April 30, 2008
Microfinance and the domestic “missing middle”By Tim Ferguson, Founder, Chair and Managing Partner
I'm often asked if the Next Street model is a microfinance model. And while I respect the thriving microfinance movement, the answer is an unequivocal no. While microfinance has for the most part directed its efforts abroad, Next Street works at home. And while microfinance has historically focused on individual entrepreneurs, Next Street serves businesses – promising small businesses that are too big for microfinance yet too small for the traditional capital markets. Unlike microfinance recipients, the businesses of this “missing middle” are critical to job creation and sustained economic growth.
Beyond entrepreneurship
The classic model of microfinance aims to place small loans in the hands of poor individuals to help them start or expand businesses. Today, microfinance has evolved into a high-profile global movement, having garnered a Nobel Prize, magazine covers, and countless celebrity endorsements. It has turned into big business, with some microfinance providers going for-profit and their investors reaping substantial returns. Microfinance seems to be achieving its goals, such as they are – improvement in the lives of countless borrowers and their families, in many ways. Beyond this immediate circle of beneficiaries, others in their communities can witness the potential for improving their own standards of living.
James Surowiecki’s recent provocative column in The New Yorker makes a solid argument for taking a realistic, practical attitude towards microfinance.1 It plays down the hype – to use Mr. Surowiecki’s apt term – noting that although microfinance has been successful in some arenas, it is not a cure-all. His piece is especially strong in its discussion of the missing middle, which he defines as “small-to-medium-sized enterprises that are bigger than a fruit stand but smaller than a Fortune 1000 corporation.” These businesses generate more than 60% of all jobs in high-income countries like the U.S. As such, he says, they are “the best hope of any country trying to put a serious dent in its poverty rate.” On the other hand, the microfinance emphasis on individual entrepreneurship rarely generates jobs.
Small loans can make a big difference for some poor people and their families, but an economy needs more than individual entrepreneurs to survive and thrive. Sustained economic growth requires businesses that reach for scale, investing in resources that help build momentum in job growth and wealth creation. To quote just one of the many studies to this effect, research conducted for The Brookings Institution Center on Urban and Metropolitan Policy concluded that “ultimately, it is primarily businesses that create wealth and jobs.”2
