McKinsey Executive Roundtable Series in International Economics: Microfinance: Business or Charity?

Monday, June 9, 2008

New York, New York

ISOBEL COLEMAN (CFR fellow): Good morning, everybody. Welcome. You've probably figured out by now that I am not Jim Wolfensohn. I'm Isobel Coleman. I'm a senior fellow here at the Council on Foreign Relations, and I also cover microfinance issues. And so it is with great pleasure that I can fill in for Jim Wolfensohn, who was, unfortunately, over the weekend called away for a family emergency. He's on his way to Australia. So he's very sorry he cannot be here and sends his apologies, but I will do my best to fill in.

Thank you all for coming. I think we're going to have a terrific conversation this morning on microfinance. We have three fantastic speakers, all of whom are real leading lights in the microfinance world, starting with Maria Otero -- oh, I'm sorry.

Before I start with introductions, let me just remind you all please do not just silence your BlackBerrys, but to turn them off. They can interfere with our system. So please make sure they are actually off. We will thank you. Also, this meeting is part of the McKinsey Executive Roundtable Series on International Economics. So we are thrilled -- we have Roger Kline here with us and we're thrilled to be sponsored by McKinsey for this meeting. So thank you.

And finally, this meeting is on the record. There are some journalists in the room and this meeting is on the record.

Let me just start with some brief introductions. We have, at the far end, Maria Otero, who is the CEO of ACCION. And Maria has been involved with microfinance for -- about 25 years?


COLEMAN: And ACCION is one of the leading supporters of microfinance on three different continents in the world and supports at least 35 leading MFIs today in the world.

Elizabeth Littlefield is the CEO of CGAP at the World Bank, the Consultative Group to Assist the Poor. And when I started working on microfinance almost, I don't know, seven or eight years ago, Elizabeth was one of the first people I went to see to understand all of the ins and outs of what was going on in the industry.

And Robert Annibale, who is with Citigroup, has also been one of the leading people in the microfinance world, who is actually in the business of microfinance today, and has seen all different sides of it over the years, from supporting microfinance institutions to the role that Citigroup is actually playing in a much more hands-on role today. And we're going to hear different sides of that from our speakers today.

I thought we would start out, actually, at the far end, with Maria, who could help us understand the changing context of microfinance today. It's an industry that is in transition. It's one that has garnered a lot of attention, a lot more money in recent years, and even a Nobel Prize. But it is an industry that is reaching an inflection point, and there are a lot of different currents and tides right now that are in the field. And I thought maybe, Maria, you could just give us a little background and set the context for us of where we are today.

OTERO: Thank you. Thank you very much. And thank all of you for coming here to listen to this story. When you've been doing it for 25 years -- I think I started when I was 18 --

COLEMAN: Exactly. (Laughter.) High school -- it's a high school --

OTERO: High school. It's a high school project, yeah. I think it's really wonderful to have an opportunity to talk to you about it.

Microfinance -- and I think, as background to the fact that we have now so much interest in it, it's important to really understand its origins. And its origins really start about three decades ago. And interestingly, they start in Bangladesh and they start in Brazil. And they start, really, in an effort to make capital available to the poor: This question of access to capital is at the core of what microfinance does. And it means making capital to people who have no collateral and who are considered high-risk.

This is really how we begin microfinance. And the early experiments try out ways to lend money that don't require collateral or really are based on what you would call the "character lending" way of lending, which is basically lending to small groups and enabling them to pay back the loan and be able to demonstrate their own capacity to use that for their little businesses.

Donors, of course, supported all this. And as part of creating this little product, it also meant that we were beginning to build non-profit organizations that could do this work. And that was all with donor money.

There are two things that we found out at that early point that continue to inform what we're doing. One was the enormous demand for capital among the poor, enormous, that could really not be met. And the second was that the payback was almost about 100 percent. So the combination of these two things allowed these early experiments to grow fairly quickly and be able to cover their costs as they evolved.

So fairly soon you had self-sufficient microfinance institutions, which were nonprofit, operating around the world, many of them in Latin America. Certainly ACCION worked only in Latin America then. And they proved that the poor were creditworthy, and in being creditworthy, they could certainly be reached in higher numbers.

So the next logical step for microfinance was to connect these nonprofits to the commercial sector, to the capital markets, in order to be able to reach the resources that are available in the capital markets and to be able to reach scale at a higher level.

So it seems very logical today, then, that the next step was to turn one of these nonprofits into a bank. But then it was really quite revolutionary. And the creation of BancoSol in 1992 -- and ACCION participated in this with other organizations -- really, I think, was one of the marking points of microfinance that showed us that we could take an organization that was making very small loans to people who had no guarantees and could become a regulated financial institution in their own country.

The hurdles were enormous at the time. There were regulatory hurdles. Nobody wanted to invest in this kind of institution. But what really did happen was it began the process of many nonprofits becoming banks and beginning to develop itself in this way.

The access to the capital markets meant that these organizations could grow, and it also meant that the poor could also save their money in these, because these were regulated organizations.

In the early, I'd say -- end of 1990s into the 2000s, we begin to see a growing number of nonprofits converting themselves into banks or into regulated institutions. And that in itself sets forth a whole set of other important elements that are part of microfinance today. One is, they begin to demonstrate that you can do this in a way in which you can reach people and you can be profitable at the same time. So this business of having those two Ps in the same sentence begin to attract a lot of additional players. You begin to see competition developing microfinance.

