Making a Major Impact with Microfinance

As microfinance initiatives gain momentum in developing economies, they also find their place in the b-school curriculum.
Making a Major Impact with Microfinance

The microfinance revolution began when Bangladeshi economics professor Muhammad Yunus first handed over a few dollars to an impoverished basket weaver in 1974. Since then, the movement toward microfinance—the granting of very small loans to the poorest people in the world to enable them to run small businesses that will lift them out of poverty—has won passionate supporters across the globe. Last year, Yunus and the microfinance institution he founded, Grameen Bank, shared the Nobel Peace Prize.

As organizations ranging from the World Bank to privately funded enterprises devote more resources to microfinance initiatives, business schools are responding by offering electives and programs designed to teach students how to function in this specialized area of business. According to Michael Chu, senior lecturer at Harvard Business School in Cambridge, Massachusetts, “Microfinance is a leading example of why business schools have a huge role to play in impacting global poverty. The bulk of global poverty is concentrated in the developing world, which is where the state and the government have many challenges in functioning well. That leaves an enormous space for business.”

Some schools teach microfinance as a component of social enterprise, a way of doing good through business. Others focus on its commercial applications—the high rate of return on loans, the profit potential inherent in partnering with the poor. No matter what the approach, those in the vanguard see the topic as one that is critical to business, business schools, and the world.

Microfinance and the B-School

While microfinance can appeal equally to idealists and pragmatists, it’s becoming popular in business schools because it works on a very quantifiable level. “Microfinance isn’t just about ideals—it’s about wedding vision with concrete financial reality,” says Andrea Wuerth, program director for the Martindale Center for the Study of Private Enterprise at Lehigh University in Bethlehem, Pennsylvania. “What has kept us from extending basic financial services to the poor is often a prejudice against them, thinking they don’t know how to manage money. Microfinance has proven that erroneous.”

But understanding microfinance requires a different kind of knowledge than a student might get through a standard finance curriculum. That’s because microfinance is delivered through a bewildering array of models. Major institutions like Citibank, Deutsche Bank, and HSBC have microfinance initiatives, but so do donor-driven enterprises, government offices, and nongovernmental agencies. How they distribute money and how they collect it varies with the organization.

“Not only are there different models for providing loans, there are different criteria for deciding who can get the money,” says Edwin Brands, an adjunct professor in the departments of geography and international studies at the University of Iowa in Iowa City. “Some organizations want people who have already started a business. Others focus on people they determine through some method to be poor. It can all be very political. You see Muhammad Yunus give $100 to someone who needs a micro loan; but then you realize that other efforts at microfinance are done in a culturally specific context by different people with different motivations.”

Different approaches obviously lead to the potential for a wide variety of b-school programs, or at least the inclusion of microfinance concepts in a number of spots in the curriculum. “It can be part of finance, or entrepreneurship, or basic economics, or even ethics,” says Wuerth. “We’re incorporating microfinance now in our socially responsible investment class.”

At Harvard, Chu and his colleague, professor V. Kasturi Rangan, include microfinance in their courses “Business and Base of the Pyramid Markets” and “Effective Leadership of Social Enterprise.” As microfinance evolves, Chu expects it to be covered in courses on banking and financial services, particularly those servicing emerging markets, as well as in courses that discuss business and low-income sectors.

“For business to be successful in low-income sectors it will require an infrastructure that is very different from infrastructure in businesses at the top of the pyramid,” Chu says. “You could say that everything that applies to business also applies to low-income business—marketing, production, distribution, and so on. But the key thing to know is that marketing in low-income sectors is very different. Production is very different. So is distribution.”

“In today’s global environment, I have to embrace the business world. If I don’t, I’m the one who loses out in my initiatives for empowering the poor.

—Elizabeth Nicole King, divinity student, Vanderbilt University

Perhaps what’s important is not so much how the topic is covered as why. The answer is very clear for professor Ronald T. Chua of the Asian Institute of Management (AIM), Manila, the Philippines. “AIM has a mission of developing managers of Asia who are entrepreneurial and socially responsible. Poverty in Asia remains a stark reality; and, at minimum, equipping our graduates with an awareness of the challenges of addressing poverty is an important part of fulfilling our mission. Schools whose graduates will have to work in a context where poverty is a critical concern need to prepare their students. That is part of being relevant.”

Interconnected Initiatives

Microfinance is such a broad concept that it can reach across the whole b-school curriculum—and, indeed, the whole university. While microfinance initiatives most often find a home in the business school, Brands points out that many aspects of microfinance fit more comfortably into other disciplines, such as environmental protection, social change, sociology, and international studies.

