Okay, so I had this idea...
Micro-Finance organizations all over the world are dominated by non-profit, religious based NGOs. They are there to help people by giving them a low interest, sometimes even zero interest loans to start a business and feed their families. In theory the recipients pay back the loans into the pool and the money is then re-loaned to others or they take out new loans to expand their businesses take on new employees etc and thereby benefit the whole community.
But there are some who say that Micro-Finance doesn’t work. My guess is that the religious connections of the organizations alienate some ethnic communities, the loan amounts are too small to really make a difference, the communities are too focused on subsistence to truly run effective businesses or that it creates a culture of dependence on easy credit (sound familiar?). There is also some merit to the argument that the recipients have almost no concept of how a free market economy actually works.
The fact that the seed capital came as a donation from an individual that does not expect a return on investment also creates a culture whereby the parent organization does not have a long term investment in the recipient, without an expectation of a return there is no mechanism that allows the Micro Loan to grow beyond a very small amount, enough to effectively support a growing economy.
What if Micro-Finance were managed like a bank or bond market, complete with shareholders who expected a return on their investment?
Simply put – a Bond is a created when a debt is portioned out to a number of different individuals. If I buy $1000 bond in a mortgage company that doles out mortgages to individuals in the amount of $100.000, I in essence own 1% of someone’s house. As the mortgage is repaid I receive a dividend equal to value of my ownership plus interest and I can sell my entire bond at market value at any time. So if the house increases in value, so does the value of my bond.
As always these brain storms bring up more questions than they answer.
Questions – What are the reasons most often cited that Micro-Finance doesn’t work?
- Who can I partner with on the ground to manage these loans?
- What is a realistic rate of return?
- What kind of regulatory hurdles are there to making this work?
If anyone out there can help me answer these questions I would appreciate it....