Tuesday, March 22, 2016

Microfinance and Crowdfunding

Jet lag prevented me from posting this yesterday.  (Yes, I am scheduled to be the BLPB every-Monday blogger going forward.)  But at least I am awake enough now to post a bit more on the 7th International Conference on Innovative Trends Emerging in Microfinance (ITEM 7 Conference) I attended last week in Shanghai, China.  My initial post on Wednesday provided some information on Chinese microfinance and the initial day of the conference.  This week, my post focuses on definitional questions that I have been pondering relating to my participation in this series of conferences.  Specifically, I have been sorting through the relationship between microfinance and crowdfunding.  My understanding continues to evolve as I become more familiar with the literature on and practice of microfinance internationally.

At the conference, one of the participants noted that while microfinance and crowdfunding appear to be mutually reinforcing, they still do not enjoy comfortable relations in scholarship and practice.  After weighing that statement for a moment, I had to agree.  I actually have been personally struggling with the nature of the relationship between the two for a few years now.  (I often wonder whether folks like co-blogger Haskell Murray who commonly work in the social enterprise space have this issue in talking about the relationship between social enterprise and corporate social responsibility . . . .)

Two years ago at the ITEM 5 Conference, I posited that crowdfunding could be a vehicle for microfinance.  The establishment of this point required defining both microfinance and crowdfunding--in each case, no small task.  To enable the audience to understand my observation, I used a broad definition of microfinance that focuses on financial inclusion (like the one found here).  I believed after my presentation that I had made the point well enough.

Yet, something still niggled at me after the presentation and conference were long gone.  I kept feeling as if I had inserted a square peg into a round hole.  Something was just a bit off.  Part of the issue is, no doubt, the fact that my observation was incomplete.  Microfinance is bigger than crowdfunding, and not all crowdfunding is microfinance, even under a broad definition.  So, picture a venn diagram like the one below.

VennDiagram

The red point of intersection illustrates crowdfunding's place as a means of conducting microfinance.  This leaves part of microfinance to be handled through other types of financing (e.g., microcredit).  It also leaves part of crowdfunding to other capital-raising uses.  This conception of the relatonship between microfinance and crowdfunding is undoubtedly more complete.

The importance to microfinance of the non-microfinance part of crowdfunding was confirmed at our microfinance site visit last week in Shanghai.  Our host for the visit explained, in response to my question about the relationship of microfinance to crowdfunding in China, that crowdfunding typically is seen as an alternative to, rather than a means of, microfinance in China.  He noted that equity crowdfunding is uncommon (although growing) in Chinese small business finance overall because the number of shareholders of Chinese limited liability companies is statutorily capped.    Specifically, Article 20 of the Companies Law of the People's Republic of China provides that "[a] limited liability company shall be jointly invested in and incorporated by not less than two and not more than fifty shareholders."  I made a mental "note to files" that crowdfunding might get crowded out of microfinance or other types of financing--intentionally or unintentionally--by positive regulation.

I invite any readers who are more familiar with world-wide microfinance than I to comment further on its relationship to crowdfunding.  Do I have the principal story right, in your view, based on your experience?  Can you provide examples from your work or life that help me to see new aspects of the relationship between the two?  I invite any related thoughts.

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Conferences, Corporate Finance, Crowdfunding, Haskell Murray, Joan Heminway | Permalink

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