So whereas BancoSol in Bolivia started by itself and had a hundred percent of the market, in less than 10 years it had five fierce competitors, and it was doing all the things that institutions do or banks do when they have competition, which means improving the access to products, lowering the interest rate, doing a variety of different things that we can talk about with a little bit more detail.

They also showed that they had good returns, these banks. Not just BancoSol but many of these banks began to have good returns on their equity, and that began to attract commercial banks to begin to look at this. But it also began to attract the possibility of carrying out different transactions in the capital market. So really in the last five years, we see bonds being issued by these banks into the market. We see bank syndications taking place. We see IPOs happening, and several of them have become particularly important.

What has happened in this process is that the big bottleneck of not having capital to be able to lend to the poor is no longer a bottleneck. That capital is now there.

And now we see that almost -- I wouldn't say everyone but almost all that are working in microfinance have taken on this sort of business approach, this commercial approach to microfinance. We call it social enterprise. Bill Gates called it creative capitalism. But it is really integrating commercial concepts into making loans to the poor and extending different types of services to them.

And ACCION has supported this commercial model from the very beginning, from the start of BancoSol. And I think in the process we've seen several things happen in microfinance that also begin to attract so much more interest. We have seen the need -- again, competition. We've seen the need to provide better quality services to the poor. We've seen the need to lower the cost of being able to lend. And we began to see linkages with other players that are in the private sector in order to be able to do this work.

Now, just to bring us to today, the impact has been not only fascinating but really quite stunning to date. We are probably reaching 60 (million) to 70 million people with loans and with other financial services through these institutions.

But the scale question, when you're looking at global poverty, the earning power that the poor need to have really extends us to about 500 million that need to be reached. And so the model that we're using today -- and this goes back to the question about transition and what Elizabeth can talk about a little bit more is -- the model that we have today for making capital available to the poor is really not going to be the model that will allow us to reach 500 million. So this concept of scale and this concept of being able to evolve it is, I think, one of the things that we want to be able to talk about today.

And the second one is, we are attracting a lot of for-profit businesses, because they are seeing that component in what microfinance does. And so the customer has to be at the core of what we are trying to do. How does one protect the customer, the poor person, and make sure that that is moved forward? So I would say that this is what then gives -- (inaudible) -- ACCION and the other institutions in microfinance the move to -- towards the future.

COLEMAN: Thank you.

Elizabeth, Maria has now thrown out a lot of the challenges that face the industry, too, some of the bottlenecks, be it the capital bottleneck that seems to be dissipating, but also high interest rates and just the challenge of making small loans to very poor people around the world. Can you talk a little bit about some of the changes that are going on right now regarding, say, technology or the drive to scalability that -- and some of the promising trends that you see that are helping achieve this transition and this scalability?

ELIZABETH LITTLEFIELD: Yes, certainly. Thank you, Isobel.

Well, I think Maria has set the ground very accurately for what we've seen going on in the last 20 or 30 years in this field. But what's -- and I think it's clear that no matter how we get excited about the new things that are happening, mobile banking and technology, clearly most of the world now is countries where it's going to be the classical NGO model that needs to -- that is still going to be necessary to get microfinance to reach the clients in those countries. You know, I'm thinking of Sudan and places like that.

But in some of the biggest markets and those that have existing infrastructure, we are seeing huge opportunities to take advantage of existing infrastructure to get financial services down to the very villages and barrios that -- where poor people tend to live. I'm thinking in particular that on the one hand, we have NGOs, as Maria said, graduating up and becoming banks and then extending their branch network, you know, branch by branch. But then in other places, you have existing infrastructure that belongs to domestic banks or in some cases domestic, you know, retailers that can be deployed to have financial services available, you know, far deeper into the rural areas than you ever would be able to do in building a branch-by-branch network.

So if you think about it, for example, in Mexico, you know, Wal-Mart got its first banking license in Mexico.

And even though, you know, microfinance institutions can build their branches in dedicated ways, when you look at Wal-Mart's, you know, 1,050 outlets already, the possibility of putting banking through Wal-Mart is quite an extraordinary possibility. They can ramp up very, very, very quickly.

You know, Elektra in Mexico as well created a bank called Banco Azteca. And they were able to offer five-dollar savings accounts with no fees, in a way that no microfinance institution could do. So I think in many of the biggest markets, where there is some existing infrastructure, we're going to see the whole kind of business model changing. Layering on that is the possibility that we've all been hearing about, which is mobile banking.

Given, as you say, Isobel, that transaction cost, the cost of getting tiny, little transactions into very remote areas, has really been the Achilles' heel of microfinance thus far, the possibility of using a cellphone to do banking transactions, connected to a cash register somewhere, enables us to think about bringing cost down to mere cents on the dollar, from what has been, you know, a much more costly model of -- labor-intensive model of loan officers.

So we are seeing mobile operators getting into this business. 20 or 30 of them right now -- (off mike) -- mobile banking pilots in different parts of the world. Some of them are actually succeeding.

