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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 8 / January 2005 |
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Voices of Microfinance
Is channelling commercial capital to MFIs an effective way to scale-up?Definitely commercial capital helps to scale-up MFIs. Because I am a private investor and also the CEO of PRODEM Private Financial Fund, I can assure you that if an MFI can find local investors, or international resources that are accessible to top management and general staff of the MFI, it will solve one end of the scale-up equation. However, the real challenge for scaling up comes from true competition, strong MIS, clear strategic planning (5 year at least), state-of-art tecnology and a strong management team that own stock in the company. In Bolivia recently ACCION International, one of the major share holders of Banco Sol, has followed our example, letting their top management buy shares in Banco Sol, but they still have to go further. In our case, in PRODEM PFF, not only do top management own shares but also 600 employees. All of them have used their own resources to buy stock; top management and employees own more than 10% of PRODEM PFF.
- Eduardo Bazoberry
Not unless there is a definite study to determine how any investment is going to have a positive effect on the capital assets of the local microfinance project, the borrowers' businesses and the quality of life for the community and reinvestment at the local level. To computerize all assets into capital cities is not helpful to the small borrower without the above.
- Michaela Walsh
It may not be effective, but I see little choice. Most MFIs having started off on grants soon outgrow the donors' ability to keep the funding going and stand the risk of spending more time hunting for more donors who may not have enough money, and the little they have may come with business-endangering strings attached. Commercial capital is in good supply, is negotiable and comes with manageable strings. Commercial capital, however, has a real cost attached to it and only sustainable MFIs will be able to take it in. We, as an MFI, have been using commercial capital for 5 years from local and foreign sources and are now in the process of issuing a listed bond in the Kenyan capital market. We are still sustainable and unhampered in outreach. Critical however is the delicate mission to the poor which, if not watched, can be pushed aside by the thrill of commercial capital.
- Gerald Macharia
If it is true that microfinance matters, if it is true that the poor are bankable, if it is true that dependency is one of the main constraints to development or, otherwise said, that empowerment of the poor is one of the key prerequisites to successful development, if it is true that MFIs spend too much time and money meeting the reporting requirements of donors, if it is true that microfinance is a viable poverty alleviation tool in the long term only if it achieves commercial sustainability, if it is true that donors are genuinely concerned about their contributions to poverty alleviation, there can only be one answer to this question: YES.
- Bengt Post
Channeling Commercial Capital is definately one of the effective ways to scale up microfinance. It has to be combined with capacity building of the organisation including Human Resource Development, system development and use of technology.
- Jayshree Vyas
Channeling commercial capital to MFIs is key in the process of establishing the conditions for the long-term sustainability and up-scaling of microfinance organizations. Commercial capital prepares microfinance organizations for more rigorous financial discipline and management required from licensed financial institutions and pushes them to continuously improve the efficiency of their operations. In the medium term, the flow of commercial capital can be more reliable than non-commercial sources of funding, allowing for greater scale and continuity in portfolio growth, outreach and overall better strategic planning.
- Guillermo Salcedo,
Channelling commercial capital to MFIs is the ONLY way to effectively scale-up; it combines the microfinance industry's unique knowledge and experience with the financial markets' limitless capital and can transform the world's financial landscape. Donor dollars have demonstrated the viability of microfinance - but cannot fill the enormous gap between supply and demand.
- Geoff Davis
In the continuation of their objective of financing excluded from the traditional banking sector, MFIs are slowed down by the lack of resources. Channelling commercial capital to MFIs may be an effective way to help them grow because it represents an opportunity to:
- Maguette Gueye
Yes we think this is an effective way to scale-up, but commercial banks need first to change their attitude towards microfinance and consider it a recognisable and bankable sector.
- Theresa Esnath Makomva
Only if that incremental capital can be leveraged in a manner similar to that of commercial banks by raising local currency deposits in the domestic market.
- Mohmud Mohamed
The Answer is yes. Microfinance is too fine an instrument to be limited to well-meaning NGOs. For MFIs with a quick turnover the interest is of limited importance and thus commercial investors can also benefit. For many the problem is not the interest but to be 'unbankable' in the traditional sense.
