Even as problems with microfinance continue to spread, cross—border microfinance is firing up.
Cross—border finance refers to any financing arrangement that crosses national borders. Consequently, the movement of money is subject to substantial taxes, even when loans or credit are extended by a third party, such as a bank. Simplifying this process is CGAP, the Consultative Group to Assist the Poor, an independent policy and research center.
The latest publication by CGAP, Trends in Cross Border Funding, shows that many cross—border funders, such as Deutsche Bank and VisionFund, the microfinance arm of the nonprofit World Vision, are committed to pulling people out of poverty through financial empowerment. Click here to view a comprehensive list of microfinance investors.
However, doubts linger over the effectiveness of microfinance. David Roodman, a senior fellow at the Center for Global Development, compiled the most complete investigation into the sources and consequences of microfinance. His report, Due Diligence, found no evidence that small loans lift people en masse out of poverty.
Despite critics such as Roodman, opaque business practices, and a lack of acceptable global guidelines and standards, cross—border funding for microfinance increased to $24 billion in commitments through December 2010, CGAP’s research shows, with steady increases in 2011.
However, challenges remain. According to the International Association of Microfinance Investors (IAMFI), some microfinance investors (MFIs) and social investors claim that commercial funding may cause “mission drift”, leading MFIs to lose sight of their core goal of serving the poor. For example, their average loan size may grow, or they may loan to fewer women and to more urban clients. That's contrary to MFI shareholders' and lenders' expectations.
Despite these concerns, the IAMFI has sought greater diversity in how they support microfinance initiatives. Investors and microfinance institutions now act through intermediaries, such as private investment entities or vehicles, removing burdensome banking fees and political roadblocks to reach those in need faster.
Cross—border financing can be complex. However, as the sector develops, IAMFI argues that several improvements should be actively pursued. Full transparency of cross—border funding information, standardized and consistent definitions and metrics, complete and timely reporting and disclosure, and standardized classification systems will allow microfinance investors and other intermediaries an effective means to communicate, collaborate and deliver.
The lingering question is whether this industry can overcome underlying doubts about its effectiveness. Cross—border microfinance isn’t on fire yet, but is slowly heating up.