International financial services provider ING published the updated study “A Billion to Gain? – The Next Phase”. The 68-page report states that the amount of outstanding wholesale loans by international banks to microfinance institutions (MFIs) doubled by the end of 2007 to approximately USD 1.4 billion from USD 0.5 billion in 2006. The author and researcher is Matthis Boúúaert.
The study covers 17 of the world’s largest global commercial banks and insurers involved in microfinance, all of which have a long-term commitment to the sector and a focus on cost-effectiveness and profitability. For perspective, a 2003 CGAP survey counted 227 commercial banks and formal financial institutions involved in microfinance. Over the next few weeks, MicroCapital will highlight the microfinance activities of several of these large international banks.
The study noticed a significant increase in loans to African MFIs, whereas, the 2006 report showed most global bank microfinance activities concentrated on India, Peru, Bolivia, or Bangladesh. Geographical preferences result from a retail presence requirement, and historical and linguistic ties between banks’ home countries and certain regions tend to affect initial country selection. Thus the paper credits the significant growth in Sub-Saharan Africa to the involvement of several French banks, such as BNP Paribas, Société Générale, and Crédit Agricole.
However, roughly 35 percent of the participating global banks have globally-oriented microfinance activities. The report also notes that many banks are widening their geographical scope due to globalization and the fact that their microfinance activities have passed their introductory stage.
There was also a sizeable gain in local currency wholesale loans by global banks, thus reducing MFIs’ currency exchange risk. For instance, 6 out of the 7 microfinance funds arranged by the participating banks stated that they provide loans and debt securities in both local and hard currencies. The study could not determine the percentage of local currency financing.
However, micro insurance has been slow to penetrate the market and primarily limited to life insurance products. According to the Munich Re Foundation, the insurance industry has found it difficult to provide insurance to the poor in developing countries, given major administrative expenses, minor scattered benefits, and difficulty balancing annual insurance premiums and corresponding claims. Quoting Microfinance Gateway data, the paper lists Allianz, AIG, AXA, ICICI, Munich Re, and Swiss Re as the best-known global financial institutions providing micro-insurance. In addition, MFI micro-insurance programs have reached 6 million low-income people, with ICICI Prudential (India) as the leader reaching 650,000 clients.
Finally, retail microfinance -i.e. direct provision of micro loans, savings accounts, insurance, and remittances to clients- is currently a small portion of global banks’ microfinance activities. In fact only five banks directly provide individual micro loans, and all activities are through their local retail networks. Santander is the leader with USD 125 million in outstanding micro loans. The paper also highlighted Barclay’s Susu investment program in Ghana as a successful, effective retail microfinance project; a MicroCapital story summarizing the project can be found here. Table 4 on page 22 outlines the banks’ direct retail microfinance activities.
The study is the latest update to the 2006 “A Billion to Gain: A study on global financial institutions and microfinance” report by ING. MicroCapital also reported on the original study’s findings as well as highlighted the microfinance activities of some of the major international players.
On June 16, 2008, ING will hold an international microfinance seminar at its headquarters in Amsterdam, to discuss the study as well as other trends in microfinance. Further details of the seminar can be found in the following MicroCapital article.
by Jennifer Lee
ING Press Release: “Global Commercial Banks Double Loans in Microfinance”, March 27, 2008.
CGAP: “Review of Commercial Bank and Other Formal Financial Institutions Participation in Microfinance”, by Isern, Ritchie, Crenn, and Brown, 2003.
Barclays: Corporate Sustianability
MicroCapital: “London-Based Barclays Bank Expands Reach into Microfinance Investing Through Partnership in Ghana”, April 4, 2006.