SPECIAL REPORT: Michael Chu: “Disrupt this Old Model to Unlock the Potential of Microfinance”

At today’s opening plenary of European Microfinance Week, which is hosted by Luxembourg’s 140-member European Microfinance Platform (e-MFP), Michael Chu of the US-based Harvard Business School and the Mexico-based venture capital fund Ignia, argued that microfinance is generally implemented using a 20-year-old model that is inefficient and “ripe for disruption” through technology. While lamenting that more funding is not available for early-stage ideas, Mr Chu cited the example of a concept being supported by Ignia whereby a potential borrower can submit personal information by telephone to a computer that determines whether to lend the person up to USD 1,000.

Suresh Krishna, the managing director of Indian microlender Grameen Financial Services Private Limited (often referred to by the name of its subsidiary Grameen Koota), argued that such “no-touch” services would not be as successful as “high-touch” services, those that involve regular personal contact with borrowers. Both speakers feel that a range of services are necessary to help poor people increase their incomes. Mr Krishna argued that high-touch models are better matched with efforts to bring in partner organizations to help borrowers with corollary services such as accessing solar power, biogas and rain-water harvesting.

Mr Chu agreed that using microfinance as a platform as a means to deliver non-financial services is “a very powerful concept,” however he argued against the idea that microfinance institutions should accept the expectation that they can bring people out of poverty and document that transition. He asked, “if we were talking about surgery, would we judge a cataract hospital on the sight of its patients or happiness of the patients’ families after surgery? Or whether their children go to school? These things are hugely important, but they would be misleading inputs into the management of the cataract hospital. Why would we do that with microfinance?”

Mr Krishna stated that – although measuring the social impact of microfinance is important – it is so complex that microfinance institutions cannot afford it. Instead, it “should be left to academics.”

Her Royal Highness The Grand Duchess of Luxembourg also spoke at the plenary, arguing that working with a poor person to get him or her out of poverty benefits more than just that person: “Whoever is taken out of poverty is going to have an impact on the political situation of that country and its democracy.”

This content is sponsored by e-MFP, the organizers of European Microfinance Week. It is one in a series of articles covering the proceedings of the event, which is taking place in Luxembourg from November 12 to November 14. MicroCapital is reporting on the sessions onsite throughout this time.

Additional Sources and Resources:

MicroCapital Special Report; November 12, 2013; “Making Microfinance Investment Responsible” Group Wrestles with Inconsistent Data Reporting at European Microfinance Week

MicroCapital Special Report; November 12, 2013; Youth Financial Inclusion Group Tackles Business Training, Scaling-up, Dormant Accounts, Program Indicators, Self-sufficiency at European Microfinance Week

Microfinance Event; September 24, 2013; European Microfinance Platform (e-MFP) to Host European Microfinance Week 2013, Luxembourg, November 12-14, 2013, With On-site Coverage Provided by MicroCapital

MicroCapital Special Report; November 16, 2012; Responsible Microfinance Implementation Action Group Looks to Boost Usage of Existing Tools, Distributes Template of Covenants for Investors to Attach to Loans to Microbanks

MicroCapital Universe Profile: European Microfinance Platform (e-MFP)

MicroCapital Universe Profile: Grameen Financial Services Private Limited

MicroCapital Universe Profile: Ignia

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