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Investing In Inclusion: How To Deliver Financial Services To The World’s Poor – Forbes

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Editor’s Note: Michael Schlein brings more than 25 years of experience in international banking, management, and public service to his role as president and chief executive officer of Accion. Previously he served in senior executive roles at Citibank and the US Securities and Exchange Commission.

Modern financial markets exclude billions of the world’s poor. That’s a failure of those markets—and a failure of imagination. A more financially inclusive world would give billions of people living in poverty access to a full range of important financial services, yielding a high rate of return by economic, social, and societal measures. The challenge is how to achieve this in a responsible, sustainable way that provides the greatest number of people with the financial tools they need to improve their lives in the shortest amount of time.

That is precisely the mission of Accion, a global nonprofit dedicated to creating a financially inclusive world. We operate in poor communities throughout Latin America, Africa, India, and China and see firsthand how these services help transform lives, create opportunities, and build stronger, more resilient communities.

As nonprofits, Accion and our peers can take chances that the private sector cannot. Over our 50-year history, we have helped build 64 microfinance institutions in 32 countries that today serve millions. In the last few years alone, we have supported institutions in rural communities such as the Amazon and Inner Mongolia and expanded the array of financial services for the poor beyond credit to savings, insurance, and payments.

One point is clear: philanthropy, though critically important, is insufficient to achieve full financial inclusion. We need to harness the capital markets and create institutions that deliver both social and financial returns. Though we are a nonprofit, we work to build sustainable, scalable, for-profit companies dedicated to serving the financial needs of society’s most vulnerable members: those living in poverty.

Today, traditional lending institutions largely ignore the poor. And some nonprofit organizations discount the for-profit motives of the private sector, seeing them as exploitative and off-mission. Neither view is accurate. In fact, for-profit microfinance is sustainable, scalable, and socially progressive—complementing nonprofit services and creating an entire industry of institutions that can compete for clients, expand access, and accelerate innovation.

Twenty years ago, Accion helped create Bolivia’s BancoSol, which today is one of the world’s best-known microfinance institutions. Its creation as a commercial institution dedicated solely to serving the poor was controversial, unprecedented—and a rousing triumph. As the world’s first for-profit bank dedicated to serving the poor, BancoSol tapped the debt and equity markets, attracting both foreign investment and expertise. It focused on strong management and operations, better governance, innovation, and improved responsiveness to clients. To date, BancoSol has loaned more than $2 billion to more than 1.5 million clients. It has a 90 percent client-retention rate and a 99 percent repayment rate. Its success has spurred competition and innovation in what is now one of the most robust microfinance markets in the world.

Accion also helped build Peru’s Mibanco, which launched in 1998. Today Mibanco has more than 400,000 active borrowers and more than 100 locations throughout the country. Mexico’s Compartamos Banco, in which Accion was a major founding investor, is equally impressive. Its operations grew so quickly and efficiently that, in 2007, it launched an initial public offering with a monumental response. Thousands of other microfinance institutions were inspired by Compartamos’ success, which in turn creates more competition and better services for the poor.

Accion is proud to have helped launch and grow these pioneering institutions, which are models for the world and whose collective outreach has brought financial services to millions who would otherwise be left out.

For-profit microfinance is also promising for investors. Take Accion Investments in Microfinance (AIM), a for-profit equity fund created in 2003 to provide capital to microfinance institutions (MFIs) working in challenging markets where such funding was typically unavailable. AIM was designed as a “double bottom line” equity fund, one that measured success in both profitability and social impact.

Over the past decade, AIM has produced annual returns of nearly 16 percent, making it one of the most successful microfinance equity funds ever. In the process, it helped build some of the strongest MFIs in the world, including BancoSol, Mibanco, and the Accion Microfinance Bank—the leading microfinance bank in Nigeria. Before AIM’s investments, those institutions collectively served a total of 386,000 borrowers and 245,000 depositors. Today, they reach almost 1 million borrowers and 1.2 million depositors who might otherwise have no access to financial services.

