The Changing Face Of Microfinance Funding

Friday, December 21, 2007

By Elizabeth Littlefield

In the three decades since Muhammed Yunus gave his first $27 loans to women in Chittagong, Bangladesh, the microfinance industry has come a long way. What began as a collection of individual non-governmental organizations funded by development donors has become a professional business offering not just credit, but a full range of banking services to poor people.

Hundreds of microfinance institutions have matured and become profitable. Local commercial banks are beginning to see opportunities at the low end of their retail market. Even mobile-telephone operators are innovating with cellphone-based banking services.

It’s attracted a flood of new money from investors and big commercial banks. There are now 80 investment funds that specialize in microfinance, 30 of which were established in the last three years. These funds are still small and highly concentrated in the leading institutions in Latin America and Eastern Europe, but their pool of capital available is growing fast. Big banks are also getting in the game: Citigroup, Deutsche Bank, TIAA-CREF, Morgan Stanley, ABN AMRO and Societ? Generale are deploying their structuring and fund-management skills to offer investment products that appeal to a broad range of investor-risk profiles and social motivations.

However, public commercial-investment agencies, such as the World Bank’s IFC, the German KfW or the European Investment Bank, are currently the largest investors in microfinance. IFC, for example, currently has $640 million in outstanding commitments to microfinance and plans to double this amount over the next three years. These investors offer equity, loans and guarantees–and were a natural follow-on from the early grant money that helped build microfinance institutions into credit-worthy investments. Several are now providing local currency loans. IFC, for example, broke new ground in 2006 with its first local currency loan to Fundacion WWB Colombia in Cali, Colombia.

Thus a heated and healthy debate has emerged over whether these public-sector investments are now “crowding out” the private-investment funds by flocking to the same successful institutions. So what is the role of public agencies when so much investment capital is flowing in?

Traditional public donors were the angel investors of microfinance in its formative years, providing the seed capital for fledgling microfinance institutions, often through grants. Now, decades later, there are still critical gaps that the traditional aid agencies are best placed to fill despite the flood of new money:

Nascent Markets. First, since the commercial-oriented investment is going mainly to advanced microfinance institutions and markets, many countries are left behind. Who will build the microfinance field in Sudan? Reaching poorer, more rural clients remains a key challenge. Research shows that microfinance actually tends to reach those at or around the poverty line, rather than those at the very bottom of the pyramid. The aid agencies, with their grant money and willingness to take higher risks for social aims, will be the ones to support early-stage microfinance in these markets.

Training. Second, most institutions need to strengthen managerial, information technology, product development and financial skills in order to grow. Technical assistance and training are the domain of development agencies.

Consumer protection. Third, governments all over the world are recognizing the potential of microfinance and are increasingly eager for advice on how to make it grow. Helping governments create laws and regulations that stimulate poor people’s access to finance, while protecting customers, has long been a key role of organizations like the World Bank.

Financial infrastructure. Fourth, creating local financial markets in poor countries that can work efficiently for their citizens means creating public goods like credit bureaus, payment systems, rating agencies. These require subsidies and technical assistance that traditional agencies can provide.

The endgame, of course, is for microfinance to principally fund itself–as most retail banks do–through local deposits. Local funding is more stable and carries no foreign-currency risk. Moreover, secure deposit services are highly valued by poor people, some say far more than loans.

Continue Reading “The Changing Face of Microfinance

Source: Forbes (link opens in a new window)