More banks are realising that helping the poor to obtain small amounts of credit in order to better themselves and their communities not only aids economies worldwide, it can also bring benefits to the bottom line, writes Ian Fraser
THE Democratic Republic of Congo, the setting for Joseph Conrad’s Heart of Darkness, has a population of some 62 million. Yet only 35,000 of these inhabitants currently have bank accounts and most are struggling by on less than one dollar a day.
Many western bankers would run a mile from such an economy, especially since 80 per cent of it is officially classified as “informal”. But Claus-Peter Zeitinger, chairman of Frankfurt-based microfinance institution ProCredit Holding, is made of sterner stuff.
In August 2005, two years after the former Zaire emerged from a bloody civil six-year war that claimed four million lives, ProCredit opened a branch in Kinshasa. This has since advanced more than €5 million in 3,000 separate loans to Congolese micro-entrepreneurs. Queues of would-be borrowers are a common sight outside its branch.
Disenchanted with the conventional aid-based model of international development, which had arguably fuelled Zaire’s descent into chaos while benefiting the country’s former dictator Mobutu Sese Seko , Zeitinger believed there had to be a better way of enabling people without collateral to lift themselves out of poverty
In the mid-1990s he found one. Essentially, this was a more commercial take on the microfinance model, a model which had itself been pioneered by Accion International in Latin America in the 1960s and Muhammad Yunus’s Grameen Bank in rural Bangladesh in 1970s.
In 1996, Zeitinger established microfinance banks in Bosnia and Herzegovina, countries which were also emerging from inter-ethnic conflict. With the benefit of about $50m in grants from US and international development organisations, the former 1960s radical has managed to roll out his ProCredit operations into several continents.
Using the “Sparkassen”, or German savings and loan associations as another of his models, Zeitinger has grown ProCredit into a network of 19 microcredit banks in Eastern Europe, Latin America, and Africa. Overall, the group has more than 11,000 staff and has lent €2 billion in 700,000 separate loans.
One of the main differences between ProCredit and many other microfinance institutions (especially those of a predominantly philanthropic or religious persuasion) is that as well as helping the poor it also aims to make a profit for its investors. Even though the process of credit checking for thousands of micro-loans to often illiterate customers is laborious, ProCredit believes it is just another banking group which happens to target the poor.
The Frankfurt-based group also differentiates itself through its use of state-of-the-art technology for credit checking the consistent back-offices in each of the countries where it operates.
Accion International, a network of Latin-American microfinance institutions initially founded in 1961, was the first microfinance player to show that money could be made from microfinance. In 1992, BancoSol, an affiliate of Accion’s in Bolivia, abandoned its not-for-profit status to become the world’s first private-sector commercial bank dedicated exclusively to microfinance.
Even though its customers remained the poorest echelons of society — they included street vendors, sandal makers and seamstresses — it rapidly became one of the most profitable banks in Bolivia. Overall, Accion has now lent more than US$12.3 billion to 4.94m people and has a historic repayment rate of 97 per cent.
The transformation was enough to turn perceptions of microfinance sector on their head. No longer was it the exclusive preserve of do-gooders, charities, and international development organisations. Now it seemed that the poor could be helped, with real money being made at the same time.
Perceptions shifted further when in 1994 BancoSol successfully sold certificates of deposit in the US financial markets, even though these certificates were backed only by the words of a woman selling oranges on the streets of La Paz. In a similar vein, in May 2006, ProCredit in Bulgaria successfully securitised a €47.8m million tranche of micro loans. Microfinance had come of age.
Mainstream Banks traditionally shied away from lending money to impoverished customers. Firstly, doing business on such a small scale is very inefficient and expensive. And secondly they feared that being seen to profit from the poor could harm their reputations. However in recent years banks such as Citigroup, HSBC, Santander, ABN Amro, ING, Deutsche Bank and Standard Chartered have overcome their inhibitions and jumped onto the microfinance bandwagon.
