Peace, Prosperity, and Profit: Finding the Missing Middle in Microfinance
Vice President of Development Finance,
Commentary & Opinion: Peace, Prosperity, and Profit: Finding the Missing Middle in Microfinance
Microfinance has become a household word in recent years. Known to most people as small loans to individual entrepreneurs and microbusinesses in the developing world, microfinance — as perhaps most famously practiced by Muhammed Yunus's Grameen Bank — has proven to be an effective way to help the poor.
In recent months, however, the media has been filled with stories of alleged improprieties in microlending practices or that question whether microfinance really has an impact on poverty. While the stories may not always be right, they're not completely wrong, either. Microcredit loans — typically, with a dollar value of $200 to $1,200 — are only one piece of the development puzzle, and while they can and often do have a powerful impact on individual lives, they are not a silver bullet for the problem of entrenched poverty in the developing world.
Middle market lending, in contrast, has the potential to play a much larger role and create serious impact in developing countries.
CHF International first began its microlending activities in Latin America in the 1970s. Initially, we were focused on home improvement loans. However, through our work, we found that a critical segment of the population — small- to medium-size business owners — was underserved. Consequently, our approach to lending has grown to encompass the range of micro- to middle market lending, with a growing focus on small- and medium-size enterprises (SMEs). Traditionally seen as too large by microfinance institutions and too risky for commercial banks, SMEs actually have the greatest potential to impact their local economies. Until now, however, they've been hamstrung by the "missing middle" market gap in financial services — that is, the inability or unwillingness of local commercial banks to provide loans to small and growing companies in their communities.
Middle market lending — involving loans ranging from $5,000 to $5 million and companies with ten to a hundred employees — typically funds business expansion plans and/or the purchase of fixed assets, raw materials, or other needs vital to the SME business sector. It also provides commercial banks in developing economies with tangible proof that lending to SMEs can be done in a way that is both effective and profitable.
CHF's own experience has shown that it is working. In Liberia, for example, we've recently partnered with the Overseas Private Investment Corporation, RLJ Companies, and the African Development Bank to create the Liberian Enterprise Development Finance Company, which offers loans ranging from $10,000 to $1 million to SMEs throughout the country.
Through LEDFC, OPIC has made available $20 million in loan capital, with twenty-four loans totaling $2.5 million having been approved to date. Those loans, in turn, have helped clients grow businesses in a variety of sectors, including hospitality, transportation, construction materials, retail, food services, and agribusiness. For example, Terravilla Gardens, a tropical flower nursery and landscaping business twenty miles from Monrovia, Liberia's capital, borrowed $30,000 from LEDFC to purchase a truck that has enabled the business to expand into the capital and beyond. Similarly, in Jordan a CHF microfinance business borrower has made and repaid eight loans, in the process growing his business from a food stand to include a restaurant and store. Such growth would have been unlikely, if not impossible, if microfinance and local commercial banks had been the only options.
The need and the benefits are clear. But the challenge for those who work in middle market lending remains finding the right partners on the ground that share our vision and see the benefit in funding these programs.
There is an important place for microfinance in development work. What we must remember is that the task is not complete once five, ten, or even five hundred small businesses have doubled in size. We have to understand the unique economic conditions in each place we operate and develop appropriate methods of delivering financial services to the sectors and industries most likely to create positive impact in those communities, regions, and countries. And we need to do it in a way that is sustainable and enables credit to flow even after the NGOs have left.
At the end of the day, middle market lending may never be as big as microfinance but the benefits may be greater.
Chris Sale leads CHF International's team of development finance professionals, providing guidance and informing policy with regard to the organization's microenterprise, housing finance, and small and medium enterprise (SME) lending programs.