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Monthly Archives: January 2010

Private sector goes into development finance

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Private sector goes into development finance

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Published: December 20 2009
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Financial Times
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The first tentative moves by western banks and fund managers into microfinance are gathering momentum. Most of the big banks have set up divisions that provide financial services to low-income clients in emerging markets, particularly to those who have or wish to set up businesses.
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Many specialist fund managers have also entered the arena in recent years, working with providers on the ground to pool large numbers of small investments.
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The infrastructure involved is burdensome and the returns uncertain, but this does not dim the belief of many in the sector that microfinance will outperform in the future.This belief is bolstered by the fact that many businesses and individuals in emerging economies are still starved of capital. Antoinette Koning, of the European Union’s ACP Microfinance Framework Programme, says a survey by her organisation shows that 2.7bn people worldwide are cut off from formal financial services.
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This is despite international state-sponsored funding increasing year after year. “Our last estimate is that $14.8bn has been provided in total,” says Ms Koning. In 2008 alone, $3bn was dispersed.
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“Donor agencies should be seen as a catalyst to attract more private capital so that permanent access to capital is eventually created,” she adds.
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However, in the wake of the credit crisis, western development finance is likely to slow considerably, potentially creating opportunities for the private sector to step into the void.
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Andrew Mold, a senior economist at the Development Centre of the Organisation for Economic Co- operation and Development, says the financing gap is widening. “The World Bank says that in 2009 the developing world needs up to $635bn as a result of the credit crisis,” he says. “In Africa, this will be $30bn-45bn.”
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The priority given to saving the western banking system has meant Africa and parts of Asia have been virtually left to fend for themselves. While 82 per cent of the International Monetary Fund’s resources have gone to European countries, only 1.6 per cent have been allocated to African countries, Mr Mold says.
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This lack of funding for emerging economies is attracting attention at a variety of levels. Friends of Europe, for instance, a prominent Brussels-based think-tank, organised a one-day conference on it this month.
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Giles Merritt, secretary general, says: “The financial crisis is far from over in my view and we need to ensure that the developing world is not wasting the opportunities presented by this crisis.”
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To date, most international public and private-sector initiatives have revolved around extending credit to the poorest areas since this is seen as the best way of achieving returns. However, this model is under attack.
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Graham Wright, programme director at MicroSave India, says: “We don’t give poor people assets by giving them access to debt. Microcredit is standardised and simple, and works for narrow market segments that can repay on a weekly basis. This is just working capital.” He says emerging economies need a range of financial services including, most notably, ones that focus on saving.
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“Imagine if you had to manage all your financial resources just with loans. It would be terribly difficult,” he adds.
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Alternative channels for finance are being created, some of which have the potential to be rolled out across continents.
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Ali Mchumo, managing director of the Dutch-headquartered Common Fund for Commodities, says his organisation allows small-scale farms to deposit their produce in a warehouse, receive a down-payment of 60 per cent of the expected price of the produce and then wait for prices to improve before selling it.
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“This protects the peasant from the cunning of middlemen who want to buy the product as soon as it is harvested, knowing that the peasant needs the money,” says Mr Mchumo. “If he can deposit the produce in a warehouse, he can’t be exploited. The peasant can earn and spend even before the final price is available.”
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This could create a virtuous circle whereby production and expenditure are functions of each other. But there is still a need to create a savings culture in societies where many people are denied access to basic bank accounts and, in any case, do not trust that institutions would treat them fairly.
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Rose Ngugi, a monetary policy committee member of the Central Bank of Kenya, says savers need access to more products, against which they could benchmark returns.
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“Savers don’t have benchmarks such as risk-free assets to decide how to invest,” she says.
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“We should think about capital markets if we want to diversify the basket, and create access to government securities at least.”
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Encouraging formal savings could have a huge impact on disposable incomes.
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A study in Uganda by MicroSave showed that people saving in the informal sector lost 22 per cent of their saved income one way or another. Mr Wright says: “Saving in cows is normal in many places. This has a higher return, but there is a risk factor involved and people really want straightforward security.”
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As well as the capital- limiting effects of the credit crisis, development funding is often not reaching emerging markets because of red tape or inefficiency.
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Paul Baloyi, chief executive of the Development Bank of Southern Africa, says: “Distribution has been problematic for poor countries. There are multiple agencies and well-meaning NGOs, but there is a huge dispersion between committed funds and funds released.”
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This only increases the emphasis on the private sector for increased funding. However, private sector institutions need to create the right products for the right people, rather than looking at the short-term profit motive.
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If they fail, western institutions, which dominate this space, may find they lose out to aggressive competitors, such as China which is leading the charge to harness African assets more productively.
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Microfinance not in the red, despite crisis

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Microfinance not in the red, despite crisis

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Published on : 13 January 2010 – 4:25pm | By Laurens Nijzink
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While major international banks have collapsed in these times of economic crisis, small microfinance institutions are still performing well. Poor women – until recently regarded as totally non-creditworthy – are paying back their loans while large companies fail to meet their repayments. How has micro-finance survived the economic storm?

