Private-Sector Investors Lift, Leverage the Poor
MICROFINANCE
Worcester Telegram & Gazette
Darlene M. Darcy
Boston University Washington News Service
Tuesday, December 11, 2007
WASHINGTON – Four years ago, Peruvian immigrant and business owner Rene Rosas was looking to borrow money from a bank or consumer lender to sustain his East Boston convenience store.
But the most any bank or lender would offer him was a credit card with a $2,000 limit, not nearly enough for his needs.
Then Mr. Rosas came across Accion USA, a private, nonprofit that provided him with a $5,000 “micro” loan that he used to stock his shelves with Peruvian products for his customers, mostly fellow expatriates, and keep his business alive.
Millions of stories about seamstresses, grocers, florists and other poor small-business entrepreneurs around the world are repeated by leaders of microfinance institutions, who extend financial services and small loans – as low as $20 or $30 – to the working poor, people typically considered high-risk and unbankable.
Recent growth of the industry has proven its viability, and it is now attracting the interest of profit-seeking investors here and abroad. But will these trends strengthen or weaken microfinance’s mission and its ability to achieve its stated goal – to help alleviate poverty?
Excluded from mainstream financial activity, aiding the poor was once the mission of socially minded philanthropists, government aid organizations and donors to charitable foundations. But the recent surge in financially driven, private-sector investors has created what some refer to as the “double bottom line.”
In April, Mexican microfinance institution Banco Compartamos issued an initial public offering, the first of its kind in Latin America. In a $468 million deal with close to 6,000 institutional and retail investors, stakeholders saw shares jump 22 percent during the first day of trading on the Mexican stock exchange. Shares are currently trading at $46, with a recommendation to buy, according to Reuters.
Data collected from the Microfinance Information Exchange, a non-profit industry organization that monitors microfinance performance, show that the most successful microfinance institutions can yield profit margins as high as 64 percent.
Commercial banks, insurance companies, private equity firms and even hedge funds have realized microfinance’s profitability and entered the market, and industry experts agree that their entry is primarily beneficial.
Profit maximization motivates most private-sector lenders. But large, commercial and private investors can offer more than their deep pockets; they can also offer technical and advisory expertise that will continue industry growth and profitability.
“We continue to develop new business models for microfinance with the support of commercial leaders – Citigroup and AIG – whose global reach and infrastructure will enable us to bring innovation to millions more poor households,” according to Accion International’s Web site.
But Elizabeth Littlefield, the president and CEO of the Consultative Group to Assist the Poor, expressed concern about the effect profit motives could have on the industry.
“This is not about transferring money from North to South or about creating a new asset class,” Ms. Littlefield told the newspaper Emerging Markets. “This is about developing local financial markets that serve the majority of their citizens.”
Despite the financial appeal, the “vast bulk” of private investment in microfinance has come from “investors with some social motivation alongside their financial motivation,” said Xavier Reille, author of a forthcoming World Bank report on the subject.“”
The emergence of microfinance is associated with the 1976 establishment of Grameen Bank by Muhammad Yunus, winner of the 2006 Nobel Peace Prize for his work in microfinance. In fact, however, Accion International, a microfinance network founded in 1961, issued its first micro loan in Brazil in 1973. Since that time microfinance has evolved into a wide range of financial services beyond micro credit, or small loans. It now includes savings, transactional and asset-building services.
In 2006, Accion and its partners served 2.4 million microentrepreneurs in 23 countries with more than $3.7 billion in credit loans and other financial services, according to its Web site. The International Finance Corporation, a part of the World Bank group, extended more than $4.6 billion in micro financing to an estimated 2.3 million micro enterprises and reported that foreign capital investment reached $4 billion by the end of 2006.
Barely middle-aged, microfinance is still considered a fringe financial sector, not fully integrated into formal financial markets but trending toward mainstream commercialization. The increased interest seems a natural development in the industry’s maturation.
As more capital flows into the sector, its technical infrastructure has improved and operational costs have decreased. Simultaneously, high interest rates on micro lending – a consequence of the higher risk of its borrowers – and repayment rates as high as 97 and 98 percent have allowed many microfinance institutions to reach a self-sustaining, profitable stage.
Martin Holtmann, a lead financial specialist for the International Finance Corporation, said that in addition to these factors, “the resilience of microfinance portfolios to crisis [systematic shocks in financial markets] shows it’s a safer asset class.”