The future of financial inclusion goes beyond traditional microfinance. We also embrace venture capital and technical assistance for start-ups, with bold, disruptive business models aimed at helping those living in poverty. For example, Accion is investing in companies such as DemystData, which leverages big data—huge sources of information that can be analyzed to help financial institutions broaden their outreach to poorer clients. Others, like Tiaxa, use mobile technology to make small “nano” loans over the phone, which can help reach people living in remote communities. Still others are pushing the boundaries of inclusion, offering financial products such as life insurance to South Africans living with HIV/AIDS—an idea that was unthinkable just a few years ago.

Although it is still too early to determine the impact of these brand-new companies, they have the potential to have a significant impact on the lives of our clients. We need to invest in more fast-moving, innovative ideas like these. Although the financial-inclusion movement is rapidly evolving, it remains young and has much to learn. Growing pains are normal, but they must be addressed head on to strengthen the industry and inspire the next generation of institutions that will create greater opportunities for the poor.

Accion’s Center for Financial Inclusion is a good start. It brings together industry players to tackle common challenges and create the conditions to achieve full financial inclusion on a global scale. For example, the center’s Smart Campaign promotes the protection of clients through greater transparency, prevention from overindebtedness, and the provision of means to address concerns. In just three years, its client-protection principles have been endorsed by more than 1,000 microfinance institutions in 130 countries representing more than 60 million clients.

By building competitive, commercially viable financial institutions that provide a healthy return on capital and by taking bold risks and investing in innovative ways to expand financial services to the poor, Accion and our partners are spurring new opportunities and sustainable progress throughout the developing world, and helping to bring billions more into the global economy. That is how change happens!

This article is part of “The Art and Science of Delivery,” an anthology of essays published by McKinsey & Company in honor of the 10th Anniversary of the Skoll World Forum. It is the most recent installment of McKinsey’s ongoing series, Voices on Society, which convenes leading thinkers on social topics. (Copyright (c) 2013 McKinsey & Company. All rights reserved. Reprinted by permission)

Using Small Loans to Generate Big Profits – Microlending Drives One of Africa’s Most Ambitious Banks – WSJ.com

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By SOLOMON MOORE

NAIROBI, Kenya—At a recent group-lending meeting in the Kawangware slum, about 10 miles from downtown, Jackson Munyovi sought $350 to build a new shanty for his wife and two children.

 

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Nichole Sobecki for The Wall Street JournalJackson Munyovi borrowed $350 to build a new shanty for his two children and wife.

The 31-year-old welder asked fellow church congregants and friends to co-sign a loan to finance building materials. A church deacon vouched for the borrower’s assets, including a few metal-shop machines and his marital bed, and Mr. Munyovi promised to repay the loan in six months, plus 8% interest.

And with that, Equity Bank Group—one of Africa’s most ambitious banks—snagged another customer.

The Kenyan bank has enjoyed a booming business lending to people with little collateral beyond the potential disgrace of letting friends down. Equity executives aren’t shy about a business model that leverages societal mores and shame—often the strongest collateral to be found on a continent where formal credit records are scarce beyond the biggest cities.

“If a woman secures a mortgage with her matrimonial bed, she will never default,” declares Chief Executive Officer James Mwangi. “And other women will support her just to ensure that that matrimonial bed is not removed when the husband is not there. Here, social relationships are more valuable than economic relationships.”

In this field, known as microlending, Equity executives say their main competition isn’t other banks—it is the bedroom mattresses where many Africans store their savings. Nearly 90% of Equity’s customers are first-time bank clients, Mr. Mwangi said.

The unbanked represent about 80% of Africa’s adult population, or 326 million people, according to banking-industry estimates. Most of those people are employed in Africa’s massive informal sector—a term describing an untaxed, unregulated part of the economy.

Among African microfinance institutions, both public and private, performance has lagged behind similar lending organizations elsewhere, according to a recent study by the Consultative Group to Assist the Poor, a microfinance-policy-research group supported by the World Bank. Only 25 African microfinance institutions have assets greater than $30 million, compared with Latin America and the Caribbean with 105 institutions and 62 in Europe and Central Asia.

