Wokai Adventures

Lessons for China from Seattle's Community Capital Development

Hongqing Chen

Hongqing Chen, a Portfolio/Risk Manager, recently joined Wokai’s Seattle Chapter. You can reach her at hongqingc @ gmail.com. 


Jim Thomas, CEO of Seattle's Community Capital Development, has created a great model that could be the answer for many developing countries like China. 

Shown waving in this 2006 photo from USA Today, Jim is a funny, warm, and sharp businessman.  I contacted him via email first on December 16, 2008.  Then a snowstorm hit Seattle area long and hard.  When ice and snow finally gave away to our normal marine climate, I finally had the change to visit him on December 30, 2008.

Unlike Washington CASH, which I profiled here, microfinance is not the sole focus of Community Capital Development (CCD).  Rather, it would be a step up for its graduates. This page outlines its lending terms.  Whereas Washington CASH focuses on helping people to move out of poverty by utilizing their skills, CCD hopes to take them onto prosperity by providing them with more resources.  He took the rein of a HUD (Housing and Urban Development under US Treasury) community development grant of $2.5MM at City of Seattle in 1994 and turned it into a $14.5MM community development lending operation today. Obviously he’s done something right!

“Our mission is job creation.” Jim explained that, for every $35,000 financed by CCD, he expects one job to be created.  His model combines training and financing (similar to Washington CASH).  However, not all applicants are taking the same training courses.  In fact, CCD requires all applicants to attend a seminar first, to assess their needs for further training.  This can last from several hours to several years, depending on the student’s level of business experience.  He estimates that about 1,100 to 1,200 people attend seminars every year, but only 60 to 70 microfinance loans are made in the end. Through the training process, most people come to realize that they are not ready to run their own businesses. 

(This is very true, confirmed by statistics and my own experience.  It is not easy to start a business.  It is even harder to grow it into a profitable venture.  Once it is successful, the business needs to stay on top of its competition in order to sustain itself if not to grow.  It’s hard!)  Through this “self-weeding” process, as Jim put it, CCD suffers very low default rate (5%, less than half of the loss rate of WaMu Home Loans’ portfolio!)

I thought about what I learned from phone calls to friends and family members in China in the past months.  “The major problem in China today is not poverty,” said one high ranking official friend, “It is how to create jobs amid factory closures that is most urgent.”  The other family friends followed such a line.  Apparently, poverty is an old issue that government would like people to overlook until it fixes it somehow someday.  More visible to the outside world now is China's urban development.  A large influx of unemployed workers, including millions of migrant workers who do not want to return to rural villages, is a cause for concern.  From this perspective, Jim Thomas should be a guest of honor to Chinese government at all levels. 

P.S. To read more about the impact of factory closures in China, we recommend this article from the Wall Street Journal , this reaction from our friend Grace Chiang of the Social Venture Group, and this story from Time Magazine. 

Photo from CCTV. 

Obama, Microfinance, and China

Leslie Forman

Leslie is Wokai's Marketing Director.  She is looking forward to January 20, 2009 and she cross-posted this article on Social Actions. 

Yes, there is at least one connection between these three words.  Her name is Nancy Barry. 

A trailblazer in the field of Enterprise Solutions to Poverty, her current work focuses on creating pragmatic ways for large corporations in China, India, Mexico, and Colombia, to create opportunities for the working poor in these countries.  For many years she was the President of Women's World Banking, an international microfinance network. 

I just came across this article from an Indian finance website, describing her role as a close advisor to Barack Obama. 

Named one of the most powerful women in the world, Nancy M. Barry, 59, the Founder and President of Enterprise Solutions to Poverty and former President of the New York-based Women's World Banking, is no stranger to the limelight. Known to be a close confidant and friend of the Obama family, she is now expected to play a key role in shaping the new US regime's relationship with India and Indians. President-elect Barack Obama's mother, Ann Dunham, worked with her as the first policy change manager of Women's World Banking, from 1992 to 1995. Says Barry: I see in Obama many of the qualities of his mother: the capacity to get to the heart of the matter, the ability to get different factions to work for common cause, and a passion to work together in building economies that work for the majority.

I am so excited to hear that she will be closely involved with the Obama administration.  I first learned of her connection with Obama from this New York Times article, which describes how Obama's mother's globetrotting work in anthropology and microfinance shaped his worldview.  Nancy Barry describes Stanley Ann Dunham as "a very, very big thinker,” who "was not afraid to speak truth to power." 

