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This week marks the official end of the United Nation's International Year of Microcredit. The aim of creating awareness about this sector of the banking and finance industry - where sums as low as $50 are lent to poor entrepreneurs who would otherwise have difficulty accessing such facilities - seems to have worked.
According to the UN's chief technical adviser to the International Year of Microcredit, Christina Barrineau, Australia did a "tremendous job" towards the development of the micro-finance industry. "It's an industry with tremendous potential," says Barrineau, who was formerly an investment banker and independent financial sector consultant before joining the UN in 2003. "We can track that micro-finance institutions have quite staggering growth rates of upwards of 25 to 30 per cent per annum."
Barrineau says that it has been difficult to measure the gross value of micro-finance on a global scale because "central banks have not taken micro-finance seriously as part of the financial sector". Nevertheless, she estimates that about a billion people in the world have access to some kind of financial micro-credit facility.
It's certainly an industry that's coming to the fore. Last week, eBay founder Pierre Omidyar and his wife Pamela announced a $US100 million ($136 million) gift of eBay stock to Tufts University in the United States to invest in international micro-finance.
Micro-finance is often associated with providing small loans to people in Third World countries so they can start businesses, become self-sufficient and lift themselves out of the poverty cycle; however, it is now making headway in Australia.
Hillsong Emerge, a public benevolent institution run by a Pentecostal super-church, which focuses on job creation and income generation for marginalised people in communities, is involved with the provision of micro-finance among indigenous communities in northern NSW and Cape York in northern Queensland. Loans start from as low as $500.
Chief executive Leigh Coleman is a veteran of the micro-finance industry, having spent 25 years with micro-finance leader Opportunity International before joining Redfern-based Hillsong Emerge. "Micro-finance has been around for a long time but Australia is one of the last countries waking up to it," says Coleman. "Governments, bank policies and decisions have marginalised a large socio-economic group from financial services. The market and absorption capacity that exists in Australia is huge - nobody knows the exact size of it."
Coleman points out that most micro-finance activity within Australia is at pilot or experimental stage. "The industry is set to grow and we hope that a national initiative will be rolled out, possibly early next year," says Coleman, who adds that it is still unclear whether this will be a government initiative or a collaboration between the government and private sector.
Nevertheless, the advancement within Hillsong Emerge may be an indication of the growth potential of the industry. Two years ago, in the area of micro-finance there was one full-time member and one part-timer. Now, there are 22 full-time employees.
Apart from administrative roles, Coleman says micro-finance provides opportunities for business development officers, capacity building staff and loan officers.
Business development officers equip entrepreneurs with the skills to grow their business. This includes business planning and strategy, cashflow, company registration and all aspects of building the enterprise. Capacity-building staff are charged with the responsibility of training the entrepreneur to be a business leader and community leader.
Coleman says that the ideal micro-finance professional needs a unique combination of social and business interests. "Usually the two don't mix well together. We need people who have a banking discipline but who seriously want to help people instead of just making money for the organisation they're working for."
Westpac allows its staff to do both. Due to its involvement with the Cape York Partnership, which helps people in indigenous communities, Westpac staff are able to spend time working in the program. Career involvement in micro-finance at Westpac remains largely as an opportunity for secondment. But careers do exist at organisations such as Hillsong Emerge. "It's all poised to move forward," says Coleman. "However, the industry is too young in Australia to clearly quantify expected salary levels."
Mr. Omidyar had three goals in mind: He wanted to help the university, help poor people around the world and further the development of microfinancing. Tufts was willing to oblige. "Partnering with the Omidyars is a strategic fit for Tufts on many levels," said Lawrence S. Bacow, the university's president, who announced the gift last night. Dr. Bacow said he liked the way it allowed the university "to do well by doing good" and "to make a difference in the world." At a time when universities are competing for maximum investment returns, the approach required by this donation is rare. But Mr. Omidyar said it was possible to earn solid returns and at the same time help the world's poor. "Business can be a force for good, and you can earn profit for doing good," he said. "That view is really informed by my experience with eBay, and its social impact." He said the company had become a source of "individual self-empowerment" for three-quarters of a million people who make a living on it.
