There are about 300 commercially viable microfinance institutions (MFIs) worldwide. The total investment portfolio for these institutions is estimated to be $3.5 billion and is growing at a rate of 20-30% per year. Those MFIs, however, are rarities among the 10,000 MFIs operating today. So what separates the few commercially viable MFIs from the huge host of laggards?

1) “Commercial Microfinance: The Right Choice for Everyone?”
2) "The Impact of Interest Rate Ceilings on Microfinance." CGAP. May 2004
3) “Expanding Commercial Microfinance in Rural Areas: Constraints and Opportunities.”
4) “Microcredit Interest Rates.”
5) Subscription only: "Strategies That Fit Emerging Markets." Harvard Business Review: June 20056) “The Influence of Donors on Microcredit Sustainability: A Case Study of the Three Microcredit Programs in Vietnam.”

To access this article visit: “The Microfinance Experience of Latin America and the Caribbean”

Author: A. Ramirez, of the Inter-American Development Bank SME Division

Qualitative Information: The beginning of the article has a concise history of microfinance in Latin America. Mr. Ramirez describes the virtuous and vicious cycles of MFIs; small MFIs have higher costs per loan that translates into a competitive disadvantage and prevents them from expanding operations. Large MFIs, on the other hand, have lower costs, which gives them an advantage and allows them to expand even more. Mr. Ramirez points out lots of problems, but does not provide any solutions or recommendations for reaching more clients. Nor does he explicitly discuss the commercialization of microfinance, which seems quite relevant to the microfinance experience of Latin America and the Caribbean.

Commercial microfinance made headway last month when Societe Generale, one of Europe’s leading financial institutions with almost $400 billion under asset management, participated in the launch of the investment company MicroCred with a $3.65 million investment. MicroCred is an initiative of PlaNet Finance, a French nonprofit committed to microfinance. Societe Generale’s investment represents 10% of MicroCred’s capital.

During the next five years, PlaNet Finance will guide MicroCred in creating or investing in 15 microfinance institutions (MFIs).

Although the Societe Generale investment is tiny compared to its other activities, it is important as the microfinance industry welcomes another large commercial investment house to the field.

Additional Resources

1) PlaNet Finance Press Release: "Societe Generale Displays its Commitment to Microfinance Alongside with PlaNet Finance by Entering the Capital of MicroCred."

2) Societe Generale Group

3) PlaNet Finance

4) MicroCapital Blog: "Big Deal in Tajikistan Illustrates Meager Deal-Flow in Microfinance Investment."

"El Financiero," a Mexican Finance newspaper, tells a story where, at first, all is bright for our hero microfinance: the Mexican government representatives talk of poverty reduction and the displacement of loan sharks. These loans are really working! The story then crescendos: the situation is so good for these micro-businesses that the Mexican government now plans to establish "The Fast Opening Business System," a new government program to help all the poor micro-entrepreneurs register their businesses formally. Does this mean greater regulatory burden for all those struggling to make ends meet?

A point of explanation is needed: people from the developed world often assume that micro-enterprises are new ‘start-ups,’ but such is not the case. Due to the dearth of formal jobs in the developing world, most people are self-employed, and have always been self-employed. So, the Mexican government is not making it easier for common folks to ‘open’ a business as the catchy name of their new bureau implies. Instead, the government seeks the registration of businesses that micro-entrepreneurs have been running for years to feed their families.

Is there something in this for the micro-business owners other than new taxes, paperwork, and bureaucrats winking for a greased palm?

Of course the formal registration of micro-enterprises should be supported, and of course one of the great benefits of successful microfinance is that it creates wealth, which in turn enlarges the tax base, hopefully helping to stabilize and clean up dreadful governments. However, this should be a natural evolution. Once a micro-enterprise starts to grow, the proprietor has ever-more reasons to formalize her business: i.e. renting commercial space, offering the business as a micro-loan guarantee, or offering benefits to her employees. In this way, the best thing governments can do for new recipients of micro-loans is stay out of the way, not think up new bureaus over U.N. luncheons.

