Tuesday, July 20, 2010

Comment: on the closing of Unitas

A couple of weeks ago the non-profit Unitas closed its doors. Unitas was a fund raiser of sorts for microcredit institutions, they raised capital and then gave the money to microcredit banks in the under-developed world. The non-profit also gave consulting services to microcredit institutions.

When closing the announcement from Unitas gave this spin: "capital markets have embraced microfinance to the extent that there are tens of billions of dollars in microfinance capital now available annually, with additional providers entering the marketplace at an aggressive clip. We now feel that there is greater need for our capital and energy in other areas—which we are currently exploring—aligned with our overarching mission of alleviating poverty through opportunity.” according to Chairman Joseph Grenny from the Unitas press release. Many observers of the microcredit industry say that this spin is way off, and that more capital is needed for microcredit to reach more in poverty.

From the great blog at the Seattle Times called the Business of Giving, this commentary from Adam Sorensen critiques the closing of Unitas. Sorensen has spent his career working in microcredit as a manager and investor.

By all accounts, Unitus executed its strategy well in India, with far less traction in other parts of the world. Since 2001, when it began hiring professional staff out of a converted bungalow in the shadow of the Microsoft campus, Unitus raised $40 million in donor funding to support 12 microfinance providers in India, three elsewhere in Asia, four in Latin America and three in Africa.

While its contributions should be lauded, the Unitus' board's claims that a wave of commercial capital washed over the industry is unsubstantiated and dubious. Outside of India, Unitus' limited activities mirror the limited penetration of commercial capital in the microfinance industry. Globally, the microfinance industry remains financed primarily from subsidized sources, with truly commercial capital (i.e. non-subsidized) limited to a few large, profitable microfinance providers, many of which previously received donor funding.

According to the World Bank's Consultative Group to Assist the Poor, donors and investors each provided roughly 50% of total funding to the industry in 2009. Of investors' share, half was invested by the German government and four development banks - all public institutions - and another large, but unspecified slice was sourced from social investors. Regionally, subsidized funding is even more important in less-developed regions like Sub-Saharan Africa, where donors provide 75 percent of total funding in Sub-Saharan Africa.

At an industry level, the trouble with the Unitus board's declaration and the unwinding of the organization is that there are serious issues facing microfinance providers, donors and investors. These issues challenge Unitus' view of the microfinance industry and its impact on the poor.

First, the 2007-08 commodity inflation bubble, followed shortly by the financial crisis and widespread economic distress, has pierced the oft-repeated assumption that microfinance is unaffected by the macroeconomic environment. Second, the rapid growth of microfinance providers, especially commercial players, in countries like Bosnia and Morocco has shown how uncontrolled microcredit extension can destabilize the industry at a national level. Finally, these difficult circumstances are compounded by an existential threat from a string of randomized-control trials have called into question the impact of microfinance as a strategy for poverty-reduction. Cumulatively, these developments demand the participation of Unitus as a proponent of commercial capital to spur the rapid growth of microfinance to reduce poverty - not a victory lap.

1 comment:

Anonymous said...

Have you read the lastest development at Unitus? The Unitus board is a simple lot of crooks and thieves who are walking away from this "prudent" decision to wind-down with millions of invested donor dollars,following SKS's proposed IPO slated to happen next week.I don't know who's fooling who,but the board will pay for this DEARLY!