Mr. Omidyar (pronounced oh-MID-ee-are) was born in Paris and moved to the United States when he was 6. He met his wife at Tufts, worked for a number of high-tech companies in California and, in his spare time, created eBay as an online auction market in 1995. Although he remains eBay's chairman, he increasingly turned his attention to philanthropy after the company went public in 1998.
Change is in the air, but the eventual outcome is still uncertain.
Reforms across more than 30,000 of China's rural credit co-operatives heated up this year following pilot programmes in selected areas, and the largest rural commercial bank was unveiled earlier this month in Beijing.
Farmers living on the capital's outskirts, which account for 93 per cent of the municipality's total area, are still unsure whether rural commercial banks can serve them better than the more than 100 credit co-operatives they were restructured from.
Observers are also not certain whether the new bank, which has 70 per cent of its loans based in agricultural areas, can boost profits.
Nobody knows anything for sure yet, but Jin Weihong, president of Beijing Rural Commercial Bank (BRCB), is confident that everything will go as planned.
Unlike many observers, Jin is resolute about the prospects for sustained profitability from the bank's primary market: rural areas, agriculture and farmers, known as "sannong" in Chinese.
Many fear that support for the sannong among China's rural credit co-operatives and the banks restructured out of them will seriously hamper their profitability targets, given the high operational costs and low profit margins in loans to poor farmers.
"Support for sannong does not mean we can't make a profit, providing we manage risks and contain losses," says Jin.
Some of the city's former 100-plus credit co-operatives, mostly those in regions closer to urban areas, were actually profitable over the past several years.
"We can survive and be profitable," Jin says.
Many rural credit co-operatives suffered losses over most of the past 50 years, because of high costs, the burden of previous bankrupt borrowers, restructuring, and the relatively low profit margins in loans to farmers, says Li Chunrong, director of the BRCB's Sannong Credit Risk Management Department.
Most farmers borrow small amounts and struggle with the high interest rates, which restricts profit margins. BRCB currently holds 80 per cent of Beijing's rural lending market.
While it can theoretically raise lending rates as high as 100 per cent above the benchmark rates set by the central bank, credit co-operatives are only able to raise rates on loans to farmers by an average of 20 per cent, says Li.
Rates on loans to township companies could be raised 30 to 50 per cent, but that margin is still lower than city-based banks.
The situation is improving, however, and urbanization and the city's rapid economic growth are generating a smaller but wealthier farming population.
Approximately 70,000 of roughly 1 million households in suburban Beijing work in agriculture.
"There is little demand for small loans between 3,000 and 5,000 yuan (US$370 to 610) in Beijing now," says Li, adding that only poor farmers with kids entering college are borrowing such small amounts.
Accelerating structural adjustments to the city's rural economy, more importantly, are making this market more lucrative than it was before.
The service industry is expected to surpass 50 per cent of the city's gross domestic product (GDP) in 2010. In the next 10 years, tourism in rural areas is expected to grow by 12 per cent, while rural residents are expected to spend 11 per cent more on housing, according to a study by the Beijing Agricultural Occupational School.
"There are just inexhaustible business opportunities in those areas," Jin says. "There is a lot we can do."
It is more difficult, however, to deal with the legacies of the past: non-performing loans (NPL) still accounted for almost 15 per cent of the bank's 55.7 billion yuan (US$6.8 billion) in outstanding loans by the end of September.
Around half of the 14,000 debtors are farmers, many of them living on the far reaches of suburban Beijing. They are small borrowers, says Zhang Weiguo, director of the Risk Asset Disposal Department.
"It's a very tough task (to recover loans), but we are confident," he says.
Zhang's department is organizing a team of debt collectors, some from outside the bank, to formulate tight debt-clearing methods, in an effort to bring the bad loan ratio down to 4 per cent within three to five years.
Higher lending thresholds and tighter write-off policies requiring compensation from previously neglected guarantors are expected to improve asset quality substantially in the future.
The government is naturally helping out because it requires the bank to continue to support the sannong.
The central bank has agreed to issue 2.4 billion yuan (US$296 million) in bonds to replace some of the bad loans in BRCB's books, and the Beijing municipal government will offer a 200,000 yuan (US$24,000) subsidy for every 100 million yuan (US$12 million) of its agriculture-related loans.
The new bank also enjoys a preferential 3 per cent business tax rate, reduced from 5 per cent, and pays only half of a 33 per cent income tax.
