I had the opportunity last month to speak at a hearing of the U.S. House of Representatives Financial Services Committee. Since I worked as a Congressional staffer earlier in my career, it was interesting being on the other side of the table. The title of the hearing was “The State of Global Microfinance: How Public and Private Funds Can Effectively Promote Financial Inclusion for All.” There is no denying that microfinance has been very effective in helping millions of people in Latin America and the Caribbean move out of poverty, yet microfinance has only reached about 10% of its potential market so far. In my testimony, I suggested that it is time to look to other methods besides microfinance to engage with the tens of millions of people at the base of the pyramid who are still excluded from the formal economy and want the chance to improve the lives of their families and communities. I think multilateral institutions have a responsibility to seek out what the private sector may not yet be ready to support. Now that we know that microfinance is commercially viable, let’s use public money to help make the case for “the next microfinance.”
Below, I share some adapted excerpts from my prepared remarks:
Once the altruistic domain of NGOs and their sponsors, microfinance is now a tested business model that can offer a variety of financial products, including working capital loans, savings accounts, remittance transfers, payment services, microinsurance, and even housing finance.
In the nearly four decades since microfinance began in Bangladesh and Brazil in 1972, we have learned what works and what doesn’t. NGOs continue to play a leading and important role in developing new approaches, but multilateral institutions have played an important part in helping programs reach sustainability and scale. The appropriate role of limited public resources is to go where others won’t.
When the IDB’s Multilateral Investment Fund began in 1993, there were approximately 400 NGOs and one regulated financial institution providing microcredit to about 500,000 clients throughout the Western Hemisphere. Today microfinance in Latin America and the Caribbean is provided through a network of over 600 organizations reaching about 12 million clients, including 200 regulated institutions, which provide about 80% of the financing.
This growth occurred principally because of the pioneering work of several NGOs, but the MIF played a key role in improving legal and regulatory environments for microfinance, providing grant financing to strengthen NGOs’ capacity, investing in leading microfinance institutions and promoting microfinance investments to the private sector.
Once the microfinance model is tested in a country, and institutions are commercially sustainable, it is time for the public sector to exit those investments and move on to other frontiers. There are many interesting directions to follow, and I’ll share just a few here.
In Haiti, there are five leading MFIs in Haiti that were reaching about 140,000 clients before the earthquake. The ability to repay many of the outstanding microfinance loans in Haiti also lies in the rubble given the scale of the disaster. The Multilateral Investment Fund at the IDB is currently involved in several projects aimed at restoring microfinance capacity in Haiti and broadening its reach – you can read about these ongoing efforts on the “Reconstructing Haiti” section of the Spanish-language site MicAmericas.
I am currently teaching a course at Boston University Law School on development finance that is attracting graduate students from Law, Business, and International Development Schools. Interest in microfinance far exceeds the current offerings in graduate schools across the United States, where it is largely located in Public Policy programs. Broadening graduate school programs is one important way to improve the “financial literacy” at the top of the economic pyramid. This is one model of “trickle down economics” that deserves widespread support.
Microfinance works, and we know how to do it in a commercially sustainable way. Now is the time to build a finance system that can reach the majority, and provide the working poor entrepreneurs of the world with more options to use their resources, energies, and talents. They will do the rest…
Donald F. Terry is former manager of the IDB's Multilateral Investment Fund. He currently consults with several organizations on international remittances.
