Written by Dr. Jairo Morales-Nieto, Executive Director of local economic development consultants InterAfrica Corporate Ltd, this 10-page discussion on the necessary steps to transition from local to global microfinance markets was published in January 2008. Dr. Morales-Nieto asserts that rigorous filters and conditions must be observed by all players for microfinance to successfully enter into global financial markets. The full-version of the paper is available here.The paper defines globalization of microfinance markets as a “recent international financial trend towards the integration of microfinance flows and institutions with global capital and financial flows and markets, in which private investment funds are a catalytic force”. Furthermore, the rise of microfinance is attributed not only to the increase in micro borrowers and lenders, but also to global, financial markets’ desire for innovative ventures, less risky clients, and higher returns.
While recognizing the benefits of microfinance’s entry into global markets, the paper strongly cautions against the dangers of an “indiscriminate globalization”. This trend will introduce different players and their respective motivations. Compared to development micro lenders who have concentrated on generating wealth for the poor, conventional big banks and investment funds have focused on creating profits. Thus big banks and financial institutions must not solely make microcredit lenders and borrowers new customers, but rather scale up microfinance services while adhering to its best practices.
Dr. Morales-Nieto lists four strategic steps which can help ensure a successful transition to global markets. The first step is for new players to have a thorough understanding of how microfinance works. The microfinance culture and its mindset regarding micro borrowers must pervade the conventional financial and banking environment. While Dr. Morales-Nieto states this as the first fundamental step, he does not provide any specifics on how to achieve this goal.
The second step is to create a strong institution framework for microfinance at a country level. This includes establishing a legal, regulatory, and policy environment conducive to microfinance and adjusting lending technologies to the needs of micro borrowers. Finally, small businesses and the non-bank microfinance intermediaries must be included into the new institutional frameworks with small entrepreneurs and their associations being active policy players.
The third step involves making microfinance a microeconomic policy issue. Currently it is difficult to evaluate the impact of microfinance on global economic aggregates. Basic questions to answer are to what extent does microfinance increase economic growth, income, or employment. Thus, a crucial objective will be to determine how microfinance can contribute to microeconomic policy goals. Finally, it will be governments and academics’ responsibility to work microfinance into policy framework
The final step, according to this doctor of economic science, is to incorporate academics into the process. Dr. Morales-Nieto states that microfinance revolution is not feasible without a solid economic theory behind it. In addition, he notes the wealth of potential studies and analysis. For instance, in economic theory, microfinance can be a tool to correct market failures and facilitate capital movements from rich to poor countries. Regarding financial theory, risk is particularly interesting as classic risk theory seems to contradict lending to the poor without collateral. Furthermore, the classic theory of investment decisions is sensitive to the level of interest rates whereas poor borrowers place an emphasis on the rates or return. Finally, in making microfinance an issue of economics, it can add to further understanding of how microfinance works.
As a self-described policy advisor, Dr. Morales Nieto believes that the above four steps will help microfinance smoothly transition into global markets. Ultimately, this globalization can enable microfinance to move beyond a mere financial tool or anti-poverty strategy and transform it into a key focus of political economy.
Dr. Jairo Morales Nieto received his Doctor of Economic Science at the University of Muenster in Germany. He also served as the Chief Technical Adviser of the Small Enterprise and Human Development Programme (SEHD) from 2002 until the end of the program in March 2004. The SEHD Programme was responsible for implementing a local economic and human development strategy in South Africa funded by the Italian Government through the United Nations Development Program. Dr. Morales-Nieto has also published several articles in AfricaGrowth Agenda, an independent magazine covering development issues in Africa, as well as a paper entitled “Implementation of a GIS at the Local Level in Central America”. Finally, Dr. Morales-Nieto was also the senior registration and development expert with the office of the UN High Commissioner for Refugees in Islamabad.
by Jennifer Lee
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