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Nov 2004: Doniz Da la Campanada
18 Nov 2004: The Economist – Microfinance Small sums, big issue: The United Nations turns its attention to finance for the poor
18 Nov 2004: The Financial Times – Borrowing seen as way out of poverty trap
18 Nov 2004: New York Sun – Micro-Credit Helps Immigrant Cash in on Dream of a Small Business
8 Oct 2004: Yale Daily News – School of Management Group Joins Global Partnership
28 Sep 2004: Business Week – Tiny Loans, High Finance
21 Aug 2004: The Economist – C.K. Prahalad thinks that big business is good for the poor
13 May 2004: New York Times – Editorial: Dollars Without Borders
30 Apr 2004: The Financial Times – Commentary: How Wall Street Can Aid The Poor Of The World
21 Mar 2004: New York Times – Editorial: Small Victories in Afghanistan
24 Nov 2003: TIME magazine – Why Micro Matters: Wall Street is figuring out how to profitably package tiny loans to Third World entrepreneurs
19 Nov 2003: New York Times – Editorial: Banking for the World's Poor
13 Jul 2001: International Herald Tribune – Sending a Lot of Money Home
   
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The Economist -- 18 November 2004
Microfinance Small sums, big issue: The United Nations turns its attention to finance for the poor

Among the more benign activities of the United Nations is the dedication of various years to specific causes. Mountains, deserts, rice and dialogue have all had their 365 days of fame. There is little evidence that the attention has done mountains, deserts, rice and dialogue any harm — but also not much to suggest that they have benefited either.

In the next 12 months the spotlight falls on microfinance, the business of lending small amounts of money to the poor, taking deposits from them, transmitting money on their behalf and insuring them. With luck, the UN's effort will turn out to be substantial rather than symbolic. It certainly kicked off in style, with a big party at the UN's New York headquarters that demonstrated how fashionable the subject has become. Among the 700 in attendance were top bankers, politicians and a film star or two. The UN also announced the appointment of an advisory panel to consider what may be impeding the growth and effectiveness of microfinance. Its members include businessmen and financiers (as well as the editor of The Economist's business section).

The success of the year depends to a great extent on whether the UN can harness its member states and financial institutions to establish some basic facts. Remarkably little is known about how finance operates outside wealthy countries. No good data exist on how many people have access to financial institutions, the breadth and penetration of banks in poor countries, the real cost of a loan and the time it takes to get one, the ease of making a deposit and so forth.

Microfinance itself is something of a mystery. There are no authoritative figures on the number and performance of microlending institutions. There is not even convincing information, beyond lots of anecdotes illustrated by photographs of women in rural villages, about whether microfinance makes any significant contribution to economic growth or is merely another philanthropic fad.

In principle, loans to the poor should bring great benefits. Because the poor have less capital and often can borrow only with great difficulty, if at all, they ought to use extra capital more productively than the rich. Indeed, this might explain why even in the poorest places there is some form of money lending despite staggeringly high interest rates: 1,000% a year is not uncommon. However, such rates inevitably take a toll on enterprise and economic growth. The year of microcredit will have proven to be of great worth if it can first document the impediments to more efficient forms of financial intermediation and then begin to clear them away.

For example, the UN would do well to address the common complaint that banks ignore the poor out of class bias. If they do, the UN's interest may hasten change: some financial institutions are already making efforts to work with the poor, either directly or by providing wholesale services to smaller financial institutions. And many working in microfinance complain that their small size and lack of traditional assets make it hard to attract capital either on their own account or through syndicated loans. A year hence, perhaps some of this will have changed.

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The Financial Times -- 18 November 2004
Borrowing seen as way out of poverty trap
By Erica Youngstrom

An elegant Parisianwoman sipping her cappuccino in a café on Boulevard de Bonne Nouvelle is one of the last people you expect to launch into a passionate tirade about microfinance. Yet Maria Nowak is no ordinary Parisienne. Not only is she one of Europe's top authorities on microfinance - small loans for poor people excluded from the banking system - but the 69-year-old Polish-born economist is also the founder of France's first microfinance lender.

