Microfinance Crisis – RBF to the Rescue?

While revenue-based financing (RBF) wasn’t necessarily created with a social good in mind, few would deny the positive economic development that can happen when entrepreneurs have access to capital.  For example, venture capital-backed firms created an estimated 12.1 million jobs and $2.9 trillion in revenue between 1970 – 2008.[i] Yet access to capital remains a critical challenge, even for some of the most promising businesses worldwide.

Making matters worse, on a global scale a key source of early stage capital – microfinance – is facing a crisis.  Championed by Nobel Prize recipient Muhammad Yunus and his Grameen Bank decades ago, microfinance has evolved into a multi-billion dollar global industry.  Its tone has also begun to shift, from socially-oriented to profit-oriented.

This increased focus on the bottom line is creating both an identity and operational crisis that has rocked the microfinance world.  For example, one of the largest microfinance markets in the world (India’s Andhra Pradesh) has begun to clamp down and regulate a number of micro-credit practices.  High interest rates and collections bullying have allegedly led to 30 suicides by impoverished entrepreneurs who couldn’t make their payments, and borrowers have protested by refusing to take new microfinance loans and by refusing to make payments until their grievances are addressed.  Some government officials have encouraged this civil disobedience, and India’s commercial banks have largely frozen credit to microfinance institutions.  In response, many of India’s largest microfinance institutions have sued to block regulation.[ii]

Last month during the Microfinance Impact and Innovation Conference 2010, a group of more than 250 academics from institutions such as Harvard, MIT, Stanford and Yale found increasing evidence that suggests microloans can further impoverish the poor.[iii] For example, Abjit Banerjee of the Ford Foundation and MIT studied 7,200 households in Hyderabad, India, for over a year and a half.  Loans of $250 were given to groups of women at a 28% APR, and little to no long-term positive impacts were found on family incomes or education (although there was some evidence of alleviated healthcare burden).[iv] As of 2009 there were 1,084 MFIs who had lent around $38 billion to over 74 million borrowers worldwide.[v]

Regardless of the motives behind microfinance, at the end of the day it’s just high-interest debt.  It’s a personal loan with a high APR for a small dollar amount.  As such, while it provides many positive benefits for entrepreneurs with zero alternatives, it’s inherently difficult to scale.  It doesn’t work for larger businesses that need larger amounts of capital.

This is where RBF offers fresh opportunity.  While RBF isn’t right for every company and there’s a range of ways (some better, some worse) to structure an RBF agreement, it gives entrepreneurs access to capital in a profoundly different way.  RBF creates a new set of tradeoffs.  It’s not just another loan, nor does it require the blockbuster growth needed for equity-based investing.

Unlike microfinance, RBF can provide capital for startups without strapping them with a high interest rate, personal liability and fixed payments they must service regardless of monthly revenue.  Moreover, unlike microfinance, RBF can scale.  It works for deals large and small.

It’s time the international development community, local investors and entrepreneurs gave RBF a closer look.  Not only does RBF hold the potential to create compelling financial returns for investors, but it can allow a promising generation of innovators to build better businesses, transform their communities and lead better lives.

[i] National Venture Capital Association & HIS Global Insight, Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy (2009).

[ii] The Nugget, Microfinance Faces a “Quarter-Life” Crisis, Vital Wave Consulting (2010)

[iii] Straus, A Sobering Assessment of Microfinance’s Impact, Stanford Social Innovation Review (October 27, 2010).

[iv] Straus, A Sobering Assessment of Microfinance’s Impact, Stanford Social Innovation Review (October 27, 2010).

[v] The Nugget, Microfinance Faces a “Quarter-Life” Crisis, Vital Wave Consulting (2010)


2 Responses to Microfinance Crisis – RBF to the Rescue?

  1. Tom Hyland says:

    Thomas, thanks for the post and greeting from Hyderabad. The microfinance situation here is tenuous and while I am hopeful based on conversations I’ve had with people in the mix that there are cooler heads in Delhi, it’s time for some introspection since, as you succinctly stated, there is not a single shred of evidence that microfinance actually alleviates poverty. All evidence is anecdotal, at best.

    As a result, I am seeing is an increasing number of traditional MFI investors scrambling for the exits and trying to introduce SME finance (namely education and healthcare) to their portfolios. There is clearly scope for royalty products in India, the trick is finding the products that work within the confines of the challenging regulatory environment, which becomes even more pronounced when foreign capital is introduced as the rules around external commercial borrowing come into play. It’s also a fundamentally different skill set than the one possessed by MFI investors, closer to venture capital, and one that isn’t easily acquired overnight.

    Related is the huge scope for innovative models focused on factoring and bill discounting for organizations with high quality order books with reputable customers.

    Tom Hyland

    • rlucas says:

      Tom, thanks for the note. I hope for both humanitarian reasons, and for not-being-too-jaded-about-the-world reasons, that the microfinance thing turns out to have at least MOST of the promise that it’s been touted as having. (That is, I hope the anecdotes translate into data with some correlation.)

      Interesting point about skill sets being specific not only to finance models and industries, but sizes as well.

      Stay in touch,


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