A
Billion to Gain
The Role of Global Commercial Banks in Microfinance
Remarks by Sam Daley-Harris
…I
have been asked to provide the microfinance sector’s view of the
role of global commercial banks in microfinance. I knew I didn’t
want to speak for the microfinance sector but wanted to have leaders in
the field speak for themselves. So I sent an informal survey to dozens
of MFI leaders asking three questions: 1) what are the positive aspects
of the entrance of global commercial banks into microfinance, 2) what
are the potential problems or difficulties, and 3) finally I asked if
there was anything else they wanted to say. As I looked at their comments,
it was as if they had read the paper [commissioned by ING], because the
issues raised in their responses were so similar. I say this as a high
compliment to the authors.
I’m
going to divide this presentation into three sections. First I’ll
offer some opening remarks on behalf of the Microcredit Summit Campaign.
Then, in the longest section, I’ll share the views of the practitioners
and other leaders from the field who responded to the survey. And then
I’ll offer some final thoughts and challenges.
I’d
like to begin by saying how delighted I am that we are having this discussion
today. Delighted that there is enough interest and activity, albeit much
of it at the beginning stages, to make this discussion meaningful and
relevant to more than a handful of bankers.
While my
involvement as an advocate in this field began in 1985, 21 years ago,
my interactions with global commercial banks are much more recent. It
was just over 10 years ago that I first began working with Citibank, part
of Citicorp at the time. My interactions with Deutsche Bank began at the
same time through the bank it would later acquire, Bankers Trust. And
it was in 1996 that I first came here to ING headquarters to discuss what
was then the upcoming Microcredit Summit. It was Gert van Maanen, the
head of Oikocredit at the time, who brought me to ING. At that point,
the field of microfinance seemed to not yet be relevant. So when I say
I am glad we are gathered here, I say that with some history.
At the risk
of seeming rude and offending some, I feel the need to begin by stressing
the extent to which microfinance is a revolution in banking—to underscore
the numerous rules that had to be broken for microfinance to even exist.
I have been
with Grameen Bank Managing Director Muhammad Yunus when he has been asked
what his strategy was for creating Grameen. “I didn’t have
a strategy,” Professor Yunus would reply, “I just kept doing
what was next. But when I look back, my strategy was, whatever banks did,
I did the opposite. If banks lent to the rich, I lent to the poor. If
banks lent to men, I lent to women. If banks made large loans, I made
small ones. If banks required collateral, my loans were collateral free.
If banks required a lot of paperwork, my loans were illiterate friendly.
If you had to go to the bank, my bank went to the village. Yes, that was
my strategy. Whatever banks did, I did the opposite.”
Now we can
take that statement as blasphemy and look for weaknesses within his system
or we can acknowledge the brilliance in what he and so many other pioneers
have done to allow us to be in this room—to get us to this place.
Imagine what this world would look like if these rules had not been broken,
if no one anywhere had ever bothered to question the notion that the poor,
those with little or no collateral, could not use or repay a small loan.
That the poor are not credit worthy. We must recognize, acknowledge, and
celebrate the revolutionaries in Latin America, in Africa, in Asia and
elsewhere who have pioneered this remarkable breakthrough. Then, and only
then can we build and improve upon their achievements.
Let me say
one more thing before we get to the comments from the microfinance leaders.
Just as we have had a revolution in banking, a revolution that was ignored
at best and scoffed at, at worst, we are now also seeing a revolution
in international development that is just as blasphemous, just as heretical
as microfinance was 30 years ago and that is a revolution committed to
reaching and empowering those in extreme poverty, those living on less
than US$1 a day. A revolution encapsulated in the Millennium Development
Goals, especially the goal on cutting extreme poverty in half. A revolution
that is best expressed by the work of activists like Bono and academics
like Jeffrey Sachs and by some of the leaders in the field of microfinance.
On a typical
Friday morning, when I am at home in Washington, DC, I drive my seven
year old son Micah and my four year old daughter Sophie to school. I am
aware that each and every day around the world some 29,000 children under
the age of five die from largely preventable malnutrition and disease.
