Microformats (II): The limitations of microloans

In an article in this week's New Yorker, James Surowiecki ("The Wisdom of Crowds") scrutinizes the effectiveness of microloans in bolstering the economies of developing countries. He posits that the hype around micro-finance neglects the small-to-medium sized enterprises (SMEs), the "missing middle" that is vital for a stable economy: "This isn't because microloans don't work; it's because of how they work," so Surowiecki.

The focus on the micropreneur, he argues, is "understandably appealing, but thinking that everyone is, and should be, an entrepreneur leads us to underrate the virtues of larger businesses and of the income that a steady job can provide." Indeed, the number of SMEs is disproportionately lower than the number of one-person shops in developing economies, which is precisely the problem to be grappled with. "Businesses that can generate jobs for others are the best hope of any country trying to put a serious dent in its poverty rate," Surowiecki contends, while microfinance "rarely generates new jobs for others."

Because of these shortcomings, the so-called "commercialization" in microfinance aims at creating a new style of microfinance that raises funds from the financial market and operates sustainably on its profits. Furthermore, philanthropic organizations have begun recognizing and filling the market gap between micro-finance and traditional, bank-led SME finance: Google.org, The Soros Economic Development Fund, and the Omidyar Network have announced that they are partnering to create a new $17 million SME investment company for India to create job opportunities and spur greater economic participation for a larger segment of the population.

Yet I wonder if -- aside from these efforts -- one could in fact leverage the "magic" of microcredit to support SMEs. The appeal and power of microloans lies in the immediate personal linkage it creates between creditor and individual borrower -- the smaller the loan, the bigger the perceived impact (and the emotional reward) for the creditor. What if microcredit sites like Kiva.org or Microplace.com added a premium feature that would let users aggregate a select percentage of their microloans towards SMEs or invite them to contribute partially to larger investments in SMEs, on top of their microloans? Or maybe these sites could offer a "Give-to-one-company" option that would mimic the "Give-to-one-person" notion and allowed them to track the impact of their investment in an SME over time?

As if it needed any further proof: These days, the most disruptive innovations are "invisible" and take place in the world of "financial innovation."