It’s not every day I read a post or article on microfinance that nearly knocks me off my chair. This article is one of them. Read it. It’s short and surprisingly frank. The opening reference to Yunus is tangential. The article is mainly about an investment fund that pulled out of the sector: Futuregrowth Asset Management. If I may just quote three particularly poingnant comments:
“The industry seems to be pumping debt down peoples’ throats. It is no longer socially responsible and does not belong in developmental funds.”
“The fundamentals are blown and the business model is unsustainable; 70% to 80% of ‘new business’ is to existing clients. So the trick is to keep them on an indefinite treadmill, always reoffering them a new loan, or reschedule but by lengthening the term to reduce the instalment”
Prof Yunus, who spoke at the Gordon Institute of Business Science, said: “We don’t lend money for consumption. Your consumption should come from income. When you create a consumption loan, there’s no end to it.” Instead, Grameen focused on lending money to people who would use it to generate income.
The poor on treadmills? The image that occurred to me was of a hamster happily spinning round his wheel, hooked up to a mini-generator to provide a drip-feed of electricity to the owner!
And once again that awkward mention of consumption lending – sooner or later people might realise that they are mostly not financing entrepreneurial activities at all, but new TV purchases.
This is dangerous for the microfinance sector for at least three reasons. Firstly, the article makes reference to yet another microfinance bubble, and it is questionable how the sector would survive such a scandal, still reeling from the Andhra Pradesh crisis, with Mexico and Peru suffering chronic over-indebtedness. Bad news from the microfinance sector of Ghana is an almost daily event. Secondly, this is another departure of an investment fund from the sector, and these are the jokers who provide the fuel for the fire. Take them away and the fire might go out. Sure, there are other ways capital enters the sector (governments, P2Ps etc), but this doesn’t bode well. The die-hard microfinance funds will continue assuring us that this is the miracle cure for poverty if only we’d hand over our dollars to them to invest on our behalf and take a nice management fee in the process, but when this class of investor starts pulling out, images of decks of cards spring to mind. If the funds don’t refinance the MFIs, the MFIs can’t refinance the clients. If clients don’t expect to be able to get additional loans from an MFI, there is a strong(er) incentive to not repay the current loan. If default rates rise and more investors are scared away, this can become a self-fulfilling prophecy.
Thirdly, the microfinance sector is furiously trying to re-brand itself, and launch all manner of initiatives to perk up its ailing reputation (largely window-dressing, see Truelift). If such measures fail to persuade the professional investment funds, for how long will the general public remain convinced? Sure, this is not a large, global microfinance fund, but watch this space.
Meanwhile Blue Orchard continues to decline. From $268m in January the August report suggests the fund is now hovering at just below $253m.