That’s 29,000 children Sophie’s age dying needlessly every
day.
I am also
aware that globally, 100 million children of primary school age are not
in school. That’s 100 million children of Micah’s age.
For me, these
statistics are scandalous and abhorrent and they remind me of the statement
by retired US Senator Mark Hatfield who said, “We stand by as children
starve by the millions because we lack the will to eliminate hunger. Yet
we have found the will to develop missiles, capable of flying over the
polar cap and landing within a few hundred feet of their target. This
is not innovation. It is a profound distortion of humanity’s purpose
on earth.”
Let me repeat
that. Hatfield said, “We stand by as children starve by the millions
because we lack the will to eliminate hunger. Yet we have found the will
to develop missiles, capable of flying over the polar cap and landing
within a few hundred feet of their target. This is not innovation. It
is a profound distortion of humanity’s purpose on earth.”
Let me plead
with you, given that your business plans might not include being active
players in this second revolution, the international development revolution
committed to reaching and empowering those living in extreme poverty,
those living on less than US$1 a day, I urge you, even if it’s not
in your business plan, I urge you to at least be silent champions for
its success. I truly believe that the lives of our children and their
children depend on it.
Now let me
get to the responses from the practitioners. We had replies from 22 leaders
in the field. They included practitioners and network leaders from 17
countries on five continents. There were a number of things that almost
everyone agreed on when addressing the first question: what are the positive
aspects of the entrance of global commercial banks into microfinance.
There was wide agreement on the importance of increased access to funds,
new technology, new products, and validation for the field.
Anne Hastings,
CEO of FONKOZE in Haiti spoke of how the engagement of global commercial
banks has “fundamentally altered” their strategy for financing
their loan portfolio. Here is what she said: “these banks are offering
innovative products that allow us to borrow in local currency with guarantees
or stand-by letters of credit from the global banks….In the past,
we relied on loans from socially responsible investors. Now we are increasingly
relying on stand-by letters of credit that allow us to borrow in local
currency from local banks. We believe that this is a better strategy for
us to be using. Specifically, we are working with Deutsche Bank, Rabobank,
and Citigroup….”
Godwin Ehigiamousoe,
Executive Director of LAPO in Nigeria talked about the need for increased
financing to support expansion, but how, in his case, the link to local
banks is still very weak because of their limited understanding of microfinance.
Here is what he said: “Grants which supported start-up projects
are becoming inadequate to implement expansion plans. Local commercial
banks have limited understanding of [the] dynamics of microfinance practice,
and therefore see MFIs as unattractive customers. [The] only ready sources
of adequate capital are global financial institution[s].”
John Hatch,
Founder of FINCA International spoke about how that divide can be bridged.
“One advantage,” Hatch said, “is that global banks will
serve an important (potential) role for validating microfinance to international
investors, as well as to local (in-country commercial banks)” He
gave as one example, “VISA International’s network of 17,000
banking affiliates” and said “that could liberate many billions
of dollars for microfinance use.”
Pierre-Marie
Boisson, President of Sogesol in Haiti, took a different view from Ehigiamousoe
in Nigeria regarding the readiness of local banks to engage with MFIs.
He said: “Global commercial banks may certainly open microfinance
institutions to world markets and its huge pool of financial resources,
which is likely to bring down both financial and operating costs. Having
said that, I believe that local retail commercial banks are more prepared
than global commercial banks to successfully enter the industry, as they
are usually more able to adapt their processes to local conditions, especially
informal sector ones. Local banks in developing markets often also suffer
from excess of unused liquidity, which can be gainfully loaned to microenterprise
thus enhancing these banks' profits and lowering their risk through asset
diversification.”
There was
also a great deal of discussion about innovation in different areas. One
was innovation in technology.
John Hatch,
of FINCA, said: “Global banks can bring large-system IT, debit and
credit card technology, and remote teller networks--all of which will
enable MFIs to become more efficient and will help reduce the unit costs
of credit disbursement and other financial services.”
