Microfinance, Mega Future

Yet more news on the economy – usually gloomy – and how it’s going to affect our day-to-day lives tends to leave us feeling bewildered. But for people in poverty-stricken communities, establishing a livelihoods is a huge challenge in itself. There is no denying that in times of crisis, financial aid can help alleviate some of the short-term problem in developing countries, often the unfortunate victims of natural disasters and devastating civil conflict. In recent years, though, it has become widely accepted that the traditional aid model is an inadequate solution to global poverty.

Africa, the recipient of around $50bn of financial aid, over time, remains in a state of unfathomable poverty. Having been on the rise for some considerable time, microfinance provides small loans to developing businesses, which enable people to work, save and invest. As a result, whole communities have their hopes restored as they become able to improve life for themselves and their families.

The first venture-backed start-up dates from 1969, when Laurance S. Rockefeller founded Venrock, which funds entrepreneurs and establishes successful companies. Despite the venture-capital market as a whole suffering a major setback in 1974 after stock markets collapsed, there was a big boom in the 1990s. Thriving companies opted to make improvements rather than fund new investments, and the results were positive.

Looking even further back to the 1700s, one of the earliest organisations launched was the Irish Loan Fund system, set up by Jonathan Swift. This microcredit firm provided small loans that helped people in the countryside to make a living.

Friedrich Wilhelm Raiffeisen, who developed the idea of the credit union, had the same notion the current founders of microfinance institutions have – to help the poorer population improve their w ell-being and livelihoods by breaking free from moneylenders.

There are debates surrounding the idea that microfinance alone cannot eliminate poverty, but microfinance and venture-capital firms are playing a greater role in serving poor communities around the world, creating opportunities to build dignified and sustainable livelihoods.

Sublime talked to individuals at five leading microfinance and venture-capital firms to find out more about the work they do, and what sets them apart from other similar organisations. Here’s a preview from the microfinance special:

Lars Erik Harv, Director of Microfinance, Strømme Foundation

Lars Erik Harv is 39, and holds an MBA equivalent from the Norway School of Economics. After a number of years working in corporate finance in Norway, including a spell at PriceWaterhouseCoopers, three years ago he became Director of Microfinance at Strømme, a foundation that seeks to eradicate poverty through education and microfinance. He remains on the board of other, commercial enterprises.

Sublime: What was the inspiration behind Strømme Foundation?

LEH: The foundation is the heritage of Norwegian Pastor Olav Kristian Strømme, who led a congregation in Kristiansand, Norway until the mid-1970s. He was well known throughout Norway for his tremendous fundraising efforts for development projects in the global South. Strømme Foundation was the first organisation in Norway to use ads in the national newspapers to attract people’s attention towards the needy. There are many who still remember the red ads.

Today, Strømme Foundation is a fully-fledged development organisation, with over 130 people working in 12 countries, using best practice and professional development tools. We continue to live out the spirit of Olav Kristian Strømme’s deep desire to fight poverty.

S: How is Strømme Foundation different from other venture-capital and microfinancing firms?

LEH: Money is a powerful resource, but without the necessary tools, it is just money. A poor person needs more than just access to financial resources. In order to make the most of access to savings and credit, the poor need other resources, such as learning how to handle the loan, new skills to improve their income-generating activities, and so on. But what really makes Strømme different from other, more mainstream microfinance firms is the way we strive to package our education and microfinance programmes together. Implementing professional and best-practice microfinance with proper risk management is a beginning. But we go beyond that to reach communities by providing education for children and seeing that their mothers are able to pay as a result of their microfinance involvement.

When it comes to professionalism on how to implement qualified microfinance based on proper risk management, cash management and corporate governance, we use the same principles as the traditional venture-capital and microfinance firms. While we pride ourselves on our professional services, these values are only prerequisites to reaching our final goal – bringing people out of poverty. This is what makes us differ from other organisations. As economists working in the field, it is very inspiring to be able to use microfinance tools for purposes other than a profitable financial result. We are actually able to see individuals climbing out of poverty. It is very rewarding.

S: How do you measure success?

LEH: Success is measured in terms of the life changes of our clients, rather than in monetary gain. Changes such as children at school, meals per day and how well houses and homes are built, with better construction and permanent walls, roofs and flooring. These are some of the criteria we use to judge success.

Microfinance often gets lost in counting the number of loans distributed and the individuals who are being reached. But noting the changes taking place, as well as the focus on long-term sustainable services, is important.

S: What are the main benefits that your scheme brings to communities?

LEH: Communities must be changed from within. As we work alongside NGOs, we can see how the strengthening of the society within a community is a goal in and of itself. Our approaches to microfinance are primarily based on methodologies in which forming groups and smaller community-based organisations is a key element. These organisations serve as effective tools and platforms for other services, such as training. We have seen numerous examples where women have gathered through the community-based organisation and demanded changes in the local education systems and customs.

S: Do you think that, with the help of ‘patient’ capital, developing businesses could eventually have the potential to affect government policies?

LEH: Microfinance is already reaching more than one billion clients. Several countries have appointed ministers for microfinance, and regulation of the microfinance market is becoming both a need and a challenge to the industry. We already see policies changing, and as microfinancing continues to grow, and connects more and more people to the formal economy in poorer countries, carefully developed policies will be needed.

S: Where do you see patient capital going over the next ten years?

LEH: After the announcement that Professor Muhammad Yunus had won the Nobel Peace Prize in 2006, one could say that there has been huge hype around the great potential of microfinancing. Strømme Foundation still believes that microfinance is a powerful tool, recognising that it cannot solve all problems relating to poverty. Over the next ten years there will be a continued need for patient capital. Trends show that commercial agents are entering the field. They are reaching high numbers of clients in urban areas, and strive to meet their goal of financial return to investors. Patient capital has its niche in reaching the poor rural areas, while balancing financial and social return. At the same time, both patient and commercial agents should continue to focus on client protection, with the ultimate goal of improving clients’ lives.