Moreover, plenty of reform of existing legislation is essential if microfinance is to reach its potential, such as streamlining red tape for all businesses. The article ends on yet another gloomy note. Amidst the excitement of the U.N. meeting, an attending government official generously offers the important participation of his particular bureau, adding that more government programs should get involved!

1) Don’t place ceilings on interest rates
2) Promote the concept of microfinance as a crucial means to resolve poverty
3) Adapt existing legislation rather than promulgate new laws
4) Eliminate unfair competition from public institutions, which often loan at below market-level interest rates
5) Actively work to improve and stabilize the business environment and general macroeconomic situation (benefits include reducing interest rates to make more capital available, stabilizing interest and exchange rates, improving infrastructure)
6) Scale-up microfinance by integrating it with the formal financial sector (benefits include economies of scale, risk management expertise, physical infrastructure and branch networks, and information, administrative and accounting systems)
7) Encourage commercial entry into the financial sector by reducing high reserve requirements to increase available capital
8) Non-prudential regulation
9)Encourage a diversified environment of regulated and unregulated institutions that meet performance standards
10) Develop transparency and performance standards

1) Main article discussed in entry, El Financiero: "Viables."
2) Consultative Group to Assist the Poor (CGAP): "The Impact of Interest Rate Ceilings on Microfinance"
3) Women’s World Banking (WWB): "Policies, Regulations and Systems that Promote Sustainable Financial Services to the Poor and Poorest"
4) "Impact of Government Regulation on Microfinance"
5) CGAP: "Guiding Principles on Regulation and Supervision of Microfinance"
6) "Regulatory Requirements for Microfinance: a Comparison of Legal Frameworks in 11 Countries Worldwide"

As part of its effort to increase credit flow to rural farmers, India’s National Bank for Agriculture and Rural Development (NABARD) will extend a pilot project, initially launched in eight states, to include the entire country this year.

The project is geared towards promoting and facilitating entrepreneurship among farmers. The project aims to educate farmers, who are encouraged to create "joint liability groups" which are akin to traditional self-help groups (SHGs) yet comprise a cross-section of farmers and participate in agri-business workshops. The number of such groups has grown by 49% in the past year. The workshops are meant to expose farmers to viable investment options such as minor irrigation and agricultural engineering.

For the past two decades, agriculture credit has grown by 15%. But with newly focused attention on the potential of this group, credit availability has increased by 40%. Sadly, the history of government-driven expansion of credit often creates more poverty, not less.

Additional Resources

1) Main article discussed in entry, Hindu Business Line: "NABARD to Extend Farm Credit to All States."

Even though 70% of India’s population inhabits rural areas, commerce has been rigidly focused on urban areas. The status quo approach is being inverted, though, as urban markets become increasingly saturated and companies’ views of rural markets are revised.

Rural Indian markets, whose potential has historically been dismissed, house 700 million people and account for more than 50% of fast-moving consumer good (FMCG) sales, and 60% of the durables market. The annual size of the rural market for FMCGs has been steadily growing and is estimated at $11 billion (pg. 3).

The shift to rural markets has only recently begun in full force as companies have realized that it is too costly to ignore this market any longer. While the per capita income of rural India is half what it is in urban India, disposable income does not follow suit. In fact, surplus disposable income is roughly the same, with the rural consumer paying virtually nothing for health, education, housing and food.

In overcoming the difficulties of penetrating rural markets, companies are turning to the rural poor not only as potential consumers, but as retailers as well. Collaborating with microcredit clients has proven to be good business.

The most revolutionary example of such partnership is between Indian company Hindustan Lever Limited (HLL), a subsidiary of Unilever, and CARE India’s multi-state microfinance program. By linking HLL with self-help groups throughout India, women have received training in retail and marketing to sell staple products in rural, low-income areas.

The joint venture, named Project Shakti, has already expanded to 12 states and aims to include 40,000 (up from 16,000) women by next year. By penetrating rural markets through access points such as microfinance institutions, an important catalyst to increase scale is emerging, with immense potential for future growth.

Additional Resources

1) Main article discussed in entry, Wall Street Journal: "With Loans, Poor South Asian Women Turn Entrepreneurial."

