MARKETS OF THE FUTURE
Opportunities for high yield investment are less visible, year by year: portfolio revenues are sinking, risk appetite increases, while new investment secrets are being unveiled. Therefore, attention of investors is focusing on areas, until now unjustly covered by disinterest and certain disdain, offering higher yield than available instruments. One of these areas is microfinance.
This massive segment of mini-sized corporate credits is related to financing of dwarf artisans, traders, farmers and small producers in countries of the third world, where many people lack collateral, formal education and access to financial services.
Until now, over expensive usurers were the only sources of capital in such remote areas. Fortunately, there are institutions today, so called microfinance institutions – MFI, that are able to lend money to small debtors and retrieve them back, with lower default rate than commercial banks and high interest.
The concept is not new. One of the first micro credit organizations of the west, providing credit to rural poor, was Irish Loan Fund system, established by Jonathan Shift in the 18th century. Later all different sorts of organizations appeared, and whether they were called „People's Banks“, „Credit Unions“, and „Savings and Credit Co-operatives “, they were based on collective savings and credit responsibility.
In the beginning of 19th century, variety of different adaptations started to appear in rural Latin America and Asia. New banks for poor were mostly owned by government, becoming inefficient and expensive. Between 1950s and 1970s governments focused on subsidized agricultural credits for small marginalized farmers with the goal of modernization of the sector and reduction of the indebtedness of farmers. These attempts were rather unsuccessful. Agricultural development banks suffered massive erosion of capital, due to surreally low interest rates. Furthermore, the capital has not always reached the poor, concentrating in hands of established players.
In the 1970s, experimental programs in Bangladesh and Brazil were put into practice, distributing small credits to groups of poor women and enabling them to invest into expansion of their micro businesses. This method was based upon so called „solidarity group lending“, where each member of the group was responsible for the repayment of others, creating social pressure leading to astonishingly low default rates.
Grameen Bank in Bangladesh is one of the most famous microfinance banks of today. Professor Muhammad Yunus, pioneer of modern microfinance methodology, dedicated his whole academic research to this field. He and his students at Chittagong University in 1976 created special experimental credit program that rapidly expanded into hundreds of villages. Thanks to a special methodology it was possible to provide thousands of small credits and retrieve with surprising efficiency. At the end, commercial banker refused to take over this successful pilot project and implement it into their daily operations, due to worries related to elevated costs and high risk.
IN consequence, thanks to donor funds, Grameen Bank was founded in 1983 and today is providing capital for more than 4 million debtors in southeastern Asia. Miraculous success of Grameen Bank stimulated founding of other Asian microfinance giants, as BRAC, ASA, or Proshika.
Micro credit programs during the 80’s have improved their methodology and created original security instruments, as obligatory saving of borrowers, collective fund collaterals or mechanisms, which block supply of credit to the whole group if one member doesn’t repay in time. Micro credits are provided to democratically created groups or village communities, whose members are responsible for repayments of micro credits of others. Also, repayment is enforced by village authorities, neighbors and other local institutions, which is an efficient method in an environment, where people know each other. Poor businessmen and especially women have proven and excellent repayment capacity, often with lower default rates than formal financial sector, which, in combination with relatively high interest rates enables to cover the operating costs of microfinance institutions.
90’s witnessed emerging enthusiasm for microfinance as agent of fight against poverty. The sector started to blossom in some countries, leading to founding of complex financial companies and term “micro credit” was step by step supplanted by term “microfinance“, arching over not only credit, but also saving and other financial services, as insurance and money transfers. Integration of microfinance structures into formal financial sector is on the rise.
Interest rates are not below 15-20 % p.a. in Asia, where this sector is well developed and heavily subsidized by governments, up to 70 – 80 % p.a. in Africa and Latin America. The interest rates are high due to considerable operation costs: every debtor must be regularly visited, often in regions without infrastructure, far away from urban areas. Even such interest rates are extremely advantageous for microfinance clients, who have no financing alternatives to many times more expensive and opaque structures of usury.
And the biggest microfinance institutions of today? The flagship of the microfinance movement is Indonesian Rakyat Bank, the largest microfinance institution of the world. This state owned bank serves 22 million of clients, organized in their autonomous village banks. Group ACCION International, pioneer of microfinance, is today one of the first microfinance organizations in the world, spanning its network from Latin America, USA to Africa. ACCION founded in 1992 Bolivian BancoSol, first commercial bank in the world, focusing exclusively on microfinance products with portfolio of more than 70,000 clients
Indian SEWA Bank was created in 1972 as trade association in Indian state of Gujarat, with the aim of strengthening the negotiation power of its members in order to increase their income and employment. In 1973, four thousands of women collected capital and former Mahila SEWA Co-operative Bank, growing into a strong financial group of the present time.
Large international financial groups already know about microfinance. American Citigroup founded in 2005 its own microfinance fund and also securitized micro-loans in cooperation with Mexican largest MFI Compartamos. Deutsche Bank, Merril Lynch, Société Générale or Dutch Rabobank: all these banks are step by step focusing on microfinance as another channel of income generation.
Microfinance in Mexico present a micro universe of its own. This compact geographical region hosts thousands of active players as donor agencies, banks, service providers and microfinance institutions (MFIs) of different sizes, interest rates and methodologies. Although difficult to measure, Mexico has an estimated 42 million poor people, or between eight and ten million poor households as a potential market. Estimates speak about 3 million formal enterprises in the country, about 2.8 million small or micro. Of this sector, only about 100,000 have access to credit from the banking sector. These figures do count myriads informal sector entrepreneurs and other clients. The lacking access to financial services does not only affect the poor, but the country as a whole.
Retail-level MFIs include a group of 29 organizations, most of which are microcredit NGOs organized into the network Prodesarrollo. The outreach of Prodesarrollo, reaches about 350,000 clients. The largest individual member of this group, Compartamos, has some time ago transformed into a regulated financial institution: the rest are not regulated. International networks are interested in setting up operations in Mexico, and the numbers of MFIs of this sort will likely increase dramatically over the next few years.
Currently, Mexican commercial banks are not doing microfinance in Mexico and there are signs of change of attitude. The international donors play a very minor role in microfinance in Mexico. The Ford Foundation has provided some support to many of the associations and federations, the World Bank and IDB funds some legal projects. The Mexican government is heavily involved in every aspect of microfinance in Mexico and is by far and away the most important and influential player in the sector, running several funding programs as FIRA/PROCREA, NAFIN, FONAES, FONOS, PATMIR, BANRURAL, and many others. These programs usually work with established retail organizations or create trust funds the funding is channeled: also, technical assistance along with funding is provided. Despite existence of many institutions, microfinance services only reach a very small number of clients, with an estimated market penetration of less than 10% overall: demand far exceeds supply.
Not all of those modernly run and successful MFIs regard financial services as their ultimate goal. Some progressive and dynamic microfinance institutions as e.g. rapidly growing Mexican FIPS AC, regard the interest rate as a mean to support the merchandising of their clients products, thus strengthening their financial position on local and international markets. This extraordinary dualistic attitude might be a model for future strategies, which are balancing on the edge between commercial and development notion of microfinance and intend to view holistic development of communities, as the best way of how to achieve sustainability.