In mid-2004, Citigroup appointed Robert Annibale, a banker with long experience of emerging markets, as its first global microfinance director. Annibale has stepped up Citi’s exposure to the sector, often by lending or organising loans worth millions of dollars to the microfinance institutions on the ground.
Citigroup has for example helped Compartamos (which means “Let’s share” in Spanish), the largest microfinance institution in Mexico, to raise more than 700m pesos (or about $67m) between 2002 and 2005. Standard & Poor’s predicts that securitisations of microfinance loan books are going to become more common, potentially reaching $3bn over the next decade.
However Standard & Poor’s warns that without a transparent and globally acceptable method for rating microfinance institutions, the asset class will only have a minority appeal. “Mainstream investors need standard metrics,” says Cynthia Stone, chair of S&P’s emerging markets council.
Compartamos went one step further towards becoming a fully-fledged bank when it was valued at $407m at its initial public offering in Mexico and New York in April 2007. But it will continue to focus on lending to micro-entrepreneurs in its native Mexico.
Standard Chartered is another bank that is keen to increase its exposure to the sector. Its chairman, Mervyn Davies, has committed the bank to creating a $500 million microfinance fund within five years and increasing its microfinance footprint from 10 to 17 countries. And Barclays recently entered the sector through a pilot programme in Ghana, where has joined forces with traditional Ghanaian “Susu Collectors” to extend micro loans to traditional market traders in the west African country
“Banks are increasingly recognizing that microfinance can provide very good returns on investment, as well as providing a social service,” ays Chris Cook, a Linlithgow-based developer of new social enterprise models who is affiliated to the Nordic Enterprise Trust. “By becoming involved they can be generating healthy returns and ticking that socially-responsible box as well.”
Matt Macellaro, a New Yorker who was involved with the conversion of a collapsed savings bank in Dar-es-Salaam into a modern micro-finance institution in 1999-2000 welcomes the arrival of mainstream banks in the microfinance sector. “My personal view is yes, they can and should embrace microfinance.
“It can help them to build a strong banking franchise, as microfinance customers progress up the food chain, a bank can build relationships. It’s good from that perspective, and it’s good from a governance perspective, as the banks who become involved in the sector can teach the NGOs a lot. They also have a greater capacity to make funds available and distribute them than the NGOs.
Macellaro adds: “One negative, however, is that they could overwhelm the existing microfinance players in certain markets. Also as more banks become involved, the original freewheeling ethos of microfinance is likely to disappear, with tighter regulations following swiftly after. It’s going to become more structured, predictable and regulated.”
In this transitional climate, there is some fierce infighting within the microfinance movement. The do-gooders and sandal-wearers are increasingly slugging it out with the money men for the movement’s very soul.
In one corner you have free marketeers and the neo-conservatives, who argue that the presence of too many philanthropy-based initiatives — such as Grameen Bank itself — only distorts the market. Their view is that interest rates, which can reach as high at 60-80 per cent per annum at some microcredit providers, will come down if commercially motivated players compete on a level playing field.
In such climate, Muhammad Yunus, who was lauded for his mission to eradicate poverty when he won the Nobel Peace Prize in December 2006, has come under fire over some of the grandiose claims he has made about the transformational powers of microfinance. These include the idea that the movement can eliminate poverty and that there will eventually be “museums of poverty.”
In a recent interview with The New Yorker magazine, ProCredit’s Zeitinger said: “I only want to be a [different type of] banker. Yunus is against banks. He’s for social revolution. Museum of poverty! It’s ridiculous! To claim that microfinance is going to solve poverty is a myth. From ancient Greece to today, poverty has been with us and it will occupy us forever.”
As the sector has matured, billionaire philanthropists including Bill Gates and eBay founder Pierre Omidyar have also been drawn in. They have been attracted by what Cook describes as the “double bottom line” of profit and social good. However some in the industry believe such benefactors are doing more harm than good, as their soft loans are squeezing out the “for-profit” money and local deposits that would put the industry on a more sustainable footing.
