NEWS WIRE: Brazil & India: Microfinance Is Both a Lifeline For Millions And a Valuable Asset Class

Original article available here.

SÃO PAULO and NEW DELHI, November 14 – When the Progesar Foundation microfinance office offered to lend her 4,000 pesos at an interest rate of 5 per cent per month, Nilda Peralta could hardly believe her luck. “It seemed there was a trick because the rate they were charging was so low,” says the 57-year-old Argentine shopkeeper. “If I had borrowed from the money lenders I would have had to pay 28 per cent.”

The money has allowed Ms Peralta to rent a small kiosk in a street just off the main square at Garín, a down-at-heel industrial town about 45 minutes from Buenos Aires. From there she sells everything from biscuits, cigarettes and soft drinks to nappies, sticks of glue and Chinese-made Power Ranger dolls, carefully noting down each transaction in a ragged-looking exercise book.

Ms Peralta is one of the 450 micro-finance clients attracted by Progresar since it started in business four years ago. But business is growing rapidly and Isabel Arzeno, the organisation’s joint-founder, is preparing to recruit new loan officers to cope with the demand.

Ms Arzeno, 30, says she was motivated to start in micro-finance after seeing Muhammad Yunus, the Nobel prize winner who set up Bangladesh’s Grameen Bank, speak at the Buenos Aires book fair 10 years ago. “It seemed spectacular to me. I liked the proposal a lot. This was a way to make people really independent.”

The pace of expansion is dizzying. During 2006, Latin America’s top 10 micro-finance lenders increased their overall loan portfolio by 36 per cent, while in India, growth was even more rapid, with institutions increasing their loans by 76 per cent in the 12 months to the end of March this year, according to MicroCapital Monitor, a Boston-based industry newsletter.

The industry is growing for two reasons. First, there is huge demand for financial services among the world’s poor. David Satterthwaite, who edits MicroCapital Monitor, estimates that micro-finance organisations have reached only about 2 per cent of their potential customers in South Asia.

Second, micro-finance organisations have discovered a viable and profitable business model. Lending to the poor is risky, but by charging interest rates ranging from 1.5 per cent to as much as 6 per cent per month, micro-financiers are able to cover the relatively high costs of managing small loans.

The labour-intensive approach to loan management also keeps down the rates of default. For these reasons, micro-finance has become an attractive proposition for conventional banks and investors. Pioneers such as Mr Yunus, non-governmental organisations and governments may have started the first experiments in micro-finance, but now the idea is attracting the interest of the world’s biggest banks and institutional investors.

André Laude, who heads microfinance activity at the International Finance Corporation (IFC), the private sector arm of the World Bank, says: ”We believe in it from a development point of view but it has also become an asset class we can promote to blue-blooded investors.”

Private investment was initially channeled into specialist funds, often managed by banks, insurance companies and others as part of corporate social responsibility commitments. Deutsche Bank, for example, manages three. More recently, however, institutional investors are also beginning to provide backing directly to micro-finance operators.

Of these, the most important was the hugely successful initial public offer launched in April this year by Compartamos, Mexico´s biggest private micro-finance bank. “In many ways it demystified the industry.

“All of a sudden, micro-finance was not just for do-gooders it was also for greedy investors,” says Álvaro Rodríguez, president of ACCION Internacional, a leading non-profit micro-finance organisation.

Banks are moving into the sector, either by forming their own micro-finance subsidiaries or by lending to micro-finance organisations. ABN Amro, Standard Chartered, Citigroup and ICICI, India’s largest private-sector bank, are among those most active.

Citigroup has tripled its microfinance disbursements in India this year.

“There’s an enormous need and opportunity,” said Bob Annibale, global director of microfinance at Citigroup, who says the bank’s top executives are now well-versed in the sector. “We are not going to reach everyone through traditional branches of bricks and mortar.”

There are now worries that the amount of funds available exceeds the sector’s capacity to manage the funds. “There are more sources of micro-finance funding than organisations to absorb it,” says Rosemary Werrett, a board member of micro-finance network Pro Mujer, which has several offices in Latin America.

Successful groups – such as Compartamos or India’s SKS, which is also considering an IPO, tend to be inundated with offers of capital. Vikram Akula, chief executive of SKS, says he has been approached by 20 private equity funds and even hedge funds in recent months.

However, many parts of the industry are deeply suspicious of private sector motives. “There is a fear that if you go commercial you lose your sense of mission,” says Ms Werrett. “Even if you want to stay with a low-income community, commercial pressures will drive you up market. That is the fear.”

Backers of the market-based approach argue that without a viable business model, it will be impossible for the industry to grow. As Mr Rodríguez of ACCION says: “We believe the problem of poverty is so big you can’t leave it to philanthropy.”

By Richard Lapper and Amy Yee

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