I met Nancy in October 2007, when she gave a speech at AmCham Shanghai's Corporate Social Responsibility Conference & Awards, which I helped to plan.  Here's a description I wrote from that event: 

In her keynote address, Nancy Barry, of Nancy Barry Associates -- Enterprise Solutions to Poverty, argued that companies should move beyond philanthropy to create enterprise solutions to poverty. Drawing from more than 30 years of experience in emerging economies, she urged the audience to move away from “Random Acts of Kindness” and mobilize core capabilities to connect low-income people with global growth. “The biggest problem,” she said, “is that poor people don’t have enough money.” To address this, she described four key areas of activity: engaging small farmers as suppliers, creating decentralized distribution channels, developing products to increase income, and building enterprise networks.

In China, she has worked with China Mobile, Mengniu (a milk company), Proctor and Gamble, and several other companies.  Here's the presentation she gave at AmCham Shanghai on October 30, 2007.   Download Nancy Barry 10.30.07

I am optimistic about the roles that Enterprise Solutions to Poverty and microfinance may play in Barack Obama's foreign policy decisions. 

*Note (added 1/16): Microfinance Gateway referenced this post here. 

Microfinance Here in Seattle? My Visit to Washington CASH

Hongqing Chen

Hongqing Chen, a Portfolio/Risk Manager, recently joined Wokai’s Seattle Chapter. Click here to see her profile on Wokai.org! 

On a freezing December evening, I braved south Seattle’s icy roads to visit Washington CASH  (Community Alliance for Self-Help),  In my quest to get involved with microfinance, I’d read their two most recent annual reports, and thought, ‘Wow, they are working on a shoestring budget and still making a big difference in many people’s lives!’  So I was especially excited to learn more.

Images courtesy of Washington CASH.

By the entrance sat a group of volunteers, wrapping donated gifts.  I walked down a hallway into a classroom with about 40 people.  They had notebooks and pens ready, and focused closely on the evening’s lesson about personal credit scores. 

Next, I met with Cheryl Sesnon, Washington CASH’s CEO.  Cheryl’s office was more like a teacher’s studio than an office for CEO.  A classic lady, Cheryl wore a warm smile and a red blazer.  She answered my questions about operations, funding cost, loss rate, and future development.  I was surprised to hear her say that Washington CASH had no shortage of money to lend out.  (How nice!  I thought.  Then again, no bank is short of money to lend.  The problem is that they are all afraid to make loans now.)  Knowing that I came to learn how microfinance works and operational details, she emphasized that I needed to be first and foremost focusing on helping borrowers when working as a volunteer here. 

What intrigues me most about Washington CASH is how it adopts the Grameen model.  When a borrower shows up at the door, Washington CASH requires him/her to attend an 8-week long class about basic finance, organization, marketing, and other entrepreneurial skills.  The borrower will then find several classmates to form a group, with a president and treasurer, to help each other to be successful and diligent in repayment of the loans.

I’ve been assigned to work with a group of four borrowers that Cheryl has not yet certified.  The group consists of four borrowers with such interesting businesses: 

- A woman who had just relocated from Texas and needed a loan to pay for virtual office space for her tax service
- A house cleaner using non-toxic products. (She was a returning borrower)
- One person in the personal health enhancement business (Also a returning borrower)
- A photographer who wished to borrow money to buy lighting equipment. 

There are three volunteers assigned to the group (two young ladies who had been long-term volunteers, and me.) Each borrower filled out a questionnaire with their business ideas, and what they had learned so far through Washington CASH. 

Hopefully our group will be certified in the next session!  I am so excited to learn more about how microfinance really works on an individual level. 

The Stock Market Goes Social

Jessica Lee

Jessica Lee volunteers in her free time with Wokai’s San Francisco Bay Area Chapter as Business Strategy Associate. She recently graduated from Stanford University and now works for a startup company in Mountain View. She likes to think that she is a budding social entrepreneur! Write to her at [email protected].

In just ten minutes, I lost $400,000 dollars, and it hurt. No, I wasn’t on the NASDAQ – I was trading on the Social Stock Exchange, bidding and asking prices for the stocks of social businesses. This one guy managed to walk away with $4 million dollars. I was impressed! But to his dismay and my delight, we were not real social investors yet, and a social stock market was only a figment of our imaginations, thanks to the simulation game we were both players in. I know…phew, right?

