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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 17 / October 2005 |
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Voices of Microfinance
Q. How will international private sector investment change the face of microfinance? Editor's Note: The majority of respondents to this question felt that private sector investment in microfinance will have a significant impact and that such investment is a good thing. Some changes it could bring include: increased scale, enhanced outreach, efficiency, adherence to prudential norms, innovative financing mechanisms and professionalism. One respondent felt that the involvement of the private sector would address problems of corruption - saying that in Africa, for example, donor funds often do not reach the intended recipient - while another contributor thought that private sector investment would increase the risk of money laundering. A few respondents felt that international investment was not the ultimate tool to address demand for financing, but should instead act as a "catalyst" for engaging domestic resources. Several participants were concerned that such investment could draw microfinance institutions (MFIs) away from their social missions, and that MFIs should select investors with a grasp of the social implications of microfinance. As one put it: "Socially responsible investments can provide greater assurance that the poor and disadvantaged will not be left behind". But perhaps the introduction of a profit motive will not have such a radical impact. One contributor suggested that the effect might actually be "subtle" - as greater competition compels banks to seek opportunities down-market, this "indirect investment force" will have the most significant impact. Or as another pointed out, private sector investment might simply establish a good business model, attracting further investment to achieve the coveted goal of extending massive outreach to poor people around the world. *Thank you to all those who contributed their expertise to provide valuable insight into this question. International private sector investments have already improved flows of finance to MFIs in many countries. Considering the scale of finance needed for meeting the apparent demand levels in most countries, the private sector will find microfinance to be a lucrative yet meaningful line of investment. Their relevance is the highest in economies where domestic capital is restricted or limited, and where MFIs do not have easy access to competitive sources of finance. Countries like Cambodia are a case in point, where almost all of the investment in microfinance comes either from donors or from the international private investors. In addition to meeting the demand for finance, such investments can also have a positive effect on the governance structures of many MFIs, since we still see a number of MFIs with weak governance and low accountability for their owners. There is also a risk in commercial flows, of diluting the overall objective of microfinance. The pressure on MFIs to be financially attractive and to be able to provide a lucrative rate of return to investors can sometimes lead to significant changes in operating strategies and missions. Thus, the MFIs will do well to choose private investors who understand the social responsibilities of microfinance along with the need to be financially sustainable.
Tanmay Chetan
It is estimated that there are up to 3 billion potential clients in the microfinance market. Less than 500 million people are currently being served by socially oriented financial institutions. In order to stretch the supply side, we need more, and more 'investments' and not 'grants'. Donor money should go towards capacity building of MFIs and boosting equity. Private sector investments in a regulated environment, will bring about: changes in the ownership structure; adherence to prudential norms set by regulators; professionalism of operations; enhanced outreach (will help the organization to 'down scale' the operation); and efficiency in lending operations.
Rajan Samuel
International private sector investment will change the face of microfinance, but perhaps not in ways that the main actors anticipate. Surely, it will produce pressure for profitability at the "bottom of the pyramid" marketplace. But it could well simply demonstrate the business model so that major players will enter the field. HSBC, ABN Amro and Citigroup are all eyeing the microfinance market. And we can also expect it to unlock a range of new financing initiatives which will move beyond the normal financial products (credit, savings, insurance, etc.). With increased pressure from globalisation, with markets for microentrepreneurs facing global competition, a range of new business opportunities will attract creative finance. These will be: fair trade finance, venture capital for SMEs in the south, cheaper remittance services, finance for logistics, etc.
Allan Bussard
International private sector investment can play a key role as microfinance sectors develop in different countries and become more formal with the establishment of legal frameworks to allow for adequate regulation and the provision of a wider range of products, such as: savings, deposits, remittances, microinsurance, currency exchange and others. More and more non-regulated microfinance organizations will likely seek private sector investors, local and international, to support their transformation and regulated banking and non-banking MFIs will need additional capital investments to meet their growth needs. However, it is the type of investment objectives - whether socially responsible or profit maximizing - that will determine how the face of microfinance may change. Although the latter may certainly also contribute to increasing outreach and the economic development in countries in need, I believe that socially responsible investments can provide greater assurance that the poor and the disadvantaged will not be left behind.
