by the MicroCapital Team - Key Players -

NEWS WIRE: United States: In Forbes, Maria Otero of ACCION Discusses “Crossroads” of Microfinance

Source: Forbes.

Original article available here.

NEW YORK, May 19 – At Davos earlier this year, Bill Gates put his mouth where he had long ago put his money, calling for a “creative capitalism” in which companies embrace, “a twin mission: making profits and also improving lives for those who don’t fully benefit from market forces.”

One front where businesses have been doing exactly what Gates called for is microfinance, the movement to provide the world’s poor with financial services–mainly, to date, with very small business loans to the self-employed.

Last November, J.P. Morgan became the latest of some half-dozen global investment banks to launch a microfinance initiative – positioning the new venture as part of the bank’s emerging markets strategy, with a stated aim of meeting “a double bottom line of social benefit and financial returns.” Indeed, microfinance is expanding at a dizzying pace. In 2007, the top 10 microfinance institutions in Latin America increased their lending by 36%. India saw a 76% increase in microloans from March 2006 to March 2007.

Something remarkable is afoot here. Some 35 years after the first microloan was dispensed in Brazil, a once-scattered and obscure clutch of NGOs has convinced the world’s largest financial institutions–as well as many national and regional banks worldwide–that the world’s poor are “bankable,” to use 2006 Nobel laureate Muhammad Yunus’ phrase.

But this stunning success raises new challenges. Microfinance sits squarely on the frontier of an emerging movement to create a “fourth sector,” composed of organizations that do not renounce profit but that work with government, businesses and nonprofits to achieve social ends.

Much of the recent surge in microfinance investment and experimentation has been on a for-profit basis. That’s turned up the heat on a longstanding debate: How can microfinance organizations (MFIs) scale up to provide financial services to the vast majority of the world’s poor who currently lack access, without losing sight of their social mission? While fueling growth through profit, can MFIs maintain commitment to fostering their customers’ welfare?

The answer is simple in concept, if still very much a work in progress with regard to execution. A bottom line means accountability, and a double bottom line must be taken literally. Each MFI should define its core social mission concretely enough that success in meeting stated goals can be assessed as rigorously as financial performance. It must then audit itself with equal rigor on both fronts, financial and social.

On the financial front, MFIs must meet the high standards of transparency and operational efficiency required of regulated financial institutions. Clearing this bar is the only route to offering savings accounts to clients and accessing local and international capital markets–all vital sources of funds if microfinance is to fulfill its potential.

That potential is vast.

Just as the poor often lack basic physical infrastructure–clean water, electricity, roads and vehicles, etc.–they also lack the basic financial infrastructure that is the foundation of middle-class stability and risk management. That means access not just to credit but also to savings accounts, checking and electronic payment services, and insurance. Without these services, life is a precarious, day-to-day enterprise, in which a fire or poor growing season or illness can cripple a family’s fortunes and stunt its children’s future prospects.

At the end of 2006, MFIs worldwide had a collective outstanding portfolio of more than USD 23 billion loaned to some 52 million people, according to the Microfinance Information Exchange (MIX). According to the Consultative Group to Assist the Poor, however, there are at least 500 million poor “micro-entrepreneurs” worldwide who lack access to financial services and could benefit from them. To increase today’s market ten- or fifteen-fold will require for-profit investment.

On the social side of the ledger, an MFI’s defined mission should be specific enough to generate a distinctive set of strategic decisions. Examples include decisions to approach clients whose needs are greatest (as opposed to those who are the best credit risks), or to develop products that address a widening range of needs such as life and health insurance, or to dramatically reduce costs through technological innovation.

With the social mission defined, an MFI should develop performance metrics and subject itself to regular social audits. Possible metrics include success of outreach to targeted clients, measured by average size of loan as a percentage of per capita income in that country; client retention and repayment rates; full transparency of loan terms and costs, affirmed by client feedback; regular board-level assessment of social as well as financial performance; and regular impact surveys.

In seeking new ways to balance the double bottom line, the microfinance community has the advantage of having started from the social side of the equation. By putting the welfare of clients first, pioneering MFIs developed a range of techniques that make microlending financially viable. These include character-based lending, where creditworthiness is assessed through interviews with neighbors, customers and suppliers; stepped lending, where prompt repayment is rewarded with gradually larger loans; and group lending, where borrowers cross-guarantee their cohort members’ loans.

Three decades of innovation have proved that the world’s poor can be served effectively and profitably. Now the challenge is for all to develop enforceable mechanisms to keep their eyes on a dual prize–profitability for growth, and full accountability to a core social mission.

María Otero is the president and CEO of ACCION International, a leading nonprofit microfinance organization.

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