Microlending should not just be about philanthropy

Microfinance is clearly in vogue with Prof. Yunus of Grameenphone winning a noble prize this year. Here’s a link to the story

James Webster, a colleague of mine, has recently posted about Kiva, a non-profit organization that allows individuals to contribute towards microfinancing a venture in the developing regions such as Eastern Europe, Asia, Africa and South America. The thing that struck me about such microlending operations is that they all are non-profit organizations. Startup Journal’s post on microlending also speaks about the issue of associating philanthropy with such operations.

Given that the returns on these investments are not very high, it would be very hard for an aggregator of microfinance to actually run a highly profitable concern.So they often call for volunteers to help them out in their functions such as accounting, Marketing & PR, software development etc. However, these voluntary activities are very intrinsic and cater to the aggregator’s own operations.

The fact that each outlay is very small, it also stands to reason that the investors themselves cannot offer value to the entrepreneurs beyond the initial seed and occasional consulting. What is truly needed is a support network for the entrepreneurs themselves. It should be possible for the entrepreneurs to get support from volunteers within the local region. This could be a management student who can help in formulating a marketing strategy, a local accountant who can offer an hour of their time, a printer who can print a small order of leaflets etc. These kind of micro support would go a long way in boosting the overall profitability of the business.

The other interesting outcome of microlending can be innovative business models that cannot be tried directly in a developed nation. C. K. Prahalad has already propounded the theory about the “bottom of the pyramid” (World’s poorest markets) where innovative practices and ideas can be harvested and tested.

The aggregator’s role, thus, should not just be about financing the entrepreneur. It should also be about facilitating a volunteer network to support the entrepreneur and it should be about harvesting innovative ideas from around the world. Collectively, these can generate the returns for the aggregator to make them move away from being non-profit charity institutions to a lucrative business model.

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3 Responses

  1. I believe Kiva is looking into being able to charge interest on loans.

  2. Take a look at the YouTube videos on microfinance in my blog. You’ll see that people are already addressing many of the things you’re talking about.

    You’ll also see that the very different circumstances of the poor mean that the likes of management students and accountants are usually going to not understand the environment or have that much to offer.

    In fact microfinance is already well on the way to commercialisation.

    Another great resource to learn about it is the Economist Survey of Microfinance here:

    http://www.economist.com/surveys/displaystory.cfm?story_id=E1_VDSJPNQ

  3. Btw, as you’re in a tech environment, you might be interested in this:

    http://www.grameenfoundation.org/what_we_do/technology_programs/mifos_software_initiative/

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