The International Finance Corporation (IFC) will gain a 19% share in PNG Microfinance with a $1 million equity investment, its first investment in
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HSBC Shows Interest in Expanding Microfinance Investment Activity
Headquartered in London, HSBC is a large international banking network which includes 9,500 offices in 76 countries in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. At year-end 2005, HSBC reported total assets of approximately $1.5 trillion.
Currently, HSBC is engaged in several microfinance pilot projects with microfinance institutions (MFIs) in
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International Banks and Their Expanding Role in Microfinance Investing
A new report by ING Bank, “A Billion to Gain? A study on global financial institutions and microfinance” takes a look at the emerging role of international commercial banks in the microfinance industry. ING Group is a Dutch company providing worldwide financial services including banking, insurance and asset management to clients in more than fifty countries. As of January, 2006 ING was ranked as the 13th largest financial institution in the world.
In the past year, spurred in part by the UN’s declaration of 2005 as the Year of Microcredit, many major international banks have announced initiation or expansion of microfinance-related activities. This has left some to wonder åö why the shift and what’s in it form them? Microfinance is a win-win situation åö it enables these banks to reach new markets while also creating a sense of goodwill. Over the course of the next several weeks åö we will be highlighting the microfinance activities of these major international players. To start things off, we’ll take a look at ABN AMRO VN. Headquartered in
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American Microfinance Investment Fund Unitus Donates and Lends to Argentinean Micro-lender FIS Empresa Social
Unitus, a non-profit microfinance investment fund with assets of $7,100,000 as of August 2004, announced a partnership with FIS Empresa Social of Buenos Aires, Argentina. Through this agreement Unitus will provide FIS with $100,000 in grants and a $500,000 debt facility, as well as capacity-building consulting services. Unitus provides a variety of services to micro-lenders throughout the world. The firm currently has eight partners serving about 540,000 clients in India, Kenya, Mexico and Argentina.
Founded in 1999 as the microfinance arm of non-governmental organization (NGO) El Ceibal, FIS became an independent microfinance institution in 2005. FIS is now a for-profit institution which receives foreign and domestic equity investments. FIS has a current client base of 3,000 and, with this boost from Unitus, projects expansion of MFI services to more than 55,000 clients by 2009. No additional financial data on FIS is available at this time.
MicroCapital Is Pleased To Present New Research On Regulation and Supervision In Microfinance
As the emerging asset class of microfinance spirals slowly to the surface, MicroCapital looks at one of its main stumbling blocks: regulation and supervision. Vijay Mahajan, CEO of the BASIX Group, a micro-bank in India, refers to regulatory frameworks as one of the “triple helix” of constraints to microfinance expansion: low-quality regulation, inadequate financial resources; and the weak institutional capacity of most micro-banks, any of which may be the ruling constraint at a given time. BASIX, one of the first microfinance institutions (MFIs) in the world to attract commercial equity investment internationally and within India, has been a major influence for successful changes in Indian policy framework.
As in mainstream financial sectors, predictable regulatory standards for microfinance reduce uncertainty and increase the attractiveness of the investment. The challenge is to strike a balance between preventing abuse of markets and consumers, and encouraging industry expansion.
This paper will:
åð explore the unique challenges of microfinance regulation;
åð advocate "regualtion by risk;"
åð consider balancing financial system integrity with costly microfinance regulation that inhibits investment;
åð review the hugely positive role that rating agencies have played in facilitating transparency and risk assessment for investors and regulators alike.
We will also take you to Peru, a burgeoning market for microfinance in which regulators seemed to have figured out how to control risk while promoting investment in microfinance.
Download the paper here.
Opportunity International Australia Lures Top Investment Manager for Work in Microfinance
Money Manager Chris Cuffe has gone from “riches to rags,” so to speak, leaving his post as Chief Executive of Challenger Financial Services Group’s Wealth Management business to become the Investment Services Director for Opportunity International Australia. Cuffe is best known in the investment world for his leadership of Colonial First State. Just a small start-up when he was brought on board, Cuffe left the company in 2003 after turning it into one of Australia’s leading fund managers with assets of more than $5 billion.
