An interesting debate about the efficacy of microfinance has been going on lately, pitting development experts and economists against one another as they seek to understand the impact of microfinance on economic growth and well-being.

The whole thing started with an op-ed in the Wall Street Journal. In it, Amar Bhide and Carl Schramm argue that microenterprise, fueled by microfinance, is less good than a "transformative entrepreneurship" enabled by policy reform. Their basic point is that everyone is not cut out to be an entrepreneur, and that simple access to finance is not enough - people need jobs, and to create jobs countries need better business environments.

(My opinion on this argument is mixed. To be sure, not everyone is cut out to be an entrepreneur; many microenterprises are economic decisions of last resort. By last resort, I mean that there are no jobs or economic alternatives to selling vegetables by the side of the road, for example, even if it is a highly competitive local market with low margins and little prospect for growth. On the other hand, "policy reforms" are easier said than done, and even with the "right" policies in place, who is to say that the economy will magically transform? You still need a bottom-up, SME-driven economic development to create the kind of employment than Bhide and Schramm envision. And for SMEs to develop, you need finance...often starting with microfinance.)

Here's where the debate gets more interesting. Following on the WSJ op-ed, Thomas Dichter (of Despite Good Intentions fame and previously featured here and here on NextBillion) recently published a new essay through the Cato Institute. A Second Look at Microfinance argues that the democratization of credit will not affect economic growth or drive business development. Based on a mix of economic history and field experience, Dichter argues that development creates jobs, "which in turn makes the working poor an attractive target for financial services." Indeed, he seems to think that financial services are used by the poor almost exclusively for consumption smoothing and not for business investment; the poor would rather turn to informal networks to fund their enterprises.

Reaction to Dichter's piece has been muted, but one very credible critic has posted a response: Gil Crawford, CEO of MicroVest. Gil is an economic historian and development expert in his own right; he also founded and runs a for-profit microfinance investment fund based in Bethesda, Maryland. His response is posted to the MicroVest site; in it, he accuses Dichter of focusing too closely on donor-driven microcredit and not talking about the growing world of for-profit microfinance. Crawford systematically deconstructs Dichter's arguments over the course of a 1-page letter - worth a read.

Where do I fall in this debate? I'd say somewhere in the middle. Clearly, not enough small- and medium-sized enterprises are being created, and there is a definite lack of financing mechanisms to enable those stuck in the "missing middle" or "mesofinance gap" between microfinance and formal finance. Investments between $10,000 and $1,000,000 are needed, but MFIs have not shown much willingness to make them (as yet) and commercial financiers can't make the kind of returns they need to justify the risk and diligence costs. That's why the Acumen Fund and New Ventures and Endeavor and Technoserve and Aavishkaar are around - to try and fill the gap.

But why not enable MFIs to do it themselves? If, as Crawford argues, MFIs are making profitable small business loans as part of their portfolios, why aren't there more good jobs being created? Going back to the original WSJ article, where is the creative destruction? It could be too early - microfinance is just now making the transition away from donor-funded models to commercially-financed work, which gives MFIs better incentives to seek out, mentor, and invest in promising entrepreneurs from within their own portfolios. It's still not happening...and until it does, the debate will go on.

Could Brazil break the curve on sustainable investing? If Philippe Lisbona, manager of the new Stratus VCIII fund has his way, the country's investment landscape could look significantly different in the next decade. Philippe's call waiting kept buzzing incessantly during our recent phone interview - his firm, Stratus Investimentos, had recently finished raising investment for a new sustainable small business fund and he and his co-manager, Wagner Duduch, probably haven't gotten as much sleep since.

Showing how far some elements of the financial sector have come in triple-bottom line investing, Philippe didn't see this as an even remotely philanthropic exercise - after a heavy dose of market research, his firm decided that moving capital into key green sectors in Brazil would generate high returns for investors. They are taking the lead in vetting companies in the sustainable agriculture and alternative fuels industries in particular, and are seeing companies with double or even triple digit growth rates.

The IFC's Innovation's blog earlier this week announced that "Brazil Banks are Global leaders In Sustainable Finance," based on a UNEPFI report showing the initiatives taken by the likes of Unibanco and ABN AMRO. It seems that actors in the financial sector are beginning to vote green with their dollars and Stratus is positioning itself to be an early winner in this growing trend. Philippe gives the details of the fund and fleshes out the philosophy a little more in the full article - take a look and stay tuned for announcements on the fund's first deals within the next month.