Profitability in Microfinance: Chu-Waterfield Debate

"How much profit is too much?" when those profits are made from the poor and when investors/ businesses bear the label of "social" or "double bottom line"? This topic was explored in a webinar discussion between Michael Chu and Chuck Waterfield this past Friday (May 24).

I think their views are more consistent than might first appear, because they are talking about two different things.

New Compartamos Study

Compartamos invited three economists, Dean Karlan, Manuela Angelucci and Jonathan Zinman, to undertake two randomized control tests to find out the impact of Compartamos' lending practices on clients.  Overall, the studies show that microcredit typically benefits borrowers in a variety of ways, even if it does not lift them immediately out of poverty.

For the study, see http://karlan.yale.edu/p/WinSomeLoseSome_Release%20%281%29.pdf

For a recent article in the Economist about the study, see "Mexico: Put to the Test" (http://www.economist.com/blogs/schumpeter/2013/05/microcredit) 

Balanced Returns in Microfinance: Recognizing Two Approaches and their Likely Outcomes

Currently several microfinance industry efforts are underway to define and operationalize the idealistic concept of “balanced returns” which is included in a number of statements of principle or codes of conduct including the PIIF and the SPTF Universal Standards.  These discussions force us to confront two distinct views of what microfinance can accomplish and how:   Is microfinance effective by accelerating the entry of the poor into mainstream markets, specifically markets for financial products, where market forces will ultimately deliver improved lives to the bottom of the pyramid through “financial inclusion”?  Or can microfinance directly benefit the poor by enlisting private capital and market incentives in targeted, pro-poor interventions not available in the mainstream?

A challenge to flat earth thinking in microfinance

According to Sanjay Sinha (Micro‐Credit Ratings International Limited), promotion of microfinance starting from the mid-1990s propagated a strong message on the principles of good microfinance practice. This note argues that while these principles may have been appropriate at the time when they were formulated, the entrenchment of these principles is now damaging the development objective – financial inclusion to serve the needs of poor and low income people, and facilitating income enhancement – and the time has come for a concerted effort to swing the pendulum back to equilibrium.

Read more: http://m-cril.com/article/A-challenge-to-flat-earth-thinking-in-microfinance.pdf

Announcing: the Pro-Poor Principles

The Pro-Poor Principles form the foundation for good practice in reaching and serving poor clients. They also serve as the core of the Seal of Excellence’s assessment framework that will help to identify those organizations doing the most to reach people living in poverty, to meet their needs, and to track progress over time.

Read more: http://sealofexcellence.wordpress.com/2013/05/15/announcing-the-pro-poor-principles/

Indian Regulatory Body to Set Norms for Impact Investment

In order to avoid excesses of the kind that derailed the Indian microfinance industry three years ago, nine impact investors have come together to form a group that will define what they can do and cannot do in their investment practices to always stay aligned with their stated objectives.

Read more: http://articles.economictimes.indiatimes.com/2013-05-08/news/39117121_1_vc-investments-vc-funds-vineet-rai