Thought Leaders: Philanthropy
The Future of Microfinance
Rosemary Werrett
11/01/2006

Microcredit programs, which aim to provide capital to poor people with entrepreneurial ambitions, attract many philanthropists because they are not charities, but rather systems for making business loans that can evolve into a more mainstream credit industry. In the past few years, commercial financiers have become interested in experimenting with ways to expand the capital available to recipients, while mitigating the risks borne by the programs.

One innovation we are trying at Pro Mujer involves local currency loans. Microfinance institutions (MFIs) typically borrow in dollars or another major currency and lend in local currencies—pesos or rupees, for example. If a sharp devaluation occurs, as has happened repeatedly in the past 20 years in regions such as Latin America, this can destroy an MFI’s ability to service its hard currency loans. Local loans eliminate the currency mismatch, thus removing one of the most feared risks facing MFIs and their lenders.

Earlier this year, Pro Mujer Bolivia, working with the Grameen Foundation, Citibank and private investors, borrowed $1.5 million in bolivares from two Bolivian banks to expand operations beyond the 80,000 clients it currently serves. The loans are backed by guarantees provided by private investors in the U.S., who issued standby letters of credit worth $750,000 in favor of Citibank. Citibank, in return, issued a standby letter of credit to the banks in Bolivia. Grameen negotiated the deal with the Bolivian banks, which agreed to price the loans at 8 percent. Pro Mujer is paying Grameen Foundation and Citibank an additional 1 percent each. The private investors’ guarantees will be called only in case of default. Otherwise, the cash backing the loans remains in the investors’ portfolios and continues to earn returns.

We borrowed $1.5 million in bolivares from two Bolivian banks, guaranteed by private investors in the United States.
While local currency loans seem advantageous, they may catch on slowly. Attracting large numbers of private investors to these complicated schemes will take time, and only MFIs with sterling track records can use them. Of the thousands of MFIs that operate around the world, probably no more than 130 are investable, based on commercial market criteria. Local currency loans and other forms of commercial finance also carry much higher funding costs than traditional donor funding. They raise the question of whether MFIs can stay true to their goal of lending to the poor if they are under pressure to pay off their own loans.

It is crucial for Pro Mujer to work with soundly managed MFIs that view themselves as a business. They must be driven by the need to be profitable and assemble the skills necessary to serve their clients effectively, passing on to them the savings that come from efficiency and transparency. The broad effect of commercial funding will be to drive MFIs to be more competitive—and sustainable.

Most MFIs will continue to prefer traditional donor funding; it is less costly, and gives them more flexibility to innovate. And commercial funders are not prone to experiment with newer, unproven financial products. But fortunately, this industry continues to attract donor funding, not only for direct relending to the poor, but for innovation as well. In March, the Bill & Melinda Gates Foundation granted millions of dollars in funding to several MFIs to support development of new financial products, such as loans for housing, education and insurance, for microcredit consumers.

Pro Mujer received $3.1 million from the Gates Foundation, which we will use to roll out pilot projects in the five Latin American countries in which we operate. The goal of the Gates grant is to understand how the range of financial products commonly available to middle-class consumers can be replicated for the poor on a wide scale.

MFIs do understand that the pool of commercial money for this purpose is potentially huge, and it offers the chance to scale up operations. The market for microfinance is virtually unlimited, given the billions of poor people still grinding out a bare existence in many parts of the world. At best, only about 100 million of them now have access to microcredit. The mobilization of new capital cannot only help the industry grow, but grow in a disciplined and sustainable way.

Illustration by Matt Mahurin. 

Rosemary Werrett is director of business development for the G7 Group and a board member of microfinance institution Pro Mujer.