ACCION International, a microfinance organization founded in 1961 to address the desperate poverty in Latin America’s cities, has recently launched The Center For Financial Inclusion , a collaborative effort to promote commercial microfinance and simultaneously ensure that the needs of poor clients are being met. A key aspect of the Center is to connect the expertise of the non-profit, private and academic sectors to enhance the quality of microfinance. It is a sign of the times as commercial banks have been increasingly involved in socially responsible investing and the debate about what role for-profit activity should play in the microfinance sector continues to intensify.
Muhammad Yunus, the microfinance pioneer and winner of the Nobel Peace Prize, has been a vocal critic of the increasing role of commercial banks in microfinance. He argues that microfinance organization should be self-sustaining and should not profit off of the poor. However, many prominent investment firms, including Citigroup, Morgan Stanley, and Merrill Lynch have become involved in microfinance investments and according to CNNMoney.com, Deutsche Bank believes that “private investors, drawn by the sector’s social mission, stable returns, low default rates, and potential as a diversification play, will be pouring $20 billion into micro-finance institutions in 2015 – ten times more than they did in 2006.”
Philip Vassiliou, managing director of Legatum Capital, an international investment firm, looks at the debate around commercialization from the opposite end of the spectrum than Yunus and has argued that the microfinance sector needs to “embrace free market principles of competitive pricing and commercial incentives”. His viewpoint assumes that efficiency will increase over time as the commercial investment flows in and organizations are given room to scale and compete. However, even Vassilious admits that there will be challenges from the rapid spike in commercial investment. For further analysis of Vassiliou’s stance and this ongoing debate see this previous Microcapital story.
To read more about the risks associated with commercial involvement in microfinance read the Microcapital Paper Wrap-Up “The Microfinance Sector: Its Success Could be its Biggest Risk” here.
The Center aims to pool together experts from many fields to try and address the challenges of financial inclusion that are likely to occur with so many private-sector players getting involved. According to ACCION, their goal is to “connect the microfinance community with the major drivers of the global economy – e.g. capital markets and technology – and harness their capabilities to address the financial needs of poor people”. They plan to do this by focusing on three major areas:
Double Bottom Line: Double bottom line initiatives address consumer protection, impact studies, and social performance monitoring so that the social mission of microfinance is maintained
Investing in Inclusive Finance: Inclusive finance is achieved through assessments and training that help NGOs transform into regulated financial institutions and help MFIs reach scale and sustainability
Client-Product Connection: The Center will operate a small grant program to support cutting edge experiments and pursue its own projects in selected areas.
“Progress in bringing the benefits of financial services to all of the world’s poor requires many actors working together,” said Elisabeth Rhyne, managing director of the Center. “Our goal is to foster collaboration that will deliver tangible results in building an inclusive financial sector worldwide.”
The Center’s website, http://www.centerforfinancialinclusion.org, will provide an online platform for microfinance discussion and research. A blog, ‘The Inclusive Finance Forum,’ will be launched soon also and will feature posts from Center staff and fellows, Advisory Council members and other notable leaders working in the financial services industry.
By Scott Everett, Research Assistant
Additional Resources:
MARKETWATCH: Home, New Center to Foster Financial Inclusion of World’s Poor through Private-Sector Engagement, September 18, 2008
ECONOMIC TIMES: Home, Microfinance Must Embrace The Free Market, August 20, 2008
MicroCapital article, August 1, 2008, “Nobel Laureate Muhammad Yunus Speaks Out Against For-Profit Microfinance from Asia-Pacific Microcredit Summit”
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