Paris Microfinance Network

Mission Drift ?

There is a plethora of private capital continuing to enter the microfinance sector. But as microfinance moves more and more into mainstream banking, is some of its original mission getting lost in the shuffle? That's the implication of a landmark study released by Women's World Banking (WWB). The study examined what happened at 27 organisations as they morphed from non-governmental (typically not-for-profit) organizations into regulated financial institutions, and found that they often end up lending to a smaller percentage of women — the very people they often started to help.

The WWB study did find solid benefits associated with the evolution of microfinancing such as increased loan sizes and ability to offer additional demanded products. Commercialized MFIs, for instance, are able to reach more borrowers and offer important new products like savings accounts. But WWB also found evidence that such growth might be pushing institutions' interests to be more in line with those of their profit-seeking investors.

WWB studied 27 MFIs (in Latin America, Asia, and MENA) that had undergone this regulatory shift (or "transformation") and compared them with 25 that had not. Over a five-year period, MFIs that had become more traditional commercial enterprises saw active borrowers increase by 30% a year on average, compared with 15% for institutions that remained NGOs. In addition to reaching more clients with loans, the transformed MFIs were also able to significantly ramp up the number of clients with savings accounts.

However, the study also concludes a steep drop-off in the percentage of female clients in the years following transformation. Over five years, the percentage of clients who were women moved from an average of 88% to 60%. That is concerning not only because many institutions start out with the goal of serving female entrepreneurs, but also because women are more likely to pay for health care and education for their children — investments that can help further lift their families out of the cycle of poverty.

How can transformation benefits be best balanced with the original social mission of microfinance ?

Accion & EcoBank launch Microfinance Bank in Ghana

EB-ACCION Savings & Loans, a microfinance bank formed through a partnership between ACCION International and ECOBANK, the leading pan-African bank, has received its license to begin microfinance operations in Ghana.

EB-ACCION opened it's doors April 1st, delivering microcredit, savings and micro-insurance products to the Ghanaian market, thus helping small entrepreneurs to expand their businesses and improve their standard of living. EB-ACCION clients will be served by two branches in Accra, located in the marketplace neighborhoods of Tudu and Lapaz. Two more branches are scheduled to open in Accra this year. EB-ACCION expects to be the market leader serving microentrepreneurs in Ghana by 2010.

Over the next few years, the 2 partners, Accion and Ecobank, plan to open microfinance banks in at least 20 countries across Africa, thereby creating the largest regional platform for offering comprehensive financial services to the vast population of informal sector players that have been largely unbanked and underbanked. A statement by Ecobank said, when fully implemented, the plan has the potential of becoming one of the largest bank downscaling efforts in the world.

Dutch Fund Manager commits €200m to Microfinance

Further demonstrating the interest by institutional investors in social invesments, PGGM, the €88bn ($139bn) asset manager of Pensioenfonds Zorg en Welzijn, the Dutch healthcare pension fund, is making one of the world’s largest institutional commitments to microfinance by announcing an investment of €200m with specialist fund managers over the next two to three years.

PGGM has made its first investment worth €27m to the Dexia Microcredit Fund operated by Swiss fund manager BlueOrchard Finance. The initial allocation will make investments in microfinance projects in Africa, Asia, Latin America and Eastern Europe. Blue Orchard invests in financial institutions providing microcredit for families and small businesses that do not have access to regular financial institutions.

Microfinance in Sudan

The recognition of microfinance as one of the priority sectors for Sudan started only in the mid-1990s. The financing regulations of the Bank of Sudan are still being revised, and lack proper identification of microfinance activities.

In microfinance, traditional Islamic financial products, such as the murabaha,
the salam, the musharaka and the mudaraba play an important role in Sudan. For example, the murabaha is a buy and resell contract, under which the bank purchases the goods ordered from the client and resells it to the customer at a marked-up price, usually on a deferred payment basis. This is the preferred product and is also the closest to standard interest-bearing financial contracts. The salam is also a buy and resell contract, but here the bank purchases the goods from the client, who then delivers the goods in the future. Mainly used for agriculture, the bank pays the farmer on the day the contract is signed and the farmer delivers the crop to the bank after harvest.

A number of banks, NGOs and social funds have been involved with microfinance in the Sudan, and more MFIs are slowly being launched. Over 100 local and foreign NGOs, in direct coordination with gov’t authorities, are active in providing microcredit, emergency loans, medical care and educational services to poor people in the Sudan. In addition, many rural development projects include components of microfinance support.

Microfinance NGOs have been much closer to grassroots operations than have the formal lending institutions. The main NGOs active in microcredit have between 15-20,000 clients and registered repayment rates on average of 85 percent. Their success is often due to being community-based; often having simpler procedures; adopting flexible collateral terms; and sometimes creatively partnering with the formal banking system; they finance a variety of activities, i.e. they are not confined to "productive activities"; and they adopt different microfinance mechanisms and approaches. NGO microfinance institutions face problems, however, in shifting from providing grants to providing credit, when credit is newly introduced to customers after a period of charity-based operations. They also face sustainability problems when moving from donors to commercial sources of funding.