Rosalind
Copasarow, Senior Vice President for International Operations at ACCION
spoke about seven areas in which she saw global financial institutions
having significant advantage over local banks and MFIs. They are: remittances,
consumer loans through credit cards, housing finance, microinsurance,
wholesale provision of debt and equity to MFIs, derivatives and risk taking
instruments, and private client guarantee funds like the ACCION Global
Bridge Fund.”
There was
much discussion of how the entrance of global commercial banks provides
validation of the field with different benefits emerging as a result.
Arnaud Ventura, Executive Vice-President of PlanetFinance spoke about
the emergence of micofinance on the agenda of the financial sector and
said it will, “Make Microfinance and the need for universal access
to financial services a [high-ranking] topic on the international agenda
of the financial sector.”
Hatch of
FINCA said the validation will bring benefits in the area of product innovation,
“….global bank participation will validate microfinance to
the insurance industry and also facilitate large-scale pension programs
for the poor.” Hatch gave the example of FINCA’s partnership
with A.I.G. to develop pension and insurance products for the poor and
poorest.
Larry Reed,
CEO of the Opportunity International Network spoke about how this new-found
legitimacy might bring in new staff “as people in the finance community
will see microfinance as a career option.”
A number
spoke of how the entrance of global commercial banks will improve performance.
Bambang Ismawan, President of Bina Swadaya in Indonesia said the entrance
will bring, “[an] increase [in] the accountability, management,
and governance of the MFI[s]” [end quote] and noted how this will
bring more efficiency in delivering services.
Many, including
Clara Serra de Akerman, President of the Women’s World Banking in
Colombia, spoke about how the entrance of global banks: “Enhances
competition, improves efficiency, brings down costs and, of course, greater
outreach and funds to reach the unbanked.”
People in
the microfinance field who responded to this survey were clear about a
wide range of potentially positive aspects of the entrance of global commercial
banks into microfinance.
Let’s
move to the second question in the survey in which I ask what are the
potential problems or difficulties with the entrance of global commercial
banks into microfinance?
Practitioners
often came back to the problem of foreign exchange risk. Godwin Ehigiamousoe,
of LAPO, Nigeria said, “Foreign Exchange risk is real in most developing
countries in which most MFIs are located. Unpredictable movement of exchange
rates could make a mess of foreign borrowing and support.” This
comment was endorsed by practitioners from Nepal, Haiti and elsewhere.
Tor Gull,
Managing Director of Oikocredit spoke about the problem of too many institutions
chasing after the best MFIs with funds. He said: “What we have seen
so far from international banks is mainly window dressing. Banks are setting
up small funds to compete to finance the strongest MFIs. I fail to see
a need for them just to bring more money to first class MFIs. These MFIs
are already flooded with money, meaning they get offers from all kinds
of funds and institutions, which may tempt them to take on more money
than they can absorb and in the long run even bring some of them into
serious difficulties. The big banks are used to handling very big amounts
and are in the market to get the highest possible profit. The challenge
is how to combine this with microfinance and also provide service to others
than the first class MFIs.”
He added,
“I think it is more important to create possibilities for local
banks to get involved in microfinance than for the big international ones….Maybe
some international banks can…[help] facilitate this!”
Anne Hastings,
CEO of FONKOZE in Haiti spoke about paperwork and oversight problems required
by global banks. She added “Often they don't have a good understanding
of the environments in which we are working, and it takes a lot of time
to educate them. Each of them asks for different information and requires
different reporting. Of course, it's not much different with the donor
agencies, so it's nothing new. It also has complicated our relationship
with our local bank, for whom these relationships are new. It just adds
another layer (often two additional layers [to the relationship]-- the
global bank and the bank’s foundation)…A larger concern is
whether these global banks are really interested in our mission. We don't
know yet what kinds of pressures they may put on us to divert us in our
mission.”
Also on the
funding side, Maria Nowak, President, ADIE, France, worried that global
bank’s entrance might "convince donors that microfinance can
by financed by banks [alone], which is not true. The lowest income segments
of clients and the most difficult sectors, such as rural finance, will
need a longer [period of] grant support.”