The bank is not strictly rural, either. Jin is also eyeing urban Beijing, which the new bank has been allowed into since the restructuring.
"Urban citizens and small and mid-sized enterprises in the city are major potential clients," he says.
"As we expand our network, our loans will go to a broader client base, and the profit margins will be higher," adds Li.
Jin's city-based management philosophy is largely behind the market strategy.
"We are going to shift to modern, commercial management methods," says Jin, who was previously president of the Shenzhen City Commercial Bank. "It's not about simply changing our name."
The bank is formulating a plan to upgrade product development technologies, services, and risk management measures. It hopes innovation can win over the competitive Beijing market.
As a latecomer, Jin also attaches much strategic importance to marketing.
"What you need in a market economy is recognition, particularly for a bank as little known as we are."
A joint-stock structure valued at 5.07 billion yuan (US$625 million) in registered capital from 387 corporate investors and 27,893 individuals, many of them bank employees, is providing a basis for improved corporate governance.
In the long run, Jin says he will also follow the larger banks by ushering in strategic foreign investors.
The future also hopefully holds a stock market listing.
"We will eventually take this path, but not yet," he says.
The bank registered 974 million yuan (US$120 million) in operating profits in the first nine months of this year, up 56 per cent from the year before. It expects this year to be its best yet.
Despite the magnitude of their respective poverty problems, China and India may have a chance of meeting the Millennium Development Goals established by U.N. Their economies are following the lead of other countries that have raised their populations into a middle-class economic base. For example, between 1975 and 2004, GDP per capita in South Korea increased fourfold. Over the same period, Malaysian incomes rose threefold.
On the other hand, in those decades, per capita incomes in
Nigeria declined by a tenth. Why? During the period 1955-2004,
the West and multilateral institutions invested more than
$1 trillion in aid and subsidies in emerging economies. But
poverty persists. It would seem, therefore, that we need
to challenge the role of aid and subsidies in promoting sustainable
economic development. If poverty cannot be eradicated with
humanitarian handouts alone, what is the alternative?
The G-8, led by Tony Blair and supported by Jeffery Sachs and Bono, believe that debt relief and a doubling of aid from rich countries to poor, especially in Africa, is the way to go. A less popular alternative focuses on the involvement of the private sector in poverty alleviation through the development of market-based ecosystems.
Irrespective of which route we take, we need to build an infrastructure to deal with poverty. There is an implicit aid overhead. According to Prof. Sachs, out of every dollar of aid given to Africa, an estimated 16% went to consultants from donor countries, 26% went into emergency aid and relief operations, and 14% went into debt servicing. How much of the remaining 40% escaped corrupt officials to benefit the intended recipients is not known.
Take America's approach to aid. Of the $1 billion in food aid provided by the U.S. in 2004, 90% of it was spent on U.S. produce. George Bush's plan for AIDS required that all groups receiving cash for drugs use FDA-approved drugs (typically expensive branded products) rather than invest in generic drugs and prevention programs likely to work in a specific country. The poor (the intended beneficiaries), or the NGOs and foundations working with them, receive a small percentage of the total aid and have very little say in how it is used. Aid may benefit aid givers and aid administrators as much as aid recipients.
In contrast, private sector investments must focus on making a return on investment. While building an infrastructure -- in this case a market-based ecosystem -- managers recognize that the percentage of funds allocated to overheads and non-revenue-generating investments must be stringently controlled. Because of the accountability for profits, private sector investments tend to be subject to less corruption.
Proponents of aid recognize, rightly, that the poor do not have access to even the basics of an acceptable quality of life. Somewhat syllogistically, they conclude from this that the poor cannot create wealth. Hence the need, they argue, to give them something -- an exercise, in essence, of wealth substitution.
When established private sector firms (including multinationals) start to look at those at the bottom of the economic pyramid -- about five billion people in all -- as potential consumers, the entire process of poverty alleviation takes on a new perspective. The motivation of entrepreneurs and the private sector is profit. They recognize that there is money to be made by serving consumer needs in the poorest countries in the world. And they are right: On a purchasing power parity basis, just 10 countries -- China, India, Brazil, Russia, Turkey, South Africa, Mexico, the Philippines, Indonesia and Thailand -- represent a GDP of more than $15 trillion. This is a market that cannot be ignored. Innovative engagement in this new market will lead to large-scale wealth creation -- especially if the focus is on a creative combination of global standards, local needs and local capabilities.
