Book review: Peter A. Fanconi and Patrick Scheurle,Small Money Big Impact: Fighting Poverty with Microfinance

The role of microfinance in reforming the status of the world through an improvement in the fiscal and civil living standard of susceptible and destitute section of population is widely recognized. Microfinance is of great interest to the authors as it largely falls in the category of corporate social responsibility and it aims at sustainable development of the underprivileged countries. The book throws light on the contribution of microfinance and impact investing in achieving the UN millennium development goals. The book discusses in detail the relevance of microfinance for microentrepreneurs as a tool for eradication of poverty. Microfinance industry is rapidly emerging into impact investing and making its presence felt in the areas of education and climate change. The authors share the positive impact of microfinance on the lives of millions of people in an interpretive, descriptive and unbiased manner. The book explains the concept and effect of impact investing in a very lucid manner with the relevant examples of microfinance. It also discusses the financial performance and social returns of impact investing. Through various examples of women microentrepreneurs engaged in small trade and business in Philippines, Peru, Cambodia and Mongolia who were able to fund their children’s education, elementary and individual needs, the authors refer to the success of microfinance in empowering people to cast off the shackles of poverty, and sustainably financing and operating their business activity.

The book under review interestingly explains how small money in the form of microloans of a petty amount play a significant role in empowering the underprivileged sections of the society to attain economic independence and a secure future along with the explanation on the process and investment avenues in microfinance. One major aspect of this book is the use of pictorial graphs and pictures of microentrepreneurs in the case studies at the end of each chapter to demonstrate and highlight significant points. These case studies enable the reader to understand the impact of microfinance at a microlevel by sharing real examples of those who have opted for microfinance loans and how these microloans have bought about a change in their life. The first 15 pages of the book include cover page, title page, copyright, content, foreword, preface, acknowledgements and about the authors. The book comprises of 12 chapters, followed by two appendices including example of loan application and due diligence of socioeconomic impact factors, list of abbreviations, glossary, references, photo credits and index, adding to the completeness of the book.

Chapter 1, ‘Introduction’, focuses on the success of microfinance in benefitting 200 million people all over the world. This confirmation of accomplishment is also used to sustain the promulgation of the microfinance sector as a tactic for poverty eradication and gender empowerment. This chapter begins by explaining the extreme conditions of poverty prevailing in Africa, Latin America, Chile and Central Asian States and the replacement of the UN Millennium Development goals with the Sustainable Development Goals on account of lack of concern for sustainability. The chapter ends by quoting the example of entrepreneur Jennifer Dalida, who could sustain education needs of her children and create jobs for her relatives through loan from cooperative rural bank of Bulacan.

In Chapter 2 ‘Microfinance—the Concept’, the authors draw attention towards the origin, objectives and goal of microfinance. The beginning of microfinance in mid-1980s and incredible popularity thereafter in the developing countries can be attributed to the Grameen bank which continues to issue loans to low income segments of population through their globally recognized programme of microfinance. Some significant features of microcredit that have contributed to its success are loans at lower rate of interest, lending without collateral, facility to reach the poorest of people and formation of self-help groups. The chapter reveals a positive influence of microfinance on capital and income by quoting qualitative and quantitative research. The authors also draw attention towards the role of microfinance in poverty alleviation at a global level by mobilizing people and resources. The authors emphasize on impact investing as a form of investment that combines conventional investment and philanthropy as well as yields maximum social and environmental returns. Finally, the authors quote an example of Zohir Abdulov, who could initiate and expand his bakery business through loan from microfinance bank.

In Chapter 3, ‘The Microfinance Value Chain’, the authors throw light on the role of specialized activities that allow the entrepreneurs to have access to valuable capital. The chapter clearly explains the process of fund launching, management and the role of regulatory authorities in supervision of funds. The authors also highlight the role of Geneva as the birth place of modern microfinance and UN-PRI (Principles for responsible investment) as an admirably successful initiative established in the name of sustainability and responsibility in the financial sector. The authors quote here the example of Myrna Borota from Malolos, who made use of microloan for initiating and expanding business of kiosk and used the income to educate her children.