There was
a lot of comment on issues related to mission drift, movement away from
the poor and poorest. John Hatch of FINCA was a bit harsh but also offered
a solution. He said, “Global banks are simply clueless about how
to reach the poorest. For them to attempt to do microfinance directly
will be disastrous. They need to partner with existing MFIs to create
"windows" that specialize in reaching the poorest, or hire MFIs
to do all their ‘front office’ promotion of financial services
to the poorest, while the global commercial banks run the ‘back-office’
functions.”
Many were
either concerned that global banks would downscale and get it wrong or
never downscale and somehow push MFIs away from poorer clients.
Larry Reed
of Opportunity International said it this way: “[S]ome global banks
are now looking into retailing microfinance loans. We welcome the competition,
but most global banks have a cost structure that is several times higher
than most MFIs. They could flood a market for a few years, find the profits
generated do not meet their expectations and then exit, but not before
seriously damaging the established MFIs in the area and destroying the
local market for microcredit.”
This challenge
was expanded on by John De Wit, Managing Director of the Small Enterprise
Foundation, in South Africa “South Africa has some interesting lessons
for the world, not from global banks but from national banks which, in
our case, are very similar to the global banks. When an exemption to our
usury act was lifted around 1992, the response from our commercial sector
was the very rapid growth of consumer lenders. Initially all of these
loans were at 30% per month. Many if not all of our major banks entered
into this market by acquiring companies that did this kind of lending.
The result of easy credit at enormous [interest] rates, on a huge scale,
has been reckless lending practices, too much over-indebtedness and the
unwise use of debt. Enter the politicians - they cannot accept the exploitation
and they have limited understanding or appreciation for any differences
between microcredit for income generation or enterprise versus exploitive
microfinance for consumer lending. So they prepare to re-impose interest
rate restrictions that will kill off all microfinance, including microcredit.
(Fortunately in South Africa we have some champions for microcredit who
may still limit the action of the politicians.) So the lesson is: If banks
take the path of entering microfinance by chasing quick profits by doing
or supporting consumer lending at unacceptable rates and in a reckless
manner; eventually the public and then the politicians will turn against
microfinance. (Logic, economics and intellectual reasoning are then irrelevant
as microfinance has then moved into the world of politics - a world in
which perceptions are often of primary importance.)”
Again and
again the practitioners cautioned that the focus on the financial bottom
line will crowd out social mission. Anton Simanowitz, Program Manager
of Imp-Act at the Institute of Development Studies in the UK said, “I
think it's important to be clear that access to financial services does
not automatically lead to poverty reduction. The innovation of microfinance
is how to provide financial services in a way that is supportive and leads
to broader benefits. My concern is that where banks consider only their
financial bottom line they will not maximixse the potential to reduce
poverty. There's also a concern about how realistic it is to expect commercially
driven banks to really make the effort to reach down. My gut feeling is
that commercial banks will do a great job of extending outreach to those
just above and below the poverty line but will do little to fulfill the
Microcredit Summit goals of reaching the poorest.”
There was
a great deal of concern about misunderstanding the market. Arnaud Ventura,
Executive Vice President of PlaNet Finance in France warned about the
“Potential superiority complex whereby global banks give the impression
of knowing it all and develop bad practices instead of nurturing the NGO
experience.”
Roshaneh
Zafar, Managing Director, KASHF Foundation, in Pakistan asked, “how
ready and willing are bankers to come down to the level of our customers
and to understanding their needs….”
Bambang Ismawan,
President of Bina Swadaya, Indonesia was also concerned about global banks’
understanding of poor clients: “Commercial banks may have their
technology in reaching wide range of the better off and rich individual
clients but they will meet totally different clients in [the] micro segment.
The shift of the client segment requires a lot of changes in procedure
of operation and their working attitudes, which is not easy. Commercial
banks and MFIs have different orientation and motives in doing the micro-finance
services.”
Ehigiamousoe
of Nigeria worried that, “The scale or volume of loans required
by these global commercial banks may be [too great]” and said that,
“Local MFIs will require capacity strengthening support before meeting
the standards of these global institutions.”
