Sean Foote, a long time venture capitalist and proponent of micro-finance in developing countries addressed recent criticism of micro-finance in his talk “If You Give the Poor a Loan: The Unintended Consequences of Microfinance.”
He defended both for-profit and non-profit micro-finance against recent reports calling it ineffective and damaging. According to him, the Nicaraguan government’s urging of citizens to not pay back their micro-loans and the suicides of two Indian women over the stress of repaying their loan have dealt “black eyes to the darling child.”
Foote, though, argues that one must understand the context of the loan. “People are seeing [micro-finance] loans at 85% interest rate and going, ‘Oh my gosh, that’s insane!’” he stated, “but it’s reasonable in a place where credit card loans are at more than 120%.”
The venture capitalist also believes that much of the criticism is a backlash to the initial hype of micro-finance. “It was advertised as the solution,” he said. “They were saying, ‘This changes everything.’” Foote gave data demonstrating that the number of micro-loans in the Philippines grew faster than global internet usage.
“It was all hype. Microfinance is still great and effective, but its only part of the solution” he explained, listing health care, food security, and education as other important problems to address.
Helen Stacy, a senior fellow at the Center on Democracy, Development, and the Rule of Law, echoes Foote’s concern about addressing the needs of impoverished people holistically. “Maybe micro-finance under the right circumstances is a great catalyst, but there’s no silver bullet, ever.”
“How can we help?” she proposed. “It’s not just exporting our ideas and assumptions and expectations, it’s far more nuanced, far more subtle, far more flexible in how we react” she explained.
When it comes to the Stanford Institute for Innovation in Developing Economies, both saw potential good coming from the project. “As far as I know, this hasn’t really been done before,” Foote said of SEED’s mission of educating and empowering entrepreneurs in developing countries. He estimates no more than $200 million globally go into these ventures each year. Therefore, SEED’s $150 million dollar donation will significantly increase that amount.
SEED’s main goals are toresearch techniques, educate the poor, and support the poor “on the ground.” Donor Robert king announced in a video for SEED, “It’s not just going to be a think tank, it’s going to be results. It’s going to change people’s lives.”
Stacy, who is not involved with SEED, said “All we can ever do is try to base [initiatives] on really good information and constantly reappraise it.” As experienced leaders in the arena, they both are highly aware of potential pitfalls.
“I hope to God its all local companies,” Foote emphasized, referring to the recipients of SEED’s efforts. He explained that with his background in for-profit business and venture capital, he knows all too well the system can be taken advantage of, doing more harm than good.
“There’s always a risk,” Stacy agreed. “The best you can do is try to manage that risk. Be smart, be compassionate, not be arrogant, have lots of humility”.
Stacy believes that these values are beginning to sink into the poverty alleviation efforts conducted in the United States. “We’re getting better. There’s still a risk we do it with hubris or stay stuck in one mindset…but we’re getting better.”