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Parts of the microfinance world are abuzz over a new report, Role Reversal (pdf), by Julie Abrams of Microfinance Analytics and Damian von Stauffenberg of Microrate, a rating agency for microfinance institutions (MFIs). (Economist coverage is here and here.) The authors document how in the last few years, official lenders such as the International Finance Corporation (IFC) have dramatically expanded their lending to the most established, creditworthy MFIs, but not to ones that are shakier but--one hopes--up-and-coming. What's wrong with that?

IFIs publicly claim to take risks the private sector is unwilling to take. One would therefore have expected government-owned development institutions to shift their lending to more risky MFIs as soon as private lenders entered the field. The opposite is happening. Development agencies are today heavily concentrating their funding in the largest and most successful MFIs, exactly the target investment market of private investors.

Recent years, as the report documents, have seen a flowering of vehicles to channel private foreign capital into microfinance. But official lenders, they argue, are "crowding out" these investors by offering subsidized loans the private sector cannot match.

The Microfinance Gateway, which is funded by the Consultative Group to Assist the Poor (CGAP), is hosting a public discussion about Role Reversal Wednesday through Friday this week. The report is clearly meant to be provacative, and as I wrote in the forum, it worked for me.

I reply in the same spirit. The report is strong in showing how official lenders are not living by their own credo. That basic point is sound. But it got me wondering about the similarities between public and private actors in this business. It is not a coincidence that public and private investment from rich countries into microfinance have both spiked in recent years. The underlying forces are the same--media exposure, evidence of effectives, intrinsic appeal of small loans to women, an element of fad, and the urge to help.

And the institutional perversities the authors see in public lenders, such as the pressure to disburse large sums quickly and the desire to be associated with winners, may afflict the socially responsible investment organizations too. They too are motivated by more than the standard risk-reward calculus, by the need to place funds promptly and be associated with winners. As socially minded investors willing to accept sub-par returns, they too can be accused of chasing out truly commercial capital.

Perhaps the greater problem in some place is not the "crowding out" of private investors but the "overcrowding" of foreign capital in general, which can undermine efforts to attract domestic capital and "mobilize domestic savings"--i.e., offer small savings accounts as well as small loans. If something like a herd mentality has overtaken both public and private investors, then does the distinction between them matter as much? In his presentation at a CGD panel discussion in January (video available), Damian predicted that the first MFI default is not far off--and will give the industry a healthy jolt. If he is right, it will be interesting to see which investors, public and private, stick around and which flee.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.