Microfinance in Transition?
As microfinance has been evolving over the past 30 years, it has invariably been referred to as a program, a sector, an industry and an alternative asset class. But some microfinance experts are now beginning to question these designations, believing the microfinance has been “oversold” , and perhaps should be viewed as a movement or a brand. In part this is driven by recent studies that question the economic and social impact of microfinance. Client over-indebtedness, certain excessive financial returns for investors, and questions regarding improved livelihoods are cited as possible ‘failures’ of microfinance to deliver critical social and development needs.
Some experts are wondering if microfinance is able to solve critical social and environmental challenges that address the poor — e.g. rural energy, affordable housing, health care, sustainable agriculture, and financial services. If microfinance can’t deliver on such challenges, is it time to look for a new paradigm? One possible alternative may be ‘Impact Investing’. It is estimated that one trillion dollars will be needed to address social and environmental challenges globally. Impact investing uses financial returns to investors while addressing such challenges. Recent studies have examined the subject as an emerging and innovative approach to finance sustainable development. For example, the Monitor Institute has identified five opportunities for impact investing that include Clean Technology, Microfinance, and Global Health. Another study, by JPMorgan Chase posits that impact investments are emerging as an alternative asset class allowing institutional investors to allocate capital for basic needs and services of the poor.
In such scenarios, could impact investments overtake microfinance as a solution to poverty alleviation? Or, could microfinance interlink with impact investing to ensure a targeted approach to address the ‘bottom of the pyramid’? Or, will microfinance — considered the driver of poverty alleviation — be relegated to a sub-category of impact investing?
The discussions about microfinance are emerging and will continue….Stay tuned.