GLOBAL INVESTOR FOCUS <strong>Microfinance</strong>—20 Walter B. Kielholz Credit Suisse Paola Ghillani previously CEO of Max Havelaar Paola Ghillani: We may have scope for cooperation with microfinance institutions to serve our suppliers.
GLOBAL INVESTOR FOCUS <strong>Microfinance</strong>—21 “The most important element that we can contribute is to put projects out in the marketplace where people can see that this is a real investment and that investors have a genuine interest in microfinance.” // Walter B. Kielholz of the ways, of course, to bring the extralegal sector inside is for the government to make a proposal clarifying quite clearly that this sector has to conform to the rules of law. One of the things you add to the package is, how does the sector access the sizeable benefits? How can people operating in the extralegal sector obtain credit? How can they get electricity? So this is starting to give the informal sector all the benefits that everyone who lives in the formal sector enjoys. Ernst A. Brugger // Let’s take the example of Pakistan. Does that country also have a huge informal sector? Roshaneh Zafar // Actually, 65% of the country’s current employment is in the informal sector. I actually don’t like using the term “informal sector.” I prefer to call it the micro- and small-enterprise sector, because once you talk about an informal sector, you are basically saying it’s a tertiary economy, which it isn’t. It’s a primary economy really; if we are saying “informal sector,” we’re not recognizing the input – the fact that these businesses provide employment in the country. If you look at job creation, every year there are 3.1 million people entering the market in Pakistan looking for jobs. Over 75% of them find jobs in the micro- and small-enterprise sector. That’s why it’s a major source of employment for people in the country. My perspective on this is a woman’s perspective. If you look at the labor force participation rate in Pakistan, it’s 24% right now – that’s the official rate. But when we turn to the informal sector, the percentage rate is up in the high fifties. The reason why I’m providing this backdrop is to talk about the impact that a microcredit program especially for women would have. The government does not recognize women as active economic elements in the country. Why? There are two reasons. One, because the government does not record these businesses; they’re really not within the spectrum of taxable income brackets, so they’re not licensed, they’re not registered, there is no counting, they’re very informal in the way they do business and they’re really not recognized. And two, a lot of women are actually providing income for their families in this sector, but they do not receive support, there is no training, there is no opportunity and no access to credit. They’re huge numbers. The overall population of Pakistan is 140 million at present, and if we turn this around and look at the demand for microfinance in the country, the estimate is that there are 5.6 million households that require access. If we look at the market penetration of the largest microfinance providers in the country, they do not even cover five percent of the market demand. Which means that 95% of the market is underserved. Ernst A. Brugger // Walter Kielholz, when you listen to these numbers, are they a big surprise to you, or do you think this is a reality that is well known in the international banking system? Walter B. Kielholz // Well, the banking industry knows that something is going on below the top ten percent of the economic pyramid. The informal sector seems to be so important and has its laws and rules as to how it works, and it must have a way to allocate resources. People must be very smart, because otherwise the sector wouldn’t survive. There is indeed a market in the informal sector – and it works. Roshaneh Zafar // But it has major constraints; it’s not a value proposition for the household. I agree it’s a market that functions, but it’s not an efficient market, and it must become more efficient for the people. The majority of our clients (we have 70,000 clients now) still need the moneylenders as much as the popular lottery because my organization cannot actually offer them full service, including savings accounts, because it’s not a fully organized bank. Ernst A. Brugger // So the informal market is a huge, but inefficient market with high transaction costs. Roshaneh Zafar // It’s very heavy on transaction costs. Ernst A. Brugger // Hernando, do you agree? Hernando de Soto // Well, the constraints that you were mentioning are important. Looking at the United States, we know that 85% of all employment there comes from small enterprises. And most of these small enterprises in the United States obtain their start-up capital from mortgages used as collateral. The question is: Can you mobilize your collateral? So to give you an idea, in the case of Egypt, if you want to formally open a bakery, it takes about 549 days working eight hours a day. The result is that you do not have any legal bakeries. Which means you do not have the documents to identify your assets, you do not have the documents to identify your collateral, and you do not have efficient access to credit. Ernst A. Brugger // Why does it take so much time to formalize a bakery? Hernando de Soto // Because you have to comply with government rules; you have to report to 33 different government offices. The average time it takes to formally establish a business in Egypt is between 300 and 400 days. It’s red tape and it’s also corrupt bureaucracy. I repeat: To go into the bakinvg business there are 33 government offices; there are 29 different offices that you have to apply to if you want to get into real estate. In the case of Mexico, to give you an idea, forming a limited liability company takes a minimum of 17 months working eight hours a day; and if you want to close a mortgage it takes 16 months; if you want to open a mortgage it takes about 20 months. >
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