Prof. H.
I. Latifee, Managing Director, Grameen Trust in Bangladesh, warned about
the “Potential for over-regulation.”
As many others
did, Clara Serra de Akerman of WWB in Colombia called for partnerships,
“[Global Commercial Banks] should be interested not only in obtaining
high returns on equity but also social returns and impact on poverty,
[which is] probably easier through alliances with MFIs.”
Let me offer
a few additional comments that point the way forward.
Copisarow
of ACCION said “The biggest challenge is for smaller local commercial
banks and sustainable NGO MFIs to stay competitive….At ACCION we
are recommending complementary partnerships between global banks and MFIs
where there are roles for each that build on strengths of each, e.g. housing
loans by the global bank but microloans for business from the MFI.”
Hatch of
FINCA said, “Even if the global banks don't attempt to reach the
poor at all, simply by better meeting (even saturating) the credit demand
of middle class and not-so-poor clients, they will force the existing
(or surviving) MFIs to go down-market to serve the ever-less profitable
segments of the unserved poorest clientele.”
Reed of Opportunity
International said: “I think there is a lot of room for effective
partnerships between global banks and microfinance institutions or networks
at several different levels. There is the ACCION model of helping commercial
banks downscale. Then there is the Compartamos model of having a global
bank (Citibank) underwrite a local bond issue. We use HSBC both for our
remittance product and our Loan Guarantee Fund. Banks and MFIs can also
develop mutually supportive relationships with MFIs where the bank lends
money to the MFI and the MFI passes on its graduating clients to the bank.”
I want to
conclude this section with a response from Simanowitz of ImpAct. “[I
heard] An interesting comment from a senior person at [one of the top
microfinance rating agencies]: ‘Over the last couple of years, I've
been thinking more and more about the limits of [our rating agency’s
] approach to analyzing risk and performance in microfinance institutions.
The most obvious limit (self imposed) has been our not fully capturing
their degree of social performance. We always took it as a given that
lending money to poor people with a productive use for it who could pay
it back and did, repeatedly and in increasing amounts, had social (as
well as financial) benefits. But that has always been a necessary simplification
of complex issues, useful as we got the financial side of our analytical
house in order. As more and more banks move downscale, and more and more
commercially oriented MFIs move upscale, the core assumption of microfinance
as a tool for not merely financial but social development is becoming
less reasonable to make in all cases."
I think it
is critical that we not assume social impact. MFIs that use social performance
measures not only to demonstrate progress to funders and other stakeholders
but, perhaps more importantly, to inform management decisions and improve
social performance, are leading the way.
The Microcredit
Summit Campaign is passionate about making sure that microfinance reduces
poverty and that the call for “inclusive financial services”
does not exclude the very poor, as always happens in international development.
The practitioners
who responded to this survey almost universally welcomed the entrance
of global commercial banks into microfinance and heralded the potential
of increased access to resources, innovative technology and product offerings,
and recognition. They also warned against passing on currency risks, pushing
MFIs away from the poor and poorest, unsound lending practices, and over
burdensome paperwork and regulations. Throughout, the key word was partnership.
…I
will close with this quote from George Bernard Shaw’s Man and
Superman:
This is
the true joy in life, the being used for a purpose recognized by yourself
as a mighty one, the being a force of nature, instead of a selfish,
feverish little clod of ailments and grievances complaining that the
world will not devote itself to making you happy. I am of the opinion
that my life belongs to the whole community, and it is my privilege
to do for it whatever I can. I want to be thoroughly used up when I
die, for the harder I work, the more I live. I rejoice in life for its
own sake. Life is no brief candle to me, it is a sort of splendid torch
which I've got a hold of for the moment, and I want to make it burn
as brightly as possible before handing it on to future generations.
Let us work
together to insure that we use microfinance for a purpose recognized by
ourselves as a mighty one, that we support microfinance in bringing us
closer to the end of poverty.
Click
here for a copy of the complete ING-sponsored study on global financial
institutions and microfinance.
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