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Muhammad Yunus, the godfather of microcredit and 2006 Nobel Peace Prize laureate, explained in early 2009 that his Grameen bank had hardly been affected by the financial crisis:

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“The simple reason is that we are anchored in the ‘real’ economy – not investments which exist only on paper. If we lend someone 100 dollars, that represents chickens or a cow. It’s not an imaginary asset.”

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This is a reference to the cause of the global crisis: loans based on fictional values (sub-prime) and convoluted financial constructions.

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Immune
There are, however, places where micro-finance institutions (MFIs) have not proved immune to the global crisis. From 2009, MFIs in Eastern Europe, Russia and the Caucasus, as well as Central America and the Caribbean were affected by the crisis. They became less profitable, there was reduced growth in the number of loans and overdue loans began to pile up. It’s no coincidence that the economies of these regions are more integrated into the global monetary economy, making them more sensitive to adverse economic conditions in the West.

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India
India, on the other hand, seems completely unaffected. In fact MFIs are growing fast, by 100 or 200 percent in recent years and even last year. With more than a billion inhabitants India has an enormous domestic market and its economy is still not all that dependent on international trade. The informal economy, in which most recipients of microcredit operate, is even further removed from global financial developments.
“In India it will take two years before the lower regions of the business community are hit by the global recession, but within two years we will already be seeing signs of recovery,” says Amitabh Kundu, Professor of Economics and micro-credit specialist at Jawaharlal Nehru University in New Delhi. He emphasizes that the Indian government is actively stimulating what they refer to as “inclusive finance”: making financial services available to everyone. As a result, domestic money – both private and public – flows into MFIs, followed by more risk-avoiding foreign money. India has proved successful in attracting commercial funding from abroad. Around 178 million dollars of foreign money was invested in Indian micro-credit schemes in the financial year 2009, more than three times as much as in the previous year.

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Foreign funding
Despite the fact that their budgets have shrunk as a result of the crisis, foreign investment companies (private equity) and investors clearly regard it as advantageous to add microfinance to their portfolios. Returns have been healthy, relatively unaffected by financial developments in the West and they look good in the annual reports. Moreover, Indian microfinance has enormous potential. More than 22 million Indians current have loans from an MFI and rough estimates indicate that another 120 million households are eligible for micro-credit. That translates as a potential market for financial services totalling 50 billion dollars.

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Too soon
But let’s not celebrate too soon. The financial crisis could still penetrate into the microcredit sector: both MFIs and their customers could be affected. The development budgets of western countries are shrinking, if only because they are normally dependent on the donor country’s GNP. This could result in fewer cheap loans to MFIs in the South, and it’s unclear to what extent this can be cushioned by funds like the Bill and Melissa Gates Foundation or the online ender KIVA. This was one reason that, as early as late 2008, Dutch Development Cooperation Minister Bert Koenders announced he was earmarking 15 million euros for a fund to help compensate for dwindling funding for micro-credit.

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Refinancing
From a commercial point of view refinancing MFI loans is a risk. Loans often run for one or two year. New loans are now being granted at higher rates of interest. This is the result of increased currency risks: the chances of exchange rates adversely affecting the lender because of devaluation are greater in times of crisis. Early last year the International Finance Corporation, an affiliate of the World Bank, and the German development bank KfW set aside 500 million dollars to cushion the risks of refinancing. In order to balance their books MFIs will have to concentrate on recovering outstanding credit. This process is already underway in Africa.

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Loans
While major banks were toppling in the West, the damage to credit lenders in less wealthy parts of the world was limited to falling profits and a brake on their growth. However, in some cases, the collection of loans will become more problematic there too. The World Bank has calculated that an additional 65 million people will end up living on less than two dollars a day due to the financial crisis. A number of MFIs show an increase in the number of loans being paid back later or too late.

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Migrant money transfers
The trend is reinforced by a dramatic reduction in migrant money transfers. Their weak position in the Western labour market means migrants are often the first to be laid off during times of economic hardship. As a result they are sending less money back to relatives in their countries of origin.

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Less rosy
At first glance the microfinance sector seems to have been immune to the financial crisis. In 2008 the ten largest microfinance funds grew by 30 percent (while ‘normal’ funds shrank by a fifth). The results for 2009 look a lot less rosy in many regions. Despite a solid basis, the big question in 2010 in whether the sector can continue to stay out of the red in the wake of the global crisis.