Leveraging Friends in Kenya’s Slums

Nichole Sobecki for The Wall Street JournalWorkers take a break at Jackson Munyovi’s metal shop.

Other Kenyan banks, particularly Kenya Commercial Bank, also are expanding their customer bases by targeting small borrowers in the informal economy, but none have caught up with Equity, which pioneered the idea of signing the unbanked in Kenya and fortified its position with the nation’s largest network of storefront banking agents.

That leaves Equity with few competitors in Africa and none that can match its scale.

The bank started out as Equity Building Society in 1984, a mortgage financier for low-income Kenyans. The company nearly collapsed by the 1990s due to management shortcomings, a downturn in the nation’s banking sector and nonperforming loans topping 54% of its portfolio.

Mr. Mwangi joined the bank in 1993 after working for Ernst & Young and Trade Bank, a now-defunct Kenyan bank, and was its chief executive officer by 2004. He is credited with fashioning its microlending strategy and steering it toward profitability by targeting individuals with deposits of less than $200 and little collateral beyond the willingness of friends and neighbors to vouch for them.

For the bank, amorphous social relationships that bind communities—church and mosque associations, tribal and familial relationships, company and school affiliations—became a hard asset.

In their lending decisions, executives used a hybrid approach that combines hard-nosed cultural analysis with microlending techniques. Such methods are common at nonprofit institutions, but Equity has used them to make money.

In 2011, pretax profit surged 42% to $150 million, making it Kenya’s second-most profitable bank after Kenya Commercial Bank. About a third of Equity’s loans in 2011 were noncollateralized payday advances for as little as $12 for civil servants who agreed to repay the loans with 10% interest taken out of their next paycheck.

An additional 11% of Equity’s loans were to small enterprises such as fruit stands, used-clothing racks and hair salons. Collateral can include anything from furniture, household appliances or the business’s assets.

Upon repayment, borrowers can qualify for loans of $590 and then $886 to be paid over the same term. The final step for new borrowers is a $1,200 loan to be paid within a year.

Godfrey Chege is one such customer: He received a loan for almost $1,200 from Equity to expand his chicken-selling business. He and his wife pledged their bed as collateral.

Eighteen months after Equity opened an office in Kibera, one of the world’s largest slums, the branch had more than 15,000 clients, according to Francis Mbindyo, a manager of the recently opened Kibera branch.

Customer lines at other Equity bank branches often snake out the front door. Mr. Mbindyo says borrowers must also be part of a loan group of at least a dozen people willing to be co-signers.

Nonperforming loans accounted for 2.7% of Equity’s total portfolio, according to the company’s most recent quarterly statement.

For 88% of Equity’s customers, the bank was the first bank at which they ever opened an account, and more than three-quarters of Equity’s loans are unsecured by collateral.

Equity also uses an agency model in Kenya, paying commissions to storefront operators who act as remote bank tellers in rural areas. The bank had nearly 4,000 agency locations in March 2012, compared with 875 at the beginning of 2011. One-fifth of Equity’s cash transactions are done through agents, according to company statements.

Equity is also expanding regionally. The bank has opened a total of 51 branches in Uganda, South Sudan and, most recently, in Rwanda and Tanzania. Those forays were preceded by yearlong executive-training programs for local staff, said Mr. Mwangi.

“We want to be an international bank that is a local bank in every community,” he said.

Fruit farmer Thomas Kimote’s first Equity loan was for about $200 four years ago. He used the money to expand his operation and he now supplies several of Kenya’s largest grocery stores.

“I am more of distributor now,” said Mr. Kimote.

Mr. Mbindyo, Equity’s Kibera branch manager, said that Mr. Kimote’s business had resulted in other customers for the bank, including his suppliers, his drivers and others linked to his enterprise.

