The ?Year of Microcredit?: A Retrospective
2005 was designated as the ?Year of Microcredit? by the United Nations, a title meant to raise awareness of the need to build inclusive financial sectors and strengthen the powerful, but often untapped, entrepreneurial spirit existing in communities around the world. Microfinance is generally accepted as one of the most successful poverty alleviation strategies tried in recent decades, a claim bolstered by a recent World Bank report that shows a strong correlation between lack of financial access and low incomes.
Now that 2005 is ending, it’s worth asking what interesting outcomes were produced over the past year. Is the microfinance sector rapidly scaling? How interested are larger commercial banks in providing such services? How much money is being invested? To answer these questions, I searched through more than 100 microfinance stories that appeared in our Newsroom over the past year. Although not comprehensive in their scope, taken together these stories strongly indicate that the ?Year of Microcredit? may well be remembered as the tipping point when providing financial services to the poor went from a charitable activity to a core investment strategy for both the financial and philanthropic sectors.
Commercial Banks Buy-in
2005 saw mainstream financial institutions taking a noticably greater interest in microcredit as a core part of their longterm growth strategy. Several of the world’s largest commercial banks, including Citigroup, Deutsche Bank, Credit Suisse, Commerzbank, HSBC, ING and ABN AMRO have invested in the sector. While some banks initially get into microfinance as a philanthropic endeavour, they are quick to realize that providing such services constitutes a viable business opportunity. In addition to loans, these banks are also discovering that the poor place great value on other financial services as well, such as savings and insurance schemes.
According to some estimates, demand for loans from poor but creditworthy people in India alone could amount to $40 billion. Leading the pack in pursuing this opportunity is ICICI, India’s largest private sector bank. After just two years in the field, ICICI now has close to 1.5m customers that qualify as deeply poor, and an associated loan portfolio of $265m. The bank recently partnered with Grameen Foundation USA to set up Grameen Capital India (GCI), established to help MFIs scale their operations by giving them access to available capital. Additionally, ICICI has been working closely with its insurance subsidiaries to expand its offerings of micro-insurance products. This year the bank also announced its plans to set up mandi branches, kiosks, franchisees and partner microfinance institutions and non-government organizations to boost its rural finance business. ?ICICI Bank plans to increase its points of delivery five times – from 3,500 to 17,500 by March 2006,? said ICICI Bank executive director Nachiket Mor.
Citigroup is also investing heavily in microfinance initiatives. The bank has already established relationships with microfinance institutions in 20 countries, with another 10 waiting in the pipeline. Rather than dealing with individual microfinance customers directly, the bank is increasing the resources and product offerings of MFIs it partners with. Citigroup is also scaling its operations in India.
Other large banks are following suit. Within a year of launching its microfinance operations in India, ABN AMRO has broken even and is expanding rapidly. The bank wants to reach 1m borrowers by 2009, with an average loan size of $90 to $120. The four largest banks in South Africa are significantly increasing their funding of housing microfinance. And in Uganda, K-Rep Bank has parterned with a local healthcare provider in an initiative designed to bring affordable health services to the poor.
One clear indication of an increase in commercial bank interest has been the emergence this past year of the first credit-rating agency set up to provide independent assessments of microfinance institutions. These impartial evaluations make it easier the banks to invest their capital in the sector by providing a clear picture of MFI profitability. Even Wall Street has taken more of an interest in defining their role in making financial services available to the poor.
Wealthy banks aren?t the only investors interested the microfinance sector. This past summer, the Omidyar Network – a foundation that invests in socially responsible businesses – made a $4 million grant to the nonprofit Grameen Foundation USA, which underwrites more than a million loans in developing countries. This was just the beginning. In November, Omidyar donated $100 million to Tufts University to establish the Omidyar-Tufts Microfinance Fund. The Fund is expected to generate healthy returns for the University, and in so doing demonstrate to other investors that microfinance deserves a hefty infusion of private capital, not just charitable and government dollars.
Also this summer, the IFC in coordination with microfinance NGO PlaNet Finance created PlaNet Bank, a new global investment company for microfinance institutions. With a market capitalizaton of almost $40 million, PlaNet Bank plans to create or invest in 15 microfinance institutions over the next five years. Other new investment funds were established in India, the Middle East, South Africa, and Ghana.
A milestone was also hit in 2005. Global micro-financier ACCION International announced in December that the active loan portfolio managed by its microfinance partners rose above $1 billion for the first time in ACCION’s history. The group has also formed an alliance in India with Unitus to reach out to 15 million new households there within the next 10 years.
High transaction costs are one reason major banks have traditionally shied away from providing microfinance services. Processing and monitoring loans is a manpower-intensive effort made more difficult by a lack of rural infrastructure. The small loan sizes and margins have made it hard to recoup these operating costs.
Thanks to the rapid spread of information technology throughout the world, the cost of completing an electronic transaction continued to fall in 2005. Innovative platforms that rely on cell phones, handhelds, and smart cards saw wider use, and may eventually make traditional brick-and-mortar banking obsolete. New software is also making tracking loans and saving easier and cheaper.
Technology also gives multinational banks easy inroads to the enormous–and largely untapped–market for international remittances. Estimated by the World Bank to be worth $225 billion a year and growing strongly, the poor stand to save tens of billions of dollars annually through lower money transfer fees.
Although governments could still be doing a better job creating more favorable regulatory environments, the expansion of microfinance services worldwide continues unabated. The biggest obstacle MFIs historically have faced when trying to scale their operations has been a lack of capital. If 2005 was any indication, this barrier no longer appears insurmountable. As more large national and international banks continue to invest in this growing and still largely untapped market, their peers will likely follow suit, resulting in an exponential growth of products and services aimed at currently underserved markets.