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    Global Poverty and Microfinance

    The latest Nobel Peace Prize brought worldwide visibility to the work of  microfinance in addressing systemic poverty.  But if microfinance is to achieve its enormous potential for reducing poverty throughout the world, significant involvement from the private sector will be required.

    What made the pioneering efforts of last year’s Prize recipients, Muhammad Yunus and Grameen Bank, as well as other early microfinance organizations, so important is that they used loans of $100 or even less to prove that the poor, without traditional credit, were in fact credit-worthy.  Loans were typically repaid at the astonishing rate of 97 percent or better, and they proved that even such small amounts of credit could make the difference between a life of abject poverty and one of dignity and promise.

    Other nonprofit microfinance networks, including ACCION International, have taken the model further, showing that microfinance loans have become investment-worthy – a critical step in taking microfinance to scale.

    The problem of scale, of course, is the magnitude of global poverty.  More than 3 billion of the world’s people now live on less than $2 per day, and estimates of the number of poor entrepreneurs who use microfinance today range from only 30 million to 50 million worldwide; more optimistic practitioners put the figure as high as 100 million.  In Africa, a mere four percent of the population has access to bank accounts, according to the United Nations Development Program, with only one percent having obtained loans or other forms of credit from formal financial institutions.

    The challenge in reaching scale is that microlending is a labor-intensive, one-on-one business, typically driven by mission-oriented non-profits.  It starts slowly at the community or village level and often grows only gradually out from there.  Working through local nonprofit organizations, it took ACCION’s partner network 20 years to reach its first million clients. 

    Unfortunately, anywhere from 750 million to 1 billion of the world’s poor could benefit from microfinance, provided they had access.  If, therefore, microfinance is to achieve its enormous potential, lending must scale appropriately. That’s where the private sector comes in.

    Nonprofit lenders have a crucial role to play in microfinance, and always will – testing new methods, analyzing their impact, mitigating risk, and providing services in places that are not economical for the private sector.  But numerous places exist where the private sector can play a bigger role, and they need to be encouraged to do so, especially by capitalizing investment funds and providing key infrastructure.  Using this approach – transforming nonprofit microfinance institutions into regulated financial institutions and encouraging capital-market investment in such entities – ACCION took only four years to add another million and half clients.

    Throughout the 1990s, ACCION worked with non-profit microfinance institutions around the world to get them to act like, and eventually become, formal financial institutions.  By 2000, the success of those experiments – BancoSol in Bolivia, Mibanco in Peru and, more recently, Uganda Microfinance Ltd. – began to draw the attention of more mainstream institutions.  Today, our partnerships extend to a diverse group of commercial institutions who can rightfully claim first-mover status, and whose work has already begun to impact significant numbers of the world’s poor. 

    Citigroup, Deutsche Bank and ABN-Amro, international institutions with global reach, now operate dedicated microfinance businesses.  Visa is exploring new distribution channels to bring the convenience of a cashless economy to the poorest and most remote entrepreneurs.  Standard & Poor’s work on international rating standards for microfinance institutions is likely to draw in mainstream investors in a new and significant way.  AIG’s micro-insurance products not only help move microfinance beyond credit, but also address some of the greatest challenges facing the working poor: high vulnerability and risk management.

    Microfinance has a double bottom line that marries social and financial goals.  But after years of getting non-profits to act more like businesses, the challenge now lies in encouraging the broader private sector to act more like non-profits – balancing social and financial interests to achieve suitable, but not excessive, return on investment.

    The development community often prefers its work to remain a purely social mission.  Grameen Bank’s Muhammad Yunus reflected that not long ago in The New Yorker, when he asked philanthropist Pierre Omidyar, “…why do you want to make money off the poor people? You make money somewhere else.” 

    But the private sector remains critical if microfinance is to reach scale, and a profit motive must exist for commercial entities to participate.  That’s not unfortunate; that’s an opportunity.  After all, private-sector resources would help make the poor richer, and those microfinance institutions that make money would earn the capital needed to extend credit and other financial services to more people.

    At the same time, the private sector must remain true to the mission of serving the poor, not taking advantage of them.  The microfinance industry has proved something important about working with the poor – keeping their interests at heart is critical for producing results, both social and financial.  Private-sector entities that learn and adopt proven best-practices from the field of microfinance will be those who achieve this delicate and critical balance.

    In the end, solving global poverty – not preventing a fair return on investment – remains the goal.  Poverty’s reach and impact is simply too devastating on too many levels.  Not only does it create conditions under which no person should have to live, it also generates resentments and animosities that threaten to destabilize entire countries and regions, if not the world.

    Microfinance holds enormous potential for alleviating poverty, but it will require substantial and substantive collaboration between the worlds of public and private – collaboration that forever keeps the ultimate goal squarely in sight.