Microfinance Shows Strong Equity Valuations Despite Crisis

.

WASHINGTON, March 3 /PRNewswire-USNewswire/ — Sustained demand for microfinance equity, in the face of the worst financial crisis in decades, continued to propel valuations in this sector higher throughout 2009 and the medium-term outlook remains positive, according to a new report by CGAP, a microfinance group based at the World Bank, and J.P. Morgan.
.
“Microfinance institutions encountered the harshest market conditions in more than a decade during 2009, with most showing a clear deterioration in asset quality and profitability,” said Xavier Reille of CGAP, co-author of the report. “And yet most MFIs continued to maintain strong reserve and capitalization levels, and investors continued to show faith in the sector.”
.
The CGAP/J.P. Morgan report shows that equity valuations continued to rise across all regions in 2009, with MFIs in the private equity market trading at a median of 2.1 times book value – a 62 percent increase since 2007. Public investors significantly increased their commitments to microfinance last year, and the private sector continued to establish new microfinance equity vehicles, including new funds from Blue Orchard, Triodos, and Developing World Markets.
.
“The investor community, both public and private, continues to be interested in microfinance, though we think that they are becoming more selective,” said Nick O’Donohoe, Global Head of Research for J.P. Morgan and co-author of the report.
.
The relative youth of the microfinance equity market means there are few established performance benchmarks, making assessments difficult. However, the CGAP/J.P. Morgan report is bridging this gap by drawing on analysis of 200 private equity transactions between 2005 and 2009 and trading information on eight publicly-listed low-income financial institutions to assess the strong performance of the microfinance equity market.
.
Indian MFIs are continuing to attract the strongest investor interest, comprising 30% of all microfinance equity transactions in 2009. Indeed, equity valuations for Indian MFIs are trading at nearly six times their book value, or three times the global median, a performance the CGAP/J.P. Morgan analysis suggests is not sustainable over the longer term.
.
The strength of MFI equity valuations masks the impact of the global financial crisis on the sector. The CGAP/J.P. Morgan report shows that loan portfolio quality began to deteriorate rapidly after January 2009, with past due loans over 30 days jumping to a median of 4.7 percent from 2.2 percent over the first five months of 2009 although it has moderated since then and thus far remained stable in 2010. The effects of the downturn were far from uniform however, with MFIs in South Asia and South America showing few signs of impact, while others in Eastern Europe and Central Asia particularly were more affected. However, very few MFI failures have been reported and most institutions remain well capitalized with equity ratio unchanged in the 18 to 20% range.
.
Judging by the performance of listed low-income financial institutions, the most comparable listed vehicles to MFIs, investors believe the sector will emerge from the crisis in good shape. These stocks have strongly outperformed emerging market banks (as measured by the MSCI Emerging Markets Bank Index) and by the end of 2009, had rebounded to pre-crisis levels or new historical peaks.
.
The CGAP/J.P. Morgan report argues that the decline in asset quality at MFIs will likely slow, but not curb, growth in their asset base, while placing a focus on improved risk management. Valuations likely will continue to be underpinned by continuing public and commercial sector demand in the medium-term, further buoyed by local bank acquisitions of MFIs and an expected initial public offering by SKS, India’s largest MFI – in 2010.
.
About CGAP
.
CGAP (The Consultative Group to Assist the Poor) is the world’s leading resource for the advancement of microfinance. CGAP provides the financial industry, governments and investors with objective information, expert opinion, and innovative solutions to effectively expand access to finance for poor people around the world. More information:  www.cgap.org
.
About J.P. Morgan
.
J.P. Morgan is the investment banking arm of JPMorgan Chase & Co. (NYSE: JPM), a leading global financial services firm with assets of $2.0 trillion and operations in more than 60 countries. JPMorgan Chase is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management and private equity. The firm serves millions of consumers in the United States and many of the world’s most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands. Information about J.P. Morgan is available at www.jpmorgan.com.
.

While Haiti clearly needs aid and compassion now, the long term prospects will remain weak if not coupled with a rigorous rebuilding and foreign direct investment plan. The Haitian government must work toward building a legislative framework for the protection of human rights and establishment of a robust private sector.
.