2) "HLL Inks Strategic Alliance with CARE India."
3) Book Review: "The Fortune at the Bottom of the Pyramid," C.K. Prahalad
4) Financial Express: "Competing Visions of Rural India."

India, one of the most developed microfinance markets in the world, may have finally received long-awaited recognition. Venture capital has come to Indian microfinance, supporting the commercialization of the industry by providing much-needed capital. The joint venture is led by the American investment company Gray Ghost and the Dutch Hivos-Triodos Fund. To skirt India’s notorious red tape, the partners transformed an existing Indian microfinance institution into Bellwether, intended to be a source of financing for India’s most innovative microfinance institutions. The fund is capitalized at $10 million, and will address small and medium-sized institutions, which are considered less able to attract finance from the regular financial sector, relative to larger microfinance institutions.The mission of the fund is to promote the commercialization of microfinance through targeted investments and will seek out microfinance institutions that are or want to be commercially sustainable. A board and committee to advise on investments will together institutionalize Bellwether’s involvement with the chosen microfinance institutions. As the CEO of an upcoming microfinance institution spends more than 60% of his or her time fundraising, such an influx of funds will no doubt improve the availability and quality of microfinance services.

Additional Resources

1) Main article discussed in entry, Microfinance Information Exchange (MIX): "Hivos-Triodos Fund Starts the First Venture Capital Fund in India."
2) Bellwether Microfinance Fund

Is ‘philanthropic investment’ just a contradictory term to make charity sound business-like? In the US, Program-Related Investments (PRIs) have served as a way for foundations to earn a return on their grant-making dollars since 1969. Such investments made by foundations to support charitable activities offer the potential return of capital within an established time frame, and are well codified in US law. PRIs are the perfect way for foundations to capitalistically and responsibly support microfinance.Of the 66,000+ grant-making foundations in the United States, only a few hundred make PRIs. Giving by the nation’s grant-making foundations increased by 7% in 2004, to $32 billion (pg. 1), but PRI financing makes up a negligible proportion. Why such dismal numbers?

The answer turns out to be the cultural inertia within foundations and non-profits. A return on capital requires a different sort of rigor than social work. And this is just the tip of the iceberg. In 2004, US foundations granted $32 billion, but they held $476 billion in assets. Imagine 1% of this principle corpus invested in microfinance, this would open the door for commercial capital investment. Whereas most huge chunks of capital (pension funds, insurance companies, mutual funds, hedge funds) fall under the ‘prudent man’ US law that obliges the prioritization of profits, foundations (and universities) enjoy leeway under the prudent man rule to invest per their missions.

The irony of course is that microfinance may well out-perform the market, so ‘prudent man’ would be irrelevant. But, we are not an asset class yet, so to get there, we look for leadership not just in your grant-making, Mr. Omidyar, but in your asset management. PRIs are an opening for you to introduce Wall Street to our emerging asset class.

Again, to give Mr. Omidyar and his group the benefit of the doubt, maybe his asset managers and his grant-makers do eat lunch together regularly, maybe they are just “ramping up,” and will fulfill his righteous vision one day soon.

Additional Resources

1) The Foundation Center: Foundation Growth and Giving Estimates: 2004 Preview
2) Although dated, the best document discussing PRI trends is still the Foundation Center’s PRI Financing: Trends and Statistics 2000-2001
3) MicroCapital Blog: Mr. Omidyar’s Philanthropic Vision: a Work in Progress, Part 1

