The Quest for Sustainability
Authored by Lily Tran
As far as trendy words go, “Sustainable” probably takes the cake. Americans want sustainable foods, sustainable business practices, and sustainable energy policies. Yet, sustainability is the problem for most United States based microfinance institutions.
Examples from the United States
Most microfinance institutions in the US seek to provide traditional microloans to aspiring business entrepreneurs; most even apply Dr. Muhammad Yunus’ model of group lending. Yet, rather than turning huge profits as their famed predecessor, The Grameen Bank, the vast majority continuously generates losses. It isn’t uncommon for a US based MFI to earn interest income of under $50,000 and yet face expenses at over $1 million, making sustainability a distant goal.
MFIs faces the harsh reality that it’s expensive to operate in the United States. Take a look at any domestic MFI, and you’ll realize that without grants, contributions, and soft loans provided by banks and private philanthropists, microfinance within the United States could not exist.
Simply put, in order for a microfinance institution to achieve sustainability, its interest income must equal expenses. In order for an MFI to overcome the cost of labor in the United States (easily $50,000 per person a year), interest income must equal expenses. That requires a lot of loans. Paradoxically, it thus requires a larger staff to be able to effectively manage the thousands of loans required. However, one benchmark institution of note is Grameen America, an organization that is quickly approaching that sustainability number; they project that they will have to reach 10,000 loans to become sustainable, and they believe there is enough of a demand to reach that threshold.
Capital Structures that lead to Sustainability
Capacity issues aside, achieving the important threshold of interest income equaling expenses requires a revolving loan fund or a loan pool large enough to disburse those thousands of loans.
Unfortunately, microfinance institutions in the United States are facing huge funding issues. For example, the single greatest factor slowing Grameen America’s goal of achieving self-sufficiency is the lack of funding to expand their loan pool. Commercial donors are hesitant about microfinance, a relatively new and emerging asset class. Only recently has commercial funding really come head-to-head with microfinance around the world and in the US.
Commercial Markets meets Philanthropy
The most notable deals of late? The IPO of Compartamos and The bond offerings by Blue Orchid and National Microfinance Bank. Despite the small number of deals, there are still more firms that are entering the traditionally capitalist markets in pursuit of funding for philanthropic organizations. Innovations arise such as the creation of VC Philanthropy, MFI Funds, etc.
The most important change is that sustainability in microfinance isn’t achieved through grants, soft loans, or contributions. Rather, it’s achieved by holding philanthropic organizations accountable to the same metrics as for-profit companies. Thus, when the philanthropic organizations are efficient, they not only achieve higher monetary returns but higher social returns as well.
The CGF Model
The Capital Good Fund faces many of these same obstacles. However, thanks to the wonderful energy of our student staff, we are able to successfully cut overhead costs by avoiding payroll expenses during our start-up phases. Also, we utilize the same infrastructure-light model of Grameen America by taking advantage of buildings and office spaces in Providence and by meeting our borrowers in their own community.
Our major goal for this summer is fundraising in order to successfully meet the demand existing in Providence. We believe that with time and hard work, and by leveraging the new development in microfinance—particularly, new, market-based approaches to funding and accountability, we can raise the capital needed to move towards achieving financial sustainability and, in turn, reach more people who need our products and services. Wish us luck!
Filed under:
