Lately, microfinance has been attracting attention for all the wrong reasons.
The Skoll World Forum on Social Entrepreneurship started off here March 30 with a discussion of what lessons social entrepreneurs can draw from the controversy.
Microfinance—which Stephan Chambers, chairman of the Skoll Centre for Social Entrepreneurship, called "the undisputed star of our movement"—involves small loans that allow poor entrepreneurs in developing countries to start businesses.
Accusations of abusive practices, as well as borrowers who have taken out multiple loans and whose debt far exceeds their ability to pay, have led some politicians in India to exhort borrowers to stop making payments. Hugely profitable initial public offerings of for-profit microfinance institutions have led critics to question whether investors are getting rich at the expense of the poor. And the government of Bangladesh is trying to remove the Nobel Prize winner Muhammad Yunus from the Grameen Bank, which he founded in the late 1970s.
"We need to question our own fundamentals," Roshaneh Zafar, managing director of the Kashf Foundation, a microfinance organization in Pakistan, told conference participants. She said that she believes lenders have a responsibility to provide prospective borrowers with the financial education they need to make smart decisions about loans.
Three years ago, the Kashf Foundation started to offer its clients financial-literacy training, and figuring out the best way to do that is a work in progress, she said. At first the training lasted 10 days, but that was too long for some borrowers, said Ms. Zafar, so the organization streamlined the training significantly.
Microfinance organizations need to be careful that they aren't condescending to their borrowers, Alvaro Rodriguez, chairman of Banco Compartamos, a for-profit microfinance institution in Mexico, told conference participants. Organizations shouldn't assume that because people are poor they can't manage their finances.
"When you are poor, you don't have the privilege of tripping, and that makes you very, very smart," he said.
Mr. Rodriguez defended the role of commercial institutions in microfinance. Philanthropic dollars will always be important for supporting innovation and for spurring financial services in countries where it's not commercially viable, he said. But, he added, for microfinance to reach all of the people who could benefit, for-profit companies need to be involved.
"We want to fulfill that mission of serving the most people as soon as possible," said Mr. Rodriguez. "Growth is important, and not just growth but the speed of growth. And the best engine for that is profit."
New Grant Announced
One corporate donor has made a large commitment to nonprofit microfinance. Here at the conference, the MasterCard Foundation announced a $45-million grant to BRAC to help the nonprofit organization expand a microfinance project in Uganda.