Financial Times has published today a supplement entitled Sustainable Banking featuring several articles on microfinance and detailing innovations in this area.
It starts with Overview: Microfinance unlocks potential of the poor which says:
Microfinance hit the headlines in 2006, when the Nobel peace prize was awarded to Muhammad Yunus, a Bangladeshi banker who pioneered the idea of providing small loans to villagers.
Microfinance may even become an asset class for investors. In May, the International Finance Corporation, part of the World Bank Group, announced an investment of $45m in credit-linked notes to be issued by a vehicle set up by Standard Chartered to facilitate microfinance lending in sub-Saharan Africa and south Asia.
Meanwhile, microfinance has become one of the main instruments through which the poor access financial services. In Bangladesh, ASA, the microfinance group, operates a decentralised model in which simplified accounting and record keeping removes the need to have separate accountants and cashiers in branches.
The article of most interest here summarises the main points of an interview with Lars Thunell, the Swedish-born chief executive of the International Finance Corporation, the World Bank’s private sector finance arm.
Several relevant excerpts from it are included below.
FT.com / Reports - Lars Thunell: Poor farmers need level field
The need for a set of standards to protect poor people while mitigating
against the risks to financial institutions chimes well with the IFC’s mission to promote sustainable private sector investment in developing countries.The IFC has established a “responsible microfinance initiative” to look at developing a version of its Equator Principles – the project finance standards first developed five years ago in conjunction with a small group of banks – which have been adopted by some 60 financial institutions worldwide.
The IFC is also conscious of the controversy surrounding the profits made by Compartamos, the Mexican lender. Muhammad Yunus, the Nobel peace-prize winning founder of the Grameen microfinance institution, criticised the high interest rates demanded from Compartamos’ poor customers after the company successfully completed a lucrative public offering.
… as commercial banks vie with social enterprises in the microfinance field, the question of how much profit is acceptable lacks a definitive answer.
“The [interest] rates are there, – it’s a fact of life – but I think what would always help in any market is more transparency and disclosure around those rates,” Mr Thunell says.
Furthermore, technology is likely to play a role in widening access to microfinance – for example by allowing borrowers to pay using their mobile phone instead of going to a bank.
But this win-win model is likely to face a serious test this year as millions of people in the developing world struggle with rising food prices.
Conscious of anecdotal evidence that rising costs have left producers unable to plant all their land, the IFC is looking at how it can help farmers expand cultivation by financing the purchase of seeds.
Moreover, microfinance is increasingly about the provision of a broad range of financial services, not just small loans, and these too could play a role in solving the food crisis.
“It’s not only a moral issue I think there’s going to be tremendous business opportunities to look at agribusiness in a new way and be creative,” he says.
Mr Thunell says his dream is to help financial firms provide insurance to farmers to protect them against sudden hardship.
If the rains fail the insured farmer would receive help to repay the microfinance loan.
“These are the types of thing that we should be doing – first showing how it can be done, then incorporating that into our projects, then finding partners and spreading [the idea].
“That’s our job, that’s what makes it fun,” he says.
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