Growing the Wealth of the Poor - World Resources Institute

W O R L D R E S O U R C E S 2 0 0 8180products, and commercial insurers are seriously considering howto provide life insurance, crop insurance, and even health insurancein a “micro” form to a historically underserved and oftenunreachable market. In the remittance sector, too, money transferoperations are competing to attract immigrants’ business,forcing down the cost of sending remittances. This positivefeedback loop between migration and falling remittance costspushed remittances to developing countries alone to anestimated $239 billion in 2007 (World Bank 2008).Against this background of change and expansion, government’srole is changing too. While financing opportunities forenterprises have definitely expanded, they still fall far short ofthe need. In India, for example, some 70 percent of smallfarmers still have no access to credit (World Bank 2007a:1).Overall, some 3 billion people could benefit from microfinanceservices, but only about 500 million currently have access tothem (World Bank 2007b:2). Governments must thereforecontinue to encourage the expansion of the commercial microcreditindustry by providing the basic economic conditions thisrequires: a stable macroeconomic environment and a legalsystem that is safe for investment. At the same time, governmentsmust take a more robust role in regulating the microfinanceindustry and encouraging competition and improved products.In addition, governments will need to remain involved asinvestors themselves to make sure that the poorest enterprises areserved—a market that the private sector may never be able toserve well (Hashemi 2001:1).Helping Microcredit MatureMicrocredit has proved its effectiveness and profitability sinceYunus and his compatriots helped pioneer the concept in the late1970s. In 2006, microfinance organizations reported an averageloan loss rate of just .9 percent: on average, only .9 percent ofFIGURE 4.1 REACHING THE POOREST WITHMICROCREDIT WORLDWIDE, 1997 – 2006Millions of customers reached1401201008060402001997 1998 1999 2000 2001 2002 2003 2004 2005 2006Total numberof customersSource: Daley-Harris 2007:22-23Number of customersmaking less than $1 per daythe lender’s gross loan portfolio is unrecoverable (MIX2008:44,53). Interest rates on microloans typically rangebetween 18 and 70 percent, depending on the lending institutionand the circumstances of the loan (Grameen Foundation 2007).Attracted by the high repayment rates and interest ratepotential, private sector banks have been entering the lucrativeand underserved microfinance arena in increasing numbers.Large financial institutions like Citigroup, Deutsche Bank, andAmerican International Group now provide wholesale loans tomicrofinance institutions around the world, and hedge funds andgovernments have also begun investing in microfinance (Parks2007). Such is the interest in microfinance investment thatCompartamos, a high-profile microfinance bank in Mexico, helda successful initial public offering (IPO) of stock in 2007 tobecome a publicly traded company. Since the IPO, Compartamos’net income has risen 38 percent over the previous year(Compartamos 2007; Parks 2007).The financial resources and management skills thatcommercial banks can tap have brought new dynamism tomicrofinance, where 44 percent of all borrowers are now servedby profitable institutions (Gonzalez and Rosenberg 2006b:3).Commercial banks also bring advantages that complement thecapabilities of the NGOs and community-based groups thatpioneered microcredit. For example, regulated banks are notconstrained by the same rules for accepting funds and accumulatingprofits that NGOs typically must follow. NGOs usuallyhave a more difficult time raising money to finance their loans,since they cannot technically accept deposits like a bank andmust rely heavily on grants (FAO 2005b:34–35). Likewise,savings cooperatives cannot usually tap commercial creditmarkets and can only cover their loans by expanding theirlimited depositor base (FAO 2005b:34–36). Commercial banksthus bring greater firepower and the hope of considerablyexpanding the credit pool.The entry of commercial banks into microfinance is notthe only transformative change under way in the industry. TheInternet has made information on microfinance widely accessible,connecting these institutions around the world to potentialdonors and investors. For example, the Microfinance InformationExchange Market website contains detailed informationon more than 1,000 microfinance institutions and 100 funders,citing statistics on their portfolios, financial standing, and transparency(MIX 2007). Even individuals can now invest inmicrofinance. Via the Internet, the would-be investor can viewthe profiles of small entrepreneurs and invest online, receivingrepayment at the end of the loan cycle (Kiva 2007). Thisincreased information exchange has been instrumental inmicrofinance’s recent growth, leveraging funds from both smalldonors and large commercial banks like CitiGroup (Daley-Harris 2006:13–14).At the same time, new computer and mobile phone technologiesare helping to make loan payments and other transactions easierand less costly. For example, mobile phones—already used by 3billion people worldwide and increasingly penetrating rural areas—