A Dialogue for Development in Microfinance
By Stan Parish

Introduction
By Daniel Rosan
ICCR's Program Director for Access to Capital

Rarely has The Corporate Examiner covered an issue in more depth, or with such frequency, as it has microfinance -- the lending of small amounts of money to the very poor. The impetus is clear: microfinance continues to grow exponentially - the latest estimates show that 110 million clients are currently served (about 80 million of those are 'the poorest' with incomes below $1/day) and that international aid agencies have a microfinance portfolio of $7 billion.

Our October 2005 issue, "The Power of Microcredit," by Hubert Humphrey Fellow Lea Uhrinova, a senior loan officer for a Slovak microfinance institution, created a blueprint for commercial banks entry into microfinance. Columbia University masters' candidate Daniel Rizk and Minlam Asset Management Managing Director Michael Hokenson considered the impact of technological innovation on microfinance in our March 2006 issue "Banking at the Bottom of the Economic Pyramid." Rizk looked at the remittance industry, and saw high-cost, high-margin models such as MoneyGram or Western Union have come under pressure from low-cost, high-volume competitors like PayPal and ATM-based services. This change is driven by immigrants themselves, who are demanding better remittance services as both consumers and political actors. Hokenson found a similar process of technological innovation changing microfinance institutions (MFIs), and followed ICICI bank in India, whose embrace of new technologies has dramatically increased the quality and flexibility of financial products offered to the poor.

The microfinance landscape is changing quickly. A recent paper from the World Bank's Consultative Group to Assist the Poor (CGAP) found that there were sixty separate microfinance investment vehicles in 2006 - up from "a handful" ten years earlier. That money chases a relatively small number of microfinance institutions - "just ten of the 505 MFIs participating in the CGAP survey captured 25% of all … funding." However, increasing involvement from faith-based and secular socially concerned investors means "the public/private distinction does not line up in all cases with the development/commercial distinction. Indeed, some of the leading advocates of social performance tracking are private foundations and investors."

A number of those faith-based partners are ICCR Members. ICCR Members have for some time now advocated for banks' responsible engagement in the microfinance sector, and continue to invest their own resources. Responding to the changing microfinance landscape, our Members hosted a roundtable discussion in February of 2005 with Citigroup, International Finance Corporation, Shared Interest, and Women's World Banking. In 2005 and 2006, Members engaged leading financial institutions ABN Ambro, Bank of America, Citigroup, Deutsche Bank, Fitch Ratings, JP Morgan Chase, and Standard & Poor's on their involvement in microfinance. ICCR members have also increased their financial commitment to microfinance; three ICCR members even joined the Global Commercial Microfinance Consortium, a $75 million fund structured by Deutsche Bank. ICCR affiliate TIAA-CREF, meanwhile, announced a $100 million commitment to microfinance.

Microfinance institutions are responding to this dramatic shift in funding and expectations. Anne Hastings, CEO of the Haitian MFI Fonkoze, recognizes that global commercial banks have "fundamentally altered" her financing strategy. "We are increasingly relying on stand-by letters of credit that allow us to borrow in local currency from local banks. We believe that this is a better strategy for us." But local banks do not work the world over. Godwin Ehigiamusoe, who runs a Nigerian MFI, explains "local commercial banks have limited understanding of the dynamics of microfinance practice … the only ready sources of adequate capital are global financial institutions."

And yet, Oikocredit's Tor Gull has a warning - "I fail to see a need for [global commercial banks] just to bring more money to first class MFIs. These MFIs are already flooded with money, meaning they get offers from all kinds of funds and institutions."

This current issue of The Corporate Examiner, the final one of 2006, reminds us that for all the good news surrounding the current state of microfinance, financial services for the poor are not a panacea, and much more must be done to address the root causes of poverty. In "Money Talk," Stan Parish explores the communications challenges on the local, regional, and global levels, from the individual client to the multi-million dollar investment funds.

A Dialogue for Development in Microfinance
By Stan Parish

Stan Parish is a freelance journalist living in New Jersey. His writing has appeared in Esquire Magazine and he works in New York for Vanity Fair.

Note: This article originally appeared in MAZI a quarterly publication of the Communication for Social Change Consortium

In 1976, Muhammad Yunus, a young economics professor at Chittagong University in Bangladesh, took his students into a rural village marketplace where he discovered a woman crafting beautiful stools from bamboo. Yunus was impressed by her work, and asked what she earned after repaying the trader from whom she borrowed. The answer appalled him. Yunus resolved to find the woman a means of financing that would allow her more than the $.02 in net profit that she earned for her craft.

Before that was possible, Yunis had an enormous communication barrier to overcome. "That was a time in Bangladesh when women didn't touch money and didn't talk to men," explains Sam Daley-Harris, director of the Microcredit Summit Campaign, and an important facilitator of dialogue in the industry. "Yunus would have a female student go ask the woman a question and the student would come back and tell him the answer." Through his student, Yunus proposed was a small loan out of his own pocket to a group of women in the village that they could pay back collectively from their individual businesses, increasing their line of credit as they did so. This model of lending is the foundation of microfinance today.

What Yunus devised was a practical and philosophical inversion of traditional financial services, and what began as an experiment in rural Bangladesh has since become a financially viable industry with a global repayment rate of 97 percent. Rather than lending to established corporations, microfinance institutions or MFIs actively seek borrowers below the poverty line. The majority of borrowers are women instead of men, and the loans are not usually made to individuals. Because physical collateral is often unavailable, social capital is leveraged among borrowers to create a joint liability or "self-help" group and collectively ensure that the loan is repaid. Loans as small as $100 have allowed aspiring entrepreneurs to escape the poverty cycle.

In 1983, Yunus founded Grameen Bank, which provides credit to small groups of women to raise them above subsistence. Since its inception, Grameen has disbursed $5.59 billion in loans with a total recovery rate of 98.49 percent. Of its 6.39 million borrowers, 96 percent are women. The Grameen model of joint liability lending has been replicated countless times across the globe. Microfinance has gone from an informal collective of open-market vendors to an industry that reaches 92,270,289 clients, according to the Microcredit Summit Campaign Report of 2005.

The difficulty of discussing microfinance with people connected to the industry is that nearly all of them have a vested interest in making it look good. "Be careful talking to them," someone warned me when I told him I was speaking to the head of a major non-profit microfinance network. "Donor funds butter their bread." While microfinance is an anecdotal goldmine- nearly every article begins with the touching story of a borrower in a far-away land- the news is not all good. Selective anecdotal evidence may be precisely the problem; there is a temptation to play up the social impact story and soft-sell the risks. A woman who rose out of poverty with an entrepreneurial sprit and a small loan makes a better headline than a recent default. And while microfinance is a valuable tool in the fight against poverty, it has its limitations.

Access to credit and financial services are not a panacea for the ailments of the developing world. "It's a band-aid solution," says Reuben Abraham, director of Cornell's Bottom of the Pyramid Learning Lab in India. "It's the classic case of a symptom being diagnosed as a disease. The disease is poverty." There are statistics which link microfinance to improvements in everything from nutrition and education to AIDS prevention and gender equality. While microfinance clearly has a transformative power in the communities where it has taken hold, the macro effects are much harder to assess. There is a heated discussion within the industry about the cost and the competency of measuring social impact beyond the shining examples. But the goal of microfinance is poverty alleviation, and the true success stories are the ones in which poverty and all its accompanying ailments are eliminated.

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Note: photos 1 and 3 are courtesy of Adam Rogers / UN Capital Development Fund