To Help Haiti, End Foreign Aid

It’s been a week since Port-au-Prince was destroyed by an earthquake. In the days ahead, Haitians will undergo another trauma as rescue efforts struggle, and often fail, to keep pace with unfolding emergencies. After that—and most disastrously of all—will be the arrival of the soldiers of do-goodness, each with his brilliant plan to save Haitians from themselves.
.
“Haiti needs a new version of the Marshall Plan—now,” writes Andres Oppenheimer in the Miami Herald, by way of complaining that the hundreds of millions currently being pledged are miserly. Economist Jeffrey Sachs proposes to spend between $10 and $15 billion dollars on a five-year development program. “The obvious way for Washington to cover this new funding,” he writes, “is by introducing special taxes on Wall Street bonuses.” In a New York Times op-ed, former presidents Bill Clinton and George W. Bush profess to want to help Haiti “become its best.” Some job they did of that when they were actually in office.
.
All this works to salve the consciences of people whose dimly benign intention is to “do something.” It’s a potential bonanza for the misery professionals of aid agencies and NGOs. And it allows the Jeff Sachses of the world to preen as latter-day saints.
.
For actual Haitians, however, just about every conceivable aid scheme beyond immediate humanitarian relief will lead to more poverty, more corruption and less institutional capacity. It will benefit the well-connected at the expense of the truly needy, divert resources from where they are needed most, and crowd out local enterprise. And it will foster the very culture of dependence the country so desperately needs to break.
.
How do I know this? It helps to read a 2006 report from the National Academy of Public Administration, usefully titled “Why Foreign Aid to Haiti Failed.” The report summarizes a mass of documents from various aid agencies describing their lengthy records of non-accomplishment in the country.
.
Here, for example, is the World Bank—now about to throw another $100 million at Haiti—on what it achieved in the country between 1986 and 2002: “The outcome of World Bank assistance programs is rated unsatisfactory (if not highly so), the institutional development impact, negligible, and the sustainability of the few benefits that have accrued, unlikely.”
.
Why was that? The Bank noted that “Haiti has dysfunctional budgetary, financial or procurement systems, making financial and aid management impossible.” It observed that “the government did not exhibit ownership by taking the initiative for formulating and implementing [its] assistance program.” Tellingly, it also acknowledged the “total mismatch between levels of foreign aid and government capacity to absorb it,” another way of saying that the more foreign donors spent on Haiti, the more the funds went astray.
.
But this still fails to get at the real problem of aid to Haiti, which has less to do with Haiti than it does with the effects of aid itself. “The countries that have collected the most development aid are also the ones that are in the worst shape,” James Shikwati, a Kenyan economist, told Der Spiegel in 2005. “For God’s sake, please just stop.”
.
Take something as seemingly straightforward as food aid. “At some point,” Mr. Shikwati explains, “this corn ends up in the harbor of Mombasa. A portion of the corn often goes directly into the hands of unscrupulous politicians who then pass it on to their own tribe to boost their next election campaign. Another portion of the shipment ends up on the black market where the corn is dumped at extremely low prices. Local farmers may as well put down their hoes right away; no one can compete with the U.N.’s World Food Program.”
.
Mr. Sachs has blasted these arguments as “shockingly misguided.” Then again, Mr. Shikwati and others like Kenya’s John Githongo and Zambia’s Dambisa Moyo have had the benefit of seeing first hand how the aid industry wrecked their countries. That the industry typically does so in connivance with the same local governments that have led their people to ruin only serves to help keep those elites in power.
.
A better approach recognizes the real humanity of Haitians by treating them—once the immediate tasks of rescue are over—as people capable of making responsible choices. Haiti has some of the weakest property protections in the world, and some of the most burdensome business regulations. In 2007, it received 10 times as much in aid ($701 million) as it did in foreign investment.
.
Reversing those figures is a task for Haitians alone, which the world can help by desisting from trying to kill them with kindness. Anything short of that and the hell that has now been visited on this sad country will come to seem like merely its first circle.
.
Write to bstephens@wsj.com
.
Printed in The Wall Street Journal Europe, page 15
.

Private sector goes into development finance

.

Published: December 20 2009
.

Financial Times
.

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.
.

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.
.

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.
.

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.
.

“Donor agencies should be seen as a catalyst to attract more private capital so that permanent access to capital is eventually created,” she adds.
.

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.
.

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.”
.

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.
.

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.
.

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.”
.

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.
.

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.
.

“Imagine if you had to manage all your financial resources just with loans. It would be terribly difficult,” he adds.
.

Alternative channels for finance are being created, some of which have the potential to be rolled out across continents.
.

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.
.

“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.”
.

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.
.

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.
.

“Savers don’t have benchmarks such as risk-free assets to decide how to invest,” she says.
.

“We should think about capital markets if we want to diversify the basket, and create access to government securities at least.”
.

Encouraging formal savings could have a huge impact on disposable incomes.
.

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.”
.

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.
.

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.”
.

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.
.

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.
.

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?

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:

“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.”

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

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.

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.

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.

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.

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.

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.

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.

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.

.

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.

.

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

Sparking a Savings Revolution

.

