by the MicroCapital Team - Africa, Key Players -

NEWS WIRE: United Kingdom: Lars Thunell of IFC Tells Financial Times “Poor Farmers Need Level Field” When Accessing Microfinance

Source: Financial Times.

Original article availble here.

LONDON, June 2 -Most investment bankers are not obliged to consider the risk of physical violence when evaluating the merits of a financial investment.

But Lars Thunell, the Swedish-born chief executive of the International Finance Corporation, the World Bank’s private sector finance arm, is not like most bankers.

He believes in the need for a clear set of principles to guide financial services companies operating in the microfinance arena and says a key concern is how companies should behave when a borrower misses a payment: “What do you do when people don’t pay? In some industrialised countries they send out not-so-nice people to pick up the money. We don’t want those types of practices in the developing world.”

The need for a set of standards to protect poor people while mitigating against the risks to financial institutions chimes well with the IFC’s mission to promote sustainable private sector investment in developing countries.

The IFC has established a “responsible microfinance initiative” to look at developing a version of its Equator Principles – the project finance standards first developed five years ago in conjunction with a small group of banks – which have been adopted by some 60 financial institutions worldwide.

In addition to defining a set of prohibited practices – including a ban on the use of violence to coerce poor people to repay their debts – these principles are likely to include a commitment to education and an emphasis on disclosure and transparency, enabling borrowers to better compare interest rates.

“If you sell a product as a bank you have to make sure the person buying that product understands what they are getting and what they’re paying for it,” he says.

The imperative to develop principles governing lending to the poor was stirred last year by widespread criticism of subprime-mortgage loans, which saddled millions of poor in the US with homes they could not afford.

The IFC is also conscious of the controversy surrounding the profits made by Compartamos, the Mexican lender. Muhammad Yunus, the Nobel peace-prize winning founder of the Grameen microfinance institution, criticised the high interest rates demanded from Compartamos’ poor customers after the company successfully completed a lucrative public offering.

Lenders are forced to levy higher interest rates from the poor because of the high administrative costs incurred trying to reach people on the margins of society. Nevertheless, as commercial banks vie with social enterprises in the microfinance field, the question of how much profit is acceptable lacks a definitive answer.

“The [interest] rates are there, – it’s a fact of life – but I think what would always help in any market is more transparency and disclosure around those rates,” Mr Thunell says.

The IFC believes that competition and scale should eventually reduce the costs of administering microfinance loans enabling financial firms to offer more attractive rates.

Furthermore, technology is likely to play a role in widening access to microfinance – for example by allowing borrowers to pay using their mobile phone instead of going to a bank.

The rush of financial firms to set up microfinance ventures in part reflects the historically low default rates among poor borrowers who take advantage of the loans.

But this win-win model is likely to face a serious test this year as millions of people in the developing world struggle with rising food prices.

“If people are not going to be able to pay because they have to feed their children the question is how should microfinance institutions deal with that. I don’t think anybody has the answer, but that’s something that needs to be thought about,” Mr Thunell says.

Conscious of anecdotal evidence that rising costs have left producers unable to plant all their land, the IFC is looking at how it can help farmers expand cultivation by financing the purchase of seeds.

Moreover, microfinance is increasingly about the provision of a broad range of financial services, not just small loans, and these too could play a role in solving the food crisis.

Next year, Mr Thunell proposes that the Sustainable Banking awards include a special prize for the bank that develops the best financial innovation to help poor farmers.

“It’s not only a moral issue I think there’s going to be tremendous business opportunities to look at agribusiness in a new way and be creative,” he says.

Mr Thunell says his dream is to help financial firms provide insurance to farmers to protect them against sudden hardship.

If the rains fail the insured farmer would receive help to repay the microfinance loan.

“These are the types of thing that we should be doing – first showing how it can be done, then incorporating that into our projects, then finding partners and spreading [the idea].

“That’s our job, that’s what makes it fun,” he says.

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