Profit: for and against

Matthew’s probing of Muhammad Yunus’s position on the role of profit in scaling up micro-finance at the World Business Forum seems to have irritated Felix Salmon, who blogs for Portfolio magazine in a post Philanthropy vs Profit.

Felix puts forward two arguments: that for-profit microfinance has failed to help the poor, citing the example of Banco Compartamos in Mexico; and that for-profit funding is not necessary to grow microfinance to the scale at which it serves all those who have need of it.

The first argument misrepresents the problem that for-profit microfinance is seeking to address. More than a billion people live in extreme poverty but a further two billion, at least, are poor and lack access to finance to improve their lives by growing businesses, insuring against risks and so on. Banco Compartamos, as we discuss in the book, is explicitly targeting what its founders call “market segments C and D”,  that is, the poor, rather than the very poor (“market segment E”).  Part of the problem here is definitions – microfinance encompasses both highly subsidised lending to the very poor (including a scheme for beggars in Bangladesh that Yunus has launched) and also lending that covers costs and provides a return on capital to investors. Both are valid (as are the variants in-between) and both are necessary. By making this an either or question, Felix is missing the point.

Worse than that, by criticising Compartamos and arguing that all microfinance needs to be subsidised rather than funded by for-profit capital, scarce grant funding that is best spent helping the poorest (market segment E) will be diverted to those who don’t need a subsidy (market segments C and D). That is unless you assume that grant funds are unlimited. As we report in the book, Pierre Omidyar, the founder of eBay turned philanthrocapitalist, calculates that meeting the needs of all the potential poor borrowers would require about $60 billion and that “there is not enough non-profit and aid capital in the world to get microfinance to the scale it could achieve”. Does Felix disagree?

Felix is right that Compartamos has earned high returns on capital and has, at times, had to charge high interest rates. But in so doing Compartamos has proven that the poor are a good credit risk and that its for-profit business model works. That, in turn, is attracting a lot more for-profit capital into the industry, resulting in more people gaining access to finance and, thanks to the extra competition, driving down the interest rates they are charged for their loans, including by Compartamos. What’s wrong with that?