Guillermo Salcedo
International private sector investments could play an instrumental role in increasing the breadth and depth of microfinance, as well as in introducing new and innovative services to target groups. However, the array of institutions classified under "international private sector investments" has to be clearly defined and studied on a country-per-country basis. This is particularly important since the entry and operations of investment funds, banks, and the like are normally subject to prudential regulations of line ministries and central banks of the country in question. If we're also including international private sector banks, insurance companies, and venture capital funds, this is more accepted by prudent MFIs and practitioners since these will bring about active governance besides fund leverage. Moreover, it should be noted that microfinance is a "single currency denominated activity" meaning that loans to borrowers, as well as installments are affected in local currency. This points to the direction where international investments should be paired by a "foreign exchange (Fx) risk mitigation function" to safeguard leveraged MFIs against risks of local currency devaluation, a case that is common in developing countries. In short, international investments would have a higher effect if viewed as a catalyst for encouraging more domestic investments to move to microfinance initiatives, and not as the solution for filling the gap between demand on, and supply of financial services. Another valuable contribution of international investment is to introduce innovative funding/leverage/guarantee schemes to MFIs.
Magdy M. Moussa
The impact of international private sector investment on microfinance will prove to be more subtle than many expect. A rapid expansion of private investment capital for microfinance often channeled through specialized funds has mobilized significant capital for microfinance. Capital, however, may be outweighed by the capacity-building and institutional development that accompanies these investments, lending meaning and structure. Broader international private sector investment forces are also to be considered. In countries such as Pakistan, private investment in multi-national banks combined with policies that generate greater competition has forced many banks to seek new markets - pushing down market towards consumer finance, low income housing finance and other services that reach much closer to and into microfinance markets. These indirect investment forces could become much more powerful forces for change in microfinance.
Gregory Chen
Private sector investment must play a central role in the future growth of the microfinance sector if we are to sustain growth rates of 30 percent and above. We believe, however, that domestic private sector investment - financing in local currency from local banks and capital markets - rather than international, hard currency investment can and should take the lead role. The opposite now occurs: a 2003 CGAP survey showed that 70% of total foreign investment was debt made in hard currency. Since more than 90% of the world's poorest live in the non-dollarized economies of Asia and Africa where microfinance assets are in local currency, hard currency financing is inappropriate. MFIs would be better served if international investors focus on facilitating the participation of local financial markets in microfinance.
Jennifer Meehan
It is estimated that global demand for microfinance currently outstrips supply by a ratio of approximately 30:1. International donors and governments may be able to make up some of this shortfall, but real progress is unlikely without access to large-scale private capital. The emergence of commercially viable microfinance organizations capable of operating without donor or government subsidies is a crucial first step in this direction. The next will surely entail opening up such organizations to socially conscious institutional investors, including pension funds and insurance companies. For this to succeed, the microfinance industry will have to educate investors about the growth potential for microfinance as a distinctive 'asset class' with documented financial as well as social returns. Increasing numbers of microfinance organizations, meanwhile, will have to transform their ownership and governance structures to become private incorporated legal entities with credible commercial leadership. If microfinance is to achieve its full market potential, the question is not how international private sector investment will change the face of microfinance, but equally how the face of microfinance will have to change in order to attract it.
Nazik Abdiyeva
The international private sector should view microfinance as an investment opportunity. We have witnessed tremendous growth in the area of ethical funds and similar investments. The advantages of microfinance include a low correlation with the primary markets as well as higher interest rates compared to those of fully developed markets. If we are able to create a framework that will increase the safety, transparency and liquidity of the investment, it is my opinion that the microfinance sector could become an attractive area for the international private sector. There is a need for the international agencies to turn away from the funding of operations and focus on insuring and creating an international legal framework for the microfinance sector, especially in emerging countries. This will in turn create the market for the private sector to start investing actively in the microfinance market.
