How microconsignment improves on microfinance
Let’s say you see a great small business in selling reading glasses, or solar-powered cellphone chargers, to villagers in poor communities. Microfinance can help you in one of two ways: it can lend money to the buyers, to help them buy what you’re selling, or else it can lend money to the sellers, giving them capital to buy inventory and then store it until it’s sold. Microlenders can even do both at once, charging high double-digit interest rates to both sides of the transaction.
Microconsignment, by contrast, avoids interest payments by taking most of the risk and putting it onto the manufacturer. The structure seems to have been dreamed up by Greg Van Kirk, who used to work in structured finance at UBS before deciding to help make the world a better place instead. Van Kirk started off with cooking stoves: families would pay for them in installments, using the money saved on fuel. The installments would go to a local mason named Augustín Corrio, who built the stove; he’d keep a cut, and send the rest on to the supplier.
Because it’s a consignment system, the supplier doesn’t actually carry all that much risk: it owns all the stoves until they’re sold, and then gets a steady income stream in payment for them. And although the buyers do commit to make a series of future payments, they don’t really have debt in the same way that microfinance borrowers do.
Stewart Paine makes the point that this system can grow much faster than microcredit, since it can be hard to increase loan size quickly in a fast-growing environment. On top of that, microconsignment poses little if any risk, and therefore needs little if any regulation.
Microconsignment require a pretty sophisticated information infrastructure, which is currently being provided on a not-for-profit basis by organizations like Van Kirk’s Community Enterprise Solutions. But that model seems to have scaled so far, and if it isn’t growing as fast as some of the more aggressive microlenders, well, that’s probably a good thing on balance.
Obviously microconsignment can’t replace microlending in most situations. And it’s not easy for governments or institutions like the World Bank to put in place mechanisms which could help it spread fast around the world. But insofar as it takes off, slowly, in one country after the next, it’s a model which I think is incredibly attractive — to consumers, to middlemen, and especially to suppliers looking to build profitable businesses around the bottom billion.