Big banks find little loans a Nobel winner, too
The world of finance is realizing Muhammad Yunus's idea is more than mere charity – it is good business.
NEW DELHI AND BOSTON
Chris Brookfield can fairly say that this year's Nobel Peace Prize winner changed his life.
He is not one of the hundreds of well-wishers who thronged Muhammad Yunus's Bangladesh home this weekend to celebrate a bright moment for a troubled nation. Nor has he ever received one of Dr. Yunus's microloans – loans of as little as $30 that have helped raise millions from abject poverty.
Instead, Mr. Brookfield is a former venture capitalist from Redmond, Wash., who has given up the life of dotcoms and wireless start-ups to raise money for microloans. His Unitus Equity Fund has collected $10 million from investors in order to offer small loans to the poor from Mexico to India.
As the world recognizes Yunus for his contribution to global peace, the world of finance is increasingly realizing his idea is more than mere charity – it is good business.
It is a trend that gives Yunus pause, saying in an interview that he would "like to see microcredit remain a social enterprise." But mounting evidence suggests that microfinance is moving beyond its modest roots, and Western banks are now keen for a share of the action.
"It has caught the attention of serious investors like Citibank and [Dutch bank] ABN AMRO ... and even the capital markets," says Syed Aftab Ahmed, senior manager for global microfinance at the International Finance Corp. in Washington. "The quality of the loan portfolios of these microfinance institutions is very high."
Throughout the developing world, the concept of microfinancing has been enormously successful. Yunus pioneered the idea in 1976 when he lent $27 to a group of poor Bangladeshi craftsmen who lacked the collateral to receive a traditional loan. The scheme worked, and in 1983, Yunus founded Grameen Bank on the concept. It has since lent $5.1 billion to 5.3 million people. And the idea has spread. The global supply of microcredit exceeds $12 billion for 50 million borrowers, by some estimates.
A next step for microfinance is to achieve an even bigger scale by luring investors from places like Wall Street, London, and Frankfurt. To some extent, this is already occurring.
Some of the biggest banks in the US, Germany, and the Netherlands – Citigroup, Deutsche Bank, and ABN AMRO – have units focused on the smallest of loans. In most cases, these bankers – like other profit-seeking investors in the field – aren't hiring their own loan officers in South Africa or São Paulo. Rather, they provide financial support to grass-roots lenders, and expecting a profit in return.
They have good reason to expect a profit. Historically, few microloans default; Yunus says Grameen Bank has a 99 percent repayment rate. And while nonprofit or agency support is typically vital for ventures started with microloans, a good share of them have developed into self-sustaining businesses.
Though the banks' emerging microfinance operations aren't a major contributor to their bottom lines, the steps hint at the promise of more Western money reaching the world's poorest people.
Last month, for instance:
• TIAA-CREF, the leading provider of teacher pension plans, announced a $100 million global microfinance investment program.
• Citigroup and the Overseas Private Investment Corp. launched a $100 million program to help provide capital for hundreds of microfinance organizations.
• Brookfield's Unitus Fund, a private equity fund that invests in microfinance institutions (MFIs), placed a $1 million investment in Credex, an MFI in Mexico.
"I'm more excited about the return potential of microfinance than I am about local venture capital," says Brookfield. "It feels to me like a global growth business that has much more growth ahead of it."
As it grows, this field should see a variety of choices for investors, he says, from initial public offerings of stock in some of the more successful MFIs to insuring debts incurred by such schemes. "You will see all kinds of investment vehicles," he says. "All of the same layers that exist in the traditional ... capital markets."
Yet Yunus is wary of microfinance as a profit vehicle. "Maybe banks can make a profit from it. There's no harm in it," says Yunus from his home in Bangladesh. "But this is what loan sharks do."
"I don't want that conventional banks go into this. We have enough enterprises generating money for profit," he adds. "I would rather think that the rich can set up social enterprises."
That is how Yunus has expanded beyond his original notion of microfinance. In addition to Grameen Bank, which means "Bank of the Villages," Yunus has founded a company that sells solar panels to equip 2,000 homes a month – serving villagers frustrated by Bangladesh's fickle power grid. Next month, French soccer star Zinedine Zidane will come to Bangladesh to inaugurate the first Grameen Danone Foods plant, which will offer inexpensive and nutritious food to the poor.
And through Grameen Phone, Yunus has teamed with Norwegian telecom Telenor to create Bangladesh's largest mobile network, and to bring solar- powered phones to remote villages – some 260,000 so far.
"What he has shown is that different ... approaches can work," says Allison Scuriatti, a spokeswoman for the Development Gateway Foundation in Washington, which gave Yunus an award in 2004 for his work on Grameen Phone. "Everyone around the world is looking at what he is doing because he is a leader."
In Bangladesh, he is more than that. Yunus's bank has benefited 6.5 million families in 70,000 villages – almost every village in Bangladesh, says Mustafizur Rahman, director of research at the Center of Policy Dialogue in Dhaka.
"The news itself was received with a lot of enthusiasm in Bangladesh," says Mr. Rahman. "I look at his success not just in economic terms but as social empowerment – he combined loans with health education, women's empowerment, and helped send children to school."
Amid the joy, many in Bangladesh also see Yunus's prize as a much-needed moment of unity. Political fighting between the country's main parties has incapacitated the government for months and sparked street clashes. Elections are scheduled for January, but by law, the administration must cede power to a caretaker government on Oct. 28.
"The good news comes at a time when the nation is tense," says Rahman. "This will also inspire Bangladesh."
On whether it will inspire Western banks and investors, though, Rahman – like Yunus – has his doubts: "This tinkering at the margins by bigger banks – I'm not hopeful about that."
None of this means that nonprofits, philanthropists, and nongovernmental organizations will become irrelevant to microfinance anytime soon. They will play crucial roles in nurturing MFIs.
For all its profit potential, microcredit remains a world apart from Western banking. MFIs require armies of loan officers. Since the typical loan is less than $1,000, an MFI must make many more loans than a US bank would to create a $10 million portfolio. Training all those loan officers isn't an overnight affair. In many nations, dirt roads or haywire phone service challenge microlenders.
Critics contend that targeting governance and corruption in poor nations would do far more than microfinance, which reaches a relatively small number of the world's poor.
Still, MFIs are making headway. "There's a growing number of MFI institutions that are ready" to link up with commercial banks, says Shari Berenbach, executive director of the Calvert Foundation in Bethesda, Md., which facilitates investment aimed at ending poverty.
As the private-sector arm of the World Bank, the International Finance Corp. had a microfinance loan portfolio of $421 million in June. But it sees its role as helping to spawn MFIs in developing nations, and helping to attract capital from major banks and investment pools.
The loans are priced for profit, and the IFC network boasted $4 billion in microloans in December, with 2.5 million borrowers.
That's good, finance experts say. "There will never be enough donor dollars out there to directly address poverty alleviation," says Bruce MacDonald of Acción International, a nonprofit group that pioneered microlending in Latin America. "The capital market is going to have to get involved."
• David Montero contributed to this report from Islamabad, Pakistan.