A lot of research is starting to show that microloans often do more harm than good by saddling borrowers with high interest rates and strict repayment terms.
For me and my team at InVenture, it’s a strange time to be entering the microfinance industry.
Recently, the only news about this industry has been bad news. For example, a front page New York Times story faulted lenders for profiting off the backs of borrowers, and more recently, in the Wall Street Journal and elsewhere, we learned that as many borrowers in India have committed suicide over looming, debilitating debt.
On the academic side of things, the picture isn’t much brighter. Researchers around the world have only recently started measuring the actual long-term social impact of micro-lending, a financial tool that has been employed to fight poverty for more than 30 years. And what they’ve found hasn’t been all that promising. A lot of research, for example, is starting to show that microloans often do more harm than good by saddling borrowers with high interest rates and strict repayment terms.
And not only that, but there is little evidence that access to microloans has helped individuals make noticeable advancements in their livelihoods. One evaluation of microfinance in rural Morocco by Esther Dufflo, professor of poverty alleviation and development economics at MIT, found that there was no impact on overall welfare, education, or women’s empowerment, which are all typical indicators of long-term development.
At last year’s Microfinance Impact and Innovation Conference, I spent a lot of time going to panels that lamented the gap between practitioners and researchers. We keep trying the same tools, panelists claimed, even while research is starting to show that these tools aren’t generating the predicted effect.
When Muhammad Yunus won the Nobel Peace Prize for his work at Grameen Bank, we all believed we had found a miracle tool that could help entrepreneurial individuals lift themselves out of poverty. And while microfinance has indeed changed the way we think about economic development and poverty–and created new possibilities on both of these fronts–we know now that we still have a lot of researching and experimenting to do if we want to see microfinance reach its full potential.
I believe, for one, that these studies on microfinance’s impact, while sobering, are actually opening the field to new ideas and providing the impetus to develop more effective and harder working models. InVenture, the organization I founded, is one such model. We’re implementing a revenue-sharing investment product with flexible, long-term repayment schedules. Our model works more like a traditional investment cycle, aligning the investors’ interests with the businesses’, so that no one makes money unless the business makes money. And, our businesses have investment terms anywhere from 13 to 36 months to repay, giving them the freedom and flexibility to take risks that might actually grow their business rather than burdening them with debt.
Additionally, we believe it’s more than just capital that will take these business to the next level. InVenture is developing a mobile application, InSight, that allows us to track the daily metrics of each business we work with– giving us the insight we need to provide customized real-time guidance to each business owner.
In the past year, we’ve already seen some positive traction for our model on the ground. Take Kamala, for example, a mother of four and the owner of a sculpture business in Tamil Nadu. Kamala and her husband were not able to complete a secondary education, but their belief in hard work created a successful business that now allows their daughter to be the first in her family to complete college and apply for a masters in computer applications.
With help from our online investor community, we raised the financial capital to help her purchase new sculpture molds and we believe that this investment and partnership will help her both increase revenues and provide new jobs for other women in her community.
Last year, we also launched pilot funds with businesses in India, Ghana, and Mali–by investing in 36 businesses to date and 90 new jobs have been created. But it will take some time to see and to measure the real effects and impact of our revenue-sharing model. The important thing for now, I think, is that we’ve developed a new model that’s focused on growth and guidance, that mitigates risk, and that changes based on the needs of each particular business owner and region.
It’s probably not the most widely scalable approach, in terms of a turn-key type of product or service, but I believe it’s the one with the most potential to make a measurable difference. And I hope it inspires others in the field to reinvigorate microfinance–and ultimately increase its social impact–by trying new models that put business owners
Shivani Siroya, the CEO & Founder of InVenture, has a wide array of professional experiences in global health, microfinance, and investment banking. Prior to InVenture she worked health costing at UNFPA and Mergers& Acquisitions at Health Net. Shivani holds a M.P.H in Health Economics and Policy from Columbia University and a B.A. in International Relations from Wesleyan University. She lives in Los Angeles and when she’s not InVenturing, she keeps herself busy and optimistic by heading outdoors, kick boxing, practicing yoga and using as many exclamation points (!) as possible!