MICROCAPITAL STORY: TIME Magazine: Commercial Banks Could Create Trouble for Microfinance

In its June 5 issue, TIME magazine wonders whether the recent rush of big-name financial institutions to microfinance creates new pressures that unavoidably conflict with the mission of alleviating poverty.

The entry of banks such as Citigroup or Spanish giant BBVA into the microfinance arena has undoubtedly wrought some positive changes. Competition has spurred more industry development, driven down interest rates, and expanded the offerings of microfinance institutions (MFIs) to include new products, such as savings accounts, mortgages, and insurance.

However, competition brought on by big-name players means that existing MFIs must adapt to the changing tide or face a losing battle against the deep-pocketed titans. For one thing, many institutions are surviving by taking cash in exchange for equity – a double-edged sword because now they are able to grow their business but are also expected to satisfy shareholders. The example of Mexico’s Banco Compartamos is given; the bank had a successful IPO last year but has been heavily criticized for its high interest rates.

Also equity-financed is SKS Microfinance of India, in which venture capital firm Sequoia Capital made a USD 11.5 million investment last April. SKS also sold USD 44 million of its loans to Citigroup last May. Its plan is to reach four million new customers, but “unless we have capital markets interested in microfinance, there’s no way we could get to that many borrowers,” said Vikram Akula, CEO and founder of SKS.

Commercial funding has, perhaps inadvertently, made it more difficult for the poorest of the poor to access loans. Al Amana, Morocco’s largest outfit, has seen a tripling in the average value of its loan sizes since it commercialized because smaller loans are relatively more expensive to service. As a result, the proportion of borrowers who are women – who used to be the principal target market for microfinance – has declined steadily, as previously reported by MicroCapital.

Another concern is that major financiers have tended to lavish their attentions on Latin America and Eastern Europe, to the neglect of the very poor in Africa and Asia. According to the Consultative Group to Assist the Poor (CGAP), 75 percent of cross-border funding has gone to the former two regions, which are already the most developed microfinance markets in the world.

One potentially troublesome development, according to the article, is the emergence of consumer loan products for the poor – if used irresponsibly they could lead to debt accumulation, and many countries lack consumer protection laws that would stave off predatory lending.

“We have two objectives,” said Rafael Llosa, founder of commercialized Peruvian MFI Mibanco, which has had to start offering consumer loans in order to remain competitive. “One of them is to have a social impact, but we also look to be profitable. If we decide to only have a social impact, we won’t have resources to grow.”

By Stephen Son

Additional Resources:

TIME: “The Big Trouble in Small Loans”

MicroCapital.org article, April 7, 2008: “New York Times Reports on Controversial Microfinance Giant Banco Compartamos of Mexico”

MicroCapital.org article, April 2, 2007: “Sequoia Capital Leads USD 11.5mm Investment in SKS Microfinance based in India”

MicroCapital.org article, May 16, 2007: “SKS Microfinance, India, and Citibank Announce USD 44mm Financing Programme with Support from Grameen Foundation”

MicroCapital.org article, April 22, 2008: “MICROFINANCE PAPER WRAP-UP: Stemming the Tide of Mission Drift: Microfinance and the Double Bottom Line, by Christina Frank”