Chapter 4, ‘Microentrepreneurs’, suggests how microentrepreneurship adopts a tailored and customer oriented approach in fostering an upward mobility within the three poverty levels, that is, extreme, moderate and the economically active poverty. The authors discuss the relevance of loans for education and healthcare consumption for microentrepreneurs belonging to different poverty levels. On reading the chapter one may be confronted with the question as to how the recipient of loan target group has shifted from men to women. With an exception of Eastern Europe and Central Asia, more than half of the loans are offered to women in countries of eastern Asia, Pacific Latin America, the Caribbean, Middle East and North Africa, whereas in South Asia 100% of the loans were handed over to the women. This change can impact the society with thoroughly indigenous beliefs concerning gender roles.

Chapter 5, ‘Microfinance Institutions’, provides an overview of role of microfinance as a development organization. To some extent there is repetition of the goals and objectives of microfinance institutions. This chapter portrays the journey, transition of microloans into comprehensive financial and non-financial services, source of funding of microfinance, and relevance of regulation and supervision. Owing to diversified portfolio, high operating costs, rise in defaults and requirement of higher capital buffer microfinance, finance institutions are at more risk. The authors conclude with the brief reference to the flow of client’s data via the MFIs to credit bureau. This data enables the clients to access their solvency and clients with poor credit score can be blacklisted.

Chapter 6, ‘Lending Methodologies’, begins with a quote by Muhammad Yunus stating ‘The entire bank is build on trust’. This chapter explores the prospects and perils of lending to customers with higher risk of probability of default through a holistic approach. In a very interesting manner the authors state the significance of trust in microfinance. Lending methodologies like group loans, mutual monitoring, a progressive loan structure, regular meetings with the microfinance institutions are indispensable in raising the morale of borrowers for repayment. A major portion of microfinance loans target women, as their repayment of loan rate is higher as compared to men. This can be attributed to the risk averse properties like sense of modesty, discretion and discipline. The authors also emphasize upon reduction of over indebtedness owing to continuous monitoring and efforts of credit bureau. With the example of a manufacturer of musical instruments of Columbia, the authors show how MFIs contribute towards expansion of business.

In Chapter 7, ‘Loan Pricing’, in a very simple and lucid manner the authors emphasize on the relation between the cost and volume of credit, strategy for compensating for defaulted interest rates. The authors also draw attention towards challenges of a microentrepreneur in gaining access to capital rather than repayment of loan. More efficient processes and optimized procedures result in reduced operating costs. The chapter addresses the fact that digitalization and mobile money transfer have added to the efficiency of microfinance institutions. With an example of vegetable stall owner in Bogota Colombia the authors depict a change in life of a women entrepreneur. A steady increase in turnover and revenue enables her to fund decent education for her children.

Chapter 8, ‘Social Performance Management’, focuses on improvement in economic and social standard of living, fight against poverty and empowerment. The chapter advocates measuring social performance for investigating social impact though the effectiveness of the social performance measures like universal standards, PPI (Progress out of poverty index) and PAT (Poverty assessment tools); has not been judged for measuring social responsibility. The authors also discuss the social impact exerted by microloans on the life of a borrower as compared to a non-borrower. The authors highlight the positive impact of microfinance on the living standards of microentrepreneurs and suggest the use of market research, impact assessment, employee training and technical assistance for enhancement of microfinance institution capacity. With the example of a furniture manufacturer of Bulgana (microentrepreneur) the authors depict the transformation of a small furniture manufacturing business in to a small enterprise.

Chapter 9, ‘Beyond the Reach of Microfinance?’, questions the deep-set prejudices about the tendency of the poor for not saving the money. The authors highlight the relevance of transparency for keeping a check on corruption, along with sighting lack of regulation of informal lenders and non-redemption of the loan borrowed from money lenders due to excessive draught to be the most visible reason for suicide and over indebtedness in 2010 in India. This chapter throws light on the formation of a social performance task force to measure the implementation of social mission contribution towards common goals by the employees and management as well as to strike a balance between profitability and social performance. There can be chances of corruption in MFI by handing out fictitious loans or indirectly by accepting money from bogus transactions. Microfinance plays a significant role in promoting the development of SMEs, as successful microentrepreneurs usually turn their business into an SME with emphasis on local relevance. Finally, the authors conclude with the example of a traditional music instrument manufacturer of Mongolia, the authors depict a boost in productivity with the help of microloans.

