Monday, June 30, 2008

Is For Profit Micro-Finance Squeezing Out Nonprofits In Mexico

A op-ed piece in today's WSJ talks about the effect of for-profit microfinance companies in Mexico and whether they are getting in the way of Mexican nonprofit success.  Micro-finance operates under the assumption that if the very poor had access to capital, they would be resourceful enough (given the hard times they've seen) to lift themselves out of poverty.  Loans from microfinance companies are typically very small (in Mexico, the average loan is $450).  The op-ed challenges the notion that nonprofit organizations, subject to the nondistribution constraint, do a better job than profit seeking microfinance companies in lifting people from poverty.  In doing so, the article provokes us to think about the nondistribution constraint in general:

In his "reflections" on "microfinance interest rates and profits," Mr. Rosenberg writes that "overcharg[ing]" clients under a nonprofit model is OK because it is done for the sake of future borrowers. But when profits go to providers of capital through dividends, then there is a "conflict between the welfare of clients and the welfare of investors." It's not the commercialization of the lending, we're told, but the "size" of the profits that must be scrutinized. 

What seems to elude Mr. Rosenberg is the fact that there is no way for him to know whether there is "overcharg[ing]" or by how much. That information can be delivered only by the market, when innovative new entrants see they can provide services at a better price. This has been happening since for-profit microfinance began to emerge, and the result has been greater competition. Rates have been coming down even as the demand for and availability of services have gone up.

Hmmmm.  Does the argument suggest that there is a sort of negative nonprofit "antitrust" effect caused by the nondistribution constraint?  If all social entities are subject to the nondistribution constraint does the lack of price competition thwart the better delivery of goods and services?  These are interesting questions for those recently advocating L3C's and the repeal or the relaxation of the nondistribution constraint.

dkj

http://lawprofessors.typepad.com/nonprofit/2008/06/is-for-profit-m.html

In the News | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341bfae553ef00e5539841af8834

Listed below are links to weblogs that reference Is For Profit Micro-Finance Squeezing Out Nonprofits In Mexico:

Comments

Post a comment