Targeting Poverty? Only Business Provides Four Critical Solutions

In order to win the war on poverty and not just alleviate its symptoms, microfinance must meet four conditions — massive scale, permanence, continuous efficacy, and continuous efficiency — that must be applied simultaneously and consistently, said Michael Chu, senior lecturer at Harvard University.

“The only thing I know that can bring these four things together is business,” Chu said during the afternoon keynote discussion of the 2009 Chicago Microfinance Conference, co-sponsored by the student-led Emerging Markets Group, at Harper Center on May 8. Chu’s keynote presentation was moderated by Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance.

If four billion of the world’s 6.5 billion people live in unacceptable poverty, a massive scaled response is necessary to reach as many people as possible, Chu said. “Secondly, you need something for the poor of today, their children, and their children’s children, because it’s very likely that any intervention you think of will be effective in one generation,” he said.

Microfinance needs a model that improves and gets less expensive over time, Chu said. “Business gets to all four of these things consistently and simultaneously because of an industry,” he said. “In all the years I’ve spent developing microfinance, this is the one enduring lesson: It is possible to put something that has high social impact on a platform that is a robust business. This is the fantastic lesson of microfinance in regard to poverty.”

The real victory for microfinance in the success of the Mexican microfinance bank Banco Compartamos, which Chu co-founded, is that it is helping create an industry. “To create an industry, you need two things: economic activity, and outstandingfinancial performance,” Chu said. “If you have only average performance and can just earn average returns,, why would anybody do something radically new?”

In microfinance, a loan used as working capital is no “holier” than credit used to buy a washing machine, he said. “There are only good loans and bad loans,” Chu said. “The difference between the good loan and the bad loan is that the good loan is extended to somebody who can actually repay it.”

The poor who are unable to repay loans should instead get social services, he said. “Confusing the two has led to tragedy for the poor,” Chu said. “The one thing worse than being poor is being poor with debt and having no way to repay that debt.”

Microfinance is not the sole solution to poverty, he said. “However, it is one of a handful of things that has had a huge impact,” Chu said. “Education and health care are also among the set of things that must act together.”

The poor need access to funds and benefit greatly from business counseling, but separating the two is very important, he said. “The challenge is delivering business advice and training that really benefits the microentrepreneur,” Chu said. “It has been very ineffective to bring in people who have succeeded in mainstream business to advise microentrepreneurs. Providing that support is an art.”

                                                                                                                    — Phil Rockrohr