The Wharton Social Stock Exchange is a simulation game that was designed for this year’s Net Impact Conference, which took place in November at the Wharton School of the University of Pennsylvania. (The three-day conference drew a diverse group of participants – business school students and professionals from both the private and public sectors – to discuss how to leverage business for good.) The 20 or so players in my session were all placed in front of computers and given stock profiles (including company description and stock ticker), dividend charts, and an initial allocation of stocks and cash. Using an interactive real-time trading platform, investments were valued and trades were made based on a company’s social (not just financial) performance. As popup windows brought social news updates (e.g., ethical sourcing, environmental practices) to us players, the room filled with pauses and then clicks, interrupted with the occasional sighs of frustration and relief. People were getting competitive.

The goal of the simulation exercise is to allow players to test out for themselves Muhammad Yunus’s proposed social stock market theory. In his book Creating a World Without Poverty, Yunus talks about how, as social businesses become more prevalent, financial institutions will open up and adapt to meet their financing needs. We will see more social venture capital funds, social mutual funds…all culminating in the rise of a separate stock market for social businesses only. Definitely hard to believe, given the current state of international markets, but going on a slight tangent now…

(start of tangent)

…What is a social business anyway? A social business is like a profit-maximizing business (PMB) in the sense that it is financially sustainable through the products and/or services that it offers. However, unlike PMBs, a social business’s ultimate goal is to achieve social impact – measured for instance by the lives it touches. Any profits turned are reinvested into the business, as opposed to being passed along to investors (no dividends). Thus, a social business operates on a non-loss and non-dividend basis. Why should social businesses exist? I like Yunus’s explanation and the logic that it represents: free markets are good --> then why have they failed the poor? --> because they are based on a single-track concept of capitalism that assumes that the pursuit of profit maximization leads to happiness --> but this is wrong, humans are multi-dimensional --> not all businesses need to serve profit alone…

(end of tangent)

Back to social stock markets, and why they are so important to the growth and development of social businesses. I’m a firm believer in incentives. As with PMBs, the budding entrepreneurs and CEOs of social businesses will catch onto bigger problems and come up with better solutions only when the financial and investor communities are ready to become more involved. Other benefits Yunus highlights include:

1.      Increased liquidity for shareholders to choose their social investments

2.      Heightened public scrutiny to avoid potential deception and fraud

3.      Greater exposure to social businesses to attract more capital into the new market

Shifting more to Wokai, my reaction to the Wharton Social Stock Exchange simulation game and Yunus’ social stark market idea in terms of Wokai is threefold:

Wokai is not a social business yet. As an early stage nonprofit, Wokai is not yet at the point where it can be called a social business, mainly because it is not making money from the services it is offering. Will this change in the future? I don’t know. Perhaps Wokai may decide to charge a reasonable partnership fee to local microfinance institutions (MFIs) – not a bad idea, since studies show that people value things more when they pay for them. Another potential source of revenue may come from ads. As a web-based solution, Wokai will at some point face the decision of whether or not to monetize its page. There are trade-offs here, and I trust that Wokai will be sensitive to the needs of its users whatever it decides. Then again, maybe Wokai will choose to remain a nonprofit. Every organization has a different role to play. Right now it looks as if Wokai’s is to enable other social businesses (MFIs and microenterprises) as a nonprofit.

Social impact is hard to measure. Seriously, how do you go about putting a number on the impact that a small loan has on a Wokai borrower’s life? One of my borrowers, her name is Wu Ren. She borrowed $450 to purchase 30,000 bushels of animal feed for her cattle and sheep business. In her own words, her goal is to lift herself and her family out of poverty. How do you quantify the return on investment of that loan? Yes, there’s the financial return that can be easily identified, but measuring health improvements, educational opportunities, and human dignity is another story.  If and when the social stock market takes off, social businesses must be ready (numbers and all!) to be evaluated by their social returns.

Games are fun. They just are. For example, people can hunt mice for hours. It’s the escape that they bring, catapulting you into another sphere of experience. The Wharton simulation game inspired me to begin thinking of ways that Wokai can create its own simulation game to educate people on what the heck microfinance is. I know whenever I tell my friends and family about Wokai and microfinance, I get bombarded with questions. And rightly so! In microfinance, there are so many players involved in the value chain, including the government as is the case with China. Why not create a game where players can interact with each other as contributors and borrowers, as well as with MFIs and governments? The game could also introduce a virtual credit system as the trading currency. These are just thoughts, but based on the Wharton game, I’ve come to realize that games can be fun and intellectually enlightening.