- Flemming Kramp
If the objective is to develop market-discipline among emerging or recouping communities, I think microfinance is very effective, with a qualification. Microfinance is effective for scalability if the program starts with homeownership and then commercial development, or at least organized hybrid units serving both residential and commercial needs. Democratic access to credit is a great virtue, however, access comes with responsibility and dire consequences upon the failure to meet those obligations. When working with impoverished or disenfranchised citizens of the U.S. The method employed at our clinic is budget first, plan second, legal structure, then, credit requests. I am more likely to steer a novice client toward homeownership due to the low odds for success in business. Of course, different places have different factors to consider when predicting the feasibility of any ownership model. In some cases, the whole concept of ownership is an affront to the unique values of the people.
- Daniel Friedson
First, In order to scale-up MFI's also need to move toward commercial sources of funding allowing them to become less dependent on donor funding. This certainly doesn't mean that other sources of funding should be neglected, especially in the initial growth phases of an MFI. Secondly, by so doing MFIs will reduce their subsidy dependence index, improve financial viability and increase the chances of achieving operational and financial self-sufficiency. As a result MFI capital adequacy will potentially allow sufficient capital to absorb possible losses while ensuring gradual financial sustainability.
- Milan Vemic
The provision of commercial capital to MFIs is clearly an effective way to scale up, although not without risks. Commercial capital demands greater focus on efficiency and return on assets employed by the MFI. These are both generally sound requirements, but they can cause an institution to drift away from its original mission. The challenges of maintaining a dual mission - serving the development needs of the poor while providing expected returns to investors and lenders - is difficult and should not be underestimated. The dual mission demonstrates the importance of governance in well-managed MFIs. Management and board need to be concerned with more than creating policy, evaluating performance and ensuring transparency. If the microfinance industry is able to grow by attracting commercial capital, those MFIs with quality governance practices are more likely to simultaneously achieve both social objectives and financial returns.
- Bill Harrington
Unless microfinance becomes a mainstream part of the capital markets and is financed through commercial sources, it will remain in the realm of development aid and its growth will be limited. However, if commercial capital is utilized and utilized profitably, growth and thus poverty alleviation can expand tremendously. So, commercial capital is the only effective way to increase scale dramatically.
- Sebastian Teunissen
Commercial capital usually brings greater financial rigor and discipline among MFIs, which is a critical determinant of financial success or sustainability for MFIs. It really does not matter if the capital is used as a scaling up investment or just for working capital requirements of the MFIs - the effect of this type of funding is likely to be the same. If commercial funds are accessed by new MFIs for large scale expansion, the capital effectively takes the form of venture capital investment. However, it is not likely that too many MFIs will be able to channel commercial capital in this way, at least in the near future. A more practical approach could be to build all round quality within MFIs so that investors are attracted to the business and are willing to invest in a manner that suits both the MFIs and the investors, whether it is for expansion, or piloting a new product/technology, or just to manage the working capital requirements of the MFI.
- Tanmay Chetan
The purpose of micro-finance is to enable poor to become entrepreneurs in their own right. Any opportunity in this direction would be a welcome step. Potential entrepreneurs will be greatly benefited.
- Isan Magimaidoss
The question that you raised is a very interesting one because it is an issue that is currently on the drawing boards here in Vanuatu. My view is that it would benefit MFIs especially in the areas of governance, accountability, MIS development, monitoring, and here in Vanuatu it should also contribute positively to improving the knowledge, skills and experience of members of MFIs to change their mentality from a subsistence mode to one of a better understanding of the cash economy and the commercial requirements of credit financing. MFIs too must begin to operate at a level of efficiency and effectiveness that is similar to commercial institutions.
- George Borugu
All capital is commercial at some stage, whether it is private capital donated to NGOs who channel it to MFIs, or tax dollars (also private before they were paid as taxes) channelled through donor organizations to MFIs - it all starts as private/commercial capital. All capital has a cost. For example, the total US debt is about $8 trillion, and nobody is providing this as a "grant" or "soft loan" to the US Government, they are paying for it. Even if they "grant" capital to an MFI, there is still a cost to those funds that must be recognized to be truly "sustainable." So the question is, do MFIs want to continue to rely on limited, sometimes sporadic, and subsidized donors or NGO funding, or do we want to be parts of the broader financial community and thereby have access to what is essentially a limitless pool of capital from commercial sources? By limitless, I mean as long as we can pay the real costs of such capital. When we scale up, we are going to compete with formal financial institutions both for clients and capital, so to do this sustainably in the long-term, we must be able to access and efficiently utilize commercial capital.
