Emerging Markets World Bank editions, October 2009 

According to Martin Holtmann, who heads microfinance initiatives at the International Finance Corporation arm of the World Bank, there are now about 140 million households in the world with access to microcredit, and a far bigger number with access to micro savings.

 We can argue about who really pioneered the idea of microcredit – the Pakistani social scientist Akhtar Hameed Khan is often cited as the first to build the theory and put it in practice – but there’s no question who gave the idea momentum and had the greatest influence on building the powerful industry it is today. Muhammad Yunus, the Bangladeshi banker and economist, is the figurehead of microfinance; indeed, these days he seems to be regarded with something of the reverence of a Mandela and the recognition of a Bono, particularly since the 2006 Nobel Peace prize for him and for his bank, Grameen.

 The Grameen approach, developed with government and central bank backing from a research project by Yunus’s team at Chittagong University, was distinctive because it made lending to the poor a solid business model. Others had lent to the poor on the back of state subsidies but without really worrying about its sustainability as a business practice. Naturally microfinance, with Yunus very much a part of it, has emphasized its ability to alleviate poverty and to act for the general social good. But you wouldn’t see groups as big as Citigroup building microfinance teams of their own if Grameen hadn’t demonstrated that lending to people without collateral was not only good for the soul but the balance sheet.

 The global financial crisis has had some surprising impacts on the microfinance industry. Sure, some have got into trouble: Holtmann developed an IFC-led facility that aims to raise $500 million to support microfinance institutions facing liquidity problems, and at the time Emerging Markets spoke to him in September it had already approved almost $140 million in disbursements. But that was chiefly for credit institutions suffering a knock-on effect of the liquidity crunch in commercial banks, not because of any lack of confidence in the microfinance institutions themselves. “You wouldn’t call it a full crunch, because MFIs [microfinance institutions] like any prudent institutions had secured medium term financing. But eventually you hit the rollover risk,” Holtmann explains. And in the main, particularly in the deposit-taking institutions, they have if anything outperformed. “Deposit takers have by and large escaped the liquidity crunch because deposits have been stable – in some cases, they have benefited from the fact that commercial banks have had runs on deposits.” So in these exacting circumstances, not only have individual borrowers remained uncommonly reliable, but the management of the banks has held up rather better than global heavyweights too.

 Grameen illustrates these trends. As of August 2009 Grameen itself had an almost 98% recovery rate; its return on equity in 2008 was 21.21% and its capital adequacy ratio 12.02%. It’s also notable that when Yunus speaks these days, more often than not he’s calling for better regulation. He wants the industry to be properly governed and supervised, with the right environment for stable growth. Along the way other long-standing micro-credit lenders have shifted their own models from state subsidy to free-standing sustainability, notably Indonesia’s powerful rural lender, Bank Rakyat Indonesia.

 Microfinance is not universally admired. Some feel it creates a culture of debt; some feel interest rates, which typically are higher than those in mainstream commercial banks, are unreasonably high; some claim that banks like Grameen can’t operate sustainability without subsidies; and still others find them prescriptive (such as Grameen’s 16 principles that, for example, discourage the payment of wedding dowries).

 But there’s no question it has provided opportunity to a vast part of world society that would not otherwise have received it and it will remain one of the fastest growing areas of financial services for years to come.

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