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The Problems of Correlation in Financial Risk Management – the Contribution of Micro finance

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In this paper, the authors, Karel Janda and Barbora Svárovská, first introduce microfinance institutions as an alternative investment instrument. They argue (convincingly) that beside socially responsible features of microfinance, there exists also significant portfolio enhancement opportunity in microfinance investments. Then they provide an overview of possible ways how to evaluate the correlation between microfinance related financial instruments and conventional financial market measures of risk and return.

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This paper is available for download at: http://mpra.ub.uni-muenchen.de/19486/1/MPRA_paper_19486.pdf

Sparking a Savings Revolution

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Sparking a Savings Revolution

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Published: December 30, 2009

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There’s an old saying about poverty: Give me a fish, and I’ll eat for a day. Give me a fishing rod, and I’ll eat for a lifetime.

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There are many variations in that theme. In Somalia, I heard a darker version: If I buy food, I’ll eat for a day. If I buy a gun, I’ll eat every day.

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But these days, there’s evidence that one of the most effective tools to fight global poverty may be neither a fishing rod nor a gun, but a savings accounts. What we need is a savings revolution.

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Right now, the world’s poor almost never have access to a bank account. Cash sits around and gets spent — and, frankly, often spent badly.
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“We used to buy a three-liter bottle of Coke every day,” recalled Socorro Machado, a 49-year-old homemaker in a village here in northwestern Nicaragua. That was a bit less than a gallon, and the cost of $1.75 consumed a large share of the family’s budget.
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Then Catholic Relief Services, an aid organization, arrived in the village with a new program to promote savings. It provided a wooden box with a padlock and organized savings groups of about 20 people who meet once or twice a month, typically bringing 50 cents or $1 to deposit in the box.
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Some of the money is lent out to start a small business, but the greatest benefit of these programs seems to be that they provide a spur to save.
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“Now we buy a bottle of Coke just once a week, and we put the money in savings,” Ms. Machado said. She saves about $5 a month in her own name and another $5 a month in her son’s name and has plans to buy a computer for him eventually.
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Some people in the development world argue that microlending has been oversold, and there has been a bit of a backlash against it lately — including a “no pago” movement here in Nicaragua. This “don’t pay” effort has been orchestrated by the leftist government of President Daniel Ortega.
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I don’t agree with the criticisms of microloans, for I’ve seen how tiny loans can truly transform people’s lives by giving them the means to start small businesses. Even so, there’s evidence that the most powerful element of microfinance is microsavings, not microloans.
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One of the ugly secrets of global poverty is that a good deal of suffering is caused not only by low incomes but also by bad spending decisions. Research suggests that the world’s poorest families (typically the men in those families) spend about 20 percent of their incomes on a combination of alcohol, cigarettes, prostitution, soft drinks and extravagant festivals.
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In one village here in Nicaragua where children were having to drop out of elementary school because they couldn’t afford notebooks, a midwife, Andrea Machado Garcia, estimated to me that if a man earned $150 working in the mountains as a day laborer during the coffee harvest, he might spend $50 on alcohol and women and bring back $100 to support his family.
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One challenge is that those men don’t have a good, secure way to save money, and neither do poor people generally. It just sits around, itching to be spent. It’s also vulnerable to theft, covetous family members and demands for loans from relatives.
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In West Africa, money collectors called susus operate informal banks but charge an annualized rate of 40 percent on deposits. Yes, you read that right. You pay a 40 percent interest rate on your savings!
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In Kenya, two economists conducted an experiment by paying the fees to open bank accounts for small peddlers. They found that the peddlers who took up the accounts, especially women, enjoyed remarkable gains. Within six months, they were investing 40 percent more in their businesses, typically by buying more goods to be resold.
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Many aid groups including CARE and Oxfam now offer savings programs in some form, and the Bill and Melinda Gates Foundation is studying how best to promote financial services for the poor. A Web site, www.matchsavings.org, lets donors match a poor person’s savings to increase the incentive to build a savings habit.
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So it’s time for a global microsavings movement. Poor countries should ease the regulations (such as requirements for banking licenses) that make it hard for nonprofits to operate microsavings programs.
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Hugh Aprile, a Catholic Relief Services official here, noted that savings schemes are very cheap to start because no capital is used to provide loans. “It’s people using their own money,” he said, “to build far more than they ever thought they could.”
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Maybe it’s hard for us to believe considering how much animus there is toward fat-cat bankers in the United States, but the world’s poor might benefit hugely from the ability to bank their money safely.
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