Citi Exec: Crisis To Spur Microfinance Move Toward Banking Model
by Ken Parks
Dow Jones Newswire, September 24, 2009

MEXICO CITY (Dow Jones)--A larger number of microfinance institutions will probably seek banking licenses to broaden their sources of funding after the global financial crisis caused them liquidity problems, according to a Citigroup Inc. (C) executive.

"What will come out of these events of the last two years is the importance of deposits, wherever possible, for institutions, and the need for diversified funding sources," Robert Annibale, global director of Citi Microfinance, said in an interview.

Microfinance, or the provision of small-scale financial services such as tiny working capital loans, savings accounts, and insurance policies, has gained popularity worldwide in recent years as a way to combat poverty.

Annibale expects the bigger microfinance lenders that today operate as non-profit organizations or finance companies to follow in the footsteps of Peru's MiBanco and Mexico's Banco Compartamos SA (COMPART.MX), which started as non-government organizations and later became banks in order to offer a wider range of products.

Deposit products such as checking and savings accounts are usually the cheapest and most stable source of funding a financial institution can have. Most countries restrict deposit taking to banks, while non-bank lenders tend to rely on more expense types of financing such as selling debt on the capital markets or loans from public and private sector banks.

Those lenders were particularly hard hit by the crisis, which saw debt markets nearly grind to a halt and banks restrict credit after Lehman Brothers Holdings Inc. collapsed in September 2008.

"Around the world in general we have seen liquidity tighten and the spreads and cost of funds increase for microfinancing," Annibale said.

The Overseas Private Investment Corporation, a U.S. government agency, said Wednesday its board of directors approved up to $250 million to expand a partnership with Citigroup aimed at addressing the funding shortfall for the microfinance sector.

Citigroup will use the funds to provide local currency loans to microfinance institutions, which in turn will lend the money to small entrepreneurs.

Annibale said the OPIC program will help Citi Microfinance enter new countries and grow its client base.

"It's important for us in terms of getting greater scale in our business. We did a program with OPIC a few years ago, a $100 million program, in which we ended up doing over $200 million together," Annibale said.

Citigroup opened its microfinance division in 2005, which today provides direct financing, access to local capital markets and other services to about 100 microfinance institutions and networks in 40 countries.

While declining to comment on specific lending goals, Annibale said Citigroup will likely grow its loans to the microfinance sector at a double-digit rate this year.