"In France, we lend only to the rich," says Ms Nowak. "There is a failing in the market. When you are unemployed or on welfare, you immediately get a negative reaction, an assumption you are a waster, not interested in work."

From a concept first used in the developing world, microfinance has recently expanded to Europe. Hundreds of government- and private-funded initiatives have sprung up to fill the void opened by the reluctance of European banks to lend money to the poor or unemployed.

The European Commission says €3.5bn ($4.5bn, £2.5bn) of microfinance - defined as loans to small business below €25,000 - was provided in the European Union's 25 member states in 2001. Romano Prodi, the Commission's outgoing president, says: "The scope for microcredit in Europe is enormous and constantly expanding." The United Nations will today declare 2005 as the International Year of Microcredit.

"Almost all new job creation comes from individuals, not from big companies, as most people assume," says Ms Nowak. The Commission reckons 90 per cent of the 2m businesses created in Europe every year have fewer than five employees. A third are launched by the unemployed.

The lure of getting people off state welfare payments and back in work has prompted politicians in several European countries to embrace microfinance. But Ms Nowak says more reform is needed if it is really to take off.

Ms Nowak, a graduate of the London School of Economics and the Institut d'Etudes Politiques in Paris, founded l'Association pour le Droit à l'Initiative Économique (Adie) with two friends in 1998. The idea came from working on microfinance in Africa with a French aid group.

"My inspiration came from a young shoe-shiner in Africa called Moussa," says Ms Nowak. "When I asked how much he earned, he said 300 CFA francs a day, or less than €1. He spent half on food and gave half to his boss. I asked who his boss was and he replied: 'The owner of the brush'."

Now Adie, financed by the French government, the EU, and banks, funds the launch of almost 6,000 new businesses a year by people who are unemployed or living off welfare. The businesses have a survival rate of 54 per cent after three years, which is above the French average for individual start-ups, says Ms Nowak.

One success story is Carmen Soubran. "Four years ago I was thrown out in the street by my husband, I was homeless and could not find a job," says Ms Soubran. "The banks wanted nothing to do with me, as you do not lend to homeless people."

After receiving a €3,000 loan from Adie, repayable over two years at a 3 per cent interest rate, with matching funds from the local chamber of commerce, Ms Soubran bought a car and set up her own cleaning business, ACP Nettoyage. It now employs 27 staff and has expanded outside of Lyon.

Yet ACP's growth is the exception. Adie estimates its loans create only 1.2 jobs per business on average. Nonetheless, it compares the €2,000 cost of creating a new business with the €18,000 each unemployed person receives from the government every year.

In France, this year's social cohesion law will include a measure to reduce social charges for business founders for the first three years. Ms Nowak welcomes the change, but complains there is insufficient funding behind it. She also wants the government to lift its 8 percent ceiling on interest rates for microloans.

In Germany, new business creation by the unemployed has more than trebled in two years to an expected 330,000 in 2004, a third of which used microfinance. The boom was sparked by the Hartz law, which in 2002 allowed new business creators to continue receiving benefits for three years.

But Martin Jung, a social finance consultant, expects Germany's failure rate to rise and growth to slow after applicants were required to submit a business plan.

The UK lags behind continental Europe in micro-finance, according to Bernie Morgan, head of the Community Development Finance Association. Many of the CDFA's 57 microfinance members, such as Aspire in Northern Ireland and Street UK in Birmingham, are still "too small to be operationally sustainable", she says.

Together they had made loans to only 1,500 micro-enterprises, worth less than £6m, by last September. As a result, the gap in the market is often filled by "predatory lenders" charging interest rates of over 100 per cent.

One model Ms Morgan says the UK is "examining closely" is the US, where the Community Reinvestment Act has forced banks to lend money to lower-income people in the areas where they operate - a notion likely to be opposed by UK banks. Yet many of Europe's commercial banks seem finally to be waking up to microfinance. Ms Nowak cites as a cause for optimism Adie's €2m microfinance deal this month with BNP Paribas.

"This is important. It shows microfinance is not only a socially responsible action, but also a viable market of the future."

