While my posts are usually technical discussions centered on international business law, I’m going off topic today to write about a concept quickly gaining traction as a viable alternative to private banks in providing capital to impoverished entrepreneurs across the globe.
On a recent trip to India, I caught a glimpse of the future as I walked down Connaught Circle in downtown New Delhi. Entrepreneurs seemed to be everywhere providing an endless array of goods and services. This is the world imagined by Nobel Laureate Muhammad Yunus, founder of Bangladesh-based Grameen Bank, a microfinance organization that makes small loans to impoverished entrepreneurs without requiring collateral.
My recent experience was echoed in an article in today’s Wall Street Journal. According to the article, Microlending in India Continues Macro Growth, Microlenders recorded a 60% increase in clients in India, to 22.6 million up from 14.1 million the previous year. In sharp contrast, the formal banking system in India recorded only 15% growth over the same period in the number of clients it serves.
As reported in the article, the surge in microloans has been fueled by a brisk flow of funds in the third quarter of this year, with about $130 million in global private-equity funds funneled into Indian microfinance institutions.
"In the middle of last year, we thought for a while the meltdown would strike this sector, but we’ve seen that it’s been largely unscathed," said Vipin Sharma, chief executive of Access Development Services. "Growth is as frenetic as it was before."
Mainstream banks, in both the private and public sectors, are increasingly considering channeling funds into microfinance banks rather than directly to India’s poor. Four public-sector banks and three private-sector banks entered microfinance this year, making for a total of roughly 30 banks invested in Indian microfinance. Total bank funding for microlenders nearly doubled to $2.526 billion from $1.281 billion in the year ended March 31 from the previous year.
As reported in Forbes, in the article, Microfinance Rides Out Turbulence, microfinance institutions have emerged as more stable than other comparable assets during financial crises. This is partly because their clients are not integrated into mainstream banking and currency markets and are therefore insulated from wild market swings.
Microlending may enjoy enormous success in India, but in other parts of the world, it has yet to flourish. In China, for example, the microlending concept has yet to take root, as reported in the article Microfinancing China in the Wall Street Journal. Let’s hope that will soon change.