In a recent interview in Forbes, Brazil’s President Lula expressed interest in bringing small and micro businesses into the tax system. Historically, this economic sector has remained outside the country’s notoriously cumbersome bureaucracy. However, by creating a business climate that is more “favorable, safe and free” of bureaucratic impediments, Lula thinks joining the tax base will become a more attractive option.
This new approach to widening the tax base seems to have a brighter side: improving the government-sponsored microfinance services. Brazil’s financial services for the poor are in desperate need of expansion. While microfinance has been on Lula’s agenda for years, Brazil continues to struggle in terms of market penetration. Of the 8 million micro enterprises in Brazil, overall market penetration is a meager 2%. This is in stark contrast to other countries in the region, which drastically exceed the absolute number of people served, even as much smaller markets. The demand for microfinance services in Brazil is particularly high due to the acute income inequality, which leaves 34% of the population below the poverty line.
Brazil consistently ranks as the country with the largest number of entrepreneurs per capita in the world (p. 4), calling into question why the market remains so underserved. Reasons specific to Brazil abound, but the sheer size and population of the country is enough to send most prospective micro lenders running (p. 4). Additionally, the un-chartered nature of the country’s microfinance landscape intimidates (p. 4). Lacking an established microfinance market fueled by NGOs or otherwise, the climate is ripe for government involvement. In spite of the government’s efforts, which certainly strive to harmonize the private and public sectors, just over 10% of the 120+ microfinance institutions have more than 1,000 clients, with a combined loan portfolio of barely $60 million. Of these microfinance institutions, the 30 most solvent are funded by Brazil’s central bank.
The microfinance climate in Brazil is unique, as an array of local, state and federal institutions combine to promote micro lending. Brazil’s enormous development bank, BNDES, which has already disbursed $8.5 billion in 2005, leads this by working as a second-tier institution with micro lenders by making loans to regulated microfinance institutions (MFIs) and by providing technical assistance. The central bank’s role in stimulating private sector activity seems to work as management is left to the actual microfinance institutions. In fact, the central bank loans to so-called ‘societies,’ which are strictly regulated private institutions designed by the central bank. They are run by boards composed entirely of individuals from the private sector. In return, the ‘societies’ are required to raise matching funds from private investors that equal one-third of the loan portfolio. This has even resulted in going beyond Brazilian borders to attract such needed private capital. The central bank views its role as temporary, having a catalytic effect for now but only intended to tide over the microfinance institutions until they are sustainable. Let’s hope Mr. Lula’s new push to tax micro and small business owners does not topple the success to date.

Additional Resources
1) Main article discussed in entry, Forbes: "Interview with Brazilian President Lula."2) Inter-American Development Bank (IDB): "Return of the State." 3) Microcapital Institute: "The Commercialization of Microfinance in Latin America." 4) "Understanding Microfinance in the Brazilian Context."5) World Bank (WB): "Access to Financial Services in Brazil."

“ADOPEM,” the Dominican Republic affiliate of Women’s World Banking, is one of the most successful micro-lenders in the country. It has an $8 million USD loan portfolio and about 300 employees, and serves nearly half of all Dominican microcredit borrowers. ADOPEM has posted double-digit ROE for years.

How does ADOPEM achieve such high levels of performance?

1) Strong executive management: CEO Mercedes Canalda de Beras-Gocio learned the business from her mother who founded what was then a little non-profit in 1982.
2) Weak competition: the only other significant microfinance player in the DR is BancoADEMI which works up-market from ADOPEM, issuing larger loans. Otherwise, the DR is estimated to have approximately 30 players, none of which have significant capitalization and professional management.
3) Clear career path: middle managers often begun their careers as ADOPEM clients. This bears repeating: impoverished women that started with a micro-loan now manage million dollar loan portfolios with thousands of customers and dozens of employees.
4) Loan officer corps: ADOPEM solidly beats the industry benchmark with a loan-officer-to-client-ratio of 1 to 400. Some loan officers manage more than 800 accounts. This success is due to rigorous loan officer training, a field-operations focus, and proper incentives based on both delinquency and yield. Loan officers can earn up to an additional 50% of their monthly salaries with performance incentives. All this combined with a clear career path into management, and this is a very motivated bunch.
5) Strong Partners: again and again, Women’s World Banking distinguishes itself as a top ‘network’ providing management consultancy, knowledge and cross-training of successful micro-lenders worldwide.

Additional Resources
1) Consultative Group to Assist the Poor (CGAP): "Dominican Republic."
2) Inter-American Development Bank (IDB): "Dominican Women Lead Lending." pg. 11
3) Women’s World Banking (WWB): "ADOPEM."