Jose Ignacio Zabaleta Kaehler
I believe that the influx of private sector investment into microfinance would drastically reduce the cost of funds, and help increase deeper penetration into hitherto untapped markets. However, an added risk of money laundering would be part of the package, and hence due diligence standards would have to be enhanced.
Vivek Sharma
In Africa and Nigeria in particular, finance from donor governments does not reach the target audience. If the private sector gets involved this could be averted. Project choice, monitoring and evaluation will be grassroots oriented and will work towards eradicating poverty and illiteracy, which remains the root cause of most of Africa's problems. International government donors may mean well. I say "may" because following the drama that has ensured on the stage of dept forgiveness, one is left to wonder if these loans are not meant to impoverish Africans even more, knowing very well how these funds are allotted back to them by African leaders, which truly becomes all profit for them. Finally, African governments oftentimes have irresponsible and poor priorities, as our leaders usually embark on projects aimed at only fueling their egos, immortalizing themselves with their funds from donor government and agencies. Where these funds are properly channeled by the international private sector, agriculture, health and education would no longer be paid lip service, but concrete steps would be achieved, as the populace will take their destinies in their own hands.
Dr. Eke Steve Chibuzor
Microfinance could face two situations in the process of investment by international private market players. First of all, international players could increase the demand for merchandise of the market. There could be rapidly growing fund transfers, consumptions of goods and gained taxes by government. On the other hand, the international private sector designates the pricing strategies in the local market which could be aggressive and causes losses on profits of local players. This would mean governments would obtain less taxes, and small and medium enterprises (SMEs) would face a human resource problem because of profit losses. Regulation on the profit transfers and market price strategies can control the market situation.
Gokboru Tekin
Private sector investment has the ability to change the face of microfinance in a number of ways depending on the structure that is adopted in order to acquire the investment. If investment can be secured from the public in the developed world, then a number of things may happen. Firstly, two myths could be debunked, one that poor people do not have the ability to deal with money and two, that dealing with poor people and money is inherently exploitative. Secondly, it would radically diversify funding sources and allow for a much broader pool of resources to be tapped. A small amount from each member of the public in the developed world would provide enormous amounts for development, possibly eventually solving the problem of further resources for the MDGs and the like.
Garrett Wyse
Governments have failed to provide housing solutions to the poorest socioeconomic communities. Lack of money, inadequate programs, corruption and many other causes have made 25% of the world populations live under a roof with no future at all. Private sector investment in housing microfinance provides the technology, materials, training, supervision and social inclusion as a full program to provide a self built home to the poorest families. In Mexico, this kind of microfinance has contributed to the construction of 25,000 houses. Thanks to the private sector investment program provided by the larger cement companies, hundreds of thousands have been helped.
Francesco Piazzesi
In most countries, private sectors play a leading role in economic and social development efforts. As we believe in the fact that communities are the units of development focus, we must put due emphasis on the nature and needs of the communities targeted for providing changes. International private sector involvement through financing and monitoring can bring effective results in the field. International stakeholders and sharing partners should consciously avoid all sorts of consulting and controlling mechanisms, which cause major failure in the long run. Meaningful coordination under national and state laws must be established by the sponsor organization for the prompt and mutual interest and at the same time for ensuring speedy and sound service delivery systems. With the active international private sector participation, our local microfinance institutions can create miracles in the present and in the future indeed.
M. A. Razzak
MFIs will move from informal to formal in order to "facilitate" foreign private sector investment. They will have to put more focus on all corporate governance issues (more professional management, better audit and internal control, more detailed MIS, etc.). More and more MFIs will go for a financial and/or social rating of their institution. There could come a change of mission (either official or in the facts) resulting in more attention on the "bottom-line" and less on their (initial) social mission and more focus on volume instead of a personalized approach towards clients. The small MFIs will disappear or will be forced to cooperate with bigger institutions (i.e., local savings banks with similar social mission as MFIs).