Consider "connectivity." Between 1998 and 2004, the number of mobile-phone users in Africa grew 41-fold to 81 million -- the fastest growth in the world. The spread of mobile phones in Africa illustrates the power of market-based solutions to usher in social and economic transformation. Bottom-of-the-pyramid consumers understand and accept high technology and are willing to pay for it. A focus on access, availability and affordability is needed to create markets at their level.
Entrepreneurs have created this capacity to "consume" connectivity in Africa. The spread of cell phones around the world -- estimated to reach two billion by 2006 -- will be accomplished by the private sector (likely in the face of stifling state regulation). The private sector has made investments to create a marketing ecosystem for connectivity. So why not in other products and services?
We have to stop thinking of the poor as victims, or as a burden, and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers to foster fundamental innovations -- be it in financial services, personal-care products or healthcare.
For example, in the Philippines, low-income consumers are starting to use the prepaid cards in their cell phones as currency. Unilever and P&G and a host of local firms sell world-class products -- Sunsilk or Pantene shampoo -- for less than $0.02 per mini-sachet in India. They had to build a whole new business model -- manufacturing, packaging, distribution and market reach -- to be profitable at these prices. And they are.
Narayana Hrudayalaya (a cardiac-care facility) is experimenting with health insurance for less than $0.20 per person per month in southern India. They have signed up two million subscribers so far. Out of this pool, 85,000 have received medical consultations; and 25,200 surgeries have been performed, including 1,700 heart surgeries. The facility has also built an ecosystem for telemedicine. Last year, they helped 5,880 patients -- including 1,925 who received consultation and treatment at remote sites using telemedicine. Similar telemedicine initiatives are cropping up in eye-care.
The Gujarat Cooperative Milk Marketing Federation, popularly known by its famous brand name "Amul," covers more than 2.4 million producer members in 11,600 Indian villages and collects and processes about two billion liters of milk per year. It sells a wide range of milk-based products, from pasteurized milk to pizza. Amul's revenue for the year 2004-05 was $672 million.
The number of commercially based initiatives from local and multinational firms that will have a desirable social impact is growing rapidly. These offer us a distinctly clear alternative to poverty alleviation, based on markets rather than aid and subsidies. This is not to say that there are no circumstances when aid is appropriate. But aid just cannot be the default position for poverty alleviation.
Global firms increasingly realize that the bottom-of-the-pyramid markets are a source of innovation in business models -- potentially, even, of "breakthrough" innovation. Innovations in technology, capital intensity, delivery, governance (e.g. in collaboration with civil society organizations) and price-performance levels are all needed to create a market at the lowest-income level. To "make poverty history," leaders in private, public and civil-society organizations need to embrace entrepreneurship and innovation as antidotes to poverty. Wealth-substitution through aid must give way to wealth-creation through entrepreneurship.
Mr. Prahalad, the Paul and Ruth McCracken Distinguished University Professor at the Ross School of Business, University of Michigan, and CEO and founder of The Next Practice, is the author of "The Fortune at the Bottom of the Pyramid" (Wharton, 2004).
In fact, Bolivia has a world-class microlending industry. Claudio Gonzalez Vega observed "one could not write the world history of microfinance without highlighting Bolivia". Bolivia stands out as one of the pioneers of modern consumer finance. Its name is synonymous with successful consumer lending.
Bolivia's track record in improving access to credit has been one of the most impressive in the world. Its bellwether institutions, BancoSol, Caja Los Andes and Pro-Mujer, evolved in a liberalised regulatory environment. Curiously, their success was one of the indirect influences for promulgation of the Exemption Notice to the Usury Act in SA in 1993, which was the catalyst for SA's microlending industry.
Consumer lending in Bolivia began with the liberalisation of interest rates, the elimination of directed credit and the closing of the state banks in the 1980s. The deregulation of the industry in 1985 was a final break with the feudal banking system. Since the commercial sector was not well developed, the poor were dependent on loan sharks and moneylenders for credit. This created distortions in credit markets and innovations were few.