Luxembourg recently launched its official participation in the International Year of Microcredit 2005 by hosting a roundtable discussion on microfinance. The country’s Ministry for Development, Cooperation and Humanitarian Aid has incorporated microfinance as a policy tool for years, and is now focusing its attention on investment in the industry. In 2004, Luxembourg allocated .8% of its GDP to worldwide microfinance initiatives, a figure that is expected to increase in the near future.

Luxembourg’s next line of business is to sensitize the country’s financial and banking institutions about the role they can play in microfinance, and to mobilize specific skills to apply them to emerging countries. Luxembourg ranks third in the world for administering investment funds and would have valuable expertise to lend to the microfinance industry. The country will soon conduct two studies, one of which will look into the potential advantages for Luxembourg as a place to launch investment funds for microfinance institutions, as well as one that considers the impact of rating such funds. The microfinance industry would benefit greatly from this attention to rating investment funds, as a lack of such evaluation stands between microfinance and its viability as a worldwide asset class.
Additional Resources
1) Microfinance Matters article on Luxembourg’s initiatives
2) Luxembourg Roundtable on Microfinance

In a developing country of just 7 million people, with one of the lowest GDPs of the former Soviet Union, one would guess that a significant microfinance deal would be done by a European development bank, not by a commercial entity. This recent transaction, the fourth in a series worth a net total of $9.5 million, pales in comparison to the scale of transactions on the world financial markets. It also pales to the current total worldwide foreign direct investment (FDI) in microfinance, which is approximately $1.9 billion. Microfinance investment now represents .5% of worldwide annual FDI.

The fact that quasi-governmental development banks in a small and poor (even by regional standards) country like Tajikistan can place 4 simultaneous investments in the microfinance industry would have been unheard of not many years ago. Growth of foreign investment in microfinance has accelerated in recent years, signaling an emerging asset class, although 90% of this investment is from public sources like these Tajikistan deals.

Yet, despite growing foreign investment in microfinance, meager deal-flow plagues the industry. Only subsidized investment banks survive on such slim deals.

For this reason, we urge you to do business with the best microfinance funds that are pooling regional investments to provide market-rate returns. Only the growth of these funds will cultivate the deal-flow necessary for Wall Street to enjoy an asset class and the global poor to enjoy financial services.Additional Resources1) Analysis of recent growth trends of both domestic and foreign sources of MF investment funding
2) Excellent springboard for articles related to the market for foreign investment in microfinance 3) Time: "Why Micro Matters: Wall Street is Figuring Out How to Profitably Package Tiny Loans to Third World Entrepreneurs."
4) For more in-depth articles that discuss the commercialization of microfinance, visit the MicroCapital website(Tajikistan-specific sources) 5) UN-sponsored paper that discusses the investment climate in Tajikistan6) Findings of study that investigated various economic factors in Tajikistan7) Paper discusses current FDI climate in Tajikistan, as well as need for further investment for economic growth 8) European Bank for Reconstruction and Development’s (EBRD’s) involvement in Tajik microfinance institution9) TMSEF May 2005 Newsletter (EBRD-sponsored Tajik Micro and Small Enterprise Financial Facility)

Elizabeth Littlefield, former Managing Director at JP Morgan who now leads the Consultative Group to Assist the Poor (CGAP) a World Bank (WB) program, recently expressed her esteemed view of the current and future direction of microfinance. One subject she approached stood out in particular: the explosion of investment funds in the microfinance industry. This explosion, however, does not mean the capital markets have embraced microfinance. While 58 investment funds were recently launched, “over 90% of the so-called ‘private’ socially responsible money is really public money at its origin.” This is clearly an important growth trend in the industry, but it points to the remaining need for improvement in order to be profitable.

In the article, Ms. Littlefield highlights the growing situation where the “commercial sector is coming down and the microfinance sector is building out and they are meeting in the middle.” This convergent evolution strengthens the industry, making the mass scale of operations possible in the very near future.