Mark Bienstman
Now microfinance is considered the best tool to reduce poverty in developing countries. National governments and international funding agencies are eager to help the underprivileged by providing microfinance through groups like self-help groups (SHGs) which will do planning and monitoring and collection of credit which is essential for reaching all sections of the community. The private sector with its flexibility could change its system and methods as per needs of the ground level. It will help the community in larger ways with its vast resources and its flexibility in the system. But the main point to be noted is that oftentimes, the private sector views or formulates its channels of investment according to their personal interests and priorities. Therefore, a social-minded private sector is essential for microfinance.
K. Ganesan
In order to gain the potential for almost universal access to microcredit, microfinance institutions (MFIs) must dramatically increase their size and outreach. Within the microfinance world, it is becoming increasingly clear that donors are willing to initiate and improve institutions, but are not willing to continually fund loan capital. Many MFIs are prohibited from attracting savings, which is a viable source of funds. Finally, retained earnings are a source of funds, but most MFIs are constrained by their social mission and the market they operate in, so profits will only marginally increase their outreach. The only remaining option for large amounts of loan capital is commercial or private sector investment. These sources of funds may require re-thinking of how MFIs operate, fit with social objectives and increased sophistication of financial risk management. Each of these actions will be beneficial for the institution.
Paul Hamlin
A new concept, international private sector investment (IPSI) in MFIs is an important and growing component of total fund management. Now, most MFIs are dependent on domestic sources of funding. The microfinance industry is not a part from conservative thoughts like donations and subsidies. Donations and subsidies make MFIs dependent and inactive. IPSI allows MFIs to abandon their traditional approach to financing. IPSI can play a vital role in improvement of good governance, building trust for local people and enhancing local financing and transparency in their transactions. Besides this, an MFI can get adequate hard currency debts to increase their outreach and network. MFIs can derive international practices, tools and techniques for standardization and professionalism. In this way IPSI makes fair competition between MFIs for their health and sustainability.
Govinda Bahadur Raut
International private sector investment has the potential to significantly impact the face of microfinance. Banks, other lending institutions and wealthy individuals are constructing large-value loan instruments with the money destined for countries and microfinance institutions with proven records of success and/or where an existing banking relationship exists. If the private sector is willing to enter into an open dialogue with microfinance institutions, to understand the MFIs' culture, to learn how microfinance works and work together to decide on how its investments can best be used to improve the quality of lives of microfinance clients, then we think the face of microfinance will change in a positive manner - and potentially change the face of the established financial sector.
Catherine Rowan, U.S., Maryknoll Sisters
Depending on our experiences, we need to establish some new vision of microfinance in the face of a world financial revolution in the near future. Microfinance has a real and profitable market in many developing countries. The promotion and development of microfinance will lead a world financial revolution. Microfinance can be a very significant and profitable financial sector for international private sector investment.
Xiaoming Ren
Any private or public sector investment in microfinance should focus on microfinance as having an essential role in the livelihoods of the poor, and its contributution to poverty reduction.
Thin Khaing
As a panacea, microfinance has been proved to be one of the most powerful instruments for poverty alleviation, which could ease the problem from the disease of poverty. In this context, international private sector investment could certainly change the face of microfinance. It will be able to reach the objective of providing services to the needy. There are two ways to do this: (1) governmental arrangements, or (2) private sector initiations. Developing nations must create a separate national microfinance policy; form Ministries for Rural Development and Poverty Alleviation; adopt practical legal frameworks; create modes for effective and efficient service delivery to rural areas; and minimize cost.
KB Kunwar
There could be a number of effects. The positive effects would be better management of the resources, proper- follow-up, utilization and recovery, better counseling, and improved coordination and efficiency to employ resources. However, there are some serious drawbacks as vested interest, partisan politics will dominate. The development agenda will be sacrificed at the altar of better geographical coverage and meeting statistical targets. Insensitivity to the real needs and problems of the poor will be pushed down in the priority ratings. It is difficult to curb the profit motive in any private program. Just to cite the fact that many high-ranking officials of charity projects are living a life at par with the officials of commercial ventures.
