The State Bank of Pakistan (SBP) has issued a new circular that it will provide a 25 percent first loss guarantee for loans under its Micro Credit Guarantee Facility (MCGF) to further encourage commercial banks to provide wholesale funds to microfinance institutions (MFIs).  The Facility was introduced last December but was met with an unenthusiastic response by banks despite the SBP’s 40 percent principal guarantee on loans.  According to the press release in the Daily Times of Pakistan, only one loan has been granted so far under the MCGF.  Banks and development finance institutions (DFIs) now will have the option of choosing either the 40 percent principal guarantee (pari passu), or the 25 percent first loss guarantee.  The first loss guarantee will cover gaps in repayment of a loan’s principal, up to 25 percent of the principal value of the loan, whereas the 40 percent principal guarantee will cover 40 percent of the actual loss incurred.  In essence the first loss guarantee covers a bank’s smaller losses upfront completely, while the 40 percent principal guarantee would require the bank to share in the losses but covers a larger percentage of loss. Continue Reading »

Source: Times Online 
Continue Reading »

Comat, a technology company providing services to rural India, recently raised INR 60 crore (USD 12.5m) from the Omidyar Network and the Unitus Equity Fund (UEF). According to a Business Standard article, the new investment will allow “Comat to expand to new States, accelerate service delivery for training and financial services [and] strengthen management bandwidth.” Continue Reading »

Written by Aneel Karnani, published by Standford Social Innovation Review, Summer 2007, 8 pages, available at: http://www.ssireview.org/images/articles/2007SU_feature_karnani.pdf

In an article published in Stanford Social Innovation Review, a magazine of Stanford Graduate School of Business, University of Michigan’s Dr. Aneel Karnani argues against investment in microfinance. As the essay’s title articulates, “Microfinance Misses its Mark,” the professor argues that microfinance “does not significantly alleviate poverty.”

Continue reading “PAPER WRAP-UP: "Microfinance Misses its Mark," by Aneel Karnani”

This Christian Science Monitor article, while focusing on for-profit microfinance, has used bits about ProCredit to profile a for-profit organization. However, they don’t seem to have done a very comprehensive job of it.
Continue reading “What ProCredit Does to Increase Profitability”

The Ugandan government capped the interest rate that microfinance institutions may charge. According to New Vision Kampala, the new rule sets rates at or below inflation, which stood at 8.1% in 2005. Microfinance institutions in Uganda currently lend at rates of 18 to 100 percent.

Continue reading “Uganda to Cap Interest Rates Charged By Microfinance Institutions”

In his inaugural speech this month, Colombia’s President Alvaro Uribe outlined plans to create a new microcredit bank. Capitalized with 120 billion Colombian pesos (equivalent to $50 million) from the state-owned bank, Bancafe, the new Banco de las Oportunidades will focus on low-income groups and microlending. President Uribe promised that this will create credit opportunities for more than six million low-income Colombians.

Continue reading “Can a State-owned Microfinance Institution Succeed? A Look at Colombia’s New Banco de las Oportunidades”

Apparently, microfinance in South Korea has failed. The Korea Times, a South Korean daily newspaper, attributes this failure to “lack of private donations and government support.” The South Korean government established the Social Solidarity Bank (SSB), the nation’s first non-governmental microfinance institution, in 2002. Since its inception, SSB attracted corporate donations of 3 billion won (USD $3.15 million), in large part from conglomerate Samsung Group and Kookmin Bank. However, The Korea Times believes this was “a miniscule amount of money and not enough to allow the bank to operate as a financial institution.”

Continue reading “The Korea Times of South Korea Says Microcredit Is a Failure “due to lack of private donations and government support””

MIX Market has released a report highlighting 2004 benchmarks on the performance of retail microfinance providers. The study evaluates over 300 institutions from around the world. Some key highlights from this robust data set include:

- MFI growth is significant: Globally, growth in borrowers increased by 30% in 2004. In South Asia and the Middle East åö growth in borrowers was even stronger, topping off at 50%.

- Profitable institutions reach more people. Overall profitable MFIs add 25% more borrowers than their unprofitable counterparts. Profitable MFIs cover much more ground åö “the 70% of MFIs earning 2004 profits reach well over 90% of total borrowers.”

- Scale and employee productivity help MFIs cut transaction costs and increase profitability. For example, as MFIs grow from 10,000 to 30,000 clients, cost per borrower plummets from 130 to 65 USD per borrower.

“These benchmarks draw on the largest benchmarking data set ever compiled by the MIX, with 302 institutions covering the diversity of institutional types within the sector and their various stages of development.”

For the full report, head to www.mixmarket.org and scroll to the bottom of the page to access data files.

Source

“MIX Market 2004 Benchmarks,” www.mixmarket.org, February 3, 2006

Peruvian MFI, Mibanco, is off to the races. Guidance for 2006 is for 23% growth in profits and a 45% increase in lending. This comes after a banner year in 2005 that saw 74% growth in profits.

Continue reading “Microfinance Picking Up Steam in Peru: Mibanco Backed by Top Industry Investors”

In an article on remittances and microfinance, Business Week has correctly pegged remittances as a potentially huge opportunity for “recipients to save money and build credit histories, so they can get mortgages and small-business loans.” Indeed, the predictable income of remittances allows poor borrowers to access more sophisticated products like “micro-mortgages”, previously limited to people with documented income and greater assets.
Continue reading “BusinessWeek Plugs Remittances and Microfinance as the Converging Paths Toward Investment in Two Billion Micro-Mortgages”

Filmmakers Sterling Van Wagensen and Matt Whitaker have created the documentary “Small Fortunes: Microcredit and the Future of Poverty.” The table below provides local broadcast times.