In Kenya, within I think nine months, M-PESA, which is really an e-wallet kind of system, has over a million subscribers, low-income subscribers, who are using a cellphone with e-money loaded onto it really to make payments around Kenya. And this is in a country that only has 3 million bank accounts.

So this goes to show some of the promise, I think, that technology and, in particular, mobile phones might offer, to actually enable us to bring down transaction costs really significantly to reach very, very poor people.

Now, of course, it's not without its challenges because on the product end of things, if you're looking at technology, there are some real question around whether or not poor people are going to be buying enough products, across those mobile phones, to make the channel profitable in the first place.

Telcos are seeing their average revenue per user going down and down and down. And as they penetrate countries where, you know, the users are more frugal, you know, they're not buying ringtones in Chad. The telephone operators are trying to find ways to make those channels profitable. So mobile banking is one of the attractive ways to do it. But will it be profitable enough to reach really deep?

What about product design? You know, how do we really design products, that poor people are going to be comfortable with and understand how to use? I've got some interesting examples, of adaptations of products, that make it attractive for poor people.

And then lastly one of the things, that we've all felt over the years in this field, is one of the most powerful benefits of microfinance, for clients, is the confidence that they gain, by having an interaction with a loan officer and working in a group together.

And if they're accessing their financial services in a high-tech, low-touch way, will we lose some of the more psychological benefits of microfinance for people?

So there are significant challenges, to deploying technology and deploying existing infrastructure to provide financial services to poor people. But I'm certainly hoping we can overcome them.

Maybe just one comment on the regulatory front: What we're finding essentially is that there's a convergence going on, between telecommunications systems and regulatory frameworks, and payment systems and regulatory frameworks, and banking systems and regulatory frameworks.

And normally these have existed in silos. And so this convergence of these three, you know, silos creates huge opportunities. But it's also really toweringly difficult for governments and regulators to think about.

And most systems, in most of the countries where microfinance exists and needs to grow, have you know ossified systems like that, that can't really envisage that. Most of them are overregulated and underprotected, as far as poor people are concerned.

So it's a big opportunity, but there's a lot of challenges ahead. And we can speak more about the other ways it's getting out.

COLEMAN: Okay, thank you.

Bob, maybe you can talk a little bit about an important part of this transition, which is the move of for-profit companies into the microfinance field that Maria and Elizabeth have both alluded to.

And I think it's an important -- it's an important development. It's an important step. It's sort of a maturation of the industry, a sign of it, but it also makes some people uncomfortable. We are talking about very, very poor people, some of whom are paying upwards of 50 percent interest rate. And there's a lot of tension and concern, I think, around this. So maybe you can give a perspective on how Citigroup has been thinking about the industry.

ROBERT ANNIBALE: Sure. From a Citi perspective, microfinance wasn't something we came to recently. I mean, if you think through the work of our foundation, it was almost 30 years ago that our first partner in the foundation was ACCION. It has been one of our longest partners, in terms of helping build capacity of the microfinance sector over a very long period of time.

So the Citi Foundation has been working with microfinance for years, for decades, now. And what was interesting was maybe about four years ago -- I was working with Stan Fischer, who many of you know. And we were more and more impressed with -- the needs of microfinance institutions were moving well beyond only philanthropy. They were becoming viable -- they are viable, innovative -- incredibly innovative -- local financial institutions. And they were reaching a range of clients. And another distinction: They were reaching them as clients, not as beneficiaries. They were very clear in their language. And they were trying to provide products and services to a very large segment that the banks, certainly, had not reached or provided for.

And I think it was with that step that we thought that in parallel to what we have done for so long philanthropically, we should be using the beast, you know, actually leveraging the majority of Citigroup, which is, you know, the $2 trillion, the hundred countries, the 300,000 people. Where is that engagement around this issue? And that was to begin by working with leading microfinance institutions as clients and partners of ours.

There was clearly, I mean, from the top down, an understanding with some humility that, you know, bankers had not been those who had reached the segment that microfinance institutions had. That innovation has been, to me, the most unique part of microfinance, the ability to assess people's capacity and their needs for financial services well beyond the conventions of normal retail banking.

So we began by working with microfinance institutions as our partners. We work with over 70 of them in some 30 countries today. But it was also about realizing how local this was, and that these institutions are part of the domestic financial sector. And they come in a whole range of what we mean by microfinance.

Someone said to me the other day, "Five years ago, if you said microfinance institutions, everyone in a meeting might know what you mean." They'd assume Grameen or a Grameen replica. Today, if you talk about that, you're probably going to preface it with also access to finance, who provides access to finance, deeper. And when the minority of the country is reached by the banks, which is the case in so many countries we work in, all of us, that's a very wide range of needs and people.

So we view microfinance as being delivered through a range of institutions. Now, they can be everywhere from an NGO -- and some NGOs are fantastic. One of the groups we do perhaps the most work with is BRAC in Bangladesh. BRAC is one of the largest NGOs in the world. It is -- from any financial analysis, it's a very attractive, interesting, you know, innovative institution. But it makes an enormous social impact in Bangladesh.

And it was with BRAC that we did our first securitization of hundred- dollar local currency receivables, under Bangladeshi law, you know, AAA-rated. And it was not BRAC Bank, which had a more commercial and even a (shareholding ?), but an NGO, but also cooperatives, credit unions, postal savings banks, because microfinance, we also are more clear, wasn't just about microcredit.