A version of this article appeared July 23, 2012, on page C1 in the U.S. edition of The Wall Street Journal, with the headline: Finding Big Profits In Many Little Loans.

dfe Partners and Creation Investments Establish CEE Microfinance Holdings, as a Regional Holding Company and Complete 3 Acquisitions

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Combined Talent from Financial Services and Microfinance Join to Expand Microfinance Services Throughout Central and Eastern Europe

DATELINE, September 23rd, 2010 – CEE Microfinance Holdings, N.V., a new, private equity backed, Dutch holding company owned by the Balkan Financial Sector Equity Fund, managed by the Swiss based dfe partners, and Creation Investments Social Ventures Fund I, managed by US based Creation Investments Capital Management, announced today it purchased three microfinance institutions located in Central and Eastern Europe. CEE Microfinance Holdings has a newly recruited management team which combines talent from the financial services industry both inside and outside the microfinance sector.

The three microfinance institutions involved in the transaction are located in Albania, Poland, and Russia and purchased from, U.S. based Opportunity Transformation Investments Inc., UK based Opportunity Microfinance Investments Ltd and FORA Fund (Russia).    The first institution, Opportunity Albania is a non-bank financial institution currently serving more than 16,000 clients from its 23 branches, with its headquarters in Tirana, Albania.  The second, Inicjatywa Mikro is a non-bank financial institution currently serving more than 2,000 customers, with its headquarters in Krakow, Poland. The third, FORUS is a registered bank in Russia currently serving more than 10,000 customers, with its headquarters in Nizhniy Novgorod, Russia and a 42 branch network.

“The successful completion of this transaction opens a new chapter for our customers, our employees, our businesses, and our investors and lenders.” said Pieter van Groos, the chief executive officer of the newly established CEE Microfinance.  “We are convinced that these businesses have tremendous potential to expand accessible and affordable financial services to both current and new customers that are underserved by traditional commercial banks and finance institutions. These acquisitions also provide a starting point for further acquisitions and create scale in the region.” Pieter van Groos was previously CEO of GE Money Bank in the Czech & Slovak Republics, and prior to this worked for McKinsey and Exxon. In addition, Koen Wasmus joins as COO of CEE Microfinance. Wasmus was previously CEO of ProCredit in Kosovo and held other management positions within ProCredit. Further appointments to the CEE Microfinance team will be announced.

Clive Moody, Managing Partner of dfe partners, who negotiated and led the transaction said, “The challenges for success in the maturing microfinance sector in Central and Eastern Europe have and will continue to change. What we see as critical to the future of CEE Microfinance is fresh vision combining the capabilities of experienced management with active shareholders who promote strong corporate governance and provide much needed access to capital. We believe there is much to be gained through developing a common business model across the three institutions that will then serve as a template for further country acquisitions.”

“The formation of CEE Microfinance with presence across three territories, including the banking license in Russia, allowed us to recruit a level of expertise to manage these operations that combines the best practices not only from the microfinance world, but also from the wider financial services environment,” said Patrick Fisher, CEO of Creation Investments. “Pieter and Koen individually have extensive experience, that combined provides a management strength that is the essential ingredient of a successful microfinance business in Central and Eastern Europe for the next decade”.

About CEE Microfinance Holdings, N.V.

CEE Microfinance Holdings, N.V. is a Dutch public limited liability company.  CEE Microfinance is involved in the business of owning microfinance and small and medium enterprise lending institutions in unbanked and underbanked markets and client segments in Central and Eastern Europe.  CEE Microfinance is owned by a Dutch Coöperatief formed by the Balkan Financial Sector Equity Fund CV and Creation Investments Social Ventures Fund I.  The Balkan Fund is a Netherlands investment fund, managed by Development Finance Equity Partners AG, Switzerland.  The Creation Social Ventures Fund is a U.S. investment fund, managed by Creation Investments Capital Management, LLC.

For more information, visit http://www.dfe-partners.com/ or http://www.creationinvestments.com/.

Or contact:

Clive Moody, Managing Partner, dfe partners AG
Phone:   +44 1962 850736
Mobile:  +44 7866 565588
cmoody@dfe-partners.com

Patrick Fisher, Chief Executive Officer, Creation Investments Capital Management, LLC

Phone: +1.312.784.3980
Mobile: +1.773.960.8520
patrick.fisher@creationinvestments.com