The improved regulatory environment set the stage for competition amongst microlenders, attracting many players who introduced new credit technologies and created a credit bubble. Consumers chose between a plethora of credit providers jostling for customers.
Aggressive lenders offered loans quickly and flexibly and secured repayment from the borrowers' salary. However, with few formal employers around they soon applied this lending methodology to the self-employed or informally employed. These lenders encouraged missed payments so they could make profits. These practices led to shifts in the repayment culture.
Consumers' attitude to debt contributed to the crisis. It became a status symbol to hold multiple loans. Delinquency rates were high. In effect, there were no rules for the game. The numbers were right but the fundamentals of lending were unsound.
As economic recession struck Latin America, borrowers who could not service their debts took to the streets, agitating for debt forgiveness and easier terms. This political pressure from organised groups forced the authorities to reintroduce interest rate restrictions.
As Elizabeth Rhyne, of microlending organisation Accion International, puts it, the "Bolivian experience suggests that the principal public-image issues for microfinance are high interest rates — the age-old concerns about moneylending".
Bolivian authorities briefly suspended their tradition of liberalised interest rates by capping rates for a few months in 2002. Caps were removed when it was realised that rates declined in a competitive environment, and that the best option was to strengthen other regulatory aspects such as disclosure.
The quick removal of interest caps and the strengthening of regulation ensured a sound framework which stabilised the market and enabled competitive pressures to improve credit methodologies and eliminate inefficient players
South African and Bolivian microlending experiences have many commonalities. In both countries, aggressive expansion led to overindebtedness, mainly among salaried workers. In SA, the liberalisation of microlending coincided with the sociopolitical changes of 1994. Increased access to credit for the previously disadvantaged unleashed large latent demand. As market saturation approached, competition for clients, as in Bolivia, led to predatory lending practices and overindebtedness.
SA now faces the prospect of interest caps in consumer credit. Do we, like Bolivia, introduce these only to reverse them in short order? The Bolivian experience teaches us that interest restrictions depress the markets and thus lead to the limited supply of financial services. Low-income borrowers suffer the consequences in the process. Secondly, free competition within a sound regulatory framework is the most effective way of avoiding overindebtedness, promoting customer service and sustainable access to credit. Deepening and extending the supply network are the key success factors in the long term.
R. Michael Rosenfeld, acting CEO of No Borders, announced that Raul Hinojosa, Co-Founder of No Borders and an Associate Professor of Political Economy at the University of California at Los Angeles, was interviewed by Brian Grow in the article entitled "Embracing Illegals; Companies are getting hooked on the buying power of 11 million undocumented immigrants." The article focuses on the money that illegal immigrants spend and transfer, and discusses the growing market for services and products targeted to illegal immigrants. No Borders' strategy and vision is to provide low cost stored value card services and products for international consumers, and to capture market share in this rapidly growing industry of both documented and undocumented immigrants. The full article can be viewed at www.businessweek.com by clicking on the cover story. No Borders' business focus is to provide a debit and stored value card platform through which the vast immigrant population and their families back home can access a variety of low cost financial services and products. This focus varies significantly from the focus of companies engaged in providing money transfer services. No Borders, through its alliances with licensed remittance companies and its proprietary stored value card platform, offers immigrant customers the ability to send money back home at a significantly lower cost than is currently charged by competitors. However, at the same time, through its card platform, No Borders offers to the same customers the ability to use its bank issued debit cards to store cash, access ATMs, pay for goods and services at retail outlets, and access the panoply of quality low cost goods and services No Borders' current and future alliance partners will offer the No Borders' cardholders, such as the current medical discount plan, and in the future, low cost mortgages, business loans and bill payment services, among many others.
Dr. Hinojosa believes that this variation to the current financial services market is full of potential. Mr. Rosenfeld stated that "the vision created by our co-founder, a true expert in this field, and the platform and business models the Company has created, will, we firmly believe, allow No Borders to penetrate this massive market as we go head to head with companies like First Data Corp.'s (FDC) Western Union Financial Services and other wire transfer service enterprises."
