The Economist’s Matthew Bishop on What Microfinance Needs Next

The biggest challenge confronting microfinance today is transferring a practice that started as charity into a proper business, said Matthew Bishop, chief business writer for The Economist and afternoon keynote speaker at the second annual Chicago Microfinance Conference at Gleacher Center April 21. “In a sense there’s nothing unusual about this, because if you look at most breakthrough innovations, they tend to be the result of love rather than the pursuit of money,” Bishop said.

Capital is abundant, but the microfinance model simply needs to be fine-tuned, he said. “A huge wall of money that is completely untapped will come into the sector if it can be demonstrated to be able to produce investment returns,” Bishop said. “For instance, a vast part of the pension fund sector will come in once we’ve had about five years of decent returns on investment portfolio of microfinance products. And that will transform what’s available.”

Microfinance institutions (MFIs) needs to utilize technology to establish a standard, open system for collecting data for market-wide analysis, Bishop said. “If you asked me what the single biggest missed opportunity is in the microfinance world alone, it is that the data is awful,” he said. “Writing about this from an economics point of view is like crawling through mud, because you just can’t really get to the bottom of what’s going on. Either the default rate data is inaccurate, which is my guess, or if it is indeed accurate, it reflects very badly on the sector because it means we’re not taking enough risk.”

Traditional MFIs need to get more excited about providing noncredit services such as insurance and savings accounts, which are more valuable in economic terms, Bishop said. “We need to become enthusiastic about consumer finance as well, which tends to be the most hated thing of traditional nonprofit microfinance providers,” he said. “I think consumption is what drives most economies. If poor people are anything like me, when you get some money you want to spend it on things that will make you happier. And if that happens to be a television, I don’t think we should begrudge people that.”

Most politicians still believe billions of dollars in aid and debt relief are the best ways to help eradicate poverty, Bishop said. “They really don’t get it, about microfinance, about entrepreneurship, about actually liberating poor people to help manage their finances in the same way that we would do,” he said. “I think many people in microfinance don’t really get it either. That’s why we’re not as dedicated to making the case politically as we ought to be making.”

—Phil Rockrohr