The Google Foundation’s $5 million gift to the Acumen Fund goes to show that "making a philanthropic investment" in international small/sustainable business development is fashionable. Google would never do anything out of fashion. The Google Foundation is the “philanthropic arm of google.”

The Rockefeller Foundation, Cisco Systems Foundation, and individual philanthropists established the Acumen Fund in 2001. The Acumen Fund is an international non-profit venture fund that provides loans, equity investments, grants and “intellectual capital” to enterprises that support progress in health, housing, and water. At the end of 2004, the Acumen Fund had total disbursed loans of $2.964 million. The Fund aims to achieve approximately a negative -20% return on investment.Additional Resources
1) “Google.org Partnership.”
2) “Acumen Fund: Our Mission.”
3) “Acumen Fund: Investment Approach.”
4) “Acumen Fund: Investment Report August 2005.”
5) “Google”

To access this article visit: “Great Expectations: Microfinance and Poverty Reduction in Asia and Latin America”

Authors: John Weiss and Heather Montgomery

Qualitative Information: Introduced as evolving for different purposes, microfinance within Latin America åö initially having a greater focus on commercial profitability åö is contrasted against Asia and the ideals of the Grameen Bank, a famous Bangladeshi microfinance institution (MFI). The authors propose that although NGOs are still important players within Latin America, there is a significant trend toward the commercialization of microfinance and thus MFIs’ focus on profitability. The article suggests that rural, impoverished regions particularly within larger countries such as Brazil, Mexico, and Argentina are under-addressed, but neither provides examples to support these statements nor distinguishes the types of MFIs and their target markets. While the authors agree that there are indications that MFIs have an impact on borrowers within Latin America, MFIs remain unsuccessful at reaching the poorest åö although they offer little propositions for MFIs to both achieve profitability and successfully touch the pooråÐest. They do, however, suggest more studies are needed on the impact and cost effectiveness of microfinance programs.

Accion and Unitus, two US non-profit microfinance "networks" announced a partnership to work together in India. While good to see even a hint of industry consolidation on the non-profit "buy" or "supply" side of microfinance, it would be great to see actual mergers and acquisitions in these networks. "Networks" are loosely defined as rich country non-profits that support microfinance institution (MFI) partners or members transnationally. Almost all the 14 major network players have small budgets, as is typical of the non-profit sector. In fact, approximately 99% of all registered US non-profits have budgets less than $100 million and about 98% have budgets less than $10 million. This absence of large-scale solutions to social problems shames all of us in the face of global poverty.

1) ACCION Press Release: “Microfinance Leaders ACCION and Unitus Establish Strategic Alliance for India.”
2) MicroCapital Blog: “Microfinance Networks (transnational second-tier): Defined and Listed.”
3) “Registered Non-Profit Organizations by Level of Total Income.”

To access this article visit: “Microfinance and Socially Responsible Investment in Latin America”

Authors: J. Cheng and M. De Sousa-Shields

Qualitative Information: The article argues that main reason for low investment in microfinance is that investors do not understand the industry, and therefore do not have the expertise to decide where to invest in microfinance. One solution is to invest in intermediary funds, which have the expertise to evaluate MFIs and make good investments. Rather than educate investors about MFIs, the article argues that MFIs should adapt to investors. MFIs lack of credibility with investors because many are from non-profit backgrounds. The article recommends that MFIs use financial tools that investors understand, such as portfolio securitization and bond offerings. Lastly, MFIs need better measurements of their social impact for investors.

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.”

The Ugandan market for microfinance services has over 1,300 microfinance institutions (MFIs) in operation. While one would hope that such a glut of MFIs would necessarily ensure the market was being served, this is unfortunately not the case.

According to the Bank of Uganda (BoU), the industry suffers from an urgent shortage of licensed deposit-taking institutions. However, this does not mean that deposit services are not being offered illegally. Among Uganda’s many MFIs, just 3 are licensed to take deposits, while many more offer such services, even though unlicensed.

The scarcity of formal ways to save comes at an enormous cost to poor people, who have limited access to formal, regulated financial services (p. 3). They are generally left with no alternative to the non-regulated MFIs that accept deposits illegally. In Uganda, 99% of clients saving in the informal sector report having lost some of their savings (p.3), with losses averaging 22% of the amount saved in the past year.

If non-regulated microlenders follow the letter of the law, that is, they do not accept savings deposits, they forego valuable capital for their loan portfolios. Prospects are dim for small operations that may serve as few as 10 people (which make up the majority of MFIs in Uganda). The government’s effort to weed out unlicensed deposit-taking institutions includes setting minimum asset holding requirements in order to be eligible to legally take deposits.

In an ostensibly inclusive move, the Bank of Uganda is encouraging all microfinance institutions to apply for licenses to take deposits. This is far harder than it sounds. Smaller microlenders will not be able to meet this regulatory burden for many reasons, including taxes, onerous paperwork, and of course, reserve and capital requirements.

We have yet to see a government launch a wholesale attack on microlenders who illegally accept deposits. Will Uganda be the first? Probably not, as Ugandan government officials would be hesitant to take any action that might upset the misguided donors who have created this problem by subsidizing microlenders outside the law.

Additional Resources

1) Subscription only: "Central Bank to Crack Down on Unlicensed MFIs."

2) "Central Bank Warns MFIs On Deposit-Taking."

3) Consultative Group to Assist the Poor (CGAP): "Regulation and Supervision of Microfinance."

4) The Monitor: "Register or Close Down, MFIs Told."