Opportunity International has been on the microfinance scene for over 35 years. The organization provides both funding for microfinance institutions and various training and support services for small businesses in developing countries. Worldwide, Opportunity International has 41 partner MFIs. Mr. Cuffe’s new role will involve managing the microfinance investments of the organization in Asia and Africa.
The addition of Mr. Cuffe’s business acumen to the microfinance world is a welcome part of a growing trend in the industry. As the pool of talented management in microfinance increases, so too will the pool of investment capital.
Additional Resources
1) “Cuffe Swaps Riches for Rags,” News.com.au, February 7, 2006
2) Opportunity International Australia
3) MicroCapital Blog: “Microfinance Invests in India’s Top Minds,” January 24, 2006
4) MicroCapital Blog: "Fremont Bank Makes $500,000 Investment in Opportunity International Loan Guarantee Fund," November 3, 2005
5) Opportunity International Network
ICICI Bank Brings Microcredit One Step Closer to Investment from the Developed World
India’s ICICI Bank announced that it has created a special purpose vehicle aimed at supporting the technological infrastructure for microfinance transactions. Initially a small pilot program, ICICI Bank now provides hardware and software for a network of 65 MFIs. The Bank provides support for microlenders in the form of funding and technological infrastructure; in turn, MFIs distribute the funding in the form of microloans and leverage the technology platform to service the loan. The Bank then receives part of the interest returned on the loan as payment for its investment.
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Has ACCIÌãN Opened the Gates’ To Microfinance Investing?
ACCIÌãN International announced today that it has received a US$5.8 million grant from the Bill & Melinda Gates Foundation. The grant will be used primarily to develop new partnerships with microfinance institutions and commercial banks in West Africa and India.
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Microfinance Interest Rates as a Function of Transaction Costs
It is often observed that the interest rates charged to borrowers of micro-loans are quite high. According to the United States Federal Reserve Board, the average interest rate charged by commercial banks for a 24-month personal credit loan was 12.22% in the third quarter of 2005. The average annual percentage rate charged on credit card debt was only slightly higher at 12.48% for Q3 05; yet the APR charged for a typical loan by microfinance institutions (MFIs) in India ranged from 20% to 40% (p.4) in 2003. In lesser developed nations such as Indonesia or the Philippines rates reached up to 80% (p.4). These rates are quickly and errantly decried as exorbitant and usurious, when, in fact, they are the product of some of the most fundamental principles of economics and are advantageous not only for the lender, but the borrower as well.
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Deutsche Bank Leads New Global Commercial Microfinance Consortium, a $75 Million Microfinance Investment Fund
Just recently, a group of private and public sector institutional investors and economic development agencies launched the
Investors include Merrill Lynch, AXA Group, HP, and the Calvert Social Investment Foundation. For a full list of investors visit: “Leading Institutions Investors and Development Agencies Launch the Global Commercial Microfinance Consortium.” Deutsche Bank, a full global financial services company with å¥972 billion in assets, led the arrangements to establish the fund and also facilitated its sale.
This Consortium is “microcapital” at its best. First, expert management by Deutsche Bank’s long-established and well-respected microfinance unit provides the leadership. Second, the investor group mixes mainstream investment banks, rational development agencies, and flagship social investment foundations. Third, the role of government as guarantor uses your tax dollars to support (not execute) for-profit, private innovation. Fourth, the fund investment in MFIs is well-diversified across countries, regions and types of MFIs.
With such leadership and innovation, we might one day soon establish a secure asset class for the investing public.
Additional Resources
1) Main article discussed in entry, Thames Techwire: “Group Unveils å¥63 Million ‘Micro-Entrepreneur’ Fund.”
2) “Leading Institutional Investors and Development Agencies Launch the Global Commercial Microfinance Consortium.”
3) “Global Commercial Microfinance Consortium.”
4) U.S. Agency for International Development (USAID) Press Release: “USAID, Private-Sector Partners Create Global Fund for Small Entrepreneurs and Low-Income Families: Agency Provides $15 Million Credit Guarantee to Fund Aimed at Alleviating Poverty."
A Little Breath of Fresh Air Teases the Microfinance Buy Side
Accion and Unitus, two
As we hope to see consolidation of the 10,000 world-wide micro-lenders, we also hope to see consolidation of all the public and charitable organizations that spawned them.
Additional Resources
1) ACCION Press Release: “Microfinance Leaders ACCION and Unitus Establish Strategic Alliance for India.”