It may have grown out of that history, and that might have also been in part because many institutions couldn't do anything but lend. They didn't have the power to take deposits. And as Maria said, as they became banks, they started offering many more services, and as soon as you offer savings, incredible take-up. So in places like India, we've done a savings product with groups like BASIX. They can provide a client reach and credit To those clients. We can offer a savings product for their client, which they can't. Or in Mexico, with insurance, we have a million policies now of micro -- would we call them micro-insurance policies, just call them insurance policies, for self-employed rural women. (Inaudible) -- 60 percent of our client segment in life insurance in Mexico. We had none of them three years ago. And that was partnering with microfinance institutions.

So it's been about, you know, how do you differentiate where you can add value in this sector. To us, it's been to work with the microfinance institutions with clients, particularly accessing their domestic markets for local currency funding. I believe there's a great interest in IPOs and in funds and things, which are important, very important conduits, but most importantly is, how do you raise taka and how you raise rupees and pesos? How do you do local bank syndications for a strong institution that looks nonconventional? How do you do a bond issue in your own country? And then those institutions are really the ones that are reaching the very poor.

So it's about a range of services and products, but accepting that there are some real champion institutions there that have been great houses of innovation; now the challenge is scale, in most cases, and bringing down costs, hopefully with scale, to benefit the end client.

So there will be many different players in the commercial sector. Ours is from this angle. I think some of the most important are what local financial institutions do to reach their domestic client market, and that, again, is really what's taking off now, I think, very, very interestingly.

COLEMAN: Maria, can I just pick up on something that you were talking about, about the strength of microfinance, which is the sustainbility of organizations. I know there's been a lot written about how today the majority -- and some people have estimated upwards of 90 percent -- are really not sustainable. There's a small group of microfinance institutions that are the cream of the crop, and they are sustainable, but there's somewhere around -- I don't know the exact number, but I've seen estimates as high as 95 percent are not sustainable. Can you talk a little bit about that?

OTERO: Certainly. Clearly, the microfinance field has attracted thousands of institutions that have wanted to do this, mostly nonprofits that perhaps were doing other things and decided this has become a bit of "flavor of the month," if you will, and then you begin to do it. But microfinance is finance. It's banking. It's not something that you can do when you're doing a series of other things. So a lot of microfinance institutions that are small, that are nonprofits, have not really been able to grow to the point where they can become self-sustaining.

The ones that are really the pioneer ones, the ones that I really mentioned and that I talked about, are the ones that have that vision from the beginning of becoming financially viable and then being able to create a relationship between themselves and the capital markets.

And so I think we probably are talking about 300, maybe 350 institutions that might be there. But what is important now is that these -- the winners, the ones that have risen to the top, have attracted not only banks in the way in which Bob talked about. If you had told me 20 years ago that I would be sitting here talking about what I'm doing in microfinance with a member from Citi, I, you know, would be shocked. So, clearly, attracting the international banks is enormously important. And then the other players now are really the private sector ones, some of the ones that Elizabeth mentioned.

So the competition for the banks that we have helped create -- for example, MiBanco in Peru, are the other banks in the country, are the other private sector companies that can have an entry point into delivering finance to the poor through another means. So the nonprofits set the tone, they created what has risen, and now the players are really more and more from the private sector,

COLEMAN: Elizabeth, I know you do a lot of work with governments around the world from a regulatory perspective. They are both friend and foe, in that they can set a strong and preferential regulatory environment or where they can actually undermine the microfinance industry in the country. In terms of when we're looking at this transition, can you talk about a couple best practices that CGAP tries to promote?

LITTLEFIELD: Sure. I'd like to also just circle back to what Maria was just saying and address what Bob was saying, too, about the notion that this is for government as well as for lenders. That in the end of the day, this is about building domestic financial intermediation capacity. And unfortunately, lenders and governments over the years have thought, "Oh, poor person needs a loan, I better fund a loan portfolio from the north or from the government's coffers."

And in fact that's really not what it's about. And that tendency to assume that the money's got to come from someplace else has been one of the most damaging things in this sector over the years.

So in the end of the day, I think it's critical for all of us to remember that most poor households are net savers. It's just that their savings take the form of a goat or a chicken or a half-built hut. And those aren't very liquid or very useful savings when you need a little bit of money. You can't, you know, chop off the leg of the goat if you need a little cash for school fees. So you know -- but that's the way poor people have been forced to economize in order to enable them to accumulate just useful lump sums of money over time, because it's very hard to keep cash in the household in a poor village.

So the savings exist in the countries in which we operate. Most poor households are net savers. Most poor countries are net savers. It's just that that money is not moving through the system. So what we're really trying to do is build the competent intermediation capacity at the institutional level that can safely mobilize and hold and then recycle savings for the productive use of credit.

And just following on what Marie was saying, yes, there -- if you look at the Microfinance Information Exchange, the MIX, of the 1,200 institutions that report their full financial data, everything you'd want to know, into that system -- it's on the Web, if you'd like to know about it -- 600 of them are now profitable, which is amazing. That's up from maybe 70 only five years ago. So the growth has been tremendous.

But again, on the savings point, which I can't stress enough, clearly, is that when you look at the institutions that are able to mobilize deposits in Africa, for example, they cover 90 percent of their loan portfolio with savings. In Latin America, when institutions can mobilize savings, they cover 70 percent.

