New trends in Microfinance

I come from a banking background and had been a long time supporter of microfinance. So I appreciate this concept that just as vital is credit is the need to provide capital to an enterprise and the value of a business angel to provide this support.

From Microfinance Focus

Microangels and Microequity: The Missing Ingredients of Microfinance

By Arvind Ashta, Burgundy School of Business, Glòria Estapé-Dubreuil, Universitat Autònoma de Barcelona, Jean-Pierre Hédou, Association Regionale des CIGALES de Bourgogne , Stéphan Bourcieu, Burgundy School of Business

Microfinance Focus, March 19, 2012: Microfinance, associated for over 35 years with Mohammad Yunus, the Grameen Bank, Opportunity International, Finca, Accion and many others, has brought to the poor and unbanked, the availability of micro loans and micro-insurance in exchange for micro-savings. If its results as a tool to fight against poverty are sometimes controversial, it probably still lacks an absolutely necessary ingredient to successful entrepreneurship: “micro-equity”.

Indeed, traditionally microfinance means providing a micro-credit and its attendant repayment obligation. During the last year, we saw possible abuses of the system, highlighted among the farmers of Andhra Pradesh in India, harassed by their creditors to suicide. Ashta, Khan and Otto (Ashta et al., 2011) had done some macro/sociological analysis of the relationship of microcredit with suicides and had commented that there may be some cause for stress in the relationship between the credit agent who needs to show a 100% recovery and the borrower who cannot always ensure this. They had recommended the development of microsavings to balance the relationship between the MFI and the borrower so that the agent is not only giving loans to the client; he is also receiving deposits from him and cannot therefore alienate him. In fact a number of well-known figures have long been stressing the role of savings to improve the lot of the poor.

But this remains a consumer oriented approach.This is because if the borrower is an entrepreneur, his savings are probably already sunk into his business. If the entrepreneur needs to lower his stress related to microcredit, he needs something else.

Knowing that it is impossible for a company to have a harmonious development without equity, and that the availability of equity has an impact on sustainable growth rates(Higgins, 1977; Ashta, 2008),it is evident that this is true for microenterprises also. This is why for the last few months we have been studying a small movement of microangels who have been in existence in France since 1983, providing micro-equity to micro-enterprises.

These micro-angels are people like you and us. They are working people and retired people, there are top managers, senior managers, middle managers and junior managers. They are social workers with no management experience. All of these micro-angels get together and form a club called CIGALES. Each angel contributes between 7.50 Euros per month to 450 Euros per month depending on how micro (s)he is. Once the combined savings of the club is large enough they finance projects which require equity of as little as 1000 Euros to projects where many clubs may get together to invest 25000 Euros. And, their magic wand is such that when they accompany projects, 75% are still surviving five years later as opposed to 50% on average for new ventures in general.

How do they do this? Like their macro counterparts, they believe in proximity and provide advice and mentoring to the entrepreneur. However, if the mentor is unable to answer the question, he uses the combined human capital of the entire club to get an answer. And if they cannot, the members use their network to find people who can help the entrepreneurs. Finally, once a CIGALES club is associated with a project, a strong signal is given to other financiers, including banks, that the project is good and therefore loans also come in where otherwise bankers feared to tread.

This role of combining micro-equity with micro-credit is lost to the layman but is of crucial importance in understanding the missing ingredient in the microfinance world. In microfinance, we talk of micro-credit, micro-savings, micro-insurance and even micro-transfers. Yet, what poor entrepreneurs (as distinct from poor consumers) need is somebody to take the risk of putting their money in their risky enterprise. Somebody, who will not ask for money back if they are a failure and thus remove downside risk and the effect of loss aversion (Quattlebaum, 1988; Tversky and Kahneman, 1991; Ashta and Otto, 2011).Somebody, who can guide them, professionally as well as emotionally, in change management inherent in a new entrepreneurial project. Banks cannot use savings deposits of their customers and fund such risky initiatives. Banks, with their high cost structures, do not have time to advise such small enterprises.  Microfinance needs micro-equity provided by micro-angels. In France, we have been doing this since 1985 and we have kept it a closely guarded secret! Less than 1% of French adults probably know about the existence of the 1,800 CIGALES micro-angels!

Why is this so? Where have the angels gone wrong in bringing in religious fervor by spreading the good word of their work?

Our work in progress indicates that unlike the normal business angels, the CIGALES are looking for an alternative economy and they want to do more than just financial good. They want to solve problems that the market mechanism fails to solve. For this, some of them want to finance environmentally friendly projects or projects by the handicapped. However, each Club of CIGALES is autonomous and its members can decide what they want to do. This mixing of a social motive, usually too many social motives, means that many micro-projects get eliminated because the members stir this with yet another motive – of democratic unanimity, so difficult to achieve(Buchanan and Tullock, 1965). Alas! If they understood, that just providing micro-equity does enough good, without mixing too many social messages, perhaps more people would be attracted.

We would be presenting our first detailed research on this subject at the Mini-conference organized by the BanquePopulaire Chair in Microfinance of the Burgundy School of Business in Dijon, France on March 22, 2012.

Ashta, A. (2008). “Sustainable growth rates: refining a measure.” Strategic Change17(5/6): 207-214.
Ashta, A., S. Khan and P. E. Otto (2011). Does Microfinance Cause or Reduce Suicides? Policy Recommendations for Reducing Borrower Stress. Available at SSRN:
Ashta, A. and P. E. Otto (2011). “Project valuation in the presence of loss aversion during economic crises.” Strategic Change: Briefings in Entrepreneurial Finance20(5/6): 171-186.
Buchanan, J. M. and G. Tullock (1965). The Calculus of Consent: Logical Foundations of Constitutional Democracy. Ann Arbor, University of Michigan Press.
Higgins, R. C. (1977). “How Much Growth Can a Firm Afford?” Financial Management6(3): 7-16.
Quattlebaum, O. M. (1988). “loss aversion: the key to determining individual risk.” Journal of Financial Planning1(2): 66.
Tversky, A. and D. Kahneman (1991). “Loss Aversion in Riskless Choice: A reference dependent model.” Quarterly Journal of Economics106(4): 1039-1061.


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