Tuesday, April 20, 2010

What is the true cost of microfinance?

Dear Colleagues

A recent article in the New York Times sparked some response from several of the better known figures in the microfinance space.

Alex Counts, President of the Grameen Foundation in Washington DC posted a response to the NYT article that may be found at http://grameenfoundation.wordpress.com/2010/04/16/what-is-the-true-cost-of-microfinance/#comment-813/.

In turn my response to this dialog is as follows:
WRONG QUESTION ... what is the true value of microfinance? When microfinance is delivered with a high level of valuable interaction between the client and the MFI, the cost is likely to be very high ... but does that matter when the value being delivered is an order of magnitude more.

I don't expect the modern financial quants to understand this ... their focus on profit and interest and all sorts of synthetic ways to create profit from valueless transactions ought to be giving the leadership of the big name business schools food for academic thought ... but I am not holding my breath.

When society starts looking at the allocation of resources through the prism of value rather than profit ... society might then start to make some of the progress that is possible

Peter Burgess
Wherever I go I find that the role of profit in determining the allocation of resources is very powerful while the role of value adding for society has little or no place. Bluntly put, this explains why the US banking sector has spent the best part of 40 years creating "profit" constructs while doing next to nothing for society where value is enormous, but profit not so good. The scale of the banking sector profit scam is very large ... multi-trillions of dollars ... and the dumb bankers just don't get it.

Why does every city in the United States have multi-hour traffic jams every day? Bottom line ... because those that in charge of allocating resources have not yet seen a way to profit from it. Instead society pays a huge price every day in terms of quality of life! Mayor Bloomberg in New York tried to introduce congestion pricing, but society did not want that ... but instead society puts up with congestion costs every day of the year.

I listen to Bloomberg News from time to time. It makes me mad! 24/7 banter about corporate profit, stock market prices, GDP growth and a whole lot about what moves the market ... but nothing ... absolutely nothing ... about the value dimension of society and the awful reality that corporate profit on top of value destruction in society is a train-wreck in progress.

I should not be surprised that the microfinance dialog has moved away from the value proposition ... when all of the decision making in the global society and the capital markets ignores the value dimension and only focuses on a quite tenuous profit construct!

Peter Burgess

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