Microfinance Investors: Profiting Off the Poor or Profiting With the Poor?

BBC News ran an excellent article in its Business section yesterday highlighting the increased interest in microfinance among investors. In particular, institutional funds are seeking safe investments in a time of economic turmoil, even if the returns aren’t as robust as investors might see from more traditional investments.

“To a certain extent, the client that [microfinance institutions] serve is insulated from the global economy,” he says. “People still require a cobbler or a rickshaw driver.”

Over the last few months, I have spoken with a number of people at microfinance investment vehicles, the organizations that channel the funds from investors to microfinance institutions. The consensus seems to be that the global credit crunch has caused a slowdown in funding, which runs counter to the findings in the BBC article. What I suspect is that investment in microfinance may slow in the short term, but continue to hit new highs over the long term. Because the investments are spread over so many individual borrowers, diversification is inherent to microfinance funds.

The article–provocatively titled “Profiting From the Poor”–also addresses the concern about the impact of for profit investors funding microfinance. Undoubtedly there is a danger (already realized in some cases) of microfinance institutions becoming driven by the profit motive, rather than by a social mission. In these cases, MFIs begin to look a lot like the payday lenders we have in the US. However, there are also plenty of examples of MFIs that balance the profit motive with a social mission, achieving sustainability as a business while contributing a social good in their impact area. These are the MFIs I would seek out as an investor.

“We see no contradiction between running an activity like a business and achieving a social impact.”