Some of the MFIs making a difference in Sudan include SUMI, the Sudan Microfinance Institution, Aljawda Microfinance Bank launched in December 2007 and Five Talents International, whom have recently launched a program in Sudan. SUMI is an innovative and high-risk microfinance institution based in southern Sudan helping small borrowers eager to grow their fledging businesses. Isaac Sadik, a used clothes dealer and tailor, started his business in 2001 with $40 he had raised by selling a bicycle. “I joined SUMI in November 2003 with a loan of Ush200,000,” says Sadik. “My stock has increased to Ush350,000. In fact, my stall is now too small so I am looking for space to construct another stall.”

Working with a consortium of partners including the Episcopal Church of Sudan, Five Talents will be assisting a village banking project in Wau Diocese, which was started in September 2005, and currently has 270 members. This is one of the first projects of this type in southern Sudan.

New Microfinance Lending Site: myELEN.com

Launching in November, the online portal myELEN.com will be the first institution to bring microfinance to the Czech Republic. While microfinance has become a relatively common phenomenon in the United States, the myELEN project will be unique in Europe when it launches in several weeks’ time, says Linda Hanyková, executive director of Microfinance, the company behind the My Electronic Loan Exchange Network (myELEN) project.

Loans granted through myELEN would range between 5,000 Kč and 157,000 Kč ($267–8,396). The site will also allow investors to make donations or interest-free loans. Through myELEN.com, investors can lend money to selected Mexican entrepreneurs — farmers, food venders, weavers, grocers — or associations of entrepreneurs, which are listed on the Web site along with their photos and business plans. Though it does bear an ethical streak, most investments made through the site will return annual yields between 5 percent and 10 percent, depending on the amount of money invested.

Annual rates by microfinance institutions in Mexico run between 40 percent and 110 percent. However, local banks and other lenders charge even higher rates while providing little educational and counseling assistance to borrowers. Rates charged by myELEN would depend on the individual business and amount loaned, Hanyková said.

Today, myELEN cooperates with only one microfinance partner based in Mexico, an NGO named FIPS. But the project’s idea is to work with many other reliable microfinance institutions in Mexico and elsewhere, so that investments are diversified to reduce the risk of unrecoverable loans, said Tomáš Hes, an economist and one of myELEN’s founders.

eBay launches MicroPlace.com investment site

MicroPlace, purchased in March 2007 by eBay Inc., has announced the launch of a new website that provides the first online marketplace for individuals to invest in microfinance and earn a financial and social return.

This is a very interesting and encouraging service as it allows anyone to participate in making a positive social impact thru personal investments. To date many of the microfinance funds and vehicules on the market have been investment tools for institutions, other funds, VC's or high-net worth individuals. Using the new site, investors can purchase microfinance securities with as little as $100 using eBay's PayPal service or a U.S. bank checking account, and have the option to direct their investment to a specific country and microfinance institution in the developing world.

How it works:
1) Set up an account and then purchase investments on MicroPlace.com from security issuers, who are responsible for making interest and principal payments to you.
2) The security issuers adds your funds to loans given to lending organizations (such as Microfinance Institutions), who in turn use those funds to provide loans to their end-borrowers.
3) The end-borrowers are generally self-employed poor, usually working in commercial activities, agriculture, fishing or craftspeople. They earn just enough to survive and use small loans to start or expand their businesses. The majority of them are women who in turn use earned revenues for household expenses, such as clothing, medical and education fees. As loans are repaid, security issuers are able to provide you with a financial return.

MicroPlace plans to make money by charging issuers to list. "We aspire to break-even, and if and when we reach profitability, eBay intends to reinvest any profits back into its own social initiatives," said Tracey Pettengill Turner, Founder and General Manager of MicroPlace.

MicroPlace thus far has partnered with OikoCredit USA and the Calvert Foundation to offer its first securities, which mature in two to four years and yield between 1.5% to 3% a year. Prospectuses are available online as well as financial reports of the local lending institutions, and MicroPlace is registered as a broker-dealer with the Securities and Exchange Commission (SEC). There are over 80 funds available on the market today investing in microfinance activities in developing countries. As the service grows we anticipate a growing range of securities to become available as investment options on microplace.com.

A great opportunity to invest part of your savings towards making a social impact in areas that need it most.

Co-Operative Bank Creates US$50m Microfinance Fund

The Co-operative Bank has recently announced a special US$50m (GBP25m) microfinance fund in order to support the development of small businesses in some of the world's poorest countries. The Bank has created an innovative line of credit in association with several major international banks that will be used to provide microfinance, or small loans, to the working poor around the world.