          

So, as Yunus predicts, heads up that you might start seeing The Social Wall Street Journal reporting that so and so social business did such and such, increasing its share price from 10.00 to 12.50. Or that two complementary social businesses merged, increasing their share values in the eyes of social investors. And don’t be surprised if you see the Social Dow Jones Index alongside the other indexes. I’m telling you, it may seem like a far-fetched vision, but it’s only a matter of time. I think I’ll change my Facebook status to, Jessica is waiting for the stock market to go social. 

Is it a Dollar or a Fishing Pole? Microfinance in the Development Tackle Box

Geri Mason

Geri Mason is a visiting professor of economics at the University of Puget Sound, and a PhD candidate in economics at the University of Hawaii at Manoa. The topic of her dissertation is microfinance in rural China; she has been studying microfinance for over three years, and has visited microfinance projects in China as part of her research. Geri is a guest expert on our blog, as well as a research volunteer for Wokai and a member of the Wokai Seattle Chapter.

Give a man a fish, feed him for a day; teach a man to fish, feed him for his lifetime; give a man/woman a micro loan, enable him/her to start a business fishing or selling/repairing fishing tackle.

That’s not how I remember that proverb going…Just as this is a new twist on an old adage, so is microfinance on an old game. For decades, wealthy nations have wondered: How do we help the countries who cannot seem to reach our level of wealth and complexity? Infrastructure projects have been tried, health and education services coordinated, and blind aid dollars channeled -- What next?

(Enter: Microfinance, stage left.)

Microfinance is not a new idea. Forms of it have been sprouting across the globe since the days when Germany was a land of poor farmers and selfish elites. In those days, farmers would rally together and form Rotating Savings and Credit Associations (ROSCAs) that would allow them to pool their money once a month in order for one member to purchase a large asset. Savings services were not available to them, and it was difficult to save at home. Each member would take a turn receiving the cash for investment or consumption. Now boasting a strong economy and technological advancement, Germany today operates under a modern financial system rivaling most European countries, and the U.S. and Canada’s. But the roots of its financial system were not so different from the microfinance industry we see budding in currently developing countries today.

I am not putting forth microfinance as a panacea for economic development; simply as a sustainable supplement to top-down development. When Germany (and many of its fellow developed nations) went through its growing pains, its population was tiny compared to the populations of China, India, and many African nations today. The poor waited for their turn, for development to trickle down to them and improve their world, too. Today’s populations are too large to wait for the trickle down effect of macro development. The health of the entire economy is vital to development, but there isn’t enough aid to help the ever-growing numbers of the extremely poor through pure donation. The money must be put to more active use. Sustainable use. Microfinance institutions distribute loans, collect repayments, and distribute new loans, essentially from the same initial funds. Each dollar goes farther. It is not consumed once, but used as a tool, and reused again as a tool would be. As with other development programs, people are still reached one at a time; but we are getting down the line faster, and the results are having a more lasting effect.

Do you see that dollar bill in your wallet as part of a latte, or a tool to be used by microfinance institutions in China to alleviate poverty?

Asia Microfinance Forum Wrap Up

Casey

I am about to leave Hanoi tomorrow morning to head back to Beijing. The Asia Microfinance Forum and being in Vietnam with microfinancers from all over the world was exciting on a lot of levels.

The most inspiring area that I learned about during the conference is the current innovations in green and renewable technologies. While we are planning on promoting green microentrepreneurs by highlighting them on our website, I hope that we can move a step further by allowing contributors to invest in clean technology for borrowers. One example would be biogas technology, which is basically a receptacle and processor of animal feces that turns it into methane gas to fire a stove. A contributor could go on, support the loans of a borrower who would like to take out a loan for biogas equipment, and then watch the borrower’s repayment over time. It would be similar to the idea of a green consumer loan. One of the MFIs that both Courtney and I have visited, Ningxia CEPA, has been providing biogas loans and equipment set-up for the past few years.

So, to get off my tangent, here are some of the most interesting new areas and organizations that I learned about during the conference:

CLEAN TECH

There are quite a few new organizations popping up that are promoting the adoption of sustainable energy technology for microentrepreneurs. This may take the form of biogas, as I mentioned above, solar technology, bio-fuel (plant produced gas), cleaner alternatives to coal, and hydro-electricity. A few interesting organizations to check out are SEEDS, a Sri Lanka based organization providing loans for solar and hydro-electric equipment, Green Microfinance, a US based organization innovating with new approaches to promoting environmentally sustainable solutions for development, Arc Finance, an organization linking microfinance and the energy sector, and Sigma Global, an organization on the forefront of integrating clean tech and carbon credits with microfinance.

