The Long Tail Strikes Again (Hopefully)

I've been looking into microfinancing and I have to say, I like the concept quite a bit. It strikes me very much as one of those examples of the long tail kicking in.

For those unfamiliar with the term, microfinance generally denotes the practice of providing financial services (loans, extensions of credit, etc.) denoted in small monetary amounts to poor people in an effort to enable them to accumulate enough money to undertake whatever it is they want to do, e.g., by more equipment for a family business.

As I mentioned in a previous post, there are plenty of examples of sectors where capitalizing on the long tail has been very profitable. The premise upon which these examples are built is that there is a large, unserved market for small (or very small) amounts of goods or services (the long tail of the market) that has been overlooked by traditional business models precisely because their revenue potential is so small.

Microfinance seems to be another example of great possibility in this regard. Currently, there are 3 billion people in the world who survive on less than $2 per day. Obviously, these people (and their enterprises) are not good candidates for things like loans or lines of credit due to, among other considerations, the fact that they would be borrowing so little that the revenue stream would be barely noticeable next to that composed on even one modest mortgage in a developed country. As a result, there is an enormous amount of economic activity and growth that is simply not happening for want of capital.

Ironically, the problem isn't that there isn't enough capital to go around, but that the people who need it don't need enough of it [to make it worthwhile for someone to lend it to them]. (Granted, there are other problems, such as the lack of collateral, etc.)

Now, there are two sides to this situation, as I see it:

1. An enormous amount of the earth's population lacks one of the most efficient and sure ways of eliminating poverty.
2. There is an enormous amount of economic success to be had both for them and those who see this as a business opportunity - just as the market for small numbers of self-branded products has turned into a business opportunity for companies like CafePress.com.

Each of these situation assessments has an economic side and a, for lack of a better word, "human" side. (1) leans more towards the human, while (2) leans more toward the economic.

{tangent}

I have always been a big believer in the wisdom encapsulated in the saying "Give a man a fish, feed him for a day; teach a man how to fish, feed him for a lifetime."

One of the problems I have always had with various aid programs (especially government disbursed foreign aid, but also various private endeavors) is that they fail to affect any long-term solution to the problem of poverty. I suspect that at least one reason this is the case is that there is an over-emphasis, both amongst their decision makers and their donors, on the end of charity (admittedly, a good end), to the expensive of the means. If the end is charity (charitably helping poorly people), the means, logically, would be whatever lifts them out of poverty most effectively and in the most dignified way possible.

It seems, however, that the means are often times only vaguely attended to in the rush to simply give money away "charitably."

Where I am going with this tangent is that I would very much appreciate the ability to contribute to the elimination of poverty in an economically prudent and effective way, rather than just hoping that my money is being put to good, long-term use.

{/tangent}

Enter microfinancing operations like Kiva.org (for more examples, check out the Wikipedia article). Kiva allows people to loan a certain amount of money (as small as $25) to people in developing countries that need access to capital for various enterprises, like buying more equipment for a bread bakery, buying a drying machine for a family laundry service, or setting up a rural cellular communication service.

From what I have seen, Kiva allows donors the most control over their money, allowing them to choose specific people with specific projects to which to lend money. The service boasts a 97% re-pay rate and certainly seems to be achieving its goal of helping poor people lift themselves into higher income situations. The only downside that I see to it is that it currently does not benefit the lender in the form of interest - which will certainly mean that fewer people will participate. Kiva's website does say, though, that they are working on that and expect to be able to set up interest-bearing loans in the future. Granted, even with that, there will be little (economically) to recommend it as an investment - but it does seem like a fantastic way to aid poor societies in a long-term, efficient way.

On the other side of the issue, Thomas Dichter over at the Cato Institute contends that microfinance will not be nearly as effective as many people hope it will be:

Recent experience and the economic history of rich countries, however, suggest that those expectations are unrealistic. Most people, poor or otherwise, are not entrepreneurs, so there is little reason to think that mass credit would in general lead to viable business start-ups. Today as in the past, business start-ups in the advanced countries depend predominantly on savings and informal sources of credit; past forms of microcredit never played a role in small business development, and much microcredit is actually used for consumption rather than investment. In the history of today’s rich countries, moreover, economic growth occurred first, then came credit for the masses. That credit was and is predominantly for consumption rather than investment.

I would note, however, that, even if Dichter is right and microfinance will not have the huge impact many hope and expect it will, it still seems to be helping in some measure - and some is better than none.

I plan on following this issue as it continues to develop. If anyone has information on it, please send it my way.

HT for some content: TCS Daily