.

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.

.

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.

.

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.

.

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.
.

“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.
.
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.
.
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.
.
“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.
.
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.
.
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.
.
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.
.
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.
.
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.
.
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!
.
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.
.
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.
.
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.
.
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.”
.
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.
.

Helping the poor just got popular

.

By Sophia Grene,  Published: November 8 2009, Financial Times

.

Since Muhammad Yunus won the Nobel prize in 2006 along with the Grameen Bank he founded for the poverty-bound entrepreneurs of Bangladesh, microfinance has entered the consciousness of the investment community.

.

The concept of lending small amounts to very poor women, each borrower part of a group that is jointly responsible for repayment, has been extended and modified as it moved to different economies with other requirements. The common thread is providing relatively small loans to people who would otherwise not have banking facilities.

.

While the original concept was all about lending a helping hand to lift people out of poverty, the inevitable result of the structure was that investors would see it as an opportunity.

.

Grameen Bank itself cannot look for investment from outside Bangladesh for legal reasons, but a myriad of other microfinance institutions are not so bound and globally some $7bn (£4.2bn, €4.7bn) is invested in MFIs. An equivalent amount is committed by donation, but the invested money is expected to be repaid with interest.

.

More than half of this money is from development finance institutions – state-led banks with a mandate to focus on poverty alleviation – but the rest comes from the private sector, institutional and retail investors hoping to get a return on their money.

.

Triodos Investment Management has a retail fund with a track record going back six years, giving investors an annual return between 6 and 9 per cent. Last year, with the global financial system collapsing round our ears, the fund returned 7.5 per cent.

.

This lack of correlation with the rest of the financial world is one reason for investors to put their money into microfinance, but it seems not to be the main one.

.

“For retail investors, it’s the social aspect – in general they are not looking for the highest financial return,” says Marilou van Golstein Brouwers, managing director of Triodos Investment Management.

.

“Institutional investors have to care more about return because of their fiduciary duties, but they are increasingly looking to invest some or all of their portfolios responsibly.”

.

Asad Mahmood, who runs a social investment unit at Deutsche Bank, agrees. “You have to understand the duality of purpose. It is not a philanthropic effort, but nor is it wholly commercial. It is a new hybrid,” he says. Institutional investors, he suggests, come to the asset class with an enthusiasm for doing good, enabled to do so while fulfilling their fiduciary duty by the potential returns.

.

Those returns are not all as straightforward as those of the Triodos fund. Mr Mahmood says he is just about to close a fund with several layers of debt- holders. The interest on senior debt – which gets paid out first – is 7 per cent, not to be sniffed at in the prevailing low interest rate environment. Investors prepared to take more risk can opt for a tranche of the investment paying 16 per cent, provided the underlying loan portfolio has a sufficient yield. This seems like a substantial profit to make out of lending to the poor, and Mr Mahmood is conscious of the dangers.

.

“If you are providing financing to the poor and your only motivation is maximising profit, pretty soon there will be abuse.” He cites examples like the subprime mortgage brokers who foisted unaffordable mortgages on house buyers to generate commission for themselves.

.

“As the industry grows, you will have differently motivated investors coming in. Some people will be interested in the low correlation, which is fine, but I don’t want people who are solely concerned with profit maximising to come in.”

.

Nevertheless, pension funds have committed about $3bn to the asset class, according to a recent report from the World Microfinance Forum. Dutch pension funds PGGM and ABP have led the way with allocations of €200m and €180m respectively.

.

The global financial crisis has not had a huge impact on the levels of investment in microfinance, according to research from Intellecap that appeared in specialist magazine Microfinance Insight earlier this year. What has changed is the form of the investment.

.

Private equity microfinance investment is a growing sector. When global liquidity dried up, “the spread for debt financing was incredible”, says Mr Mahmood. “Equity financing was easier to raise.” According to further research from Intellecap, private equity investors have seen recent developments as much in the light of an opportunity in microfinance as a problem. Low valuations of the existing institutions and the low correlation of returns on microfinance with the global economic system make it an attractive proposition.

.

Triodos’s fund is one-third equity, with the rest in debt.

.

Microfinance is not immune to criticism. For many, it has strayed too far from Mr Yunus’s original idea of social lending; many microfinance institutions in eastern Europe and Latin America lend to established businesses, becoming essentially indistinguishable from traditional banks in the small and medium-sized enterprise sector.

.

Others are uncomfortable with the idea of charging what can seem like punitively high interest rates to poor borrowers – microfinance is resource-intensive as lending has to be informed by detailed understanding of borrowers’ ability to pay in relatively informal economies.

.