TECHNOLOGY INNOVATIONS

So, after about three hours worth of explanations, I finally understand cell phone technology applications for microfinance. I knew that borrowers would go to local grocery stores or small vendors to make cash repayments and take out loans, and then use their cell phones to do the transaction, but the piece that I had been missing was that this doesn’t mean that the loan officer is out of the equation. As Ryk from B2Bpricenow.com explained, the loan officer still goes to the borrower's village every week for borrower meetings, but the loan officer’s role changes from being the cashier to being a support, training and information resource, and enforcer in case the borrower does not repay. This increases efficiency because the loan officer doesn’t have to return to the branch as often to deposit funds, reduces the risk of fraud by the laon officer and danger that funds could be stolen from the loan officer in transit, and ensures that the MFI receives on-time, accurate information. The storeowner that is collecting and disbursing cash may herself be a borrower from the MFI and receive a fraction of the margin on each transaction. To learn more about interesting organizations on the cutting edge of microfinance technology, check out B2Bpricenow.com, Green Bank, IBM Global Services, and MICRA.

INVESTMENT

Microfinance investment has traditionally been isolated to funds providing loans to first tier MFIs. It’s great to see how this model is evolving.

Adam Smith Ventures is the first large fund to introduce the private equity model into microfinance investment. They are launching this year and I can’t wait to see their model implemented.

Another new approach is that introduced by Catalyst Microfinance Investors. CMI is being launched by ASA, the world’s top microfinance institution, according to Forbes. CMI will use the MFI model developed at ASA to create new greenfield MFIs in countries including Sri Lanka, India, Ghana, Nigeria, and China. In China, they plan to have two branches and 400 clients by the end of this year. CMI aims to have a total portfolio of $500 million by 2014.

The final trend I learned of is debt-based funds moving farther down the microfinance pyramid. An example is Incofin, a Belgium based fund, which is investing in second tier MFIs that before would not be considered as a potential investment options. Up until now, almost all microfinance investment was limited to about seventy first tier MFIs. This meant that 99% of MFIs could only access funding in the form of grants or subsidized loans, which are obviously unsustainable funding sources. The only way that funds can promote the movement of MFIs up the pyramid is to start investing in MFIs that are lower down the pyramid. It is therefore exciting to see this evolution in microfinance debt investment.

Asia Microfinance Finance Forum - Day 1

Casey

I arrived in Hanoi last night for the Asia Microfinance Forum hosted by the Banking With The Poor Network (BWTP), the Foundation for Development Cooperation (FDC), and Citi Group. Today was the welcome reception and opening dinner for the conference. It is so exciting to be down here in Hanoi and an honor to be part of the conference. There are over 500 participants who make up the leaders of microfinance both in Asia and worldwide. Tomorrow I will be speaking on Why China Needs a P2P+ Model on a panel called "Internet Based Lending Models - Status and Trends" along with Daren Miao from Kiva and Professor Arvind Ashta from CEREN, Burgandy School of Business and Finance in France.

Being here in Vietnam and interacting with members of The China Delegation (the six other people here at the conference that make up our representation here of China's microfinance sector) at the conference, makes it so I can't help comparing China and Vietnam:

After the glory of the Olympics, I was in China-awe mode before deboarding my flight in Hanoi. It's interesting to be able to compare China and Vietnam's capital cities, Beijing and Hanoi, one day after the end of the Olympics. There are definitely more of what metropolitan Beijingers might consider "poor people" here, but it seems more like they make up the middle class of Hanoi. While the streets are lined with flowing gutters and most people eat on at small vending stands on the streets, almost everyone has a motorbike and I looks as if they can afford their meals. From what I've seen today, as well on my past trip to Hanoi, everyone is pretty much even financially with a few outliers, unlike Beijing where you have the extremely affluent urban dwellers driving Audi A6's and very poor migrant workers crammed 8 people to a room live right beside eachother.

This state of relative equality is similar when you compare Hanoi with the Vietnam countryside; the gap between urban and rural areas in Vietnam isn't all that great (of course my perspective is biased coming from China). As opposed to China where the cities and countryside are two different worlds. I was walking with a few members of "The China Delegation", and they were commenting on how "Vietnam is in the same place today as China was fifteen years ago". When I took a closer look, it was more like, "Hanoi is where Beijing, and China's other big cities, were fifteen years ago". When you compare the countryside of Vietnam with that of China, they in fact share a pretty similar level of development.

So does that mean that Vietnam will experience a similar path of development as China? Will Hanoi, Danang, and Ho Chi Min, experience rapid growth and modernization, while the countryside only sees minor developments, or will development in Vietnam enjoy a more egalitarian form of development?

