Shark-free Finance
The actual practice of lending minute sums of money to subsistence farmers, fishermen, herders, weavers and market vendors is as old as civilization itself, but in ancient valleys and villages the loans were bestowed by local usurers who would charge interest rates as high as 20 percent a day and perhaps add the indentureship of a first-born child. Without the backing of a micro-lending agency, similar loan-shark arrangements are pretty much the only capital source available to the uncollateralized poor even today. Muhammed Yunus, the economics professor who founded Grameen— which means village or rural—in Bangladesh after the 1974 famine, believed that small loan programs with plenty of community support could help the poor start sustainable businesses and lift their families out of poverty.

The microfinance industry has become large enough that the likes of Deutsche Bank and Citibank have found it a viable model for social investment funds.

It is significant that close to 80 percent of all micro-loan borrowers are women. World Bank studies have found that men in impoverished countries (with exceptions, of course) are more likely to spend their earnings at the pub, whereas women spend money they earn on their families, particularly on sending their children to school to get the education that can lift them out of the perpetual grind of poverty.

There are now hundreds of microfinance agencies that provide capital to MFIs around the world, including impoverished areas of the United States. A donor can provide capital through three types of organizations. The big institutions such as Grameen, Accion International and Opportunity International/Women’s Opportunity Fund oversee a vast global network of MFIs and lending banks. Specialty donor-advised funds, which direct contributions to MFIs, include the Philanthropic Collaborative of Rockefeller Philanthropy Advisors (RPA), the Tides Foundation, the National Philanthropic Trust and the Charities Aid Federation. A third approach is to start one’s own program; the challenges are many, but Melissa Berman, president and CEO of RPA, which also helps donors develop and manage their giving programs, has worked with brave souls who feel a sort of calling to power the wheels of free enterprise with their own personal business savvy in places such as Afghanistan.

While much of the money has always come from donations, the microfinance industry has become large enough that the likes of Deutsche Bank and Citibank have found it a viable model for social investment funds. And because there are so many ways to donate to microfinance programs and so many programs (with track records that range from lackluster to excellent), many donors are becoming actively involved in field visits, like the Dallas-to-Chiapas expedition, and in efforts to build the industry further.

Among those donors is Atlanta real-estate developer Bob Pattillo, who believes capitalism is the most powerful model for mobilizing resources. Pattillo is a founding investor in Microfinance Information Exchange, otherwise known as TheMIX.org, a web-based information bank formed by a consortium of philanthropists under the aegis of the World Bank’s Consultative Group to Assist the Poor. Another donor, Bernie Marcus, the founder of The Home Depot, gives money to the microfinance agency Accion International through his Marcus Foundation, and has sent staff members traveling to see the results in action. Donna Dubinsky, coinventor of the Palm Pilot, and her husband, Len Shustek, have donated both money and Palm Pilots, which lending officers from Accion-affiliated banks are using to speed up the loan and repayment process in remote areas. In Ecuador, Dubinsky recalls, she met an onion farmer who was a micro-borrower, and she thought he could use a handheld to check information about crop prices. "But he was mostly interested in making enough money to buy his own truck so that he could reach new markets faster," she says.
Figures on the extent to which micro-lending programs have actually alleviated poverty vary, but the sums of money going into underwriting micro-loans have become significant. Grameen Bank itself has lent $3.7 billion.

Tapping the Markets
MFIs have been in business long enough to establish performance track records, and while there are close to 10,000 of them around the world, there may be only about 200 that are truly effective, well-managed commercial entities that get the capital to lending banks, monitor the banks, and make sure the money goes to entrepreneurs, says María Otero, president and CEO of Accion. The most successful of the micro-lending banks have begun to finance their activities by issuing debt on local capital markets. Compartamos, the biggest and best MFI in Mexico, earned an A+ credit rating from Standard & Poor’s and has issued debt on the local market since 2002, underwritten by Banamex, a local subsidiary of Citibank. MiBanco in Peru has issued $20 million in debt on the local bond market. Donor money in these areas, Otero explains, goes into training and technical assistance for the entrepreneurs.

Meanwhile, less successful MFIs struggle for capital. Attempts to reform the less successful banks can be a daunting task involving lobbying of local governments to pass transparency laws, raise interest rate limits, stamp out corruption, and deal with myriad other small details that stand in the way of viable micro-lending. According to Deutsche Bank research, only about 11 percent of the world’s potential 500 million micro-finance clients are being reached.

Bill Clapp, the great-grandson of Weyerhaeuser Co. cofounder Matthew Norton, decided in 1994, after 20 years of heading his family’s investment company, to step down in order to run a private microfinance fund with his wife, Paula, a social worker. The fund focuses on Central America, and Clapp has found that the search for well-managed MFIs and reputable lending banks is about as challenging as flying planes in the Alaskan bush, something he did in an earlier chapter of his life. But he is determined to run his own program. "Business people are problem solvers," he says. "I wouldn’t say we’re better at micro-credit than others, but when we engage with a partner, it’s like a venture capital deal. We work out a plan."

At the final level of the money trail, the much-touted repayment rate—about 95 percent, according to MicroBanking Bulletin—is questionable. The biggest players have instituted loan management policies borrowed from the commercial banking industry; Accion requires its affiliates in Latin America and Africa to report as "at risk" any loan overdue by 30 days or more. Unscrupulous borrowers or their advisors have in some cases reported unpaid loans as up-to-date. There are occasional stories of a borrower putting up his or her own Potemkin village-style facades for visiting benefactors, borrowing a neighbor’s cow, for example, and claiming it was purchased with a micro-loan. And no doubt whole communities of micro-entrepreneurs fall off the radar screen if they default and their lending bank’s reporting is flawed.

Community Collateral
Yet among those communities of successful borrowers, the mechanisms are in place to make the entire system of borrowing, repaying and borrowing again work in a way that fosters dignity, sustainable capital growth—even if on a small scale—and that crucial, albeit New Age co-opted concept, empowerment. Typically, a borrowing program involves about 20 to 30 community residents banding together to form a trust group, each member receiving a loan in the double or low-triple digits, and each cosigning the others’ loans. Interest rates can vary from as low as 2.5 percent to upward of 20 percent, but the higher rates are usually found among the banks with less underwriting. Needless to say, only the most responsible and hard-working members of the community get chosen for loans. Peer pressure replaces collateral. The group meets regularly, usually twice a month, and usually with a loan officer who collects payments and gives them business counseling, sometimes even health advice. Some groups require each member to start a micro-sized savings account.

An Indonesian trust group whose loans came from an Opportunities International-affiliated bank once went and serenaded a woman who had not made her payment. "Why don’t you come outside? You know we love you," the borrowers and the loan officer sang through the night until she came out and agreed to explain her financial problems and cooperate with the others to find a course of action.

Stories of that kind of determination are part of what draws philanthropists to microfinancing. "I’ve heard statistics that as few as 30 percent of the recipients in a given area ever get out of poverty," says Scott Reardon, chairman of the Deutsche Bank Microcredit Development Fund and president of Dakon Group, a venture capital firm in Sioux Falls, S.D. "But it’s still good, that that many have made it."

Illustration by Nicholas Wilton