Sunday, April 20, 2008

Building Sustainable Healthcare and Microfinance in the Developing World

There is the opportunity in developing countries to build entire healthcare systems from scratch - and therefore you don't need to work around entrenched groups who actively fight change and to maintain their privileged positions. A pretty inspirational presentation of someone who is attempting to build a first class healthcare network with third world costs here:

In many ways I think growth in healthcare will mirror that of microfinance (making loans to the poor mostly to build their own businesses and mostly in developing countries). Both have the potential to be transformative for the clients they serve. It is however microfinance that is seeing the first glimmers of real economic success for some of their largest and fastest growing players. This success however has not come without controversy.

The recent example is the stunning success of the IPO of Compartamos - an organization funded by Accion. The success of the IPO has even drawn seething criticism from Nobel Peace Prize winner Muhammad Yunus who won the award for popularizing group lending that allowed for the scaling of microfinance and who "refuses to mention the words 'Compartamos' and 'microfinance' in the same breath". While profits from Compartamos had been reinvested into the organization to fund additional loans, the returns on the original equity investments were nothing short of amazing - half of Accion's $1 million initial investment in 2000 was sold for $135 million in 2007.

I've made my views known on another site which is one of the reasons I haven't talked about it as much here. I hold the minority view amongst the pre-existing interested parties in the field (with my views being seen as unwelcome by some). I personally don't have any issues with the wealth Compartamos has created its shareholders for a few fundamental reasons:
  • Critics fundamentally misunderstand how wealth is created as they fall into the trap of worrying about "how to distribute it more equally, thinking the only way the poor can become richer is by receiving some of the wealth the rich have"
  • Profits were directly reinvested into the organization. They weren't paid out in the form of dividends. Thus the tradeoff was had the firm lowered interest rates from the beginning this would have resulted in fewer people getting access to funds.
  • Further, I think what gets left out is the goods and services that borrowers create with the funds they get. Someone who is able to make more money means by economic definition that they will have a bigger impact on the local society because they are serving a more needed demand. As a result, by artificially dropping prices on loans, you have too many people to serve initially and you may not have enough funds to lend to the most promising businesses. So there is also a little self selection here.
That I am in the minority in this view isn't surprising given the historical not for profit roots under which microfinance developed (many see even the concept of profits unseemly andn vulgar). So now you're more or less caught up (I purposely have tried to stay away from talking about too much microfinance on this blog for the simple reason that I've been trying to avoid making it too eclectic in terms of the subject it covers but I think that you can't really talk about microfinance without talking about entrepreneurship at the same time). There was a great summary of an event hosted by the Council on Foreign Relations posted by Rob Katz at the Acumen Fund's Blog. It's a bit long but if you have the time read the whole thing if you're interested in development in the third world - it's quite remarkable for the calibre of people in the field and you'll probably learn something. A few of Katz's notes:
  • " 82 percent of all microfinance clients worldwide are being served by just 2 percent of the MFIs ... The vast majority of MFIs have 3,000 borrowers or fewer – and WWB believes that you need to have at least 5,000 to really be sustainable"
  • "I was especially struck at how easily Iskendarian and Zafar can move from discussing the business aspects of microfinance to the social aspects. Their organizations seem to have been able to merge these two goals – financial sustainability and poverty alleviation – without compromising either."
Update (April 20): For the "other side" - have a look here (Enterprise Resilience Management Blog). While consistent with the criticism of Compartamos, as a personal note, I would have expected more from Enterprise Resilience which bills itself as something of a development focused consultancy that supposedly recognizes the role markets play. It's something that I've often wondered about the bulk of people who are currently in microfinance - whether they understand the role that financial services play in markets and why microfinance has worked when other interventions have failed so miserably.


mikey said...

hi Clement,

great post. my google alerts found your blog and I really enjoyed reading this last article and will be reviewing the related links soon. for me, microfinance is a very exciting area that I would like to focus. Hope to hear more of your thoughts and finding on such topics.

cheers from Berlin :-)

Clement Wan said...

hi Mikey -

Thanks for dropping by! Yes, microfinance is a pretty exciting field that would deserve a blog of its own... something that I have considered but there just isn't enough time in the world.

If you're interested, check out MicrofinancePractice Group on Yahoo Groups. There are some interesting announcements and discussions from time to time.

All the best,