ups.

Hype and Hope: The Worrisome State of the Microcredit Movement
Dates: May 23-25

“Development is the current frontier of the microcredit movement, and the toughest challenge of all. In the end it is easy to give out microcredit, and using best practices developed over the years, even relatively easy to get the money repaid. But the marginal developmental returns from microcredit simply don’t warrant the enthusiasm nor the money spent so far.”

Has the widespread enthusiasm for microfinance transformed a noble idea into a panacea? Based upon his recent article, “Hype and Hope: The Worrisome State of the Microcredit Movement” and the book, “Despite Good Intentions: Why Development Assistance to the Third World Has Failed”, Tom Dichter brings twenty years of microfinance expertise to this discussion that explores some reasons why the microcredit movement has done more harm than good. Interested participants should join microLINKS.org (if they have not already) and subscribe to the live discussion at http://www.microlinks.org/hype. Participants can send in questions and receive email updates during the discussion.