Musings on microcredit.
One of main beneficiaries of the new paradigm in financial services might well be the fascinating and important business of microcredit or micofinance. For anyone new to the subject, you could do worse than starting by reading a survey The Economist published last November entitled The hidden wealth of the poor.
I think that in time many of the advances in information and communications technology that will drive the transformation of global wholesale financial markets (and in doing so blur the lines between what are now considered distinct wholesale and retail markets), have the possibility to precipitate a quantum shift in the viability and scale of microfinance around the globe. I’m not saying that this is inevitable, nor that it will happen overnight - as pointed out in The Economist survey, many of the obstacles holding back the growth of these markets is political or cultural - but the opportunities are potentially too significant both in terms of profits and, more importantly, in terms of human development.
Where does the opportunity lie? One element is captured in this statement from The Economist survey:
The idea is that big business has so far ignored a huge number of people who have very little money but nevertheless represent a potentially lucrative market. The big banks have noticed, but they are moving slowly and with great caution. ICICI Bank of India reckons that providing $1.3m in loans to microfinance clients currently requires 40 times more manpower than a corporate loan of the same size.
Technology will help bring down the cost of doing business. Clearly newer and better ways of managing transactions at the centre will help and seem intuitively inevitable, but how does one apply technology in reducing the distribution costs of microfinance? After all the customers are unlikely to have broadband connections at home or be familiar with the concept of online banking…but initiatives like the $100 laptop and businesses like Grameen Telecom are sure to revolutionize access for the world’s poorest over the next few decades. (This is a topic that I was first properly introduced to at TED.)
The Economist survey finishes with the thought: Financial services for the poor and the rich are becoming increasingly alike:
Microfinance offers all the transactions you would expect in any branch of finance: loans, deposits, money transfers, insurance. It is distinct only because it involves amounts of money so small that in the past conventional firms did not think them worthwhile. That is clearly changing.
Many microfinance institutions report better returns on equity than do large banks. Five years ago, providing financial services to people with little money might have been dismissed as a tiny niche business or charity. Now all the participants in the capital markets, from big banks to investors to rating agencies, are beginning to open up to it.
But within a few years, the number of people who have access to financial services may expand from hundreds of millions to several billions. Historical precedent suggests that this could bring huge opportunities. In the past, some financial institutions, notably Bank of America, Merrill Lynch and many large European insurers, did spectacularly well by nurturing clients only slightly too poor to be of interest to the leading firms of the day.
Rather than quote or regurgitate the entire article I highly recommend you read it if you are interested as it eloquently sums up the opportunities and challenges that lie ahead, concluding:
In the past, the two main obstacles to providing financial services to poor people have been lack of information and costs. Those obstacles are now being overcome. Ultimately lower costs and better information are good not just for the poor, but for everyone. Microfinance may have started as a niche business, but the chances are it will soon be micro no more.
February 12th, 2006 at 10:11 pm
Robin Hood Would’ve Liked This
The Park Paradigm reports on the boom in microlending — the ability to lend small amounts of money to anyone anywhere in the world. The post includes a key quote from
February 12th, 2006 at 10:58 pm
ProCredit Holding is an interesting example of a new breed of commercially driven microfinance companies.
February 13th, 2006 at 12:43 pm
Microcredit business plans are a lot more difficult to keep working than is sometimes suggested. It works well if there is only one lender, but I have heard of serious problems once a second lender entered the marketplace.
Sure, you’ll get better returns on equity than Citibank, but the level of risk and and uncertainty are completely different.
That’s not to say microcredit isn’t good and important. It is, but it is also difficult to do well.
February 13th, 2006 at 6:30 pm
[…] Also in the FT’s Digital Business supplement today, Craig Ehrlich asks us to Let private enterprise bridge the divide as he (more) eloquently and completely makes the point I tried to make below that mobile phones are likely to become the main technology in the developing world for connecting people to the global internet, economy and markets: Although mobile phones do not have all the features found in a laptop, they can deliver services – voice calls, text messages and, increasingly access to e-mail and the internet – that meet the needs of the hundreds of millions of farmers, fishermen and other small business people. […]
February 20th, 2006 at 12:36 pm
A colleague of mine took a sabbatical some time ago to work for a micro-credit business lending small amounts of money to people in developing countries. One of the general themes is that it is much more useful to lend money to individuals to develop a country than it is to lend money to Governments.
One interesting fact that he brought back from the experience was that the recovery rate on this lending was extremely high, much higher than one would intuitively believe.
March 1st, 2006 at 6:06 pm
[…] Zopa in the UK and the new Prosper Marketplace in the US are variations on the eBay/Betfair person-to-person business model focussed on lending and borrowing. Zopa likens their business to microfinance only using the internet to create the networks of lenders and syndication of risk needed to make this a viable and attractive proposition. Interestingly on Zopa, you can only lend (I imagine borrow as well but haven’t read the terms) if you are not a “a credit broker or lend money to other persons in the course of any business. “ I can imagine where this idea came from but over time I wonder why an exchange would want to limit or restrict the types of participants on them. Indeed, institutional players can be key liquidity providers with the long tail of individuals setting the marginal price. Betfair is a lot more robust as a marketplace for instance for having a heterogeneous base of users. […]