Non-Profit Microfinance versus For-Profit Lending - Essay Example

Faisal Albwardi 01 December 2009 Non Profit Microfinance versus For Profit Lending Introduction The origins of microfinance can be traced as early as the 1800s when Lysander Spooner proffered the advantages of lending to small businesses to release people poor from the bondage of poverty. Contemporary microfinance began in the 1970s through the enterprising spirit of Mohammad Yanus of Grameen Bank in Bangladesh. (Microfinance and Micro Credit 1) Accordingly, microfinance is defined as ““banking the unbankables, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral.” (Gert van Maanen, 2) There are two schools of thought regarding the entire industry of Microfinance: the first advocates non-profit lending, while the other takes the opposite view- that for-profit. In this regard, this essay is written to present arguments that profit microfinance institutions (MFIs) are better off by pursuing profits making them more sustainable than non-profit MFIs. This paper will argue that by microfinance institutions (MFIs) pursuing their own interest (profits) this is the only way to be sustainable & will lead to more outreach & more the greater good for all impoverished people despite the fact MFIs are for-profit. Arguments for Profit MFIs Years of research indicate that for-profit MFIs are more sustainable than non-profit microfinance institutions because they have higher growth rates, access to a larger pool of funding and are much more profitable. According to Global Microfinance Forum (1), “profit-maximizing MFIs run just as normal businesses do, making enough profit to fund themselves and benefit owners and investors.” For-profit MFI’s pursue profits because they are market driven. They could rely on donor funds in their initial stages, but unlike non-profit MFI’s, they specifically stipulate that their goal is to be financially self-sufficient—the ability to rely on themselves financially from within the institution. Hence, by gaining profits they want to grow, expand the number of institutions; lower all possible costs and ultimately reach the most amounts of people possible. By relying on themselves, for-profit MFIs are sustainable. The opportunities for profit MFIs are greater in terms of availability and accessibility for investor capital. In addition, with their own sources of funds, potentials for expanding their target market are vast. Supporters for nonprofit MFIs stipulate that these institutions solicit funds from donors, grants, government organizations and even international organizations. Through these sources, non-profit MFI’s are subsequently able to lend to the poor at very low rates not concerned with return or growth. Accordingly their concern is helping to alleviate poverty through lending them money, but not very worried about efficiency. However, non-profit MFIs constant dependency on outside funding means that they would be unable to operate in the long term without donor funding and, are therefore, inefficient and not sufficiently sustainable in the long run. If the institution is for-profit and implements cost-saving methods, it is sustainable, and continues to grow and produces profits, the MFI can turn around and use those funds to reinvest in their institution. These reinvestments can highly impact the performance of the institution such as gaining more talented employees, investing in information technology, training their customers in basic bookkeeping and so forth. The most important use of increased funds is the institutions ability to further reach additional clients. Therefore, they are able to access credit that would not have otherwise been available to them. In addition, profit MFIs “are forced to be more transparent with their governance. Generally, this is forced upon them by regulation and their investors who want to see how their money is being used and to reduce the possibility of fraud and mismanagement. A more transparent, healthy MFI is likely to receive better rates on loans from banks which lowers their cost of capital which over time can (and will due to competitive pressures) be passed along to poor clients.” (Richards, 4) Another plus factor for profit MFIs are the option for investors to purchase shares expand potentials for investment opportunities. As Richards averred, “equity capital can be leveraged to enable them to borrow more money from banks which is then lent out to poor clients. So, the net benefit to poor clients is more loan money at lower interest rates.” (5) Finally, profit MFIs view their clients as customers rather than as beneficiaries due to the sources of funds. The implication of this is that as customers, profit MFIs devise ways and means for customer satisfaction and realization of the customers’ long term goals to likewise succeed in their specific endeavors. Further, non-profit MFIs’ tendencies of viewing their clients as beneficiaries rather than customers cause a change in the expectations for loan repayments. The Global Microfinance Forum emphasized that “non-profit MFIs do not structure or run their business to break even or bring in a profit. Many MFIs are non-profits because they do not believe in making money off the poor. Some are non-profits because in many countries there’s no legal way to accommodate social businesses.” (2)  The ultimate counterargument for supporting profit MFIs are discourses that state the essence of “microfinance banks that focus on the investors and their returns, instead of the borrowers, end up defeating the very purpose of micro loans.” (Urbanomics, 3) With more money invested to develop and expand profit MFIs services and target markets, there are possibilities for catering to higher income groups rather than relying solely on the micro-poor level. Concurrent with the philosophies of microfinance lending, profit MFIs create a set of policies and procedures to ensure that invested capital would have enough returns to expand their clientele and to offer more services and training for personnel, as needed. Conclusion The very essence of microfinance, as the definition explicitly states, is lending to those who cannot avail of credit from financial institutions. The emergence of profit MFIs was a matter of necessity to service the majority of unbankable clients. The potentials for growth shown by the success of microfinance lending provided the impetus for profit MFIs to improve their specific charters and enable to service these clients through more efficient and effective means, without diverting from the original philosophy of microfinance. Sustainability is the ultimate objective of profit MFIs to better serve the needs of the marginalized poor. How else can entrepreneurial talents ensure that this scheme would continue in the future if funds run out due to global financial or economic pressures that curtail and lessen the source of funds? Only through profit MFIs would the framework for microfinance lending survive for many years to come. Works Cited: Global Microfinance Forum. How MFIs are funded? n.d. Web. 01 Dec. 2009. Maanen, Gert Van. Microcredit: Sound Business or Development Instrument. Oikocredit. 2004. Print. Microfinance and Micro Credit. History of Microfinance. 2 Feb. 2008. Web. 01 Dec. 2009. Richards, Dave. For Profit Microfinance. 2009. Web. 01 Dec. 2009. < http://www.defeatpoverty.com/2006/05/for-profit-microfinance.html> Role of for profit-MFIs. Urbanomics. 19 April 2008. Print. Read More