Recently at a No Borders outlet in Venice, Calif., 26-year-old Felix Castillo (not his real name), an undocumented immigrant from Santa Ana de Valle, Mexico, showed off his 4-month-old son, Lucas, to his grandparents at home in Mexico via a 52-inch TV and a Webcam. No Borders' affiliates have set up outlets in small villages in Mexico to make such connections. The cost to the consumer is $25 for 30 minutes. On both sides of the border, the families chatted using their Zapoteca dialect. Castillo's parents had never seen their grandson. "I hadn't seen my mother in four years. Now, I've seen her three times in three months," says Castillo, a food runner at a Venice restaurant who crossed the border seven years ago. Mr. Rosenfeld stressed that "providing access to such a meaningful service for a reasonable price further intertwines, and in some small way enriches the lives of, long separated family members who reside in different countries. At the same time, providing this service creates customer awareness and an additional profitable revenue source for No Borders."
Oscar Javier Rivera Jimenez stands on the corrugated steel roof of his warehouse and surveys the urban wasteland around him. "We constructed all of this with the money from Compartamos," he says. "Before, there was nothing. We built it ourselves. That made it possible. And the help of God as well, which is the secret of everything."
Compartamos is Latin America's biggest provider of micro-finance - small loans aimed at budding entrepreneurs, targeted at areas of severe poverty.
Significantly, the first tranche of a bond it raised last year was underwritten by Banamex, the Mexican subsidiary of Citigroup. It means that Mr Rivera, who started his business on a tricycle, now gets his working capital indirectly from the world's biggest financial group.
Mr Rivera, who set up his business six years ago in the municipality of Chimalhuacan, one of the poorest slums on the outskirts of Mexico City, is one of Compartamos' most successful clients.
Starting at the age of 21 by delivering parts on a tricycle - much of the area lacks paved roads, while both water and electricity supplies are unreliable - he now controls a impressive warehouse, where builders can buy an array of different girders. He recently opened a second branch about a mile away.
Typically, locals build their houses a room and a floor at a time, buying the building supplies when they can scrape together the money. But Mr Rivera also sells to merchants from the north of the country, a day's drive away. He cheerfully says that his company is "going after Wal-Mart".
He now has nine employees, four from outside the family - showing that his brand of enthusiastic entrepreneurialism might yet rescue the neighbourhood. It is also now attracting the interest of foreign investors.
Compartamos ("Let's share" in Spanish) started life as a non-governmental organisation, and gained its seed capital from multilateral funds. In 2000, it converted into a limited-objective financial organisation ("sofol" for its initials in Spanish). That allows it to offer loans, although it is still blocked.but still blocks it from taking in deposit
Now with more than 300,000 clients, its next plan is to convert itself into a bank, so that it can take in savings and also start to offer life insurance. Its portfolio grew by 58 per cent last year, and Carlos Danel and Carlos Labarthe, its joint chief executives, intend to keep that growth going. By 2008, they aim to have 1m clients.
As with micro-financiers elsewhere in the world, their credit quality is excellent, with only 0.56 per cent of loans even 30 days late. Armed with statistics such as that, and with a partial credit guarantee from the International Finance Corporation, it was last year able to raise the first tranche of a Dollars 45m (Pounds 24.5m) bond on the local capital markets, from Mexican institutional -investors.
"The first challenge for micro-finance was to demonstrate to the world that there was a way to make the poor creditworthy," says Mr Labarthe. "We think we are now in a second phase. We now have to show that micro-finance institutions themselves are credit-worthy."
Citigroup seems to have been convinced of the case, and has even set up its own special micro-finance group to look for opportunities in the sector around the globe. While the Compartamos bond is its biggest to date, Citigroup has also underwritten micro-finance bonds in Peru, and worked with groups from Kenya to Bangladesh.
"This is the best way for us today to extend financial services," says Robert Annibale, who heads the group for Citigroup. "The Dollars 45m bond in the capital markets is an interesting bond, but also remember that's Dollars 45m for Compartamos, which makes Dollars 100 loans. That means you can reach 400,000 people with that bond. We didn't just come into this based on the bond unit looking for a new issuer group around the world, but as a strategy to extend access to financial institutions by working with micro-finance institutions as partners and clients."
Citigroup's involvement helps Mexico's economic policymakers fulfil one of their most pressing goals - to bring financial services to the nation's poor. Mexico's shallow banking system means that scarcely more than 20 per cent of the population has a bank account. Increasing that figure could open new and lucrative markets for the mainstream banks, who are concentrating their efforts on attempts to tap the flow of remittances from migrant labourers in the US, which last year topped Dollars 16bn.
