Why doesn’t money flow to the poor?

The first live cast of this series offered an interesting overview of the situation and the challenges in the field of microfinance and was a genuine eye-opener for me. For instance, in his presentation Dr. Foote introduced a graph indicating that on average, developing countries are willing to pay more than developed countries to get access to capital. However the global allocation of capital has been concentrated in the developed countries, because compared to the average population, low income populations are seen as presenting a higher credit risk profile. Given that fact, risk-averse investors have to limit their access to credit (as the subprime mortgage crisis reminded us) and the same should apply to lower income countries, which are even riskier given the deteriorated economic / political / social / technological environment they experience, undermining their ability to create wealth and accumulate capital.

Interestingly enough, the history of microfinance and the experience of the Grameen bank in Bangladesh showed that poor populations were not necessarily all unbanked and unbankable. Indeed, poor populations have been using various sophisticated and flexible financial services that are quite similar to those used in the Western world, such as savings accounts, mortgages, project and commodities financing and these services have proven to be successful over centuries to alleviate poverty and to create sustainable activities and communities. However, as suggested in the Reinke’s paper, there is no unique business model in this field; the multiplier effect of microfinance is contingent to a MFI’s ability to create the right incentives and financial structure to minimize defaults and to align loan sizes, social and economic goals and its costs with the borrower’s repayment ability.

In today’s class, I would like to discuss the following:

- In certain microfinance programs, women empowerment/involvement has been described as a major success factors: is it the case in all programs?

- What makes a MF program stay small or shift to an industrial stage?