Thursday, October 27, 2005
The Bank of Nova Scotia has been running a quiet little experiment in banking for the past three years in some of Jamaica’s poorest communities that it says might one day yield results across all its far-flung international operations.
The bank has ventured into the field of microfinance, traditionally the realm of advocacy groups and charities, making small loans to people who otherwise would never be able to borrow from a traditional bank.
Loans can be as small as $50 and be handed out to people with no collateral to back up a traditional loan.
“We adapted the model from Bangladesh, the grandfather of microfinance,” says Debra Williams, executive director of Micro Enterprise Financing Limited (MEFL) in Kingston, Jamaica.
Microfinance has helped more than 13 million Bangladeshis improve their lives over the last 30 years, the World Bank found in a recent study.
The country’s Grameen Bank, established in 1976 after a famine, has lent almost $5 billion in amounts as low as $12 to Bangladeshis to buy such things as sewing machines, animals or materials to make baskets over the past 29 years. Its 98 per cent repayment rate far exceeds traditional banks’ 80 per cent.
In neighbouring India, the Self-Employed Women’s Association (SEWA) Bank in the western state of Gujarat was founded in the same year with assets of just over $3,700. Its assets now total more than $22 million, while its repayment rate is 94 per cent.
At MEFL, the repayment rate is 97 per cent.
Nanci Lee, an expert on microfinance at St. Francis Xavier University in Antigonish, N.S., says such successes are not uncommon in the world of very small loans. In fact, on a profitability basis, microcredit organizations often outperform traditional banks.
“It’s drawing the attention of commercial banks,” says Lee, who is in India helping SEWA set up a financial training centre for women.
In Jamaica, Williams teamed up with the Canadian International Development Agency and the Kingston Restoration Company, a joint public-private agency working to revitalize Kingston’s deteriorating and impoverished downtown, to set up MEFL.
She says microfinance is key to alleviating poverty. It can help unemployed people scratching out a living any way they can – such as selling clothes, crafts or food from booths on the street – to expand their operations.
“They have no security to offer a bank,” says Williams, who worked for Citizens Bank in Jamaica for 12 years. “Most of our clients are poor.”
Such people are part of what is known as the informal sector of the economy, a vast black market that is fast becoming a bigger part of the economic life of developing countries. Williams says that sector accounts for 42 per cent of Jamaica’s employment.
Under traditional banking models, that 42 per cent would be beyond the banks’ reach since none of the people would have proof of their earnings or collateral to cover a loan. “We want to make them part of the formal sector,” Williams says.
Pat Minicucci, senior vice-president of international banking at Scotia, says the work in Jamaica – along with a similar program in Guyana – offers a model for Scotiabank’s operations in dozens of developing countries where poverty and large informal sectors hamper growth.
“We are looking at expanding this,” he says.
“Finding a partner like we have in Jamaica is the formula we are looking for.”
Scotiabank is not alone in this strategy. Citibank chief executive Chuck Prince was in India last week for a press conference with Sir Francis Xavier’s Nanci Lee to launch the training centre and to give financial support to the project.
Prince used the opportunity to say that the world’s largest bank will be pursuing microfinance to build market share in the bustling Indian economy, which has attracted the attention of some of the world’s major banks.
Lee says banks first get into microfinance as a philanthropic endeavour, but soon realize that they can make money at it.
“You’re finding commercial banks seeing that it can be a viable business opportunity for them,” says Lee, who has worked with banks in Asia and Africa to help them get into microfinance.
She says microfinance can help the booming informal sectors in developing countries become part of the formal sector and improve the lives of the poor, something that has also attracted commercial banks to microfinance.
“A strong formal sector means a stronger business economy.”
Informal sectors in many developing countries are huge. In Mexico, for instance, more than half the population works outside the formal sector, paying no taxes and unable to provide proof of their employment, and so beyond the reach of the traditional banking world.
That’s where microfinance comes in. Organizations such as MEFL offer loans of between $50 and $2,500, often with no assets offered as a security against default. The idea is that if the loan is small, so is the risk. Do that enough times, and a sizable loan portfolio is built up. In Jamaica, MEFL now has 1,375 active loans totalling $365,000.
Most loans are to women. “Women are the ones who are more entrepreneurial,” Williams says. “They need the income generation.”
Like many microfinance lenders, MEFL organizes its borrowers into groups of three or four. They offer support and advice to each other on operating their businesses, as well as peer pressure to pay off their loans.
Williams says such a structure deters men from getting micro loans, since they are less likely to want to talk about personal financial issues. Her office has responded by setting up more ways for people to borrow outside the group structure. “That was for the men,” she says.
When MEFL was set up three years ago, its goal was to be self-financing in five years. It now covers 67 per cent of its costs from the profit generated by its hundreds of small loans.
“We are doing very well,” Williams says.
Unlike a traditional bank, MEFL works to lose its customers. It sets each of them up with a savings account at Bank of Nova Scotia, which has been in Jamaica since 1889, and gives them training on accounting and business management.
“We try to turn them into small businesses,” says Minicucci.
Once the clients have enough savings and enough assets, they no longer need the microfinancing offered by MEFL, so they move on to the regular bank sector, Williams says.
“We don’t consider it losing, we consider it graduating.”