Microfinance in 2008

Microfinance (the provision of financial products and services to individuals and entities that otherwise would not have such access) has gained enormous steam in recent years, thanks in no small part to the Nobel Peace Prize awarded to Muhammad Yunus and the Grameen Bank in 2006, the growing interest and participation in the sector by international commercial and investment banks (my favorites include Citibank and Morgan Stanley) and increasing numbers of individuals who want to get involved in the sector, whether as investors (who can do so via portals such as Kiva and the new MicroPlace platforms) or more directly in terms of professional expertise.  More and more attorneys- and entrepreneurs-to-be seem to be contacting me for career advice every week, and I am convinced that I would not have been able to do the things I do had I commenced my own career even five years earlier.  The opportunities that I have encountered simply would not have existed.2007 saw several microfinance firsts, from the rating by S&P of certain tranches of the BlueOrchard microfinance securitization to the first outright debate about the 'goodness' and mission fit of the controversial MFI IPO (microfinance institution initial public offering), Compartamos.  The key obstacles -- and therefore opportunities -- to the successful scaling and outreach of microfinance remain, in my opinion, the same as before: technology; legal and regulatory issues; and foreign exchange/local currency constraints.  But I also foresee several new avenues for innovation and expansion in the sector, some of which are already underway, and others which deserve more attention...So here is my short list of what 2008 may see -- and mean for -- international microfinance:

  • Equity investment: More opportunities for meaningful equity investment in MFIs and related initiatives than ever before, and the tandem development of feasible and timely exit strategies for equity investors.  These are going to arise from equity funds in the United States and Europe, and will invest in MFIs in Asia, India, Latin America, Africa and Eastern Europe.
  • Use of new forms of media: Major need and potential for contribution here!  More MFIs and investment funds using new forms of media -- wikis, podcasts and videocasts, blogs, document-sharing programs like Google Documents -- for both internal and external benefit.  Internally, MFIs and international microfinance networks (along the lines of Women's World Banking, ProMujer, Finca and Accion) should use these new media to link their network members, enhance opportunities for learning and collaboration and anchor the establishment of best practices and guiding principles.  Imagine a standing weekly conference call between network MFIs in Bolivia, Bosnia and Botswana, or a document that MFIs in Cambodia, Colombia and Cameroon can edit simultaneously. Externally, MFIs, banks, investment funds and others across the board should be using new media to 'get the word out' about microfinance in a responsible way that encourages dialogue and dissemination of useful information.  (This blog hopes to be part of that movement...)
  • Expansion in China: No question, this country is going to see more microfinance activity in 2008 than in any previous year.  This will be accelerated if the much-anticipated 'microfinance law' (which at a minimum establishes the legality and permissible scope of activities of in-country MFIs) actually is published and goes into effect.  Nevertheless, there will remain challenges to international investors who want to get microfinance-earmarked funds into the country with a reasonable intention of getting them out of the country someday.  If they are left to circulate in-country, there is much less legal and logistical hassle.  One China-focused microfinance capital-raising intermediary that I really like is Wokai. I think their business model has enormous potential.
  • Social return metrics: I think that we will finally start to see the development of robust metrics for 'social return' that are generally (though by no means universally) accepted, and the use of such metrics in gauging and pricing microfinance transactions.  I wish I were more abreast of what these metrics currently entail, but that's one of the things I plan to learn more about in the coming year.

And here is a shorter list of the things I'd still like to see in microfinance, but despite my optimism, believe that their time is as-yet premature:

  • Committed and substantial prioritization of Tier 2 and Tier 3 MFIs:  The majority of international funding that goes to MFIs globally still focuses on 'Tier 1' MFIs (those which are already the best recognized and most efficiently run; a small % of the total MFIs in existence).  Many more funds need to be deployed to get smaller Tier 2 and Tier 3 MFIs up and running, to find the diamonds in the rough and let them shine.  This will require more knowledgeable and innovative investors to ramp up their investment activities, and in some cases to adopt a more hands-on approach.  (To be sure, this also requires more information and due diligence on Tier 2 and Tier 3 MFIs  being made available to investors.) The benefits of doing so will be widespread and long-term: most of all, for the MFIs who can tap into these resources and opportunities for collaboration (and even experimentation).
  • Hybrid billing structures vis-à-vis social return:  I wish that more law firms were able to grasp the fact that reality -- and massive opportunity to do good and do well -- exists between fully-billable and pro bono work.  As most private law firms in the United States are currently structured, it is a black-or-white equation; either you charge full fees (which as anyone deeply involved in microfinance can tell you, can potentially be so high as to be a deal-killer outright), or you charge nothing (and get pro bono credit and community visibility for doing so).  In my opinion, long-term this structure is neither sustainable nor progressive.  What is necessary is for the legal sector to recognize that it is possible to charge 'hybrid fees' - something less than full-fee, but more than pro bono - and that doing so is in the collective best interest.  Many MFIs and microfinance investment funds are able and willing to pay some legal fees; they simply need to be calculated into the transaction at the outset.  Why isn't it easier (or simply acceptable) to have discounted fees, at least in the first iteration of a transaction, in order to recognize the value of 'building the pipes' in the sector?  After all, we have to build the pipes before the water can flow...
  • Transparent and understandable land/property rights reform: Ever since The Mystery of Capital was published, the role of property law and legal title to land has been a hot topic within microfinance circles.  A particularly exciting potential investment opportunity lies with microentrepreneur-related housing: small mortgages and home-improvement loans for microfinance clientele; the development of collateral and the knock-on benefits of community development.  All of this will happen with time, but legal norms are slow to change.  As much as I would like to see microfinance housing funds take off in 2008 (and I think they will, relatively speaking), it will require more time and political will for such investment opportunities to even come close to meeting demand.

Overall, I am more optimistic than ever before about what the coming 12 months will see and mean for international microfinance, and I am delighted to be able to participate in and witness these exciting times first-hand.  One final note just to say that I look forward to seeing how these observations, trends and quasi-predictions play out during the next year, and what my blog post on January 1, 2009 looks like!

April Rinne2008, Microfinance