After starting out as just small loans for the poor, microfinance has mushroomed into a large market that is attracting big banks, technology billionaires, and last week brought its innovator the Nobel Peace Prize.
The business of lending small amounts of money to the poor who are unable to access loans elsewhere was once considered unfathomable by the financial mainstream.
Nobel Peace Prize winner Muhammad Yunus, a Bangladeshi economist, and his Grameen Bank started making small loans to the poor without any collateral because no one else would in 1976.
With loans as little as $50, microcredit can allow the poor to start or develop small businesses, from raising chickens in the backyard, to making handicrafts for tourists.
”I wanted to change the mindset of the conventional banking,” Yunus told Reuters in an interview.
”No one should be excluded. Look at conventional banks, they don’t serve two-thirds of the world’s population,” he added.
That is changing, said Robert Annibale, who heads banking heavyweight Citigroup’s own special microfinance group, which looks at commercial opportunities in the sector.
”This is not a recent revelation but is an awareness of the demonstrated potential of microfinance that is making a much more significant impact than people thought,” he said.
”It’s not just the sustainability of leading microfinance institutions, but really the commercial viability of them and their ability to reach large numbers of people with a whole range of financial services,” he added.
While hard figures are tough to come by, microfinance specialists estimate the market is worth several hundred billion dollars and its growth in Africa, for instance, is second only to that of cellphone use.
Annibale said mainstream banks can help develop microfinance institutions, even non-profit organisations, by seeing them as commercial and not social partners.
Whether it is helping them access global capital markets and investors through bond issues, private placements or securitisation in local currencies, Annibale said the prospect of reaching the estimated 2,5-billion people who do not have access to basic services is exciting.
”People have a longer term view, and a responsibility for doing what they can deeper in the markets where they operate, and we are in a 100 countries or so,” he said, adding that the challenge is to lower the costs of running microfinance institutions and charges to the poor.
”This is an investment that is beginning to serve a much wider population than we and banks in general have done before,” he said. ”Banks should enter this with complete humility.”
People and profits
Meanwhile, new-age development gurus such as Bill Gates, eBay founder Pierre Omidyar, and former US president Bill Clinton are also looking at microfinance schemes as a way to help provide basic services to the poor.
”Microfinance is very appealing to the political right and the left, bootstrap capitalists, and others with social motivations because it so clearly improves poor people’s lives,” said Elizabeth Littlefield, chief executive of the Washington-based Consultative Group to Assist the Poor (CGAP), housed in the World Bank.
The CGAP has estimated that microfinance institutions are now able to reach profitability within a year or two and the growth rate of leading microfinance providers over the last five years has been a fast 15%.
But Littlefield said microfinance should focus more on developing local markets and spurring savings.
”There is too much emphasis on Wall Street-type solutions and not enough solution on local mainstream industry,” she said.
David Roodman, an analyst at the Washington-based Center for Global Development, said microfinance groups have found clever ways to get capital to long-underserved populations in remote and impoverished areas.
But despite a growing clientele and high repayment rates, it is not clear whether microfinance is directly improving lives, said Roodman, who just published a study that looks at the mushrooming micro-credit business.
Leveraging the potential of women, who are historically underemployed, has motivated the World Bank’s private sector lender, the International Finance Corporation, to look at ways of helping women entrepreneurs.
In June, the IFC provided a $15-million loan to Nigeria’s Access Bank, the first in Africa to dedicate credit to finance businesses owned by women. This week, Access partnered for the first time with a local microfinance organization in Nigeria which reaches deep in rural areas. – Reuters