This also brings to mind the question of what the meaning of development is, both for China and more globally?

If eventually 20% (260 million) of China's population acheives a standard of living that is equivalent to that of an average citizen in a Western European country, 20% (260 million) are living a lifestyle equivalent to an urban inhabitant Ho Chi Min or Hanoi, and 60% (780 million) share the same living standards as a rural inhabitant in Vietnam, Cambodia or Malaysia, will China be considered a developed country?

Are they right: Microfinance won't work?

Courtney

A friend recently sent me interesting article by Jeffrey Tucker: Will Microcredit Save the World posted on the The Free Market. The article basically says that microcredit won't work and that the Grameen Bank is doomed to fail.

Why is Grameen and the rest of the microcredit industry doomed to fail? in Tucker's article, Vijay Mahajan -head of an India-based microfinance institution BASIX - highlights five fatal assumptions of the Grameen Bank:

1. The idea the poor should be self-employed over working for someone else, contrary to the whole history of successful economic development
2. The idea that loans are the main financial services needed by the poor, not savings and insurance
3. The idea that credit builds business, not entrepreneurship and management
4. The idea that the non-poor don't need credit, where market-based banking has shown higher incomes can handle higher debt
5. The idea that MFIs can become self-sustaining, where history has shown that the majority cannot

With a 6,000+ credit card bill vested in a microfinance start-up, Tucker's article definitely threw me for a loop. The poor not entrepreneurial? Credit only for the rich? Is he serious? Or is he right? 

Some thoughts:

1. True: Capitalism has been fueled by large corporations (like Ford, McDonalds, Coca-Cola, and GM) and small businesses where people work for "the man". Not True: That that is the way of the future. I think the question that Mahajan is not asking is "why". Why is it that in the past we all work for someone else as opposed to starting our own ventures? I think the answer to that question is a lack of access to capital, which is exactly what microfinance provides. In addition, we need to think about the people we are dealing with in microfinance. Microfinance clients are typically located in rural areas. Rural China is a different ball of wax than Corporate America. Most individuals do start their own business - they farm their rice and raise their pigs. Therefore, in agrarian societies, I would argue that it IS the norm to work for one's self (or one's family), quite the opposite from Mahajan's point of view.
2. How can you save if you don't have any income? More importantly, how can you insure yourself if you don't have money to make insurance payments? You can't. Grameen and the rest of the microfinance industry unfortunately cannot alter capitalism. As we say in banking, "it is what it is." But, what they can do is work within the confines of the system. Grameen requires its borrowers to create a savings account. For every x amount of dollars repaid, borrowers are supposed to save x amount of dollars. Grameen has also developed an insurance system based on this same model.
3. Mahajan had me on this one for a while. I agree. It is not credit that builds businesses; it is entrepreneurialism. But what Mahajan is forgetting is context. Microfinance provides loans to the poor. The poor may not be entrepreneurial by nature, but I do believe they become entrepreneurial by nurture. If your child was unable to eat, would you think of a way to provide food? If your mother was ill, would you think of a way to make money to get her the medicines she needs? Probably. Human nature reverts back to survival of the fittest mentality in tough times. Remember the phrase: desperate times call for desperate measures?  And as for management, while a microfinance institution may not be able to provide the training for the next Microsoft, they have been proven capable of providing business training for a small hand-good shop or a business in animal husbandry. 
4. Hogwash. The poor are just as capable of paying off a $300 loan as the rich. They just have not been able to do so historically due to risk. The poor do not have collateral - car, house, steady job, etc. Therefore it is much harder for banks to determine their creditworthiness. Harder means higher costs. Banks shy away from high costs unless there is high reward. Until recently, it was not known that loaning to the poor could be profitable. Microfinance has only recently established that the poor are reliable, with 95% and up repayment rates.
5. Sustainability is not easy in microfinance, but it is possible. Remember Compartamos - the Mexican MFI that has made 70% up and above returns? They clearly have moved way past sustainability into heavy profiteering. But Mahajan does have a point: most MFIs have not been able to achieve sustainability. But that does not mean they won't in the future. Microfinance is not one stop shopping. It takes time to perfect a microfinance institution. There are many factors to take into account: cultural norms, demographics, weather, ecology, etc. And so far, they have only been at it for about 30-40 years, so with the added complexity and the dire circumstances, I think the industry has fared pretty well. Besides, how long did it take the formal financial sector in America to develop anyways?