2008 Woodie Awards
Microfinancing brings capital to the masses
An Interview with Bhakti Mirchandani of Lehman Brothers
Ari Jahja
Issue date: 2/20/07 Section: Business
BM: As we have just discussed, a number of well-run microfinance institutions are profitable. Specifically, 50 are considered top tier, and the profitability of the top 30 microfinance institutions in Latin America exceeds that of Citigroup, in terms of return on equity. The majority of microfinance institutions (9,000 to 10,000) must be at least partially subsidized, i.e. somewhat unprofitable. Philosophically, if you can make money on lending money to the poor, you use the profits to grow your operations and help the poor even more by lending them more money. So profits mean scale, and scale is good for both the poor and those who serve them.
AJ: Will microfinance ever work in the U.S.?
BM: It depends on what you mean by "work." Microfinance can be considered as working if it creates opportunities for poor people to start businesses. Nonetheless, microfinance tends to be less profitable in the U.S. because micro-entrepreneurs can do less in the U.S. with each dollar they are lent, relative to what they can do in developing countries. In other words, since capital is less scarce in the U.S., returns on capital are lower.
It is more expensive to set up small businesses in the U.S. Also, credit cards create competition for microfinance in the U.S., and the poor in the U.S. can have poor credit histories associated with credit cards. It is therefore more difficult to make the case in the U.S. that the poor are a better credit risk than the rich.
AJ: According to my research, right now there are very few Wall Street firms that are supportive of microfinance. How do you see that changing in the future?
BM: A few firms have made significant commitments to microfinance, but most firms have made some sort of commitment to microfinance. Larger commitments include founding microfinance groups, raising microfinance funds and doing microfinance deals. Smaller commitments include hosting events for employees and clients, encouraging volunteerism and giving money. The recent awarding of the Nobel Peace Prize to microfinance pioneer Muhammad Yunus should accelerate the rate of Wall Street's involvement. Microfinance can not only be profitable, but it also appeals to clients and employees, which can only help Wall Street firms.
AJ: Will microfinance ever work in the U.S.?
BM: It depends on what you mean by "work." Microfinance can be considered as working if it creates opportunities for poor people to start businesses. Nonetheless, microfinance tends to be less profitable in the U.S. because micro-entrepreneurs can do less in the U.S. with each dollar they are lent, relative to what they can do in developing countries. In other words, since capital is less scarce in the U.S., returns on capital are lower.
It is more expensive to set up small businesses in the U.S. Also, credit cards create competition for microfinance in the U.S., and the poor in the U.S. can have poor credit histories associated with credit cards. It is therefore more difficult to make the case in the U.S. that the poor are a better credit risk than the rich.
AJ: According to my research, right now there are very few Wall Street firms that are supportive of microfinance. How do you see that changing in the future?
BM: A few firms have made significant commitments to microfinance, but most firms have made some sort of commitment to microfinance. Larger commitments include founding microfinance groups, raising microfinance funds and doing microfinance deals. Smaller commitments include hosting events for employees and clients, encouraging volunteerism and giving money. The recent awarding of the Nobel Peace Prize to microfinance pioneer Muhammad Yunus should accelerate the rate of Wall Street's involvement. Microfinance can not only be profitable, but it also appeals to clients and employees, which can only help Wall Street firms.
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