Far from being a new invention, the concept of microfinance goes back to the 16th century. Initially, microloans came to be accepted as a modern development policy tool in the 1970s, whilst microinsurance has established a foothold in the last few years. The conference attendees agreed that microfinance called for the broadest possible approach, including access to savings deposits and payment transactions. Dr. Martin Held, Director of Studies at the Protestant Academy of Tutzing: “To be successful in the long term, microfinance has to be seen to have both an economic and a social function.”
Matthias Adler of KfW Development Bank also pointed out that the true objective cannot be attained if we concentrate solely on the lending aspect. Dr. Peter Wolff, a Head of Department at the German Development Institute, added that the all-round approach enhances the relevance of microfinancing to development policy and affirms the legitimacy of a tool capable of establishing an interface between “empowerment, capability and good governance”. However, we should not pin all our hopes on it. Thomas Loster, Chairman of the Munich Re Foundation, also believes that microfinance should be regarded as one of several development policy tools embedded within a broad strategy. “The major objective must be to overcome poverty. At the same time, we must not forget the need for empowerment to prevent the establishment of new dependencies.”
Since companies in the industrialised nations discovered microfinance as a commercial business concept in the early 1990s, the sector has experienced rapid growth. “Investment in microfinance funds tripled between 2005 and 2009,” Wolff commented. Institutional investors in particular are showing keen interest and the sector has emerged as an asset class in its own right. Although the basic concern of all microfinance institutions is to tackle poverty, there are substantial differences between the individual institutions and the way they operate.
For instance, Deutsche Bank, whose involvement goes back to 1997, does not grant direct microloans but provides funds to support other microfinance institutes. It set up the Global Commercial Microfinance Consortium, the first microfinance fund aimed solely at institutional investors, in 2005. “Since the launch of db Microfinance-Invest Nr. 1 catering for private clients and socially oriented institutional investors in 2007, microfinance has been a fully-fledged strategic business unit,” Zarpana Massud-Baqa of Deutsche Bank Asset Finance & Leasing explained. As with all forms of investment, it requires careful risk analysis and portfolio selection combined with maximum transparency.
Despite the successes, we must not forget the shortcomings of the microcredit market. By no means all institutions have evolved positively, and there have even been insolvencies in Morocco, Nicaragua, Pakistan and elsewhere. Excessive growth and fierce competition caused by over-capacity are making life difficult for some providers. In the absence of adequate controls, multiple loans are no exception, i.e. borrowers who cannot pay off their debts to one bank and simply take their custom elsewhere. The answer is to improve supervision within the institutions and monitor lending more closely. Currently the sector is going through a healthy consolidation phase.
Michael Anthony, Head of Microinsurance at Allianz, sees growing market innovations in the field of microinsurance. A pilot project in southern India has identified three types of risk where action can be taken: healthcare, insurance of the home and school fees savings plans. Allianz has put together a package which also reduces the risk of non-payment for the insurer. Allianz’s microfinance portfolio includes eight developing countries in all (Senegal, Colombia, Ivory Coast, Indonesia, India, Madagascar, Cameroon and Egypt). Most products are financially sound and viable and some even showed a profit after the first 12 months. Anthony estimates that the market, i.e. those earning less than US$ 2 per day, comprises some two billion people.
Apart from major players like Allianz, credit cooperatives like Oikocredit, founded in 1975, have also gained a foothold in the market. Dr. Florian Grohs of Oikocredit Germany said that 36,000 investors/members have now invested in the development cooperative. It works on the basis of one member, one vote and a maximum 2% dividend per annum. Oikocredit offers financial services at 32 country offices, primarily situated in rural areas of eastern Europe but also in the USA, Asia and Africa. According to Dr. Grohs, the advantages of the cooperative model are that it is easy to set up and democratic in structure. Moreover, administration expenses are low because many of the staff are volunteers, and the model enables people to have local access to capital in the form of savings deposits. The main problems are that some managers lack professionalism, more state regulation is needed and the interests of savers and borrowers frequently conflict. Felix Oldenburg, CEO of Ashoka Germany, demonstrated how to establish a successful network of social entrepreneurs. Ashoka, currently the largest such network in the world, monitors its so-called Ashoka fellows very strictly. This leads to a well-functioning system of social business members, with high efficiency and sustainable results.
Unlike the cooperative model of Oikocredit, Opportunity International relies solely on donations for funding. The organisation tries to find regional solutions. It has been active for 36 years and now covers 25 countries, Opportunity International’s 8,000 staff – 84% of them female – service 1.6 million clients. Chairman Stefan Knüppel explained that the average loan was US$ 250. Apart from normal banking business, a typical regional Opportunity bank also addresses social issues like AIDS prevention, and offers a varied training programme covering many different aspects of life. The statistics show that as many as 98% of borrowers repay their loans in some cases, but higher default risks are also encountered. Since Opportunity International is funded by donations, it is able to focus more on combating poverty, primarily by supporting borrowers’ initiatives and special projects.
The conference showed that successful microfinance initiatives need a favourable environment and, above all, strong institutions, to ensure full use is made of the growth potential. Microfinance on these lines is not transacted in a vacuum: it is part of a broader understanding of what social entrepreneurship means, although even now economic and social interests are all too often thought of as working against each other. However, the conference also demonstrated that both objectives are compatible and that all-round programmes in developing countries can not only encourage economic initiative on the part of the individual but also support democracy, civil social structures and equality. The goal of microfinance institutions must be both financial viability and, at the same time, the promotion of development.
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