Still others see it as simply too small to make a difference – less than $15bn of capital globally is not going to change the world. But for investors who want to do something socially useful with their money, it looks set to remain an attractive option.

.

Copyright The Financial Times Limited 2009.

.

The Berlin Wall of Aid: When Will It Fall?

.

By GLENN HUBBARD, Wall Street Journal – November 9, 2009

.

On November 9, Germany and the world will celebrate the 20th anniversary of the fall of the Berlin Wall. The fall marked the end of Eastern Europe’s failed system of state-run economic development. But systems of top-down economic development continue in most of the poor countries of the world, where aid donors continue to fund government development projects despite their decades of failure. Why is this so? Why has the “Berlin Wall of Aid” not fallen despite its record of failure?

.

The answer is simple: the Soviet Union controlled the system throughout Eastern Europe. Once Mikhail Gorbachev decided to stop supporting the system by force, it crumbled. In poor countries today, the system is fragmented among dozens of unconnected national governments and dozens of unconnected aid donors. There is no Gorbachev to pull the plug. So the failing aid system continues, and unfortunately, there is no obvious remedy on the horizon.

.

The failure is not hard to diagnose. Prosperous countries developed their wealth through the growth of a domestic business sector. India and China are only the most recent examples. A thriving local business sector is the only path to prosperity and business the world has ever known.

.

Let’s look at the World Bank’s Doing Business report, which ranks countries by how easy it is for local citizens to start and run businesses. Among 183 countries, the former Soviet Union make up 20 in the top half and only eight in the bottom half. Georgia is highest at 11 and Tajikistan is lowest at 152. From sub-Saharan Africa, only six countries are in the top half while 38 are in the bottom half. Mauritius is highest at 17, and the Central African Republic is lowest at 183. The former Soviet bloc has come a long way in its shift from government economic development to the local business sector. But Africa has much, much further to go.

.

There have been three recent calls to tear down Africa’s aid wall: George Ayittey’s Africa Unchained, William Easterly’s White Man’s Burden, and Dambisa Moyo’s Dead Aid. Many observers agree with them, but these calls fall mostly on deaf ears among the people in power: the heads of aid agencies and the leaders of poor countries. It is in the interest of many of them for aid to continue. In our recent book “The Aid Trap: Hard Truths About Ending Poverty,” my colleague William Duggan and I suggest an alternative. Instead of halting aid, we can shift much of it from government-directed projects to the local business sector. And we have a compelling precedent — the Marshall Plan of post-war Europe. It made loans to local businesses, which paid them back to their local governments, who then used the money for commercial infrastructure to help those same businesses.

.

The world recognizes the Marshall Plan as the most successful aid program in history. We find smaller versions in post-war Japan, South Korea and Taiwan, and in Eastern Europe – as Enterprise Funds – after the fall of the Wall. But the central mechanism of the Marshall Plan can adapt to any kind of economy. Post-war Greece was small, war-torn and very poor–in some respects like most of Africa today–and the Marshall Plan in Greece was a great success.

.

Can the aid system shift, or is it too inflexible – like the Soviet system was – to adapt to a new Marshall Plan? We can find some encouragement in two changes in the aid system over the past two decades: it has accommodated NGO projects and microfinance alongside government programs. Humanitarian aid especially works best through NGOs, and microfinance has helped millions of poor people start and run micro-businesses across the world. These major shifts over the past two decades show that the aid system has some ability to adapt beyond its traditional form of government development projects.

.

But NGOs can’t raise people out of poverty — only local business can do that. And microfinance operates in most poor countries below the radar with unregistered companies that can’t get formal loans or join the normal business sector. Small and medium-sized businesses, not microfinance, generate the jobs and demand that lift poor countries out of poverty. That’s how it happened in Western Europe, the United States, East Asia and now China and Eastern Europe.

.

A Marshall Plan would continue aid to poor countries, but directs it in a way that can actually lead to prosperity. The growth of NGOs and microfinance show that the aid system can adapt. But the shift to local business will be harder, because it is a more fundamental change of the economic system. NGOs and microfinance can operate alongside government development projects while local businesses are a direct alternative to them.

.

The Marshall Plan might not be the only way to shift large amounts of aid to the local business sector in poor countries. If there is an easier or faster way, all the better. But the time has come for the Berlin Wall of aid to fall. Sub-Saharan Africa is as poor today as it was 50 years ago despite increases in foreign aid.

.

The Berlin Wall lasted only 28 years, from 1961 to 1989. How long will the aid wall last? Who will tear it down?

.

Mr. Hubbard, dean of Columbia Business School, was chairman of the U.S. Council of Economic Advisers from 2001 to 2003. He and William Duggan are co-authors of “The Aid Trap: Hard Truths About Ending Poverty” (Columbia, 2009).

