How Do We Keep Microfinance Relevant?

Authored by: Chad Jordan

I’ve done a lot of consulting work in the microfinance sector over the past several years. I don’t work in that space much anymore, though. Most of my time these days is occupied by working in the SME (small- and medium-sized enterprise) finance sector. Microfinance, though, is one of the big reasons why.

Microfinance became a global phenomenon over the last couple decades. It’s utilized in nearly every country on the map – rich, poor, and every one in between. It serves some of the most vulnerable men, women, and children on the planet. It allows income to be produced and services to be provided.

Microfinance brings people out of extreme poverty in a way few other interventions can – and none can boast the global reach or sustainable framework microfinance is able to claim. It relies on small loans to achieve large strides, not only for the active participants, but also for the communities from which they come.

What microfinance has done, though, is create businesses that are no longer served by its own loan capacity. It has helped create a business sector it can no longer finance. Would that every program be so successful.

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Businesses that start with microfinance-level capital needs often scale past the size that microfinance loans go. As such, these businesses need larger financing interventions that can push them toward the full commercial marketplace, becoming job creators and growth engines on a much larger scale than previous capacity allowed. Hence, my involvement in SME finance – the sector microfinance helped accelerate.

It’s safe to say I wouldn’t be able to do most of the investment work I do now without the existence of the microfinance sector. Microfinance enables the incubation of entrepreneurs and the formation of small businesses that turn into commercially viable enterprises.

There’s a lot of negative press about microfinance in some publications, and some adaptations do need to be made for it to remain competitive globally. What I don’t think most of those articles and pieces recognize, however, is that many of the businesses in the SME and commercial finance sectors wouldn’t exist if they hadn’t started out as microfinance or microfinance-sized loan clients. Growing businesses exist because microfinance helped push them toward scale.

The global economy needs businesses of all sizes to thrive. It’s true that microfinance is not able to financially support businesses that are hiring a large number of people; however, without microfinance as a rung on the ladder, very few businesses would ever reach the point of scale. Besides, some businesses aren’t meant to become large commercial enterprises, and that’s perfectly fine.

Just as businesses need to be enabled to exist at all levels, we need to support access to finance interventions at all levels. Each tool is a building block for the others. As the global conversation has begun to shift toward SME finance as a necessary rung in the ladder post-microfinance, let’s not forget how the businesses got to that point. Let’s not allow people to leave microfinance out of the conversation or ignore its ongoing relevance in the global development conversation.

We each have a voice, and the Month of Microfinance is a great venue through which to make it heard. Engage, share, and participate. Microfinance is and will be relevant – don’t let the world forget it.

 

Chad Jordan is the author of Shut Up and Give?, ReThink Missions, and the soon-to- be-released Three Jobs. He is the co-founder & CEO of Arrow Global Capital, a impact investing platform focused on mobilizing idle capital in support of emerging market entrepreneurs, as well as the founder and Chief Consultant of Cornerstone International, a boutique consulting firm specializing in business development and income creation around the globe. Chad holds a master’s degree in international development from The George Washington University in Washington, D.C.

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