2) MicroCapital Blog: “Microfinance Networks (transnational second-tier): Defined and Listed.”
3) “Registered Non-Profit Organizations by Level of Total Income.”
Current Trends in Microfinance: The Growth of Commercial Microfinance
Downsizing of commercial banks, greater number of partnerships, increasing amount of local currency deposits, and the integration of the commercial and microfinance sectors—all current trends—are tightly linked.
As commercial banks have realized that poor people’s finance can be profitable, an increasing number have gone down market to tap lower income clientele. The World Bank’s microfinance unit, the Consultative Group to Assist the Poor, estimates that there are currently around 225 commercial banks “engaged in microfinance”— a figure that is increasing.
The main reasons for the emergence of commercial banks at the low-income level are: 1) Competition in existing markets driving banks into new ones, 2) Excellent repayment rates by micro-entrepreneurs, and 3) Technology allowing the poor greater access while transactions remain cost-effective. Though governments in some developing countries have required commercial banks to work in certain sectors, banks are increasingly lured in by the low risk, stability, and potential growth opportunities in the microfinance market. They are entering either directly by utilizing their own resources such as an internal microfinance unit, or with existing providers through partnerships.
Partnerships between MFIs and commercial banks have enabled each to leverage their competitive advantages. While MFIs are more knowledgeable at the community level for instance, banks have the advantage in greater access to capital and existing infrastructure. The meeting of the commercial and microfinance sectors has come about through their collaboration. MFIs have scaled up to “access higher levels of credit, augment their portfolios, and strengthen management and efficiency levels,” while commercial banks have purposely scaled down to profit from this emerging industry. Both types of institutions “scale-up and scale-down” by redesigning their financial products to suite the clientele they are targeting.
Integration between these sectors leads to another current trend in microfinance—the increase in deposits as a source of funding. It is important for MFIs to turn from foreign debt investment, which is vulnerable to foreign exchange risk, to their own domestic and regional markets so that domestic savings can be transformed into “productive loans for the poor.” Due to limited knowledge and a lack of trust beyond the community, the local poor may therefore be more inclined to make deposits into local savings accounts. Within the last year for instance, the number of accessible savings and loan accounts among the poor has gone from 750 million to 1.4 billion. Furthermore, and importantly, foreign currency risk can be avoided when MFIs borrow and lend in the local denomination.
One of the main links between these trends is technological advancement. Efficient technology has allowed smaller and simpler banking transactions to become more cost effective, motivating commercial banks to scale down and reach a greater number of people. Low cost ATMS with picture and voice prompts for example, are bringing in rural and illiterate clientele. An in-country example is the State Bank of
Additional Resources
1) Main article discussed in entry, United Nations Capital Development Fund (UNCDF): “Microfinance—Where We Are Now: And Where We Are Headed.”
2) The Consultative Group to Assist the Poor (CGAP): “Commercial Banks and Microfinance: Evolving Models of Success.”
3) “Microfinance Sustainability through Private Sector Partnership.”
4) Inter American Development Bank (IADB): “Savings Becomes First Source of Funding for Microfinance.”
5) “Managing Foreign Exchange Risk: The Search for an Innovation to Lower Costs to Poor People.”
6) “Microfinance: Facts and Figures.”
7) “Financial Institutions with a ‘Double Bottom Line’: Implications for the Future of Microfinance.”
8) “WSBI’s Contribution to the Collection of Data on Accessible Finance: Telling the Supply Side of the Story.”
Microfinance Networks (wholesale transnational): Defined and Listed
Microfinance “networks” facilitate financial services to the poor by offering support to lower-level partners. The term “network” refers to the main organization and its partner organizations as a whole. The diversity of network structures makes a precise definition difficult, and herein we only define and list what we call “wholesale networks” defined as transnational, not national or regional, partnerships.
Adding to the challenge of a clean definition, some organizations such as ACCION and Credit and Savings for the Hard-Core Poor (CASHPOR) simultaneously exist as individual institutions as well as a network of secondary partners.
Unfortunately, much of the confusion about networks is self-imposed. Donors prefer to give to actual micro-lenders “where the rubber hits the road”, not supporting organizations. Networks at times present the aggregate micro-banking activities of their partners with the implication that they themselves actually provide microfinance services. Another opaque outcome generated by the counter-incentives inherent to donation-driven “development aid”.
