Sunday, May 10, 2009

Mashing up Micro-Credit, Economic Crisis, Social Media and everything in between – Part 1

In the last 15 days I’ve been working on a project about micro-credit. A client approached our agency and I’ve been entitled to handle the pitch. The subject is actually heavy and tiring and given it’s printemps out here and the weather is beautiful and I have to work late everyday while others are enjoying the sun, the cafés and the skimpy cladded Parisien women, concentration on subject matters like micro-credit becomes little difficult. Not that I don’t like the banking and financial category, it’s too complex for a non-economist poor planner like me. Obviously being as ignorant as I can be, I tried to read as much possible on micro-finance, micro-credit, the impact of economic crisis, world poverty, social media, social investment, civic banking, ethical economy, triple bottom line, corporate philanthropy, Grameen Bank, SKS Microfinance, Mohammed Yunus, Jonathan Morduch, Microplace etc. phew. Honestly too much information for my half-wit brain to process in such a short span of time.

I ended having lots of unanswered questions. So, I thought its better to put everything up here for discussion and someone among you might be able to enlighten me in the process.

The objective of micro-finance is to provide financial access to all people living on the edge of poverty and eventually eradicating poverty from the face of earth. Micro-credit (under micro-finance) helps build micro-entrepreneurs, generate employment for the poor and make them self-sustainable to handle difficult times of their lives. So, microcredit is a tool for socio-economic development.

However marco-banks (read Lehman Brothers, Merrill Lynch, UBS, AIG, Citi) have proved us how they can push the middle-class on the verge of poverty instead of eradicating it. The global financial crisis is slowly manifesting itself across the globe and the impact is becoming clearer by sweeping away firms, mines, jobs, revenues, and livelihoods. What an irony. The microfinance sector is trying to eradicate poverty while global banking segment is making us the people poorer. The recent economic crisis will leave more than 20 million jobless by the end of 2009 according to ILO. In a world inhabited by 9 billion, more than 1.4 billion people are already living under extreme poverty on the sidelines of the global economic crisis. By end of the year more gets added to that number.

Anyways. My concern at the moment is whether the banking segment re-invents itself? If yes, how? Is there a place for ethical economy in the world of finance and banking plagued with growth, gross product and greed? The more we invest in Micro-lending, the more individuals will be working toward bettering our economy as a whole. Will larger banks and corporations start looking at micro-finance seriously?

Forbes magazine said that "microfinance has become a buzzword of the decade, raising the provocative notion that even philanthropy aimed at alleviating poverty can be profitable to institutional and individual investors." There signs of things happening. Members Project from AmEx par exemple. So my first reaction is micro-finance is one very important segment that will indeed see growth and integration within the larger system.

Microfinance institutes benefits from these close ties with their local communities, from knowing their borrowers well, from having an ownership structure that includes shareholders with a strong interest in their well-being, from conforming to local financial regulations and from making good use of local savings. In India, the National Bank for Agriculture and Rural Development (NABARD) finances more than 500 banks that on-lend funds to self-help groups (SHGs). Nearly 1.4 million SHGs comprising approximately 20 million women now borrow from banks, which make the Indian SHG-Bank Linkage model the largest microfinance program in the world. Microfinancing also helps in the development of an economy by giving everyday people the chance to establish a sustainable means of income. Eventual increases in disposable income will lead to economic development and growth.

It’s a kind of offline version of Social Networking. And since big banks didn’t show much interest or help MFI, P2P based institutes like Kiva, Babyloan, Veecus, Microplace etc. gained prominence and started growing. Individual investors and common people understood the importance while banks kept showing their reluctance. Suddenly the whole world of banking got affected by so called Web 2.0, Social Networking, and Digital Media. The internet is now giving birth to new concepts like social investing, social finance, and social budgeting tool. Social Picks, Bull Poo, Green Sherpa, Geezeo. List is endless. Bankers better take noice.

