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Subsidy And Sustainability

Subsidy and Sustainability

Introduction

The August 20, 2003, Wall Street Journal carried a short article on micro- finance in Latin America (Kaplan 2003). The article starts with the story of Mrs. Esther Simone Garcia, a shopkeeper in rural Mexico. Mrs. Garcia’s $130 loan from Pro Mujer, a leading microlender founded in Bolivia, was enough to improve the range of offerings in Mrs. Garcia’s small grocery store. With the debt repaid and business expanding, the Wall Street Journal reports that Garcia has started raising her ambitions, and even thinks of sending her daughter to college.

“Now, one of the highly praised tools in the global fight against poverty is also proving it can be a viable business,” the article continues, “increasingly drawing investors who seek profits along with the loftier goal of social development.” BancoSol’s 1996 $5 million bond issue in Bolivia and Compartamos’s 2002 $10 million bond issue in Mexico are cited by the Wall Street Journal writer to support the case, along with the news of Bank Rakyat Indonesia’s plan to sell 30 percent of its equity through an initial public offering in late 2003. These banks are proving part of the promise of microfinance—that microlending can be profitable.

The other part of the promise of microfinance is that it can deliver critical benefits to underserved borrowers such as Esther Garcia in Mexico. Some programs have achieved both promises (sustainability and deep outreach to the underserved), but most have not—even though many microlenders are now well-established and run impressively efficient (if not actually profitable) operations. On the other hand, BancoSol, Compartamos, and Bank Rakyat Indonesia (BRI) all serve underserved low-income populations, but their outreach to the most impoverished falls short of the leading programs in Bangladesh and
India. The South Asian programs, on the other hand, have not been as commercially successful as BRI or the top Latin American programs. The...