Twenty-one second-tier networks are listed below. Fourteen of those are based in North America, one in South America, one in Asia, one in
“Networks” can be grouped broadly in four ways: 1) Degree to which they provide technical support, 2) Extent of ownership over partners (0-100%), 3) whether they invest in partners through loans or equity (or both), and 4) amount of donor cash inflow (private or public) to secondary partners (p. 8).
Microfinance networks are either involved only within the microfinance industry and/or in multi-sector development. The World Savings Bank Institute (WSBI) focuses on microfinance and business development services for instance, while Catholic Relief Services “works in microfinance, community health, education, and emergency response among other development sectors.” (p. 4). With the exception of ShoreCap International, a subsidiary of Shore Bank in
Numerous subcategories further clarify distinctions between networks—this information appears in the article, “What is a Network? The Diversity of Networks in Microfinance Today.” Broadly speaking however, “NGOs, cooperatives, non-bank financial institutions, MFIs, and banks,” may all be part of a network. While some of these organizations were simply strengthened by higher-level partners, many were formed by them. Mennonite Economic Development Associates (MEDA) for example, both supports existing institutions and creates others.
Due to the diverse roles different networks play, microfinance institutions may belong to multiple networks such as SHARE Microfinance, Ltd. of
WHOLESALE TRANSNATIONAL MICROFINANCE NETWORKS:
ACCION, US
Catholic Relief Service (CRS), US
Developpement International Desjardins (DID), Canada
Finca International (FINCA), US
Freedom from Hunger (FFH), US
Mennonite Economic Development Associates (MEDA), Canada
Opportunity International, US
Pro Mujer, US
Save the Children, US
ShoreCap International, US
Unitus, US
Women’s World Banking (WWB), US
World Council of Credit Unions (WOCCU), US
World Vision, US
International Network of Alternative Financial Institutions (INAFI), Costa Rica
Credit and Savings for the Hard-Core Poor (CASHPOR), Malaysia
Banking with the Poor Network (B.W.T.P.), Australia
Ecumenical Church Loan Fund International (ECLOF), Switzerland
PlaNet Finance, France
Microfinance Centre for Eastern Europe and the New Independent States, Poland
World Savings Bank Institute (WSBI), Belgium
Solar Power: a Welcome Resource for Entrepreneurs
A recent award given to a Bangalore-based solar electric company, SELCO, demonstrates an innovative new approach to microfinance. SELCO sells power systems that can electrify a room with one to four bulbs, and has already installed 42,000 such systems in rural
With over 1.6 billion people worldwide lacking electricity, the market for such services is vast. Apart from ensuring better livelihoods, electricity also offers financial benefits. A recent article discusses these foreseeable incentives, which include being able to save money on alternative sources of energy, as well as not being restricted to working during the daytime. The most common options for basic lighting include candles, kerosene and oil lamps, which are low-quality, cumbersome, expensive, and often dangerous, but are usually the only options available to rural families. With the help of microloans, monthly payments for access to solar power are often below what a family is currently paying for alternative sources of energy.
Additional Resources
1) Main article discussed in entry, Times of India: "Solar Power Can Light Up Villages."
2) Ashden Award: Press Release
3) Solar Electric Light Fund (SELF): Economic Benefits
The Real Digital Divide
The current issue of The Economist features an article entitled "Calling an End to Poverty," subtitled “mobile phone firms have found a profitable way to help the poor help themselves.” The article discusses the obstacles that prevent cell phones from being available to and affordable for people in the developing world. According to the article, despite rapid subscriber growth in much of the developing world, only a small proportion of people—around 5% in both India and sub-Saharan Africa—have their own mobile phones. Overcoming barriers to market penetration is clearly in the best interest of everyone involved: in a typical developing country, a rise of ten mobile phones per 100 people boosts GDP growth by 0.6 percentage points.
The Economist’s cover story from several months ago, entitled “The Real Digital Divide,” cites a new study indicating that the spread of mobile phones is the best new technology for addressing poverty. In its usual fashion, the editors rail against the UN-directed “Digital Solidarity Fund,” which sets up projects such as “technology centers” filled with computers that few people actually use because, among other factors, most of the world’s poor are illiterate. Opening telecommunications markets creates a lot more wealth than a quasi-governmental official directing tax dollars to help the poor across the digital divide.