The federal government has concentrated on an ambitious scheme known as "Red de la Gente" (The Network of the People), aimed at making it possible for small co-operative savings institutions known as cajas de ahorro to cut their costs and extend their services. Javier Gavito, the chief executive of Bansefi, the development bank charged with stimulating the sector, says the main aim is to allow the cajas, which are mostly tiny organisations based in outlying villages, to benefit from economies of scale.
Under the ambitious scheme, cajas in outlying rural areas will be able to carry out all their back-office functions using an intranet provided by Bansefi. Their data will be stored in Arlington, Texas, by Atos Origin, the US software group that won the contract to install the system. As telecommunications can be very poor in rural Mexico, connections will be made by satellite. Clients will be able to use their local caja to receive remittances from the US, to receive government pay-outs, and to save. Bansefi is even arranging for them to save in a market-based pension fund - something up to now almost unimaginable for people living in the peasant economy.
According to Mr Gavito: "This is a bottom-up model. These cajas have been around as regulated institutions for more than 20 years, they've survived all the disasters of the economy, and they are still there. There are more than 4,000 of them, and the idea is to strengthen them in what they're already doing."
Meanwhile, the time when Compartamos transforms itself into a bank is overdue. The experience of Armando Soto Soto, another of Compartamos' clients in Chimalhuacan, shows that the need is great. A former taxi-driver, his general store started by accident when his five-year-old daughter started trying to make sales on a table outside their house.
Fifteen years later, his store covers three houses lining the street, which is still unpaved.
Electricity is possibly less reliable than it used to be, while the store is deliberately camouflaged, looking much smaller from the outside than it does from within. "If you let them see you've got money inside," he says, "you'll get attacked."
The shop is open 24 hours a day, and Mr Soto's wife works a night shift, seated behind a metal door. Those in the know knock on the door, and she can sell them products. It is convenient for the clients, and much more profitable, if exhausting, for the Sotos.
Six years of Compartamos loans have funded, among other things, various extensions to the shop, a freezer, an extension into an impressively wide range of branded spirits, and a van. Mr Soto banks with HSBC, whose branch is immediately underneath the Compartamos office.
Now, Mr Soto needs even bigger loans from Compartamos - who know his history as a reliable payer - to make improvements to his property. He could also do with savings products and -insurance.
Few of his neighbours ever have the luxury to think of such things. But Mr Danel, Compartamos' co-president, is confident that it is by finding a way to address Mr Soto's concerns that poverty will finally be beaten.
"We think micro-financiers are nothing more than an example of how private initiative can offer products and services to the marginalised classes," he says.
"Really understanding this market and understanding what quality they expect - that's the solution to the problem of poverty."
Poverty may be almost a universal problem. But solutions to it vary from country to country.
The micro-finance concept is best known for its application in the rural areas of Bangladesh. Grameen Bank, headed by Muhammad Yunus, a charismatic economist who proclaimed that "credit is a human right", is particularly famous. Grameen diversified from micro-loans to offering services such as mobile phones in local communities.
But a concept that works in countries of severe poverty such as Bangladesh does not translate directly to wealthier countries such as Mexico, where the problem is severe inequality.
"For Mexico, credit is not a human right - it's a service," says Carlos Labarthe of Compartamos. "It is different. The problems are distinct."
Ideally, financing comes from local capital markets. But in countries where they barely exist, micro-lenders are looking to securitisation - even though this can be difficult with portfolios of very short-term loans - or at grouping together to tap international markets.
One trend that appears to be universal, however, is that micro-finance can be profitable, and can even make the transition to banking.
According to Maria Otero, head of Accion International, a micro-finance agency with operations across Latin America, returns on equity for its most successful associates are more than 20 per cent. "Big banks would be very happy with that. That is why the Citigroups of the world are starting to take an interest."
With about $200 of his own money and a $1,500 loan, Vahid Hujdur rented space in the old section of Sarajevo and started repairing, then reselling discarded industrial sewing machines. Eight years and several loans later, Hujdur now has 10 employees building, installing, and fixing industrial machinery.