- Paul Hamlin
In my judgement, it depends on the nature of the capital market and on the nature of the market for goods and services. In Central and Eastern Europe, it is not a good idea. There is no reason why MFIs should attempt to replace the role of commercial banks in this region, and in a situation where there is regulation, competition and a market for consumer or small business credit, commercial capital should be channelled to microenterprise through the banking sector. In parts of the world where the banking sector is not efficient, or not adequately regulated, then commercial capital becomes an option. But I think that inevitably it is an economic fact, that the more commercial capital is employed by an MFI, the more it will be forced away from poverty lending and toward the more affluent.
- Allan Bussard
It is true that commercial capital can help most MFI's scale up if all are operating commercially. My personal observation is that most MFI's are socially oriented and profit is not their primary concern hence getting commercial funding can actually slow their operations down as they will be trying to strike a balance between outreach and sustainability. Whilst I also agree that most MFI's run short of loan capital because of sole dependence on Donors, the injection of commercial capital must be augmented by a good return on income from the portfolio. By trying to increase income institutions tend to move away slightly from their target clients in search of higher returns. This can lead to their looking for larger borrowers and scaling down on quantity, which will definitely reduce the numbers of clients.
- Dyson Mandivenga
It seems to me that there are only two good ways to approach scaling-up: (1) access savings deposits (2) attract commercial capital. Since the two go hand-in-hand (one cannot usually access savings without commercializing), it would seem to be a logical approach. For our institution, it increased our lending capacity five times almost overnight.
- Sharmi Sobhan
Absolutely. The guiding message to all practitioners in today's world should be SUSTAINABILITY. What do I mean? In the past, grants, patient seed capital have been necessary for us to reach the present level of awareness of the need to provide financial services to low income and poor people. But with inevitable donor fatigue, the introduction of commercial capital forces practitioners to become real entrepreneurs. Among other strategies, we would question our business models, cost control, effectiveness of technology deployment, human resource competencies, etc. MFIs would then assume their rightful place as drivers of development and change in developing and developed economies worldwide.
- Dolapo Ogunmekan
I write from Zambia, a country in which microfinance is still relatively new, young and working towards sustainability. While in its initial stages of development the industry is being supported by donors (this is essential), we do believe that this will not continue to be the case as donor funds are finite. Hence, the need for MFIs to become sustainable and begin utilizing or obtaining funds from commercial sources, including mobilising public voluntary deposits. This will enable MFIs to reach more people than is presently the case. In Zambia, despite the small size of the industry, MFIs are already expressing that perhaps the major problem they face in expanding outreach is their inability to access funds for expansion. Consequently, they are unable to reach a critical mass of clients that would generate sufficient income to cover costs. This will subsequently delay their entry into the group of sustainable MFIs.
- Webby Mate
Yes, commercial capital is needed, because public capital is not sufficient and adequately directed to the poor rural areas of the world. Today, the Asian countries represent over half of 4 billion poor and low-income people in the world. Therefore, channelling public and commercial capital, particularly to the populous rural areas of countries like India, Bangladesh, and China, would essentially increase the scale of poverty reduction in the world. However, it is a big challenge to organise and control such extensive financial activities, and to keep them clean from corruption.
- Leif Söderlund
Based on ADA's experience, channelling commercial funds to MFIs allows them to scale up. However, not all MFIs are ready to take commercial funds, and a premature increase in funding could do more harm than good. A relatively mature MFI, which has an efficient microcredit methodology and good portfolio, and which is able to cover its operational costs, often needs, if it takes the decision to grow, additional financial resources. Moreover, commercial funding encourages the MFI to increase its rigor in terms of governance and transparency, and will heighten its credibility for additional funding from other commercial sources. Through access to commercial funding, an MFI enters a virtuous circle, leading to better performance and quality of service, sustainability and deeper outreach.
- Véronique Faber
At its outset, the Hawaii Community Loan Fund (www.hclf.org) blended government and private sector aid with rather high interest, medium-term commercial capital from several commercial banks. Each investor imposed disparate financial covenants and reporting requirements on the fund. Several years later HCLF is at a critical juncture -characterized by disproportionately low equity and high operating and high human resource costs by peer-comparison. Incessant granting of loans, reporting, turnover and low-tech adoption converge with an over-reliance on commercial capital to stymie HCLF attaining sustainable scale and making a positive net impact. Our future remains uncertain.
- Eric Abdullateef
I am of the view that channelling commercial capital to MFIs is indeed an effective and best way to scale up. There are a number of reasons for this: Firstly, commercial capital, unlike grants, entails that MFIs will repay with interest. This has the advantage of ensuring that the capital is efficiently and effectively utilised as contrasted to a grant, which could be utilised with laxity knowing that it will not have to be repaid. Secondly, commercial capital encourages MFIs to commercialise their activities as well, which has the advantages of ensuring sustainability. Thirdly, commercial capital will normally be available without much of the conditions entailed with a grant. In this case, commercial capital enables MFIs to invest the capital in their best interest.
