microfinance, microbenefit?
Source Jim Devine
Date 09/08/29/17:22

The New York Times
Some Fear Profit Motive to Trump Poverty Efforts in Microfinance

SAINT-OUEN, FRANCE — From a warehouse in this scruffy suburb outside
Paris, Jacques Attali has been building what he calls the “McKinsey”
of the microfinance world, a one-stop consulting shop for the sector.

A consummate French insider, Mr. Attali, a former banker and
presidential advisor, has recruited big names as board members and
advisors, including Bernard Kouchner, co-founder of the Nobel
prize-winning Médecins Sans Frontières, now the French foreign
minister; and Muhammad Yunus, the Nobel-winning founder of Grameen
Bank, a pioneer in the field of microfinance. He has attracted a host
of corporate partners, like SAP, the German software company, and BNP
Paribas, the largest bank in France.

The result — PlaNet Finance — now has a staff of 700, about 10 percent
based in Saint-Ouen, active in more than 60 countries. Since 1998, it
says it has provided help to 140,000 entrepreneurs and set up $80
million in financing.

It also has an investment arm and offers technical assistance to
donors and recipients. Some services, like ratings, have become
benchmarks; others, like insurance, are less successful.

The expansion illustrates just how microfinance — the providing of
small business loans to individuals, usually in developing countries —
has become big business. Companies like PlaNet Finance and
BlueOrchard, based in Geneva, attract not only public investors, but
private ones seeking a “double bottom line” of socially responsible

Intermediaries, including major investment banks like Citigroup and
J.P. Morgan, have jumped on the bandwagon, finding investors and
offering services like bond issuance, initial public offerings of
shares, ratings and insurance.

But the growth and hoopla has some in the field worried that the
industry, awash in liquidity despite the financial squeeze of the past
year, may become overly driven by profit and lose sight of its
original aim — reducing poverty. There are also persistent questions
about debt burdens and regulation.

“Wall Street became very excited a few years ago,” said Elizabeth
Littlefield, chief executive of the Consultative Group to Assist the
Poor, or CGAP, an independent research institute that is based at the
World Bank. “There were elements of a bubble. In some countries,
institutions were probably growing too fast.”

Some in the industry privately chide Mr. Attali, for example, of
exaggerating PlaNet Finance’s achievements for publicity purposes —
but they decline to do so on the record because of his stature.

The company itself concedes it has gone through a bit of a learning curve.

“We burned a bit our fingers” in Mexico, where microfinance “developed
extremely quickly, with many players entering the field very
aggressively,” said Arnaud Ventura, vice president of PlanNet Finance.
The results were defaults and a pullback.

During an interview, Mr. Attali agreed that “some people” in the
industry “are using microfinance as a way for advertising themselves.”
He did not name anyone in particular.

The aim of microfinance should be creating products that improve
lives, Mr. Attali added, so it is not ideally suited to a purely
commercial model. But he said that because PlaNet Finance had “very
patient shareholders” the group did not have to chase profits.

Although PlaNet Finance is a nonprofit organization, he did not rule
out going to the market with some products in the future

Modern microfinance took root during the 1980s, although experiments
in Bangladesh — with Mr. Yunus and Grameen — and in other countries
occurred earlier. It differed from traditional aid by insisting that
loans be repaid, charging interest and seeking poverty reduction via

The basic model involves the establishment by governments or investors
of microfinance institutions, which channel money, directly or via
funds, to local banks and credit offices to lend on.

According to research by the CGAP, to be published soon, financing
from public and private investors passed $10 billion in December.

More than half is managed by specialized funds, known as microfinance
investment vehicles, run by players ranging from private equity to
specialized managers.

Assets under management grew 16 percent in the first quarter, to $6.6
billion, after rising 31 percent in 2008, and 72 percent in 2007. And
fund managers are reporting few redemptions, the institute said.

BlueOrchard, the largest commercial microfinance intermediary,
estimates that to meet projected demand over the next five years,
microbankers will need $10 billion to $20 billion.

Most of the funds are based in Europe for tax and regulatory reasons.

BlueOrchard co-manages the largest specialized fund, the $500 million
Dexia Micro-Credit Fund. It has added about $100 million this year.

Triodos Bank of the Netherlands, another large player, announced a new
fund in March, bringing its microfinance funds to €185 million.

Yet returns are moderating.

The Symbiotics microfinance index, tracking six of the largest funds,
has returned over 2 percent so far this year, compared with about 6
percent last year and in 2007.

Over all, the sector is weathering the financial storms “chastened but
intact,” according to a CGAP report in February.

Jean-Pierre Klumpp, BlueOrchard’s chief, said, “We have disbursed in
the first half of the year a lot less than before.” But he added that
“we actually have funding available. After the crisis in the third or
fourth quarter, investors stopped investing.”

The financial storm has had other side effects.

A report in July from the Center for the Study of Financial
Innovation, based in London, concluded that lenders were now focusing
on credit risk and liquidity; a year ago, management and regulation
concerned them.

“This very rapid growth put a huge strain on branches and management,”
Mrs. Littlefield said. “Now there is some pullback” on funds coming
in, she said, allowing more focus on improving delivery, which she
called “a healthy adjustment.”

More broadly, there are lingering questions about how funds are
channeled and tracked.

Loïc Sadoulet, a professor of economics at Insead, a French business
school, said new rules might be needed to limit risk for the most
vulnerable. Some recent reports have found that high rates are being
charged — up to 60 percent in countries like Zambia and Bangladesh —
and cite aggressive tactics in recouping loans.

Mr. Attali said his company had been pushing two or three years for an
international treaty to regulate microfinance.

Others, like Mrs. Littlefield, are not sure that more regulation is
the solution. The sector has become more professional, most
institutions are fully audited based on internal accountancy norms and
nearly 1,000 of them are rated, she said.

Further out, work needs to be done on the sector’s effects, as most
studies so far have been inconclusive, said Dean Karlan, an economics
professor at Yale University.

Microfinance “didn’t transform people’s lives to the extent suggested
by the hype,” he said. “We need to know more about how to target and
how to design programs.”

The ultimate benchmark, reducing poverty, suggests “very much a mixed
picture,” he said, adding the emphasis should be on savings, rather
than lending.

Still, Mr. Ventura, of PlaNet Finance, points to “many tiny
indicators” — surveys and anecdotal reports — “that tell us that the
situation is better because of microcredit.”

Copyright 2009

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