At Vanderbilt University in Nashville, Tennessee, a microfinance initiative called Project Pyramid brings together students from the Owen Graduate School of Management with divinity students. Participants in the program, which is entirely student-driven, headed to India in March to bring their business plan ideas to entrepreneurs at the base of the pyramid. According to Owen student and Project Pyramid co-creator Rehan Choudhry, the goal was to “arm graduate students with the tools to create sustainable businesses and programs that effectively combat poverty.” 

Members of the program say their very different perspectives on the world created a valuable synergy for reaching their goals. “One of the questions brought up in class was, ‘Are we going in to make money or are we going in to better lives?’” says divinity student Elizabeth Nicole King. “In today’s global environment, I have to embrace the business world. If I don’t, I’m the one who loses out in my initiatives for empowering the poor.” 

Administrators at both the University of Iowa and Lehigh University also capitalized on the multidisciplinary aspect of microfinance when they recruited mixed groups of majors to travel to developing countries to study microfinance. As detailed in “Destination: Microfinance” (on page 30), the Lehigh group, which traveled to Honduras, included graduate and undergraduate students in business, anthropology, engineering, and computer science. “The business students enjoyed problem-solving with the multidisciplinary group,” says Wuerth. “They got involved in mutually beneficial teamwork.” 

The Iowa group that headed to India was similarly blended, and Brands thinks the project benefited from the diversity. “It worked well because the discussions that went on among the students were much broader,” he says. “In a situation like this, if we are all engineers, we might just be interested in a small business that deals with solid waste or bio fuel. Whereas if we have students and faculty from anthropology and finance and geography and international studies, we get to see a much bigger picture.” 

He thinks any microfinance initiative should include students from women’s studies, because 90 percent of the microfinance participants are women. On his recent trip, he was also impressed by what the photojournalism students brought to the project. “They were able to combine video and music in a thought-provoking way,” he says. Such a graphic visual tool can be very powerful if a school is trying to promote its microfinance program, he says, since it can be shown to administrators, sponsors, and other students who might be interested in a future trip or a course. 

The Right Student Attitude

Just as there is more than one approach to teaching microfinance, there is more than one type of student who might sign up to learn about it. Brands and Wuerth find that many of their students are also interested in sustainable development and corporate social responsibility. “For instance, two of the engineers who were with us also belong to a group called Engineers for a Sustainable World,” says Brands.

In fact, Wuerth thinks that interest in microfinance has been driven at some schools by the students themselves. “The students are the ones who have a sense of wanting to do good and do well at the same time,” she says. She believes many students of this generation are committed to a strong community and a better world, unlike students of previous generations who all wanted to be Wall Street analysts. “It seems the pendulum is swinging the other way,” she says.

Other students who exhibit an interest in microfinance are from countries where such programs are successful, she notes. “Many of our Indian, Pakistani, and Bangladeshi students know all about microfinance,” says Wuerth. “The more global a business school is, the more microfinance will be known to its students.”

To Harvard’s Chu, it’s not so obvious that the sustainable development crowd is leading the microfinance charge, but he suspects that’s because of the way Harvard teaches the topic. He says, “For example, in our microfinance executive education course, we look at corporate strategy, emerging markets, competition against multinationals, profit, growth, and control. From that perspective, it’s about understanding how to manage effectively in an industry that serves the low-income segment. But you could take a different approach and look at microfinance from the perspective of sustainable development and social impact, and you would look at completely different cases.” 

A World of Good

No matter how they are structured, microfinance programs meet several key criteria for business schools. They offer schools opportunities to become involved in their communities and to participate in the global economy. They also give management students a chance to see the power of business to change the world. Even so, experts know that microfinance will not solve all the problems of the world—or even all the problems of the poor. 

“Access to financial services is necessary and important, but it is not enough to lift people out of poverty,” says AIM’s Chua. “A problem arises when people expect microfinance to be a silver bullet.” 

Today’s microfinance programs aren’t even scratching the surface of the potential, Brands says. “In India alone there are 300 million people below or at the poverty line, and only four or five million are being served by microfinance,” he says. 

The numbers are growing, however. “In the 2006 Global Microcredit Summit in Halifax last November, it was announced that the goal of reaching 100,000 million poor women worldwide with microfinance was achieved in 2006,” says Chua. “The new goal is to reach 175 million poor women by 2015 and move 100 million of them out of poverty.” 

That leaves a lot of room for business—and business schools—to maneuver. Business schools that want to participate in the microfinance revolution should identify their goals, pick their models, refine their approaches, and roll up their sleeves. There’s plenty of work to be done.