And this is a very important message to funders that want to invest, because we see a lot of appetite, in Wall Street as well as London and elsewhere, who -- investors super eager to invest in microfinance because it's so successful. But then we've got to make sure that we're actually helping to build the sector, not just satisfy the investment appetite here.

Governments have over the years often had the same reaction. You know, particularly as of late, we see the BRICs -- you know, Brazil, Russia, India, China -- or BRICSA, if you include South Africa in that, or BRICK with a K, including Kazakhstan -- anyway, so the -- (laughter) -- so we've seen the BRICs, you know, recently hearing about microfinancing. And suddenly they have the financial will and also the resources to help focus on their own poverty problems in their own way. And we worry a little bit that they're not going to be listening to or interested in the prescriptions of the West as to how to do this the right way. Over the years we've often said, you know, the government's role is to create a stable macroeconomic situation and to create enabling environment that stimulates access to finance while protecting poor depositors, but the government should just, you know, stay out of the way of the direct delivery of retail services.

But you know, some governments are impatient and they have very short-term horizons to them. And so in many countries, we're seeing governments, you know, pre-election -- you've seen this in Bolivia -- doing massive debt forgiveness and things like that or setting up deeply subsidized banks for the poor, that are distributing subsidized loans.

And while that may serve the short-term interest of that government, in a pre-election moment, it does poison the water forever for sustainable, responsible microfinance to follow. So I guess the long and short is that governments over the years have often not followed best practices. And they've put in place, you know, things like interest rate caps or subsidized loans that have been damaging.

But now we're actually seeing governments again looking at this exciting convergence of what's going on -- telecommunications, payments and banking systems all coming together -- that they're actually proactively seeking to exploit this convergence to create, you know, access for all and frankly take credit for it.

(Cross talk.)

COLEMAN: Let's go to the audience, if that's okay. We have about half an hour for questions. Would you please stand, state your name and affiliation? And please do ask a question -- I know that I see a lot of hands out here -- and make it a short and concise question. Thank you. Let's start back here.

QUESTIONER: Thank you. Dick Huber, Norte-Sur.

Elizabeth, you touched upon it, and you avoided it, Maria -- I know why -- the fact that many of these institutions now are profitable. And there has been a lot of criticism of the sector. And I guess I shouldn't duck it any longer, the particular case of Compartamos in Mexico, which had a very successful IPO.

How do you respond to these criticisms, and I guess I'd direct that to both, the two ladies there, which have been -- some of the criticism has been quite nasty? And is it really evil to make a buck?

OTERO: Well, I would say, as soon as you begin to talk about creating microfinance banks, institutions that are for profit, then you begin to see that component come into play.

And we, I think, right now measure the success of microfinance institutions, not only in terms of how many people they're able to reach but also how they're able to maintain their financial returns strong.

So I think this double bottom line is one that is very important to highlight. And that, I think, is the case that has taken place not only with one IPO that we know about, but with several that have taken place.

The market is beginning to see microfinance as an attractive place to invest. This is why the IPO in Mexico received probably 13, 14 times the number of shares that were available in order to be able -- by the demand that there was in the market for it. And that is one of the reasons why the price of that IPO was so high. And those individuals who had initially invested in this organization were able to make quite a profit.

Now, when Compartamos needed $6 million to turn into a financial institution, they couldn't come up with the $6 million. I mean, so the world has really changed dramatically. But that was really, you know, 10 years ago. And so there were many individuals in Mexico itself that put in some resources and, I think, at the time with no intent of thinking that this was going to yield the kind of return that it has. You know, I think they did this because they saw that the financial return may be there, but that the social objective of this bank was going to be great. And so I think that's basically what has happened there.

And I think we're going to see more of this, because we're going to see more and more banks -- some of them have just been written about. I mean, you read about MiBanco, for example, in Peru, which I've mentioned. You've read about some other banks. You will see some more IPOs. And I think we will see a growing amount of profit.

Now, you know, is that a piece that we should be able to have or not have what we're talking about -- microfinance? I do think that microfinance is being handled as a business. It is making capital available to the poor. And as such, in order to attract the kind of capital it needs to grow both domestically, as you're talking about, or internationally, it's going to need to be able to find a way to move those two things forward and for people to really understand the social dimension of it. But people will become profitable, so --

COLEMAN: Do you want to add anything, Elizabeth?

LITTLEFIELD: If I could -- a nanosecond, that'd be all.

COLEMAN: A nanosecond?

LITTLEFIELD: Well, no, I think Maria's right. I think, though, you know, as Bob was saying, we've long gotten away from the fact that microfinances used to be identified by institution-type; the NGOs were microfinance and the banks were not. But I think we've also got to think -- now that there's some consumer credit companies that are coming into this business that are perfectly conscientious, and as microfinance institutions they're charging interest rates that I think are unconscionable -- we can no longer justify -- distinguish who we are by institution type.

We have to distinguish how microfinance differs from the mainstream by our having client benefits at the center of our ethos in a way.

And so, I mean, I could go on and on and on about this and I won't. But I'll just say, I think there's been a little bit of like, you know, fortune at the bottom of the pyramid. Well, no, I think we have to talk about creating wealth for the people at the bottom of the pyramid.