Chapter 10, ‘Investing in Microfinance’, the authors state that owing to its outstanding diversification properties in a portfolio, microfinance has become a preferable investment opportunity. Social responsibility policy of institutions, financial performance and diversification of a portfolio are the main incentives as highlighted in the chapter. There is a 10 times increase in the assets managed by microfinance funds with the highest percentage (56%) constituted by institutional investors. The authors also explain in a lucid manner the concept of horizontal and vertical risk sharing through public–private partnership. In the discussion of possible pitfalls of microfinance, the authors state that global high yield asset class has the highest rate at default of 2.2% followed by global corporate loans at a default rate of 1.1% and finally mutual funds at a default rate of 0.5%. With the help of pictorial presentation, they illustrate the asset allocation split up into countries, maturities and currencies.

In the section on ‘loan agreements and pricing policy’, the authors emphasize on the role of loan amount, maturity, interest rate, coupon frequency, seniority, amortization schedule, collateral and covenants in determining the loan contract negotiations. With the example of a women entrepreneur running a sweet shop in Columbia the authors depict the expansion of business through purchase of modern equipment enabled by microfinance loans, leading to an enhanced productivity and profit. In the section ‘microfinance in the overall investment portfolio’, the authors explain about mitigation of various types of risks with the help of the efficient frontier concept. The authors also give a pictorial presentation of the key performance indicators and correlations of the sample asset classes with a final conclusion that portfolio with a higher share of microfinance will yield a higher return with the same level of risk. With the example of a fisherman in Philippines, the authors state how microfinance loans enable the small entrepreneurs to expand business and thereby generate employment opportunities for several people.

In Chapter 11, ‘Real and Financial Economy’, the authors elucidate the inspiring success story of microfinance. The chapter highlights the sustenance of the two digit growth rates paving the way through financial and economic crisis and turbulence in emerging markets. The authors focus on the role of local activities in amplifying the effect and impact of diversification thereby benefitting microfinance from real economy point of view. Intense focus on liquidity situation and appropriate hedging instruments offer a reliable shield against losses. As a precautionary mechanism for stabilizing the economy and prevention of crisis, strict regulations and credit bureaus have been introduced along with specially designed insurance policies for investors. With an example of an entrepreneur in bee keeping business in Bosnia the authors depict the funding and expansion of business of bee keeping through the microfinance loans.

Chapter 12, ‘Discussion of Results and Conclusion’, starts with a quote of Muhammad Yunus, ‘Microfinance is not charity. This is business: business with a social objective, which is to help people get out of poverty’. The authors emphasize on the ability of microfinance in synchronizing the interest of borrowers, investors and the society. Microfinance is referred to as an outstanding and unprecedented achievement in the world of asset management. Attractive risk pattern coupled with new technologies will boost the productivity of microfinance in the years to come.

In the section ‘win-win-win, onwards and upwards’, the authors elucidate the utility of microfinance as a powerful and effective tool for social development and the role of technological revolution in accelerating the loan accessibility. Finally the chapter emphasizes two main responsibilities, namely, offering support to the neglected and paving the way for innovation to give rise to a new world order, where microfinance and impact investing will assume a key role in the investment process. With the example of cashmere weaving women entrepreneurs in Mongolia, the authors depict the success and expansion of their business owing to the microfinance loan.

The book Small Money Big Impact is a perfect book in the sense it makes one ponder on the potential probabilities that can be attained through microfinance by examining holistic approaches and strategies. The book is informative, explanatory and comprehensive. A significant contribution in the fight against international poverty and targets at convincing the investors that the returns in terms of financial gains and societal benefits are equally attractive. However, given some of the limitations like lack of sufficient empirical findings for depiction of the challenges faced by microentrepreneurs in the process of obtaining access to microfinance, repetition of some concepts and lack of elaborative examples, overall the book is worth reading for the students, research scholars, microentrepreneurs and managers to understand the huge impact of small microloans on changing the life of microentrepreneurs.