Additional Resources
1) Microfinance Matters newsletter article: “Microfinance – Where We Are Now: And Where We Are Headed”

The non-profit organization PlaNet Finance just announed the launch of PlaNet Bank, a new global investment company for microfinance institutions. The International Finance Corporation (IFC) was the lead investor with $7.3 million. The new investment vehicle intends to “create or invest in 15 microfinance institutions over the next five years,” with at least 60% of these envisioned microfinance institutions (MFIs) in Africa.

The bank will be capitalized at $38 million, signifying a substantial addition to the worldwide microfinance investment climate, in which commercial and (mostly) quasi-commercial investment approximate $1.9 billion. Last year, the launch of a fund of a similar size caused a significant spike on our MicroCapital Index. Though not in our index, PlaNet Bank is now in the top tier of microfinance investment vehicles in terms of asset footings.

The IFC is one of the world’s largest investors in commercial microfinance, with a worldwide microfinance portfolio of more than $260 million. PlaNet Finance has invested over $300 million generally, $220 million of which was allocated to microfinance.Additional Resources1) Press Release: "IFC Invests in New Africa-Focused Microfinance Initiative."
2) International Finance Corporation (IFC) Summary of the PlaNet Bank project3) PlaNet Finance’s Annual Report FY 2004

Last week, Hewlett-Packard (HP) and Accion International announced the global release of an elaborate software that will perform rural loan transaction over mobile phones. The Remote Transaction System (RTS) is a “cost-effective means of tracking loan information” that will soon have an open source aspect. The announcement culminates the collaborative efforts of HP and multiple microfinance entities working to develop the software.

Banking software tailored to microfinance of course exists, but there is no industry standard. The World Bank microfinance unit (CGAP) lists over 50 such applications on its website, 15 of which are reviewed. To date, however, no one has tried an open source approach. Because most of the world’s 10,000 microfinance institutions (MFIs) are unprofitable, the firms that make the software products for MFIs are under-funded and often subsidized themselves. Revenue has historically been insufficient to support a better product, leaving the microfinance industry in need of an efficient, standardized approach to banking software.

The RTS innovation will hopefully succeed on both accounts, allowing for the creation of an industry standard and also achieving a “breakthrough in the scale of microfinance services,” because only open source might be affordable for all those tiny, cash-strapped microfinance institutions out there.

Will this open source development create an industry standard? A standard is certainly needed. Banking software taken downstream to service microfinance is just too expensive to buy and maintain for most micro-lenders, while on the other hand, the new products from technology firms focused on microfinance are limited in the face of microfinance market challenges, namely varying language, regulation, maintenance (infrastructure is scarce) and of course, cost.

Might an open source solution be affordable? Establishing a standard will depend on how cost-effectively on-site technicians can manage the application. Open source is not by definition cheaper of course. It is all about execution.

Again and again in the emerging microfinance market we are left with the same conclusion: many of the pieces are in place for an asset class, now it is up to local talent to see it through.

Additional Resources1) HP News Release
2) More in depth article by the UN Capital Development Fund’s Microfinance Matters
3) Sevak Solutions, which holds the rights to the RTS technology and licenses these rights to interested parties

Jean-Philippe De Schrevel of BlueOrchard Finance, a microfinance asset management company, has hit the bull’s eye when he explains in the current Asian Development Bank newsletter how the financing of microfinance institutions (MFIs) should be left to the capital markets, rather than donations or public funds. Public and charitable funds should be re-directed to:
1) Auditing and regulatory standards 2) Strong financial infrastructure such as supervisory authorities and research institutions 3) Credit rating agencies and standards
4) New financial products, such as those that hedge foreign exchange or political risk
5) Subordinated tranches of investment funds, while leaving the senior tranches to private investors.

Overall, governments and non-profits should not give away their money to MFIs, but responsibly fund the infrastructure for an emerging market and asset class.
Additional Resources
1) Newsletter: “Finance for the Poor," Kathryn Imboden2) Subscription only: "Building Inclusive Financial Sectors: the Road to Growth and Poverty Reduction." Journal of International Affairs. Spring 2005. Vol 58, Issue 23) Subscription only: “Crawford’s Minifund for Microlenders.” Institutional Investor. Feb 2004. pg. 14) Subscription only: “Microfinance Break.” Latin Finance. Feb 2005. pg.1