And so we need to find a way to distinguish what we do from what everyone else does -- that includes those institutions that hold client benefit at central -- and distinguish ourselves from those that might abuse the lack of competition in the market.

ANNIBALE: You know, I think it was an important inflection point when this came. One, nobody in the financial services had any clue that that was what the outcome was going to be whatsoever; that this IPO would result, you know, in the kind of returns that Maria has mentioned.

But it's kind of an inflection point of also coming above the radar. And I think microfinance is, as a result, going to be, you know, held accountable to a much wider set of critical eyes than may have been the case before when -- whilst in the NGO world.

And I think that that's a good sign. And that is a very important thing that will happen, you know, because I know how banks or others, who are always in the public domain, would have been seen much earlier, had that been the case.

And the other just reality is, the vast majority of people being reached today, with basic financial services, who are low-income, aren't in these banks or in these -- even the ones that may IPO now.

IPOs excite people in New York and London. It's a familiar tool. It's, you know, the kind of things everyone thinks there's a natural point of development towards in the world.

You know, until the 1970s in Britain, most people had a bank account, not at a bank but at a mutual society or the postal savings bank. The Japanese postal savings bank has $3 trillion in it. So public-owned and NGO-owned and mutually owned and cooperative-owned institutions shouldn't be excluded.

In Latin America, in the same countries as Mibanco, I would bet its biggest competitor today are the cajas. And the cajas are municipally owned and publicly owned as well as, you know, member- owned.

So there is a very vibrant market, of a range of providers of financial services. And people require, you know, have their different competencies along whom they can deliver to.

So I believe we will see that. And I, coming from the commercial sector, am so impressed by all those who we haven't really looked at closely for a lot of years, as to how many people they are reaching, like the cooperatives and the postal banks and the world savings banks. It's a very wide range of institutions.


QUESTIONER: Thank you. Diana Taylor, Wolfensohn & Company.

I think one of the things that's really important to look at, when you're looking at profits being earned in this area, is what actually gets done with those profits.

So Maria, could you talk a little bit about what ACCION is doing with its, one might say, windfall from the Compartamos sale? Thank you.

OTERO: Sure. ACCION was one of the investors in the Compartamos Bank in Mexico, which as a result of this IPO -- and Bob is absolutely right. No one had any idea that demand would be like this, of course including ourselves. Which has meant for us that we now do have some resources that will allow us to really expand the work that we're doing. We -- ACCION is expanding its work in Africa in particular, in Asia, mostly in India and in China.

And these resources really allow us to take risks that are difficult to take in countries that most people would not really initially operate, but where there is a great deal of need for financial services, places like Nigeria, for example, or opening up China, which is really one country where there really has been very little done in microfinance.

So this is one area of just growing and developing what we would call greenfields, agreeing with Bob that one type of institution that you can have is really organizations that you can start from scratch. But you can start them from scratch with a new business model, if you will, using Elizabeth's language, which is, how do we start and experiment with a way to lower costs, with a way to not just build branches but to really deliver through alternative products -- alternative channels; how to bring in technology from the very beginning, so that you can begin to grow the lending in a way that you wouldn't; and how to provide a whole quality of products that can be made available.

So I think this is -- experimenting and taking microfinance to the next level up, to reach that scale is one enormous component for us, because really our bottom line is to be able to address global poverty.

One other quick way -- not to go into a lot of detail, but one other way is, because the players now in microfinance are so varied, there's many companies that don't do finance but that can provide some very good support to the base of the pyramid, if you will. For example, if you look at -- what we are doing is investing some of these efforts -- like, to give an example, ParaLife develops insurance products. That is what they do. That is how they know how to do. We could help invest in them to enable them to develop microinsurance products. They know how to do insurance. We know how to work with people that they have not reached.

So these partnerships with the private sector, be it in insurance, be it in home improvement, be it in technology, this is one of the areas in which we're working. We can bring a great deal of know-how to these companies.

CEMEX is another one in (MIX/Mexico ?). It's one of the largest companies that builds homes. Well, can we help them do a home in a box that is -- can be -- you know, can require a $4(,000), $5,000 credit that will allow the poor to have that?

We know how to reach people that have those needs, and they know how to do their piece. So how do we bring the private sector companies and build these partnerships that are going to be the ones that I think are going to allow us to really reach the level of skill that I think we all agree is necessary? So wide range of different, very exciting opportunities that we can take on right now and that we're doing.

QUESTIONER: Thank you.

MS. : Not to go in more detail.

QUESTIONER: Matt Nimetz, General Atlantic.

In all the discussion of microfinance, I never hear a connection between the subprime crisis here and microfinance. Basically the same model -- you find poor people; you figure out a need -- homes -- you lend and you scale up rapidly and then you securitize.

And our experience with subprime has been a complete disaster. Your experience in microfinance has been a tremendous success, you know, 95, 100 percent of people pay the interest, pay the capital back. And you're scaling up. Is there a risk management issue here that you're going to start to face? Or is there something we can learn in the subprime area that you all figured out that no one here figured out? Bob?

ANNIBALE: I think it's a really valid point and an interesting one and one which we've looked at very closely, too.

