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Microfinance: The Next Frontier?

(Asia Society Hong Kong Center)
by wpoon
26 April 2010

HONG KONG, April 26, 2010 -
Microfinance is a powerful tool that can improve the lives of poor people, yet,
there are many challenges facing the industry, according to Jennifer Meehan, the Asia Chief Executive
of the Grameen Foundation.

Speaking at the Asia Society
Hong Kong Center,
Meehan pointed out that over three billion people lived below the poverty line
of $2.50 a day. "Can microfinance empower the poor? Absolutely," Meehan said. "An illiterate, innumerate
person who gets a chunk of capital, what will they do with that? In Inner Mongolia, they will raise goats. In the Philippines, it
will be small businesses like hair cuts or nail shops. In northern India,
animal husbandry. These are things that people don't need training for. They
are skills they already have".

Still, Meehan underscored the challenges facing the
sector. "The challenge going forward in terms of the poverty alleviation impact
of microfinance is to accelerate the movement," she said. "Once you've tapped basic skills and
raised incomes, you plateau again. How do you get it up to the next level?"

Matthew Gamser,
a microfinance specialist at the International Finance Corporation, also stressed the importance of the microfinance industry. "What
can microfinance mean in a broader sense? It's not just about credit," he said. "It's
about money transfers, savings, insurance et cetera. We are now starting to
think that if these institutions grow too big, we will need to think of
structure, governance and their regulation."

While the development of
microfinance in India has
been a success, China
pales in comparison. "Seventy-five million people in India have
access to microfinance. In China
it is 100,000," Meehan said. "India is
running circles around China."

Gamser predicted, "China is going
to be exploding in microfinance soon. It will make some mistakes. There will be
spectacular Ponzi schemes. But the learning is so fast in China and regulators are watching
carefully and letting good institutions do a little more than they are allowed.
‘We'll watch, you go ahead and once we see progress, we'll change the rules'."

ACCION Microcredit's
experience in China
highlighted the difficulties plaguing new entrants. As one of two foreign-owned
microcredit companies licensed by the Chinese Government its operations are highly
restrictive.  Its Chief Executive, Stanley Kwok said "We can only lend, not take.
We don't do insurance or credit cards, unlike our operations in the rest of the

The dilemma facing the
industry, said Meehan, was how microfinance could reach the neediest. "Seventy
percent of the poor are in rural areas. But there are challenges like infrastructure.
Where can you get cash? There are no police. These challenges are real and make
microfinance expensive to deliver relative to the price of financing. This model
is not sustainable in the long term. This cannot scale to the size of the
problem - three billion people - give or take."

Despite the challenges, Meehan
remained upbeat. "We are still trying to tinker and fix some of the pieces of
that puzzle, but it actually is possible - that we can make a big dent in

Reported by Penny Tang, Asia Society
Hong Kong Center