Dr. Devendra S. Kunwar
Private investment would demand an appropriate environment in order to assume the risk involved in microfinance projects. International investors will compare different MFIs looking for suitable practices. Therefore, private investors would make a choice between the MFIs that operate following market practices (such as having cost-reduction boards, balance-scorecard reports or innovation departments, to mention but a few) and those MFIs that do not. These choices would function as the "natural selection", leaving the former without private resources. Although important efforts should be made in order to assure that the most vulnerable people would still be the main target of the MFIs, I believe this scenario will be positive both for the MFIs and those whom they assist, since through market-oriented practices microfinance can defeat poverty.
Lic. Federico J. Melli
The market for demand for financial services for the poor is huge and the outreach of microfinance institutions is concentrated in scattered pockets. In India, barely 3-4 million poor families of the estimated 60 million families are covered by the microfinance sector. The government-backed formal sector has achieved some success but at the cost of flexibility leading to increasing dependency on such families upon high cost services of the informal sector. International private sector investments can bring about a sea change in the microfinance sector through: innovative products/ mode of services; competitive cost of services; extended outreach; sharing and implementation of best practices across countries; choice of suitable products/services; scope for linkages with business opportunities across the world; evolution of regulation, transparency and standardization of norms for effective and fair transactions; local-international partnerships; and global information exchange.
R.Nalini
Most of the people who lack credit in developing countries are in rural areas. The issue now is to assist in establishing microfinance institutions in rural areas. International private sector investment should aim at investing in rural areas with an accommodation of improvement of rural infrastructures, especially the rural roads, so as to ease communication and enable more access to rural areas for frontline staffs of the microfinance institutions who may go there first for mobilization and capacity building as the foundation of microfinance.
Charles Ichulangula Mwesiga
International private sector investment possess prospects of changing the face of microfinance significantly. Lack of business orientation and still viewing microfinance in a humanitarian assistance mode is one of the biggest challenges faced by microfinance sector in most less developed and underdeveloped countries. Such investment may be instrumental to meeting the funding needs of potential and viable microfinance institutions. If these MFIs demonstrate success in expanding outreach by maintaining viability, this could be instrumental towards changing attitudes and perceptions of planners and policy makers towards the microfinance sector as a whole. This will help in shifting the frontier of microenterprise finance and ultimately increase the outreach of microfinance services, especially in areas of high demand and need.
Nara Hari Dhakal
Poverty is a direct consequence of the economic development or capacity of a state. In many developing states, funds are not even available to formal industries. In most cases, funds from the international funding organizations are thus the main sources for major investments, through some formal financial organizations or other forms of foreign direct investments. International private sector investment will significantly change the face of microfinance where there is a structure for formal channeling of scarce funds from the international private sector funds to microfinance institutions. This will require effective legislative pronouncements by states given perhaps as benchmarks from the United Nations and its agencies for international guidance.
Romeo Enueshike Omenogor
According to international practice, the future success of financial institutions depends on ownership structure and governance soundness. The success of the Rural Finance Company model (RFC) much depends on its specific design of ownership structure and governance. Most MFIs are invested in by international multi lateral and bilateral organizations or by its government. The previous experience highlights the importance of ownership and governance structure. The RFC, which is invested by local private sector, and by its local community is now under piloting stage. The following are the specific features of the model, as well as innovation in the microfinance sector in rural Mongolia: Profit-driven, community-owned financial service provider, and replicable in other remote rural areas of Mongolia; diversified Local ownership, encouraging the owners' active participation and commitment; good governance of RFC and independently in the future. International best-practice will be combined with local involvement; The model should be accountable to not only the government and donor, but also to the community as well as the private investors.
Nergui Sandagjav
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