Microfinance: the smart money

Microfinance: “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers.”

Today’s International Herald Tribune (specifically, Daniel Altman, writer of the Managing Globalisation column/blog) discusses the insulation of microfinance against the trials of the world of non-microfinance.

Given this integration with the global credit market, you might think that episodes like the credit tightening of the past several months might have a more damaging effect on microfinance. But it still seems fairly insulated from the recent turbulence, and from that fact may spring an opportunity.

Several factors have insulated microfinance operations, Otero said. First of all, the amounts they seek from credit markets to fund their operations are relatively small, in the tens of millions of dollars. Second, they are also funded in large part by the savings of the poor, which is not so sensitive to the benchmark interest rates used by global investors. And third, when they do raise money, it’s often locally, in emerging economies that haven’t become completely synchronized with the major markets.

That’s the willingness-to-lend side of the microfinance equation. On the ability-to-repay side, there are also insulating factors, said Premal Shah, president of Kiva, a program that connects individual lenders in wealthy countries with borrowers in the developing world.

“Shocks to an economy, like a global recession, affect the informal sector less than the formal sector,” he said. “For the microfinance institutions, because their clients are in the informal sector, typically the portfolio quality does not decline.”

Waay back last June, microfinance was discussed with specific reference to the differential risk between it and global capital investment – and the fact that, while microfinance had transparency problems, it couldn’t possibly be worse than leveraged buyouts, monolines, CDOs, etc. Turns out that was a good call.

Anyway. I would not have thought that “episodes like the credit tightening of the past several months might have a more damaging effect on microfinance.” I hope that does not make me a weirdo. This gets back to Warren Buffet’s priceless line earlier this week:

The woes in the U.S. financial sector are “poetic justice” for bankers who designed and sold complex investments that have since gone sour, billionaire investor Warren Buffett said on Wednesday.

“It’s sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end,” he said.

“I wouldn’t quite call it a credit crunch. Funds are available,” Buffett said during a question and answer session at a business event. “Money is available, and it’s really quite cheap because of the lowering of rates that has taken place.”

He added: “What has happened is a repricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago.”

You’ll note that Buffet is an educated man. He knows irony from poetic justice. His statement is, of course, entirely true: the issue is not with ‘easy’ money, but dumb money. Now, microfinance really doesn’t have dumb money. As Altman’s article discusses,microfinance is just that: microfinance. The scale of the thing just doesn’t lead to stupid things. The sustainability imperative of microfinance does not lead to that sort of thing and, ultimately, the point of microfinance does not lead to that sort of thing. Microfinance isn’t about the mad pursuit of unsustainable (financial) yields: it is about investing in small-scale core development-friendly infrastructure.

Scale-wise, I don’t know how far microfinance will go as a hedging bet – as more people try it, for example, its ability to perform that function will diminish. We should have expected it to weather the thoroughly non-sensible financial flows of the rest of the world though – sensibleness (I own that word, now) is one of the things that makes microfinance so clever, after all.

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