- Kennedy B. Lweya
The question 'Is channelling commercial capital to MFIs an effective way to scale-up?' has recently become very relevant in our own work with credit unions in less developed countries. Credit unions are very different from more conventional MFIs in that they are member-owned democratic institutions, managed by their members and generally entirely reliant on members' savings for on-lending. Evidence suggests that utilising credit unions as channels for external lines of credit (be they commercial or of other nature) is detrimental to the long-term institutional and financial development of the credit union. Savings growth will not be stimulated (unless actively promoted), savings might even stagnate as a result and the credit union may become borrower-dominated. Loan repayments have been noted to deteriorate because external funds are less likely to be repaid than members' savings. If you have any other information on this issue, relating to particular credit unions, I would be very interested in receiving it.
- Nancy Belfiore
We think that for the MFIs which are at starting phase, commercial sources can't be profitable since they are at a learning step and due to their high need of resources to face charges of capacity development, and to attain their expansion goals, they are often obliged to have recourse to donors' funds and other subsidies to raise efficiency. Channelling commercial capital is therefore only strategic for MFIs which reach the integration step where they master their charges & profits properly and are more able to face risks and to be competitive even with a commercial capital.
- Jean Jacob SAHOU
I believe it is the best way to hit the roots. The rate of return increases as the scale of enterprize decreases. If we observe the market indexes for the last couple of decades, larger corporations have given lower return than small cap companies. And small cap companies have given lower return than venture capitalist firms. The problem could be that, without proper infrastructure, it cannot be handled, e.g., there may be a lack of skills to keep an accurate accounting record of such small scale loans.
- Anas Sabri
Bosnia and Herzegovina (BiH) offers a great example on how positive commercial capital has been in expanding already financially sustainable microcredit organizations, and breaking donor dependence to finance portfolios. As well, scale-up has been possible in two ways: by giving access to vulnerable non-poor who were not bankable but not suitable clients to microcredit due to the donor poverty focus; and by retaining clients with their increasing financial needs. From access to commercial capital, this market expansion and client diversification enabled institutions to reach greater economies of scale and higher levels of efficiency while maintaining and increasing their primary client targets. However, according to high-end MFI forecasts, commercial capital scarcity might appear in the years to come; commercial supply will not meet the exponentially growing needs of institutions. This situation and the up-coming new legislation will nurture the sector to initiate mergers, create linkages with other financial institutions, and create portfolio supplies from indigenous sources of capital. UN agencies were positive in building the microcredit sector in BiH. The World Bank has been instrumental in providing seed capital, policy advice and extensive training programmes. In the early humanitarian phase, UNICEF supplied large amounts of pro-poor loan portfolios with evolving limited constraints towards client selection and reporting. UNDP stimulated rural and agricultural lending practices through targeted technical assistance and loan portfolio, and as well in launching its Best Practice Award last year. Nonetheless, CGAP was pro-active in tracking investors' interest toward Bosnian MFIs. Coordinated efforts lead by the World Bank and synergies between donors, executive agencies, NGOs and multilateral organizations were milestones in building a credible microcredit sector that involved investors to finance substantial portions of lending portfolios.
- Guy Dionne
I believe it does help in scaling up but many times compromises the depth of outreach. Often commercial funds have strings attached, and MFIs for the sake of better returns or even stipulated by a commercial lender move away from micro-enterprises. There are also examples where MFIs are able to retain their focus and may even channel more funds from the profits they generate from investing commercial capital into larger businesses. I guess the bottom line is how "well" (depending on their mission) the MFIs are able to use commercial sources of funding.
- Owais Parray
Yes, channelling commercial capital is one of the effective ways in scaling up microfinance operations. The simple reason is the grant money available is not sufficient to meet the needs. Before channelling commercial capital to MFIs, the MFIs should be assessed properly in the areas of Governance, systems, procedures, controls and capacity for a wider outreach. Sustainability of the MFI is another key factor one has to look into before channelling commercial capital to them.
- J Milton Devadosan
From a purely economic viewpoint, commercial capital is a channel that can assist MFIs to scale up. From a social view point I see a potential conflict of motivation . MFI -NGOs do what they do on a non-profit basis. Owners of commercial banking institutions invest for profit. If a happy marriage of the two can be achieved, commercial capital could be an effective way to assist MFIs scale up. Another consideration on the use of commercial credit by MFIs is, "at what price?"