.

Microfinance Mission Drift?

.

By Roy Mersland and R. Øystein Strøm, published by Elsevier Ltd, July 2009

.

This paper studies the tendency of microfinance institutions (MFIs), as they grow, to cater to groups that are different from those normally considered to fall under the “mission” of microfinance. Generally, this mission includes serving low-income people who have less access to credit – often poor, rural women. To investigate this possible mission drift, loan size, lending methodology and gender bias were studied in 379 MFIs in 74 countries using data taken over 4 to 6 years. Average loan size did not increase from 1999 to 2007.

.

There has not been a move from group-liability to individual-liability loans. Nor has there been an increased proportion of urban loans compared to rural loans. However, there is less gender bias now, meaning that the tendency to lend to females more than to males has decreased. Overall, the authors feel that there has not been a mission drift in microfinance.

.

The average loan size from 1999 to 2007 was USD 747, adjusted for purchasing power parity (PPP). The authors consider this to be a relatively small loan size. Furthermore, the average loan size has decreased by 2.2 percent from 1999 to 2007. This is seen by the authors as evidence that low-income borrowers are still being targeted by MFIs. Lending methodology was measured to compare group and individual lending. The authors found that most loans are made to individuals.

.

However, group lending increased by 3.3 percent during this period compared to individual lending. The authors view this as a sign that microfinance continues to meet its mission. It has also been tradition that MFIs would target rural regions more than cities as the former are generally thought to have less access to mainstream credit. The authors found that rural lending grew by 9.5 percent from 1999 to 2007 compared to urban lending.

.

Lastly, the authors find that there has been a decrease of 35 percent from 1999 to 2007 in terms of preference for female clients. Though this may seem inconsistent with the microfinance “mission,” it does indicate less gender bias. Therefore, the authors do not see this result as particularly harmful and claim that it does not necessarily indicate mission drift.

.

.

By KETAKI GOKHALE

.

NEW DELHI — Despite last year’s global financial meltdown, the microfinance industry has continued to boom in India because of an influx of private equity and bank funding, according to a new study.

.

AFP/Getty Images.

An Indian fisherman throws his net as he tries to catch fish in northeastern Tripura state capital Agartala.

.

Microlenders recorded a 60% increase in clients in India, to 22.6 million in the year ended March 31, 2009, from 14.1 million the previous year, according to a report from Access Development Services, a New Delhi-based nonprofit serving the microfinance industry. Microlenders lend small amounts of money to groups of poor people, mainly to help foster entrepreneurship and trade.

.

In contrast, the formal banking system in India recorded 15% growth over the same period in the number of poor and underserved clients it serves, expanding its reach to 54 million clients from 47.1 million clients, according to the study. For the last 15 years, the formal banking system has been partnering with nongovernmental organizations to deliver loans to people living below the poverty line (around 20,000 rupees a year, or $430) and people who live in remote areas.

.

At the current growth rate and with larger loan sizes, microlenders might outstrip the formal banking sector in lending volumes within a few years, said N. Srinivasan, the author of the study.

.

The surge in microloans has been fueled by a brisk flow of funds in the third quarter of this year, with about $130 million in global private-equity funds funneled into Indian microfinance institutions, according to the Center for Microfinance in Chennai.

.

“In the middle of last year, we thought for a while the meltdown would strike this sector, but we’ve seen that it’s been largely unscathed,” said Vipin Sharma, chief executive of Access Development Services. “Growth is as frenetic as it was before.”

.

Mainstream banks, in both the private and public sectors, are increasingly considering channeling funds into microfinance banks rather than directly to India’s poor. Four public-sector banks and three private-sector banks entered microfinance this year, making for a total of roughly 30 banks invested in Indian microfinance. Total bank funding for microlenders nearly doubled to $2.526 billion from $1.281 billion in the year ended March 31 from the previous year.

.

Some foreign banks have reduced their exposure to microfinance in response to the global economic downturn and less liquidity, and smaller regional microlenders are having a hard time accessing bank funds because of a recent loan repayment revolt in the southern state of Karnataka, Mr. Srinivasan said. Borrowers in two rural districts stopped repaying their loans en masse at the urging of local religious authorities who felt that microfinance had taken too strong of a hold in their community.

.

But several state banks and major Indian lenders stepped in to fill the gaps. At the same time, a number of major microlenders have pooled 28 million rupees to form Alpha Microfinance Consultants, which will set up a credit bureau to reassure investors and to prevent future repayment crises like the one seen in Karnataka.

.

Printed in The Wall Street Journal, page C6