UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 13 / June 2005

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Update

on the International Year of Microcredit 2005

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Past Issues

By Micki O'Neil, joint degree student with the University of Chicago's Harris School of Public Policy and Graduate School of Business

Nearly 300 microfinance practitioners, business leaders, distinguished academics, and students from across the globe gathered at the University of Chicago's Gleacher Center in downtown Chicago on Friday, May 20 to discuss the promise and challenges of the commercialization and continued growth of microfinance.

Inspired by the International Year of Microcredit, and organized by graduate business and public policy students from the University of Chicago and Kellogg at Northwestern, the conference brought more than 30 speakers together to focus on the bridging of microfinance and business. Expanding the Frontier: Transforming Microfinance into a Global Financial Markets Instrument included representatives from large commercial banks, regulated microfinance institutions, local non-governmental organizations, economists, and others.

Marilou Uy, financial sector operations and policy director at the World Bank, outlined in the keynote address three trends that comprise commercialization: the down-market entry of commercial banks, microfinance institutions becoming more commercially oriented, and the establishment of partnerships between corporations and specialized microfinance institutions.

The first panel immediately expanded on these developments, as speakers representing Citigroup, Women's World Banking, the nonprofit South Pacific Business Development Foundation, SKS Microfinance, which recently transformed into a for-profit bank, and New York University explored "The Challenges and Opportunities of Commercialization."

"The ticket to play is commercialization," Vikram Akula, founder of SKS Microfinance in India, said in describing his organization's transformation from nonprofit to profit status. He cited access to capital markets, restrictions on product offerings for unregulated financial institutions, and efforts to foster a "new level of rigor and discipline" as driving the conversion.

On the other hand, Robert Annibale, Citigroup's global director of microfinance, said that large commercial banks, while having the capacity to manage risk, provide capital, and offer a range of financial services, must "accept a bit of humility" that this remains new territory for them and often extends beyond their expertise. For this reason, Citigroup's microfinance business unit, recently created to build upon the company's long-standing philanthropy efforts in the sector, forms partnerships with local institutions that have nurtured trusting relationships with borrowers and developed specialized expertise in microfinance.

Throughout the day, panelists cited capital constraints as a primary force driving the commercialization of microfinance institutions. Annibale noted that organizations with which its foundation works began asking to approach Citigroup as bank clients. Echoing Akula, John Fischer from ACCION International said his organization shifted away from an NGO model because donations could not meet their demand for funds.

As the founder of a leading non-profit microfinance institution and Advisor to the International Year of Microcredit, Greg Casagrande emphasized that he believes financial self-sufficiency is central to achieving his core mission of poverty alleviation because it enables the South Pacific Business Development Foundation to guarantee permanence to its clients and remain unaffected by the whims of donors or governments. He said 95% of SPBD's financing has come from soft and commercial loans.

"Charity is limited. Profit is not," Mary Laraia, senior vice president of civic and community development at LaSalle Bank, said in describing the constraints on further development lending initiatives by LaSalle and its parent company, ABN AMRO. For the company to expand its operations in microfinance, it will need to develop models more profitable than the small development banks it currently supports.

An additional common theme that emerged from the day's conversations was the need for continued innovation and departure from traditional modes of banking.

"Fresh ideas are needed here as much as resources," Jonathan Morduch, a professor of economics and public policy at New York University, said, reiterating a point from Uy's keynote. He added that not enough attention has been given to the "nitty-gritty details" of product design.

Fischer said that while ACCION emphasizes the commercial model in its expanding global network, it recognizes that NGOs are a necessary continued model for microfinance, particularly as innovators in the field. Fischer's comments echoed those of other participants who identified NGOs as more willing to accept risk and develop innovative microfinance directed to the most poor.

Many panelists emphasized the need for improved regulatory frameworks that allow for flexibility in developing new products and structures to address the unique demands of the poor. Others added that regulatory systems in many countries have not adequately incorporated microfinance institutions.

While panelists repeatedly referred to demands of efficiency and scale that require microfinance institutions to operate like commercial ventures, many also cautioned against thinking like traditional banks.

"Like Muhammad Yunus said, we must forget what we know about banking," Mauricio Moura, executive manager of Unibanco Microvest, said, referring to his meeting with the Grameen Bank founder. Unibanco, Brazil's third largest bank, is expanding its microfinance operations as part of its business plan to tap into Brazil's vast informal sector, which Unibanco estimates at 40% of the country's economy.

Academic panelists like respected University of Chicago professors Robert Townsend, economist, and Richard Taub, sociologist, often tempered participants' visible excitement with more measured assessments of microfinance that cautioned against exaggerated claims. Townsend, Taub, and Morduch all discussed the difficulties in isolating microfinance's impact on poverty reduction. They also underscored the prevalence of examples of unsuccessful microfinance.

"Despite all the euphoric talk," the returns to microfinance would not be enough without donations and subsidies, Bhagwan Chowdhry, finance professor at Anderson, UCLA's business school, said.

Those involved in microfinance must be clearer about what its goals are and what it can accomplish, Taub stressed more than once. He questioned its broad assurances of profit, poverty alleviation and women's empowerment, and warned that despite "the dream about perpetual motion machines," microfinance will continue to require subsidies.

"We do have to face that there will be tradeoffs [between poverty alleviation and financial returns]," Morduch said, adding that "perhaps we [in the microfinance industry] have been too glib about this."

In response to the question of whether or not microfinance impacts poverty, Annibale quoted his former boss at Citigroup, Stanley Fischer: "I think so - I sure as hell hope so."

Conference details

Inspired by the United Nation's International Year of Microcredit, students from the University of Chicago's Graduate School of Business and its Harris School of Public Policy and from Northwestern's Kellogg School of Management organized the first annual conference.

LaSalle Bank, the Ford Motor Company Center for Global Citizenship at Kellogg, and the Graduate Business Council at the Chicago GSB sponsored the conference, with additional support from Grameen Foundation USA and the United Nations Capital Development Fund (UNCDF).

In addition to the topic of commercialization's opportunities and challenges, the conference included panels on evolving models for microfinance, financial innovation and strategic risk management, and best practices. Five "Lunch and Learns" allowed attendees to explore relevant issues with leading thinkers and practitioners in smaller settings. The sessions covered the topics of leadership and career development, eradicating poverty through inclusive economies, SROI analysis, branding microfinance, and microfinance in Brazil.

The day's formal sessions concluded with a discussion moderated by Christina Barrineau, Chief Technical Advisor for the International Year of Microcredit, entitled "What Lies Beyond the Frontier? Exploring the Future of Microfinance." In addition to Annibale and Taub, Grameen USA CEO Alex Counts and ShoreBank president and founder Mary Houghton contributed their insights to the panel.

Additional speakers included Louise Schneider, Women's World Banking; Cate Ambrose, The Economist; Rick Halmekangas, Opportunity International; Maya Chorengel, president of the Dignity Fund; Andre Laude, International Finance Corporation; Sam Moss, partner at Gray Ghost Microfinance Fund LLC; Saurabh Narain, head of new markets tax credit funds, Shorebank Advisory Services; Tom Coleman, Microfinance Consulting; Kip Darcy, Hewlett-Packard; Michael Eber, Grameen Foundation USA; Anna Paulson, senior economist at the Federal Reserve Bank of Chicago; Rob Gertner, economics professor at the University of Chicago Graduate School of Business; Eduardo Carlos Ferreira, Unibanco Microinvest; Beth Houle, Opportunity International; Leslie Barcus, president of Microfinance Management Institute; Bill Kramer, World Resources Institute; and Julie Peachey, Grameen Foundation USA.