Violence in Kenya and Pakistan Challenge the Microfinance Moldel.

Posted by: Bruce Nussbaum on February 17, 2008

Microfinance has been been one of financial innovations best able to empower people at the bottom of the pyramid to plug into economic growth and move out of poverty. But the recent political violence in Kenya and Pakistan—two countries with deep microfinance operations—is undermining the effort. In Kenya especially, thousands of people who took out loans to build businesses have seen everything destroyed by mobs. They cannot pay back these loans. In the West, “Too Big To Fail” is the motto for government policy toward big banks, which translates into bailing them out of bad loans because their bankruptcy would threaten the entire economic system.

I suggest that “Too Small To Fail” is appropriate as well, since the lending of money to small business people in towns and villages of Asia and Africa is essential to their upward mobility out of poverty, the spread of the market economy and political stability. We need large financial institutions to step up, write off the debt of people with micro-loans in Kenya and elsewhere and start lending them additional funds to rebuild their businesses and their lives.

Jacqueline Novogratz, founder of Acumen, has the best insight into

what is happening in Kenya that I have seen anywhere. She recently returned from the country, where Acumen has significant programs in place.

Just as we need more innovative insurance products to protect people in the US and Europe against the disruptive unemployment that is now part of globalization, we need new kinds of insurance for poorer people to protect them against the political and economic disruptions in their lives. In many ways, it is all part of the vast globalization process going on today.

Reader Comments

Grant

February 17, 2008 10:05 PM

Hi Bruce.

I agree with what you're saying, and wanted to add one other thought.

As a contributer to microfinance inititiative via Kiva.org, I can say that if any of my loans become bad due to violence in country, I wouldn't be calling for foreclosure - in fact, I'd probably offer more.

One of the compelling things about an operation like Kiva.org is that the risk is spread amongst a large base of "mini-banks" (individuals) - so exposure to bad debt is minimised. This is an innovative model - so much as I agree that big banks should be stepping up to the mark, I suspect that most innovation will not be coming from those institutions.

The hard part for Kiva.org and others in this space is that, so far, the figures of bad debt have been exceptionally low, making the offer more attractive. If they have a lot of loans in countries such as Kenya, and that bad debt increases significantly across their base, it's harder for them to "sell" the concept. Not impossible, but harder.

Regards, Grant

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