But in addition to the influx of commercial activity and increased hope for competitive returns on investment, experts say there are also significant private investors, not considered commercial, who are ethically motivated.
A number of online funds aimed at socially minded individual investors have emerged in the last two to four years. High-net-worth individuals, considered venture philanthropists, are entering the market through such microfinance networks as Kiva.org, MicroPlace, Globe Funder and Kabod.
Kiva.org, which launched in 2005, has already allowed more than 80,000 individual investors to provide debt capital to more than 50 microfinance institutions, and MicroPlace, launched by eBay, is the first microfinance securities broker-dealer registered with the Securities and Exchange Commission. EBay founder Pierre Omidyar first invested in microfinance in 2005 with a $100 million endowment to establish the Tufts University Omidyar-Tufts Microfinance Fund.
Individual investors are likely to see returns of two to five percent, similar to what could be expected from putting money in the bank.
But others hope to get much more competitive returns.
Last year TIAA-CREF, the $380 billion financial services company, created a microfinance investment program worth $100 million. The program is financed by assets invested by 2.3 million investors in TIAA Traditional, one of the company’s annuity products worth an estimated $160 billion at the time. The program’s first investment was a $43 million private equity stake in microfinance institution ProCredit Holding AG.
“This investment in ProCredit gives us an opportunity to seek competitive returns through socially responsible investments that we believe have a low correlation to traditional equity and fixed-income markets,” said Ed Grzybowski, TIAA-CREF’s chief investment officer, in a statement.
Still, development organizations like the World Bank and the Consultative Group to Assist the Poor say that private-sector investors like commercial banks have a positive role to play in integrating financial services to the poor into mainstream markets.
“International banks are often the catalysts for the integration of mainstream models and new product development in the microfinance industry,” the World Bank’s Mr. Reille said.
Citigroup is one such bank. It works with microfinance institutions and investors “to expand access to financial products and services to allow those who are currently under-served by the financial sector to participate fully in the mainstream economy — many for the first time,” said Robert Annibale, global director of Citi’s microfinance group.
Citigroup began its work in microfinance through the charitable Citi Foundation, but has dramatically expanded the scope of its effort as the microfinance sector grew.
“Our microfinance group has evolved to take our efforts in microfinance beyond philanthropy and to embed it in our business to view those once thought of as beneficiaries as clients,” Mr. Annibale said.
Microfinance institutions also need to access the capital as well as the technical and advisory skills available in the private sector so that they can continue to be self-sustaining in the long term and reach more people who need access to financial services.
The International Finance Corporation’s Mr. Holtmann said that he sees the increased participation of private-sector investors as a positive development, allowing microfinance to expand its outreach in hard to reach places, what he calls the “frontier” of developing countries.
Last month a World Bank research report estimated that 50 to 80 percent of adults in developing countries still lack adequate access to financial services. In Africa, for example, where microfinance is less advanced than in other developing areas, a mere four percent have access to bank accounts, according to the U.N. Development Program, and only one percent have gotten loans or other forms of credit from formal financial institutions.
Development of the industry is likely to continue. Developments such as Standard & Poor’s establishment of a ratings system for microfinance institutions may contribute to this growth. Ratings, often required by investors, provide a way to assess the risk associated with an investment. The creation of a ratings system, analysts say, reflects investor confidence in the microfinance industry.
As the industry grows, however, challenges to integrating it into formal financial markets remain. For instance, because microfinance lending has different features from traditional bank lending, regulation of the industry is a big question. Some microfinance institutions also take deposits. With varying capital adequacy requirements, differing rules for setting aside funds as a hedge against bad loans and various requirements for reporting financial performance, regulations to promote an efficient market still haven’t been developed.
Mr. Holtmann’s greatest concern is not about appropriate regulation but about the “overselling” or over-popularization of socially responsible investing as a way to relieve poverty.
“With the Yunus and Nobel Prizes of the world, people may simplistically believe that all that needs to be done is to put microfinance out there and poof, all will be resolved,” he said.
A recent World Bank paper said that the “real opportunity for microfinance is to tap into the huge and growing socially responsible private-investor market.” But Mr. Holtmann called this a “dangerous” misconception and warned that such a belief could “provoke a backlash if we claim that microfinance is the recipe to put poverty in the museum.”
Nevertheless the desire to push microfinance into the mainstream is real, however, for socially minded investors and the industry alike. The tagline for the MicroPlace Web site reads: “Invest wisely. End poverty.”
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