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The expanding imprint of microfinance

The expanding imprint of microfinance

Susanna Khavul, management assistant professor

Microfinancing is big international business, but its ability to spur development and improve quality of life is uncertain. Will it become an economic boon or a pariah that dooms those least able to survive?

An emerging phenomenon, microfinancing represents a way for financial capital to stimulate economic growth in developing countries. Management Assistant Professor Susanna Khavul recently published a research paper on the practice in Latin America and Africa in the Journal of International Business Studies, Entrepreneurship Theory, and Practice, and the Academy of Management Perspectives.

“Microfinancing is clearly an innovation in entrepreneurial finance,” she says. “Now it is poised to redefine how banking industries in developing countries approach lending.”

Most microfinancing focuses on an estimated 2.8 billion people in the world who live on less than $2 a day.

“This is economic territory where banks have historically feared to tread,” Dr. Khavul says. “Complexity of managing many small loans issued to people who are difficult to monitor was always a turnoff. When microfinancing started, banks saw it as a risky, ‘nonprofit’ sort of activity. This is changing rapidly.”

Technology is leading the way.

“Banks now see an opportunity for serving the poor profitably,” she says. “Mobile payments are reducing the transaction costs of making small loans. When we go to Guatemala for research, people who have no running water or electricity are easily reached on their cellphones. They are on the information grid.”

In the United States, microfinancing is increasingly available to those who want to be micro-entrepreneurs but can’t access traditional bank credit.

“The industry is just getting started in the United States,” Khavul says. “Internationally, though, there has been massive expansion in credit targeted at the world’s poorest citizens, but the picture is not all rosy. The industry has been criticized for high interest rates and borrowers mired in debt. The threat of wide-scale default, like what happened in parts of India last December, raises fears in the halls of government that popular unrest may bring economic instability and financial crisis.”

Khavul, a finalist for the Academy of Management Perspectives 2010 Outstanding Article Award for “Microfinance: Creating Opportunities for the Poor?,” focuses on understanding how financial and technological innovations change the entrepreneurial landscape worldwide.

Ultimately, she says, “social and economic historians will judge whether microfinance made a difference in development or in the lives of the poor.”