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| Thought Leaders: Philanthropy |
The Future of Microfinance
Rosemary Werrett
11/01/2006
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Microcredit programs, which aim to provide capital to poor people with
entrepreneurial ambitions, attract many philanthropists because they are not
charities, but rather systems for making business loans that can evolve into a
more mainstream credit industry. In the past few years, commercial financiers
have become interested in experimenting with ways to expand the capital
available to recipients, while mitigating the risks borne by the programs.
 One innovation we are trying at Pro Mujer involves local currency loans.
Microfinance institutions (MFIs) typically borrow in dollars or another major
currency and lend in local currencies—pesos or rupees, for example. If a sharp
devaluation occurs, as has happened repeatedly in the past 20 years in regions
such as Latin America, this can destroy an MFI’s ability to service its hard
currency loans. Local loans eliminate the currency mismatch, thus removing one
of the most feared risks facing MFIs and their lenders.
Earlier this year,
Pro Mujer Bolivia, working with the Grameen Foundation, Citibank and private
investors, borrowed $1.5 million in bolivares from two Bolivian banks to expand
operations beyond the 80,000 clients it currently serves. The loans are backed
by guarantees provided by private investors in the U.S., who issued standby
letters of credit worth $750,000 in favor of Citibank. Citibank, in return,
issued a standby letter of credit to the banks in Bolivia. Grameen negotiated
the deal with the Bolivian banks, which agreed to price the loans at 8 percent.
Pro Mujer is paying Grameen Foundation and Citibank an additional 1 percent
each. The private investors’ guarantees will be called only in case of default.
Otherwise, the cash backing the loans remains in the investors’ portfolios and
continues to earn returns. | We borrowed $1.5 million in bolivares from two Bolivian banks, guaranteed by
private investors in the United States. |
While local currency loans seem advantageous, they
may catch on slowly. Attracting large numbers of private investors to these
complicated schemes will take time, and only MFIs with sterling track records
can use them. Of the thousands of MFIs that operate around the world, probably
no more than 130 are investable, based on commercial market criteria. Local
currency loans and other forms of commercial finance also carry much higher
funding costs than traditional donor funding. They raise the question of whether
MFIs can stay true to their goal of lending to the poor if they are under
pressure to pay off their own loans.
It is crucial for Pro Mujer to work with
soundly managed MFIs that view themselves as a business. They must be driven by
the need to be profitable and assemble the skills necessary to serve their
clients effectively, passing on to them the savings that come from efficiency
and transparency. The broad effect of commercial funding will be to drive MFIs
to be more competitive—and sustainable.
Most MFIs will continue to prefer
traditional donor funding; it is less costly, and gives them more flexibility to
innovate. And commercial funders are not prone to experiment with newer,
unproven financial products. But fortunately, this industry continues to attract
donor funding, not only for direct relending to the poor, but for innovation as
well. In March, the Bill & Melinda Gates Foundation granted millions of
dollars in funding to several MFIs to support development of new financial
products, such as loans for housing, education and insurance, for microcredit
consumers.
Pro Mujer received $3.1 million from the Gates Foundation, which
we will use to roll out pilot projects in the five Latin American countries in
which we operate. The goal of the Gates grant is to understand how the range of
financial products commonly available to middle-class consumers can be
replicated for the poor on a wide scale.
MFIs do understand that the pool of
commercial money for this purpose is potentially huge, and it offers the chance
to scale up operations. The market for microfinance is virtually unlimited,
given the billions of poor people still grinding out a bare existence in many
parts of the world. At best, only about 100 million of them now have access to
microcredit. The mobilization of new capital cannot only help the industry grow,
but grow in a disciplined and sustainable way.
Illustration
by Matt Mahurin.  | Rosemary Werrett is director of business development for the G7
Group and a board member of microfinance institution Pro Mujer. |
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