Global Financial Institutions and Microfinance: A Promising Marriage?

The intent of the microfinance movement has been to build “financial systems that work for the poor majority.”  The involvement of international financial institutions undoubtedly enhances this cause, enabling the poor to better access financial services.

As it turns out, ING Microfinance Support has just released a follow-up report entitled, “A Billion to Gain? – The Next Phase:  A Study on Global Financial Institutions and Microfinance” which aims to provide a “preliminary overview of of current developments regarding the position of major financial institutions within the microfinance sector.”  A brief summary of the report follows:

Amongst the top 20 financial institutions by market value, the following are most active in microfinance (in order of decreasing activity):

1)  Citigroup, Inc., 2) HSBC Holdings, 3) AIG, 4) Grupo Santander, 5) BNP Paribas, 6) Allianz, 7) ING Group, 8 ) Barclays, 9) AXA Group, and 10) Morgan Stanley

The report goes on to say that these and other international financial institutions have recently shown a shift in their respective business models.  Instead of simply regarding microfinance simply as a component of their corporate citizenship vision, an increasing number of banks “have chosen to integrate their microfinance activities into their ‘normal’ commercial activities,” which include “well organized teams, the involvement of specialists, and a significant increase in microfinance activities.”  More specifically, the report defines “normal business with social impact” as the following (more after the break):

This is the highest degree of microfinance commercialisation. Profit and growth are important factors in the policy. Microfinance products are approached as a normal business service. The products are fully commercialand supported by the normal businesses. In addition, they have significantly more social impact than the ‘normal’ business services.

The impetus for increased involvement centers around sustainable profit and growth opportunities in a market estimated to consist of approximately 3 billion clients.  According to Ian Callaghan, Head of Microfinance Institutions Group, Morgan Stanley, the potential for partnership is significant:

“Global financial institutions and microfinance: a promising marriage?!  If microfinance is to reach its full potential, there will need to be greater involvement by global financial institutions.  Future funding demand by the industry is approximately a few billion annually.  However, challenges to commercial investing remain in this nascent asset class.  The scarcity of information and lack of understanding of microfinance by institutional investors are only a few to note.  If financial institutions can help enhance transparency, liquidity, and access to the asset class, then the marriage is a very promising and lasting one.”

Finally, the report focuses in detail on the financial products provided by the aforementioned banks, and their social impact on the target population.   Some notable developments include the following:

• Retail microfinance activities (micro-insurance, individual micro-loans, and the provision of current accounts) remain a small part of business activities in comparison to microfinance related wholesale products (ie wholesale loans to MFIs, equity stakes in MFIs, or investment in microfinance funds)
• Albeit slowly, micro-insurance schemes are starting to emerge on the market – an example of this is Allianz’s micro-insurance program in India, which is currently providing 100,000 micro-insurance credit-life policies. 
• The market of international (micro) money transfers or remittances is slowly being explored – an example is BRAC, which in July 2007, signed a remittance distribution agreement with Citi Bangladesh.
• The total amount of wholesale loans to MFIs or microfinance-oriented institutions has doubled over the course of the past 2 years.  Also, wholesale loans are now more prominently being provided in local currency. 
• Banks such as ING (as part of their Microfinance Support Programme), have started providing capacity building/technical assistance to MFIs in developing countries. 

It is truly remarkable that just in the course of the past few years, microfinance activities have diversified significantly, offering complex forms of investments and products.  With regard to the future, the report found that all participating banks indicated that they are “committed to the sector in the long-term.”  

An important closing note, however – as the participation of global financial institutions increases in the microfinance sector, the original objective of microfinance – promoting financial inclusion, and thereby increasing social impact for the world’s poor – should never be overshadowed.