Micro Finance - Real Info Wanted

Sitting at a micro credit luncheon in Seattle, I heard an incredibly inspiring story of a woman in central America who built a business from nothing.  It was so moving I gave 100 bucks even though I hadn't come to give anything.  There was no guilt in the message.  There were no crying  babies, or impassioned pleas from movie stars.  The wonder of the micro credit model is that it is so incredibly easy to give to.  Small bits, that change the world - for a novice the bite sized ask met me right where I was at.

There have been a number of really great articles highlighting the challenges of micro credit.  Thomas Dichter authored a critical piece on the effectiveness of micro-credit.  I will say, that Dichter asks some pointed questions and makes some invaluably probing dissections of the concept.  It should also be noted that he suggest that if credit opportunities exist why add to the market new credit opportunities.  That's reasonable, but in many places in the world credit does not exist.  Well, at least in Guinea-Bissau where we are it doesn't. 

We've all heard about how corporations have cooked books to make their shareholders happy with the results.  I was reviewing the 2007 year end report of a very well known micro finance charity - one of the largest.   The most astounding thing to me is that it's November 2008 and they still haven't audited it.  Here's what they didn't say:

1. They did not state how much money was generated in positive revenue from program repayment.
2. Similarly they did not show any positive revenue as retained earnings from loans for program growth.
   
3. I saw their impressive "98% of loans" repayment rates.  With the loss of 2% of all loans - what size of loans are typically lost and how do they compare with the median size of the loans made?  Because if you make 90 $100 dollar loans and lose 2 of 10 $5000 dollar loans haven't you lost a sizable percentage of your capital?  From a business perspective lost if capital should not be attributed in percentages of loans made but in dollars. 
   
4. Cleverly split up into various line items, they showed 20% of their new donations were spent on training, program administration, network maintenance, fundraising, and none of it was investment capital.  I have no problem with that if they aren't slowly consuming their reserves.  If it is sustainable, the admin has to be covered by generated revenue not donations.

I saw lot of twisting and turning of the data that makes for a very impressive albeit undecipherable and non-standard public report.  What wasn't made up for in straight ahead figures was carried by anecdotal stories of success with the opiate of the average $150.00 change the world price tags.

Look, if we want to talk about real sustainability, we need to think from a business perspective.  Few businesses turn a profit in their first few years, but at some point, after 5 to 10 years, a sustainable business should be so on several fronts.  They should have a plan in place for sustainable indigenous leadership.  They should have the ability to pay their staff, expand the program, and show fundamental progress.   

I know of a commodity processing company in West Africa that loses about .45¢ on every pound of product.  No it's not much, and they are putting people to work.  Their business plan is to to make up for the loss with quantity.   Are we doing that with micro loans?  If all donations to micro-finance stopped today, would the vast investment capital grow?  If not, it's not sustainable.

Mike