Dec 12, 2006

Microlending Highlights Rift Between Nonprofits and Social Businesses

by Laura Starita

With the recent focus on microlending programs in developing countries, it’s easy to forget programs aimed at the poor within the developed world. A recent Wall Street Journal article highlights one microfinance project in Southern California. Interestingly, given all the high profile, high-dollar investments in microfinance from Silicon Valley moguls, the program’s biggest challenge is raising money. Why? Because there is little chance that microfinance in the developed world can be profitable.

One of the arguments made in favor of microfinance is its ability to be self-sustaining, even self-funding. This works in the developing world because interest rates are so high (150 to 200 percent), but lenders can’t do that in the United States because of usury laws. So U.S. microfinance institutions run at a loss despite high repayment rates - and philanthropic investors snub loss-making microfinance.

There is, of course, a larger dynamic at work here, the recent trend toward philanthropreneurship, as the New York Times coined it. This is the practice of starting a for-profit venture with a social mission. The logic is that the goal of profitability provides an automatic yardstick to measure whether something works or not. It’s a way of creating accountability, which is a good thing. Except that profitability is not the only way, and is often a completely wrong way, to measure social benefits. There are some great ideas being generated by socially conscious businesses, but that doesn’t mean social efforts with no profitable potential can’t do good work too.

Wall Street Journal: Silicon Moguls Support Microlenders, Just Not in the US