Funding the Bottom of the Pyramid: A Primer on Microfinance

10665104743_f4ba583f26_kWhat does $50 mean to you? In the microfinance world, a $50 loan might mean the ability for a woman in rural Bangladesh to open a market grocer or a teenager in Kenya to build tech support for his poorly-wired community. Vinod Khosla, founding CEO of Sun Microsystems and founder of Khosla Ventures, has calledmicrofinance “one of the most important economic phenomena since the advent of capitalism and Adam Smith.”

It’s not often you have the opportunity to read, learn, and explore an industry still in its relative infancy. Through the below recommended Reads, we enter the world of microfinance, a social finance mechanism with the goal of providing capital to those who otherwise could not access funds to grow their businesses or improve their lives, those often at the true bottom of the pyramid. First explored by Muhammad Yunus (who won the Nobel Peace Prize for this revolutionary idea) in the late 1970s, microfinance has expanded greatly from its humble beginnings in Bangladesh to a global phenomenon backed by bulge bracket banks, government agencies, major global institutions, non-profit organizations, and more. Microfinance operates almost solely in the form of debt investments or loans. New models, including that of the Micro Equity Development Fund, which I founded in 2008, seek to build upon this foundation and find new ways to expand the traditional microloan model to include micro-equity and other capital raising opportunities, the ultimate goal to elicit greater growth and scalability across the developing world (as well as job creation).

For those less familiar with the workings of microfinance, these key texts will serve as a useful primer for what Kofi Annan has famously called “an idea whose time has come.”

1. Where Microfinance Was Born

Banker to the Poor, by Muhammad Yunus.

Arguably “the book” about microfinance written by none other than the founder and Nobel Prize Winning creator of the idea itself and the first microfinance bank, Grameen Bank. This book provides an autobiography of Muhammad Yunus and explores the story behind how this idea grew from community sharing in Bangladesh to one of the most important and impactful forms of finance. Today, Grameen Bankstill operates, providing microloans worldwide, including in the US through Grameen America.

2. Creating Opportunities from the Bottom Up

Fortune at the Bottom of the Pyramid, by C.K. Prahalad.

C.K. Prahalad is considered by some to be the “godfather” of microfinance. This book was revolutionary in focusing on the business and entrepreneurial opportunities present at the base of the pyramid. One of its core arguments focuses on “fighting poverty with profitability.”

3. Addressing Microfinance’s Failures

Confessions of a Microfinance Heretic, by Hugh Sinclair.

This book may be under the radar for most, but Sinclair’s arguments (drawn from his firsthand experiences in microlending) take a different approach and tone from others. His work focuses on the problems and challenges present in the microfinance industry, including instances of negligence, corruption, and extortion in microfinance. In this work, Sinclair does not simply criticize the industry but provides strategic solutions to failures. Today, Sinclair sits on and advises many organizations and firms in the microfinance world. While loathed by some for his critical views, his goal is to ensure microfinance continues to serve the bottom of the pyramid through regulated lending processes. For those interested in micro-equity, many of his arguments lay the groundwork for why micro-equity is a viable alternative to microfinance.

Further Reading:

If you want to plumb the depths of capital, as a historical and political phenomenon, check out the following links:

  • Critical new readings are being published every day: The Center for Social Innovation at Stanfordprovides frequent articles and journals on the industry.
  • Some short publications include:
    • Empowering Women Through Microfinanceappeared in a publication sponsored by UNIFEM and is one of the key writings explaining the strong ties microfinance has with women’s empowerment.
    • Microcredit: What Can We Learn from the Past?”appeared in World Development and is one of the first analyses of the different frameworks of Microfinance Institutions and which models were most successful.
    • The Empirics of Microfinance: What Do We Know?”appeared in Economic Detail and at the time was one of the largest research studies analyzing and explaining the microfinance industry and its success.
    • Microfinance Misses Its Mark” published in the Stanford Social Innovation Review is a discussion on ways microfinance fails and how to change and improve the existing structure. While dated, it’s a fantastic piece providing a nuanced viewpoint of the microfinance industry.
  • Columbia University and other institutions hold yearly showcases or symposiums focused on microfinance, social finance, and impact investing. Each year their brochures and articles provide information and details on countless new studies. In terms of micro-equity itself, not much has been written.
  • An article of mine, “Should Micro-Equity Replace Micro-Loans,” published by McKinsey’s ‘Voices on Society’.

Welcome to the world of microfinance! Happy Reading!

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