In the news wake of Mr. Yunus’ Nobel Peace Prize, the accepted meaning of the word “microfinance” has been transformed. The popular columnist Ron Lieber of the Wall Street Journal (subscription only) recently capped this development when he named the new internet firm Prosper.com as a microfinance player.
The term “microfinance” has been in play for some time as we reported in May when covering PlaNet Finance and ACCION International, two rich country non-profits that buck tradition by micro-lending both at home and internationally in poor economies.
Mr. Lieber focuses his article on technology. And for good reason, it is technology which has fundamentally changed the meaning of microfinance.
Two websites, Prosper.com and Kiva.org, which have both received ample press, are offered as ways “to be a micro-lender” either for a profit or to get your investment principle back while doing the right thing. Mr. Lieber is right that “peer to peer” micro-lending for a profit on-line will revolutionize microfinance. The reason is the cost structure of micro-lending.
To better understand this phenomenon, let’s look at the traditional microfinance model: in Boston, money is cheap and labor expensive whereas the opposite is true in Bangladesh. This fact makes microfinance a wildly interesting business in Bangladesh, whereas, in Boston, inversely, it mandated government and philanthropic subsidies. Prosper signals a change to this regime.
Prosper leaps the hurdle on one hand by “externalizing” labor costs using do-it-yourself, person-to-person, on-line micro-lending. On the other hand, the cost of capital is lowered because the middle-man is removed. Prosper is an auction marketplace working in the United States, supported by credit profiling and virtual self-help groups. Prosper’s borrower pool consists of individuals with the broad range of credit ratings (A through D paper). In this way, the same system serves people alike who have the option to lend from a bank and those that do not, thus reaching the traditional customers of microfinance.
So, Prosper serves poor people in Boston, but could it serve the customers of the Grameen Bank in Bangladesh? For now, those customers are not going to “do it yourself”, and will depend on micro-banks to secure financing. (For this very reason, Kiva.org, who works in emerging economies, partners with micro-banks, who in turn manage the customer inter-face on the micro-borrower side.) Therefore, while pure “peer-to-peer” micro-lending for the global poor world will not happened tomorrow, we will start to see micro-banks selling interest in their loans to individuals whether directly or, more likely, through a third party like Kiva or Prosper.
Hats off, then, to Mr. Lieber for finally cracking the term “microfinance” wide open by so labeling Prosper. We regret, however, that he let his tidy technology theme badly advise his readers about how to donate money to microfinance. He mentions three organizations which are well respected to be sure, but are not leaders in non-profit microfinance (DonorsChoose, ModestNeeds and GlobalGiving). These organizations are leaders in using technology to improve efficiency and transparency when donating to grass-roots projects. This is important work; the point is not to criticize these worthy organizations because Mr. Lieber over did his provocative and welcome essay. The point is simply that a donation is a donation whether made over the internet or a jar of coins dropped off at your local school. Please Mr. Lieber, if you are going to tell Wall Street Journal readers about charitable options in microfinance, then it is most responsible to start at the top of the list.
The fact remains that delivering good financial services to the global poor at a good price requires deep institutional expertise and infrastructure. Bangladesh does not have a Prosper (yet). The top microfinance charities delivering on their mission should not be overlooked in the name of slick writing, especially in a business publication like the Wall Street Journal dedicated to rational allocation of resources. Nonetheless, Mr. Lieber’s essay is brilliant because it demonstrates exactly how technology transforms what we mean by “microfinance” and the probable evolution of the same.