I think there's an enormous difference. I mean, firstly, microfinancing -- when you refer to microcredit as part of microfinance -- of course, there's a whole range of services you provide -- has been largely focused and came out of a model around productive finance. It was around providing financial services that were meant, in some way, to help build assets, not necessarily acquire them, as in, say, a home. It could be, if you -- most people in microfinance who do have a home often work out of it and they're improving that. But on the whole, it's about investing in productive assets with entrepreneurs, as you will. And so that's been one reason.

The other very interesting -- as I keep reading through the models -- remember, the vast majority of microfinance comes out of a tradition, a history of group lending. And group lending meant you already selected a group amongst yourselves. So, I mean, as an institution, you have another seven or 10 people, 15 women, who aren't going to -- because you're co-guaranteeing, often. In traditional group-lending models, you're not going to pick somebody you don't believe is truly going to borrow what they can afford, because you're going to -- you, too, share in that responsibility. So you have a very unique set of eyes that's very close.

The other is that it is about, very much, old banking, as you think of it. It is about knowing who your relationship manager is. It is the weekly or monthly visits that happen. And I would say in Citi, the only people who ever see a banker anymore are the very rich, who can't get away from their private bankers, probably -- (laughter) -- they trail them everywhere -- and the very poor in microfinance who see them maybe too often, even, for the cost, because it's a very costly model, at least in the group side.

So I think there is a number of traditions, but it is about productive finance. And I think you're right to say there's a gray zone. We, ourselves, try to establish -- because we have a credit policy for microfinance institutions and others, we want the consumer finance company, you know, boundary -- (inaudible) -- to the microfinance.

And as microfinance institutions get into, you know, becoming commercialized or IPO'd, and go into individual lending, they will overlap with the banking sector, and that's going to be a big challenge for them, and understanding ultimately, to us, if you have a mission and a focus or client target market, that will help -- people stick to it, because the expertise of this sector is understanding the capacity of very low-income people to -- and the products they require to service them. And I think staying within that gambit is very important, because the mission drift could be target market drift too, and it could be the dilution to

your model that has been so successful.

OTERO: Yes, just to add to that, because I think Bob has really answered it well, one of the big differences -- and Bob said it earlier -- is that in microfinance, the effort has always been to measure the capacity to repay the loan by the borrower and to lend no more than that. And I think that's where we see the big difference with the subprime.

And of course one of the big concerns that I think we have now, as so many are entering microfinance, is that that won't any longer be the main concern, and that indebtedness and that -- you know, the fast-in process, fast out, which we've seen with some consumer finances -- certainly in my own country, in Bolivia -- can become a real problem. And that, I think, is something that we are all quite aware of. For ACCION, the development objective is absolutely at the core of what we do. We are looking at addressing global poverty. That is our concern.

So keeping fresh those components of microfinance is very important. Otherwise, I think we can enter into those potential difficulties.

QUESTIONER: Yeah. Jose de Lasa with Baker & McKenzie. Could any of the panelists comment on the role that microfinancing played in Eastern Europe and, you know, all of the former communist countries? As a Cuban-American, I have -- I'm beginning to develop an interest on the subject. (Laughter.)

(Ay vamos ?).

OTERO: (Ay vamos ?). (Chuckles.)

COLEMAN: There are a lot of hands up. If you don't mind, I'm going to take several questions and just -- we'll remember them, but Eastern Europe.

Bettye. Here.

QUESTIONER: Bettye Musham. I'm a little confused, because we started out talking about lending to people that couldn't -- that didn't have any assets. Now we're talking about IPOs, buying insurance. What is the normal amount that you lend? And how many people do you access?

COLEMAN: There was a question over here.

QUESTIONER: Thank you. Alberta (inaudible name). There's a model for the relationship between philanthropy and commerce in here that we haven't really explored.

I'm wondering if you wise ones see other opportunities in areas where philanthropy begins the investment, maybe in health, maybe in films and culture, maybe in agriculture. Do you see other places where the sustainability of these efforts could come from the commercial side?

COLEMAN: We'll take one more here. Go ahead.

QUESTIONER: Yeah, thank you. I just wonder if there is an approach here of a market segmentation, as it were, which is used in business a lot, where you have multiple players who have slightly different angles and strengths and weaknesses come to address needs of different segments of the market. Clearly we have the small size issues and the larger, you know, collateral-based or housing finance kind of issues. But you know, can you address the issue of potential market segmentation with the public and the private sector?

COLEMAN: Okay. We have Eastern Europe, what is the normal amount that's actually being lent, philanthropy and commerce, and market segmentation. And we have five minutes left. (Laughter.) So why don't we just -- Maria, why don't you start and just give us a few minutes on any of those, if you want to comment.

OTERO: All right. Certainly. I'll leave Eastern Europe to my colleagues, because we don't work there.

But I do think that, very quickly, the lending that is done or is certainly from all the partners that ACCION works with can start with loans that are $80 or $100 that a person might need in order to run their business. But that person might also grow considerably over time, and literally five years later, you might be lending that person $3,000. You know, the woman who's baking bread in a mud oven might grow to have five mud ovens and to need larger amounts. So the lending can start very small and can grow. And if you have a variety of products, those can also vary.

Average loan size can be around $600, perhaps a little bit more.