The Co-operative Bank will distribute these funds through the Global Commercial Microfinance Consortium (GCMC), of which they are a member. The Consortium, launched by Deutsche Bank, brings together institutional investors and development agencies in order to provide finance to poor people and is now looking to build on that commitment with other similar organisations. At its launch, the Consortium represented the largest public-private microfinance partnership. The Consortium lends to MFIs either directly or in partnership with commercial banks (such as Banco Solidaro), subject to a maximum loan size of US$3million. The fund has provided loans having committed to MFIs across the globe in places such as Russia, Kosovo, Peru, Nicaragua, Colombia, Pakistan, Mozambique, Mongolia and Azerbaijan.

This is one of several recent efforts in Co-Operative Bank's history of microfinance activities; in 2005, The Co-operative Bank committed US$5million (GBP2.6 million) to the US$80 million GCMC. In May 2007, the Bank committed US$5m (GBP2.6m) to the US$108m 'BOLD' fund launched by Morgan Stanley - a fund which comprises of 21 loans to MFIs in 13 countries with the largest country exposure being Bosnia.

Harvard Business Review MF Investment Article

Harvard Business Review posted an article highlighting the importance of stringent due diligence for donors and philanthropic organizations interested in making microfinance investments. For many folks rigorous due-diligence is an obvious point, any CSR or social investment activity should conduct serious analysis before making a final investment decision in any sector project. The more nascent the sector, the more demanding your process should be. One of the best ways to learn about a microfinance institution that you may be interested in supporting, is to look at or commission a rating report that the leading firms produce utilizing their lengthy due-diligence process conducted to develop the ratings. These rating reports are used by many folks in the sector, primarily the investment funds focused on offering debt and equity to MFIs. See our Ratings section for more info.

The social performance of microfinance institutions is becoming increasingly recognized as a major necessity of measurement by all practitioners in order to assess the achievement of the double bottom line. Many of the rating firms have added social impact analysis to their due diligence process often in conjunction with firms that have specialised in this area such as CERISE and the Ford Foundation. CGAP also offers an excellent resource center supported by it's Social Performance Task Force charged with defining social performance and addressing questions about measuring and managing social performance.

In the HBR article however, the most important point for us is that the authors stress the importance for investors to seriously consider investments that improve access to technology that lowers the cost of lending and borrowing - we believe this is how the microfinance sector can best achieve scale and sustainability.

IFC Equity Investments in Latin America

Today, the IFC (International Finance Corporation) reinforced it's microfinance investment strategy in Latin America/mexico with an 18% equity purchase (roughly $7.1 million) of Banco Amigo, a new player in
Mexico’s microfinance sector. IFC’s investment in Banco Amigo provides long term funding for Banco Amigo to scale-up its loan portfolio as it begins to grow its portfolio and intermediate savings; and equity allows IFC to be a long term partner and support Banco Amigo’s regional expansion, and introduction of new products.

For Banco Amigo this surge of funding is great news to help expand their reach. They began operations in late 2005 as a non-bank financial institution and received its banking license in November 2006. In May 2007, Banco Amigo opened for business after receiving approval from Mexico’s National Bank and Stock Market Commission. The bank aims to place an emphasis on providing credit to low-income women entrepreneurs, as part of its mission to promote microfinance for smaller businesses. They currently offer loans up to 10,000pesos after providing an address & ID card, and they promise the cash within 24hours. Furthermore they offer savings accounts incentively tied to the credit accounts.

The Banco Amigo investment follows a recent string of IFC investments in MiBanco Peru of a US$7 million subordinated loan, a long term loan up to $29 mill, and an acquisition of a 6.5% stake in Mibanco, valued over US$6Mln. This is the 2nd financing agreement between MiBanco & the IFC. MIBANCO is Peru’s largest specialized microfinance bank with more than 170,000 clients across the country. To date, MIBANCO has provided more than one million loans to low-income individuals and small businesses in Peru, many of whom had little or no prior access to formal credit institutions.

Microfinance in Madagascar

The 'Free Press of Namibia' posted an article on the early stage effects commercial microfinance is having in Madagascar. In the capital city of Antananarivo there are several foreign commercial microfinance instiutions such as AccesBanque (funded by Access Holding in Germany), french based MicroCred (see previous article)and the Agh Khan Foundation.

It certainly is an interesting investment to set up shop offering microfinance services in Madagascar because the traditional banks usually do not demand higher interest rates than microfinance institutions. The main difference lies in the amount of the loan.

Microcred clients can take out as little US$50 at a time while the minimum loan in mainstream banks is generally 20 times that amount. Petty entrepreneurs who are not considered "bankable" due to a lack of steady income or collateral have pounced on such microloans, in spite of interest rates fetching around 24 per cent over a year.

In barely six months, some 2,000 people have taken out loans with Microcred and around the same number with AccesBanque.