Hujdur didn't get his initial loan from a local bank. "They were asking for guarantees that were impossible to get," he recalls. Instead, the capital came from LOKmicro, a local financial institution specializing in microfinance -- the lending of small amounts to the poor in developing nations to help them launch small enterprises.
Microfinance institutions (MFIS) such as LOKmicro get capital from individual and institutional investors in the U.S. and Europe via microfinance funds. Groups that run the funds collect the money, vet the lenders, offer them management assistance, and administer investors' accounts. In the vast world of global finance, microfinance is, well, microscopic. But it is growing. The microfinance Information eXchange, an industry tracking group, says its universe of 60 leading microfinance institutions lent $3.1 billion to poor borrowers in 2003, the latest available figures. That's more than twice the $1.4 billion loaned in 2000. But because the loans are small, sometimes $50 or $100, the money goes far. Microcredit Summit Campaign, another microfinance watcher, says the 779 MFIs in its database serve about 81 million customers in Latin America, Eastern Europe, Africa, and Asia. Loans are made for a variety of purposes: manufacturing, transportation, agriculture, and retailing.
The borrowers pay relatively high interest rates, perhaps 20% to 30% on an annualized basis. Why so much? Lenders say the cost of writing and administering such small loans is high. And since the MFIs operate in nations with weak currencies, they need to charge more to make sure there's enough to pay back investors who lent them dollars or euros. The rates may not seem onerous to borrowers when their only other source of credit is a loan shark.
Default rates on MFI loans run about 4%, which is less than half the rate on subprime loans made by U.S. lenders. "There is a deep pride in keeping up with payments," says Deidra Wager, 50, an executive vice-president of Starbucks (SBX ), who invested $100,000 in a microfinance equity fund in 2003. "In some instances, when an individual is behind on payments, others in the village may make up the difference."
Nobody should invest in microfinance for the financial returns. Expect to earn perhaps 1% to 3% on debt funds, and 7% to 8% on equity funds. But that's not the point. Through this sort of social investing, you give people a shot at self-sufficiency. "Handouts generally promote dependence, not independence," says Mark E. Van Ness, part-owner of a commercial real estate investment firm, Sperry Van Ness in Newport Beach, Calif.
His company's foundation invested $100,000 in the Latin America Bridge Fund in January, 2004, managed by ACCION International, one of the largest players in microfinance. The fund helps secure financing for MFIs from local banks by guaranteeing a portion of the loans. "Each dollar we give can help local organizations receive up to twice that amount in loans," says Van Ness. "Every time the MFIs repay their loans, the fund can subsidize a new batch of loans." His yield, only 1.5%, offsets foundation costs.
Some microfinance funds accept investments as small as $1,000 or $2,000. They're usually just lending money, and the funds are registered with securities regulators in states in which they're offered for sale. You still need to study the prospectus and visit the Web site to assess the manager.
Funds that make equity investments, such as ACCION Investments, may be riskier. The minimum investments are high -- say $250,000 -- and you may need to have $1 million in liquid net worth or as much as $300,000 in annual income. Since they're usually private placements, there's even less regulatory oversight. There are usually no distributions during the life of the fund, about 10 years.
For Starbucks' Wager, a prospective 7% or 8% return was an important consideration in deciding to participate in the MicroVest I equity program. The $100,000 she put in two years ago "represents a significant portion of the assets which I can invest," she says. "But it's the social return that makes this a truly meaningful investment." She spent a one-year sabbatical in Latin America seeing what microfinance means to people living on the edge of subsistence.
A major promoter of microfinance in the U.S. is the Bethesda (Md.)-based Calvert Social Investment Foundation, which manages its own programs and collects assets on behalf of other funds. The foundation takes care of administrative matters while MFIs such as ACCION, Oikocredit, Grameen, and MicroVest, in turn, manage these resources.
Kelly and Edward Simpson have invested $30,000 in Calvert Community Investment Notes. Starting with a small position in late 1998, the San Francisco couple -- she's a preschool teacher and he is a software developer -- found that these notes, even when they paid 1% to 3%, have performed better than many of their stock market investments in the ensuing years. "But more important," Kelly Simpson explains, "microfinance enables us to invest more toward helping the poor than we could possibly give."
Indeed, investing in microfinance is like a perpetual gift. Money repaid gets recycled into new loans, giving Vahid Hujdur and millions of others a shot at moving up the economic ladder.