The recent Wharton Finance Conference paints an ebullient picture of 3^rd world microfinance – it was totally centered on the Nobel peace prize and Muhammad Yunnus.

The highlights are as follows:

Microfinance has got the world’s attention per economist Muhammad Yunus, founder of Grameen Bank in Bangladesh, being awarded the Nobel Peace Prize on Oct. 12.

There is a microfinance curriculum at Wharton,  whoopie!

It’s not just another 3rd world handout or free money scheme – it can actually be profitable to the lenders.

Although reliable statistics are hard to come by, there is evidence that microfinance is growing dramatically. As of the end of 2004, according to the Microcredit Summit Campaign Report, more than 3,000 Microcredit institutions reported reaching over 92 million clients, two-thirds of whom were among the poorest when they received their first loan.

Vis a Vis the pressure of being profitable as a business lender, how do you balance the dual objectives of profitability and social responsibility?

Everybody may not be able to play the microfinance field like Developing World Markets, an investment bank involved only in socially dedicated projects. Commercial bank participation both as wholesalers and retailers may help fuel microfinance growth trend.

On the downside:

From potential western lender standpoint like Citibank – there’s a big human capital challenge. . "You can't take commercial bankers and drop-kick them into the Congo. There are not a lot of people willing to work in Kabul. It means going into places that make your hair stand on end. You can't be worried about room service."

Lenders can’t do appropriate risk analysis: “…banks in the Middle East often have absolutely no mechanism to assess risk, and this makes them more dependent on subsidies. In Haiti… there is no national ID system and thus no traditional way to track clients who might want to get multiple loans from different agencies. You had to take someone's word for who they were...”

Abusive collection methods occur in some cases – see BBC report on plight of Indian farm widows.

Next, from Colombia business school – another report by Suresh Sundaresan and Sam Cheung examines issues facing both lenders and borrowers in the microfinance market, using data collected by the Microfinance Information eXchange (MIX), a nonprofit that promotes information exchange in the industry.

A quick summary of their findings:

Microfinance institutions reporting their data to MIX have more than 28 million active borrowers – Banks account for 31% of active borrowers while 46% account for NGOs (Non governmental Organizations). Notice the wide gap between this figure compared to the 92 million clients reported by the Microcredit Summit Campaign Report referenced in the previous article – speaks volumes about information gathering in 3^rd world regions.

Microfinancing is profitable for lenders and soft enough for borrowers -- average interest rate for a microloan ranges from 30 to 40 percent — a bargain compared to the 70 or 80 percent borrowers might otherwise pay to a local loan shark. The repayment rate is 90 percent, higher than that of high-yield corporate borrowers in the United States.

It is very progressive -- most of the borrowers are women, and many microfinance institutions lend exclusively to women.

Risk is fairly small – given average loan is $848 in Latin America, $483 in East Asia and just $83 in South Asia

Biggest obstacle Sundaresan observes is administrative overhead costs -- monitoring borrowers to make sure they are using the money productively gets pretty expensive. And as such, any mechanism to minimize direct/physical-monitoring activities by lenders would be a big plus.

At this point my ICT bias kicks into overdrive; I would firmly urge micro finance lenders to examine enabling technologies to support the lender monitoring effort. The profit potential would more than justify the thrust for innovation in that direction – and how hard can it be in the midst of present day tech superfluity, to customize existing technologies towards this monitoring function? How hard can it be to replicate similar tech/Net/ICT advantages as currently enjoyed in e-commerce today where a single individual can operate a number of online virtual stores for 24 hours without being there? A possible scenario:  borrowers could file periodic reports/interact with lenders via mobile phone text messaging, along with some electronically verifiable proof of progress. Hey – that’s my idea and you read it here first!

Anyway, Sundaresan and Cheung appear to be more on a low-tech wavelength. They recommend joint liability contracts – where borrowers form groups and assume mutual responsibility for each other’s loans. Since group members select their own partners, much of the burden of screening falls to the borrowers themselves. It may require a big initial input and peer pressure replaces collateral as a motivator for repayment.

So far, Sundaresan has been unable to find an MFI in India that is willing to test his model by experimenting with larger loan sizes.

And finally, Sundaresan observes a fundamental truth about human nature as follows: Even if more capital becomes available at lower interest rates, less than 10 percent of microloan borrowers turn out to be true entrepreneurs. Sundaresan tracked the borrowing patterns of nearly 50 women in two Indian villages over a period of 5 years. The real entrepreneurs borrowed larger amounts each year and gradually increased the scope of their economic activities, eventually pulling themselves out of poverty. Some of them now employ 100 or 200 other women. For the other 90 percent of microloan borrowers, microfinance may offer only an incremental improvement in living standards.

Nice work Sundaresan – I don’t see anything on microfinance in Africa here though.

But I dug up a few Africa specific microfinance links here.