Companies like Virgin Money, Globe Funders are changing the way banking is seen. Will the growing apathy of people towards our banking system force them to re-look at Ethical Economy seriously? I mean people are buying only ethical coffee so why not start focusing on ethical economy sooner. Will traditional banks adapt to these new changes? Yes, I am aware of the fact that this economic crisis will have a major impact of P2P lending platforms like Kiva, Babyloan etc. but I also have a feeling that individual investors driven by their passion of ‘doing good’ to society will keep recycling their money they have already put. And the numbers will grow by the end of this year. That’s because they will find micro-investment a less volatile investment option rather than just sitting on the money or taking up other high risk investment decisions. Micro entrepreneurs participate in micro economies, which are in part fueled by micro loans. This is one system that benefits all. Though it’s a lengthy process of return on investment but it is indeed a right step in the right direction.

I wanted to put these questions out there for discussion. Will small investors start looking at microcredit and micro-lending as a serious alternative to mutual funds, bonds and stocks? Who will social media influence people in social investments or social companies with micro entrepreneurs from poor regions of the world? How innovative do you think bankers will become and what new products can they launch? Will the banks drive these innovations through their social media platforms? Where do you think is the convergence point of social media and micro-credit? Do you think Social Banking is the new frontier?

Do write back with your comments and feedback. Maybe there is merit in what I am thinking, maybe its utter cow crap. Whatever. Would love to hear it from you.

11 comments:

Charles Frith said...

I recommend going to Adam Crowe's bookmarks on Delicious and searching for local currency, localcurrency.

Drew Meyers said...

"Will small investors start looking at microcredit and micro-lending as a serious alternative to mutual funds, bonds and stocks?"

Yes, but not overnight. It would be awesome if a major bank had some way for their customers to designate their investment money to be put towards microfinance initiatives. Who knows how long it will take, but I genuinely think a major bank could win some clients if they took this step. They could capture the crowd on Kiva that invests a considerable amount of $$, but would double or triple that investments if there was some way to get a return on it.

Lastly, I'd highly recommend moving your blog over to wordpress. If for no other reason than it has a better comment system for people like myself to use :)

pooR_Planner said...

Thank you Charles. Local Currency is in my radar. Maybe for part 2.

pooR_Planner said...

Hello Drew,
Welcome to Tissue-Issues. So my thoughts are in the right direction. Do you think from a communication standpoint, it makes sense to make consumers aware the Micro-finance is a better alternative to the stock market? Also do you think major banks in the near future might think of taking over organizations like Kiva, Babyloan etc?

I have changed my comment moderation setting so I guess this time it will work perfectly fine. In any case lemme see how soon I can move to wordpress.

atmoko said...

in global crisis, Micro finance especially micro bank still survive..

Saurabh Sharma said...

Hello Roop, hope you are doing well. Pardon my complete lack of understanding on micro-finance. My knowledge on this subject really limited and I wonder how I can help you answer your questions..all I have are questions and I am certain that you are not not looking for them..regret not being of any help..

pooR_Planner said...

Hi Saurabh,
Hope you doing well too. How are things in China? Well, would love to hear your questions, so you can shoot them anytime.

KP said...

We may find that a lot of people move towards green banks such as e3bank (http://www.e3bank.com). With all of the environmental concerns, this is something that people may find more valuable to invest in as they offer a triple bottom line ... incentivizing people to install eco-friendly features to their homes for a better interest rate.

Saurabh Sharma said...

China is good Roop - deep pool of learning.
My questions are very amateurish
What is micro finance?
If it is so big and useful, why there is no global name in microfinance (other than nobel prize winners)?
Why is microfinance good only for poor countries?
Thank you for your patience Roop..

pooR_Planner said...

At a very basic level, Microfinance is small money for poor people to start living a better life. Basically financial help to people below poverty line whom traditional banks don't help. Till this time banks ignored to see the importance of Micro finance but they are realising the potential now and its emerging as a growing segment. Microfinance is good for developing countries rather than poor countries. Microfinance helps create small entrepreneurs and small scale industry which contributes to the GDP, economic and social growth of the society in the longer term, hence its important. Hope I have managed to answer your questions. Keep in touch.

Kyle F said...

Roop,

While RSF Social Finance, where I work, is not doing micro-finance, we are deeply involved in the world of socially responsible investing, lending and giving. Please check out our website: rsfsocialfinance.org for more info on how we are using the tools of finance to change the way the world works with money.

Hope you find it interesting & continue this dialogue on your blog!