Irrespective of whether microfinance should be about making profits or not — and the truth is there is probably scope for both given that only about 500 million of the 3 billion unbanked people in the world have been touched to date — one of the hardest questions to answer is whether it actually works.
There are masses of examples and case studies of individual lives having been transformed. On its website Grameen claims that more than half its borrowers in Bangladesh (close to 50 million) have risen out of acute poverty though its efforts – as measured by standards like having all children of school age in school, all household members eating three meals a day, a sanitary toilet, a rainproof house, clean drinking water and the ability to repay a 300 taka-a-week ($8) loan.
Unfortunately, however, there is a lack of hard evidence for some such claims. The Washington DC-based Consultative Group to Assist the Poor (cGap) says that “despite abundant anecdotal evidence that microfinance is improving the lives of millions, capturing that impact in numbers — especially global numbers — is a tall order.”
In America, some say, a backlash against microfinance is already brewing, with some academics portraying it as a faddish palliative that does nothing to address the structural changes and infrastructural improvements that are essential if a poor country’s economy is to be transformed.
There are also fears it is being used as a Trojan Horse for proselytising religious groups. There is a fear that the ways certain faith-based providers insist on adherence to a particular religion or religious sect before advancing loans is divisive.
Professor Aneel Karnani of the University of Michigan’s Ross School of Business, says: “My analysis of the macroeconomic data suggests that although microcredit yields some non-economic benefits, it does not significantly alleviate poverty. Indeed, in some instances microcredit makes life at the bottom of the pyramid worse.”
Writing in the Stanford Social Innovation Review, Karnani added: “Contrary to the United Nations’ hype that micro-entrepreneurs will grow thriving businesses that lead to flourishing economies, most micro-enterprises are small and many fail.
“Most people do not have the skills, vision, creativity and persistence to be entrepreneurial. Even in developed countries with high levels of education and access to financial services about 90 per cent of the labour force is employees not entrepreneurs.”
MUHAMMAD YUNUS AND GRAMEEN BANK
Muhammad Yunus, who founded Bangladesh’s Grameen Bank in 1976, sees access to credit as a human right. With Grameen, he reversed conventional banking practice by removing the need for collateral and created a banking system based on mutual ttrust.
Often, money is lent to groups of five borrowing individuals but the whole group is denied any further credit if one person defaults. The defaulter is therefore seen as having let down their whole community, providing an extra incentive for responsible behaviour. Yunus dislikes the fact that conventional banks go into “punishment” mode whenever a borrower gets behind with their repayments. Grameen instead prefers to allow defaulters to reschedule their loans “without making them feel that they have done anything wrong.”
When Yunus won the Nobel Peace Prize in December 2006 microcredit hit the front pages. The award, which followed the UN’s International Year of Microcredit in 2005, sparked masses of coverage of microfinance’s ability to transform societies, particularly through the empowerment of women as agents of responsible progress in traditionally patriarchal societies. The statistics are certainly impressive.
As of May 2007, Grameen (“Bank of the Villages” in Bangla) has 7.16 million borrowers, 97 percent of whom are women. With 2,422 branches, the bank provides services to more than 93 per cent of the total villages in Bangladesh. Latest figures from its website say it has lent out a total of $6.2bn since it was founded, of which $5.8bn has been repaid, and that it has a 98.6 per cent recovery rate. Grameen has also branched out into telecoms and energy and food in partnership with western firms including Norway’s Telenor and France’s Danone.
Yunus says: “Grameen methodology is not based on assessing the material possession of a person, it is based on the potential of a person. Grameen believes that all human beings, including the poorest, are endowed with endless potential.”
This article was the cover story in Scottish Banker, the magazine of the Chartered Institute of Bankers in Scotland, Aug/Sep 2007 issue. To visit Scottish Banker’s website click here