- Esdee Kanu
MFIs, to be sustainable in the long run, have to source cheap capital. Commercial Capital is not always cheap. The costs of dispensing micro loans is very high. In order to keep the costs low enough for poorer clients to afford them, the cost of funds for the MFI have to be low, ie, a mixture of commercial capital, and deposits (low cost) from the members.
- Ramakrishna
Scaling-up through MFIs could face enormous challenges depending on the nature of investment opportunities available to their clients and the type of clients intended to be reached through the scaling-up. There are MFIs operating under difficult environments, and for these MFIs and their clients, the scope for scaling-up is very limited.
- Chekol Kidane
Channelling commercial capital to MFIs can be an effective way for scale up assuming the institution had adequately capitalized from cheaper sources of capital i.e grants. And also if the conditions of such "channelling" has been properly aligned with the needs and situations of the MFI in terms of the cost of capital versus the administration cost in microfinance and other conditionality.
- Esther P. Yamat
The microfinance sector is facing acute capital starvation and it is painfully undercapitalized. The mutation from charity to commercialization of welfare has to be monetized only through the commercial capital. The present decade is fast witnessing microfinance as acceptable sector by the commercial finance markets. The leverage of mainstream commercial resources can only scale up the microfinance sector which is otherwise cash starved. Microfinance is the inclusive financial sector and commercial markets stand to gain through the outreach which can become captive market for other financial and service products.
- R. Divakar
Microfinance has to be an empowering process in itself which is initiated by small thrift and credit activities by poor people. Progressive credit linkage should strengthen the poor to become credit worthy for commercial capital. Channeling commercial credit would be appropriate as the cost would still be reasonable for the informal nature of loan. In case the borrowers are required to reach the commercial entities the poor need to be guided and warned by NGOs/MFIs of commercial exploitation as well.
- Nixon Mathur
Absolutely. Commercial capital is imperative for us to meet the demand for financial services by the world's poor. At Grameen Foundation USA, our leading grassroots micro-finance partners are already beginning to tap the capital markets, unleashing what could become vast amounts of capital on attractive terms and driving rapid scaling-up. In India and other countries, we are providing catalytic capital and strategic consultation to facilitate groundbreaking financial transactions, including securitizations, bond issues and others. These innovations are especially critical where MFIs are restricted from mobilizing savings. If we are to reach the hundreds of millions of poor families who currently lack access to capital, the financial markets will need to play a major role.
- Alex Counts
We strongly believe that leveraging private capital is indispensable for a further successful and sustainable development of MFIs and we already organised in November 2004 a 2 days conference to discuss this issue and to bring together MFIs, donors and Microfinance Investment Funds. You will find more details and valuable insights on the website of this conference: http://www.kfw-entwicklungsbank.de/EN/Fachinformationen/FinancialS15/Events29/Symposium24/Inhalt.jsp
- Dr. Mark Schwiete
I believe the simple answer is yes, the cost structure and on-ground presence make the MFI organisation an advantaged agent for the purposes of capital allocation. Somewhere along the spectrum of becoming commercial this might change. What is needed is better arrangements between capital providers (banks and markets) to facilitate massive capitalisation of the opportunity. CK Prahalad should be obligatory reading. In addition the NFP MFI are to be preferred in the first instance as the holistic development of the sector and the client is essential, pure profit motivation is not appropriate.
- Jon Hartley
We believe one need not reinvent the wheel and that we could look at existing business solutions to apply to MFIs. The mortgage and credit card industries have grown into trillion dollar businesses. MFIs can follow their examples. Securitization has been instrumental in getting loans off balance sheets, and diversifying the risk so that the loans can be converted into securities to be held by a large base of investors. Over time, we believe the same can be done for MFIs.
- Linda Pei
In UNDP Pakistan's experience the response is affirmative. Commercial capital provision is indeed an effective vehicle for scaling-up MFIs. However this is conditional upon:
- Faiza Effendi
Definitely yes, but we must take into account the level of development of the MFI. Start-up MFIs do need donor funds and concessional funds to strengthen their financial basis. Emerging MFIs need to mitigate both commercial and a great deal of concessional funds to achieve the same goal. But for financially strong MFIs like ACEP and so on, commercial funds are the only way to scale-up for mainly 2 reasons:
- SEYE Massina
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