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Saturday, January 22, 2011

"Credit is just dangerous. It’s like a drug ... and microcredit is not exempt"

The Article: The Microfinance Backlash

"Co-creating Value" is a term being thrown around a lot lately, especially within the international development community. The origin of the term is derived from the problem of traditional charities simply pumping money into developing countries without a care of where the money actually goes. How many hands does it go through? How long does it take? or Is the funding sustainable? Sooner or later microfinance institutions starting popping up, applying a capitalist approach to foreign aid. "Co-creating Value," a sustainable for-profit business that also brings value to the local community in which the organization operates in.

One of the major key success factor of microfinance organizations is building trust and accountability with its borrowers through interest and loan repayment. And if you ask any business student, most of them would tell you that Grameen Bank would a prime example of such organization. Its unique business model ensures a high percentage of loan repayment and ultimately, provides income generating opportunities for the borrowers.

Sounds great, right? All parties involved are able to get something out of the venture. Then why is the model currently being under reviewed?

After the mortgage bubble bursted, so did a lot of microfinance institutions around the world. The cause to blame comes from the inherent nature of all organizations operating in developing countries, and that is risk. Multinational corporations don't want to operate in these countries because it is a risky business.

Companies are afraid of dealing with the ethical issues of bribes and corruptions. These countries often lack the infrastructure needed for the companies to operate. A lot of time and resources would be needed to reach the millions people spread across hundreds of kilometers. All these efforts for a chance to hopefully breakeven, let alone make a profit.

When you are lending to a risky borrower (quite often with no collateral), if anything goes wrong, as a microfinance institution, you gain nothing but a large bad debt account. I am not saying that all microfinance institutions are destined to fail. Acumen Fund would protest that there are successful business models out there. But, are there any other solutions, other than a capitalist approach?

-GlassFrog Blogger Jackel

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