Our network right now lends to about 3.2 million people, and we have probably fewer savers in the system, but also large numbers of those. So that's sort of the kind of total level of effort that we have.

I think on the question related to philanthropy and commerce -- it's a very important question, because having said everything that we've said today, the role of donor, of subsidy in microfinance continues to be very important. It continues to be certainly for ACCION a very important piece that allows us to train people to provide technical assistance, to try out things that nobody that is in the private sector would try out, to add some other areas -- to combine microfinance with some of the other areas, like insurance.

So even in microfinance alone, there is still a real important need for donors to support the -- but to support specific areas that make sense, because the private sector or the commercial sector can now fill in in some of the other areas. One can debate or discuss that some more, but I think it's very important that we still have the needs for both of those components. And certainly Citigroup understands that, and that's one of the reasons it partners with ACCION in helping us push that forward.

I'll leave it to those two.

COLEMAN: Thank you.


LITTLEFIELD: Yes, just as a rough guess of who we're reaching, again, these institutions that report to the Microfinance Information Exchange -- you may know the spread of how -- I think it's a 54 million -- 60 (million) savers, and about 58 million borrowers. And Maria mentioned the average loan sizes.

On Eastern Europe -- Eastern Europe, Central Asia, you know, depending on the country, it's either very -- you know, a slow developer or a fast developer. One of the biggest problems in Eastern Europe was that NGOs struck -- weren't allowed to lend. You couldn't be an NGO as a -- have your legal stature as an NGO and lend. So there's been lots of regulatory challenges there, but it's grown tremendously in the last few years.

And now -- one of the models, to address the other question out there, is that NGOs now are partnering with banks, so that the banks are providing either the front or the back office function, while the NGO does the client interface. So about three-quarters of the microfinance institutions in Eastern Europe and Central Asia now operate through a partnership with a bank of some kind.

But this sort of gets to the question of market segmentation, as well. And absolutely, that's precisely what we're talking about now, is recognizing that, as Bob said and we've all said, microfinance is really about access to finance, provided by all kinds of providers, whether they be state banks or cooperatives or NGOs, commercial players, Wal-Mart, retail shops, mobile operators -- all these kind of organizations, we welcome, as long as they follow certain codes of best practice. I mean, I think the question about the subprime market, yes, I mean, our industry has taken on some lessons from that. And so we welcome all institutions as long as they follow basic principles, with safeguards against reckless lending and some notion of mandated pricing transparency and best -- plain-English services, things like that.

So we really want a world where, you know, every kind of possible institution is choosing its target market and is jostling and competing for poor people's custom, trying to outdo one another in terms of providing better services and cheaper services and more convenient services. So all are welcome, as long as they follow those, kind of, best practices.

And maybe just one last thing on that, though -- and again, about your question about aren't we -- what about the poor people? Aren't we supposed to be about very poor people? I think one has to always remember, too, that there is a limit to what financial services can do and that there are people who probably are too poor or destitute to be able to have finance help them at all.

And we've often said that debt -- credit is debt, in the end of the day, and debt can make very vulnerable people even more vulnerable if they haven't got the ability to repay.

So I think we have to be very clear that this isn't going to solve all problems, and that, you know, financial services can stimulate economic opportunity but they don't create the opportunity in the first place. And so, clearly there's a role, as Maria said, for donors and others to provide -- and governments, frankly, to provide grant-based systems that help steady and ready poor people that they can then graduate up and use financial services to grow. But in the end of the day, it's not for everybody.

ANNIBALE: I think your question, market segmentation, comes back also to your question about why and what sort of services and what amounts, and whether it's insurance or credit people want to avail, is that there is a simplicity to this whole discussion around -- I mean, I don't mean it for Mr. Prahalad -- but bottom of the pyramid, you know, this discussion, well, the profit's at the bottom of the pyramid -- is the title. And I go to business schools and they're always using BOP; they say, the bottom of the pyramid, this is a bottom-of-the-pyramid initiative. And I said this to Ken Fishman (ph) -- all this BOP discussion. He said, "Balance of payments? (Laughter.) Bob, don't use that business-school lingo." I mean, who are they talking about?

When the majority of the population is not reached by financial services, then clearly there are many stratas of needs and activities within that. Now, whether you go to Mexico, which is -- right? -- an OECD, investment grade, mid-income country, where, you know, over half the country may not have a bank account, well, does everyone there need the same service or not? Clearly not. And there are providers of services across all that strata with certain competency and others which don't, and we have to be careful of that continuum and we reach the right ones.

And that brings to where partnerships can come in. I mean, I -- we clearly with humility believe that people that we talk about, who reach the poorest segment, need to be other than just a commercial bank. We're not a development agency, nor necessarily feel totally equipped to do that, but we can partner with some people who are incredibly talented at understanding more than just financial needs of the poor, those who need health care programs, those who need housing issues, those who need livelihood -- is the language often used -- and that would be the kind of BASIX in India or BRAC in Bangladesh or elsewhere.

So, segmenting is to really then say who are you talking about as a client, and what do they need, and who can best deliver it? Is it us, our partner, the savings bank, the cooperative? You know, all of them will have a contribution here when you're talking about the majority of the population being poor.

COLEMAN: Unfortunately, we are out of time. I feel like we've just scratched the surface. But thank you all for a very interesting -- (inaudible). (Applause.)






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