Shamefully, The Economist does not mention microfinance. Yet, the editors cite “the phone ladies of Bangladesh” as the great example of cell phone-driven development: one phone is rented throughout a village as a business, thus multiplying wealth creation. Why so stingy with giving recognition and praise to microfinance, which supported the phone ladies?
After all, it was the genius of the Grameen Bank of
Why does The Economist remain bearish on microfinance, despite the success of the phone ladies and so many others? The answer is simple: microfinance is still the child of governmental and charitable funding. So, while alerting us to the ballooning sinkhole called the ‘digital divide’ filled by the UN and other stewards of your tax and charitable dollars, the editors are weary to simultaneously tip their hat to microfinance, which they suspect of being more of the same. This caution makes sense. Nonetheless, let’s give credit where credit is due: microfinance, if done right, facilitates the creation of wealth, not just the creation of “aid” funds.
Additional Resources
1) Initial article discussed in entry, The Economist: "Calling an End to Poverty."
2) Grameen Phone Company
3) Consultative Group to Assist the Poor (CGAP): "Key Principles of Microfinance"
4) BBC News: "Mobile Money Spinner For Women"
5) "Global Cell Phone Giants to Capture Bangladeshi Market."
6) Subscription only: "Mobilising Africa’s Untapped Potential." African Business,
7) “Telenor Ups Ownership Of Grameen Phone.” Dow Jones International News. 28 Dec 2004
"Flat" Interest Rates: Just Another Way to Swindle the Global Poor Using Your Tax and Charitable Dollars
Flat interest rates are the current controversy raging on the microfinance community listserv. This is a highly widespread and dubious practice in microfinance. Flat rates cost the borrower more than the standard declining interest rate – but the micro-enterprise owner is often in the dark about this reality. With flat interest rates, each month’s interest is charged on the original amount of the loan. Declining interest rates vary in that interest is charged according to how much of the original loan remains in the borrower’s hands, which shrinks as successive payments are made. Although common in microfinance, flat interest rates are not the banking standard in the developing world, so often when a microfinance institution quotes a 2% monthly interest rate to its customers, the actual rate of interest is much higher. How much higher depends on the term of the loan, but the actual rate can easily be twice as high.
Because clients are often illiterate and financially inexperienced (or too trusting of the local NGO), flat interest rates sound appealing. And in addition to the larger interest payments that come with flat rates, they are easier for microfinance institutions to calculate. For these reasons, flat interest rates have been seized upon, but at the expense of the unsuspecting borrower.
Bottom line: not only are customers deceived, but microfinance institutions that use the standard declining rate are at a significant disadvantage. Equally insidious, microfinance institutions quote these flat rates to donors who fall for the same trick as the micro-enterprise owners.
Not surprisingly, there are plenty of defenders of flat rates in the donor community. The reasons range: "German mortgages are written using flat rates too;" "a top microfinance institution in India, ICICI, uses flat rates;" "small microfinance institutions do not have the infrastructure to calculate declining rates." While all this may be true, it is a well-known fact in the microlending trenches that flat rates deceive customers. Of course, there are many examples of firms responsibly using flat rates, but that is not the point. The point is that your tax and charity dollars are often being used to gouge the global poor.
Additional Resources
1) US Agency for International Development (USAID): "Calculating Effective Interest Rates on Microcredit Loans."
2) Consultative Group to Assist the Poor (CGAP): "Microcredit Interest Rates."3) Information from the Consultative Group to Assist the Poor (CGAP) regarding potential disparity between flat and declining interest rates in terms of annual return on loans
Weather Derivatives: Saving Lives With High Finance
Inspired by Wall Street, the World Food Program is creating weather derivatives, a sophisticated financial instrument that would insure Ethiopian farmers against harvest failures caused by droughts. Applying high finance to the risk that millions lose their lives to drought guarantees that funds will reach
Additional Resources
1) “Can Insurance Break Ethiopia’s Vicious Cycle Of Hunger?”2) World Bank (WB): “Piloting Weather Insurance in India.”
3) Subscription only: “Basix India Distributes Agri-Insurance.”