More Trouble With Microfinance

I've been meaning to write about James Surowiecki for a while. He's an amazing writer.  I read his "Financial Page" each week in the New Yorker and without fail I learn something new each time. This week's column is about microfinance and he makes a simple but interesting point.

That is, one of the problems with microfinance is that it doesn't address the real problem in underdeveloped countries: job creation.  He notes that there's tons of cash for one-man businesses (microfinance) and tons of cash for large and mature businesses (institutional investors) but there isn't any money for small businesses which he argues is where most new jobs come from.  In the U.S., angels and venture capital firms often fund these businesses.

I think it's a great point that I hope people that are as smart and as passionate as the pioneers of microfinance start to address.  Microfinance firms could easily partner to create funds that could fund businesses that have real growth potential.  There's no reason there couldn't be a variation of venture capital financing in the developed world.


The other day I joined and made a couple of loans to entrepreneurs in Azerbaijan; one cafe owner and one animal trader.

What a great sentence...

Anyway, after working in the microfinance industry for two years during business school I am absolutely thrilled at the popularity of this site. 

But while Kiva is doing great things, I still think microfinance has an awful long way to go. 

The industry will never truly succeed until its investments become regulated and indexable.  Regulation and reliable indexes will allow large institutional investors to use the asset class as a way of adding additional diversity and solid returns to their portfolios.  The industry can't rely on individuals making loans simply because it's a nice thing to do (which it is by the way). 

In order to move money from the top of the developed financial world to the bottom of the developing financial world, microfinance must become a real investment for serious investors.