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New York Sun --18 November 2004
Micro-Credit Helps Immigrant Cash in on Dream of a Small Business

By Daniela Gerson

It cost only $2,500 to reverse the fortunes of Fatimata Lonfo. A fireball packed into a petite 5'2" frame, Ms. Lonfo visited the banks in her Staten Island neighborhood a year-and-a-half ago, determined to get a loan to expand her hair-braiding salon and African clothing boutique. From Citibank to Commerce bank she received the same response: Without credit history or a green card, no capital was available.

Ms. Lonfo, 42, doggedly searched for another way. An immigrant whose request for political asylum is currently pending and could remain that way for a decade, she was determined to work for herself. Her accountant suggested she contact a microfinance organization. For Ms. Lonfo, it was a familiar concept: The lending institutions that provide small loans are more common in her native Ivory Coast than in New York.

This morning, Ms. Lonfo is being recognized as a pioneer in a growing local population of micro-credit loan recipients. As the New York winner of the first Global Micro-entrepreneur Award, she is to tell members of the NASDAQ stock exchange of the challenges she faced in finding access to banks, and how the $2,500 loan was enough for her to complete a down payment to become a self-sufficient business owner.

The awards ceremony will also serve as the kickoff for the United Nations Year of Micro-credit, in which international experts are to explore means of using small loans to help the estimated 2 billion people around the world who have no access to financial services. Closer to home, micro-credit is increasingly being looked to as a solution to problems of financial access.

"The reason why microfinance tends to be seen as something for the developing world is simply because of the ease with which you can find clients who have not had credit before," the chief technical adviser at the U.N. Capital Development Fund, Christina Barrineau, said, noting that in developing countries, 80% of the sector lacks access to banking services, in comparison with 10% of the population of North America.

Among that 10%, Ms. Barrineau said, are immigrants who don't have legal status, individuals who have never been part of a banking system or have bad credit, and ex-convicts - all of whom can benefit greatly from micro credit services. "In America," Ms. Barrineau said, "we have huge immigrant populations that have a very difficult time opening a bank account. Not because they're poor clients, but simply because they don't have a history."

Since it was founded in 1991, the micro-lending institution Accion New York has disbursed more than $36 million in 6,100 loans, ranging from $500 to $50,000. Most of the loans have gone to Hispanic immigrants, but more recently Accion has made an effort to diversify its clientele, and this year it hired an African loan consultant to reach out to the growing - and highly business-oriented - West African immigrant community. Other nonprofit organizations and credit unions, such as Trickle Up, the New York Association of New Americans, and Project Enterprise, provide micro-credit loans in New York as well.

For Ms. Lonfo, who is already looking forward to expanding the tailoring service of her store with the next loan, finding a way around the banking impasse was "extraordinaire," she said, relying on her native French to express the emotion. As she expertly plaited cornrow extensions into a client's hair yesterday, Ms. Lonfo, a single mother of three, recalled the difficult days when she first arrived in America and discovered she would be unable to continue working in the airline industry, as she had done for 22 years in Africa.

"Jobs I never did in Africa I had to do here. But I didn't have a choice. I closed my eyes and I did it," Ms. Lonfo, who wears high heels and a business suit to her salon most days, recalled.

While she took on "disgusting work" cleaning homes and buildings and caretaking, all the time she braided hair at home. Later she also sold imported African clothes from her living room.

The two loans she received from Accion, first $2,500 for a down payment on her store and later $5,000 to purchase synthetic hair, have enabled her to become self-sufficient, she said. In addition to the financial advances, Accion has given her advice on developing her business, building credit history, and creating a business plan.

When she found out she had received the micro-entrepreneur award, Ms. Lonfo said, she fainted. Then she "got up to see the reality." It is one she cannot wait to share with her elderly parents, who took refuge a few years ago at Burkina Faso. "Nobody would think I would come to this big country and in only three years do something like this," Ms. Lonfo said. "My story is a miracle, starting with nothing and watching the business grow."

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Yale Daily News -- 8 October 2004
School of Management Group Joins Global Partnership

By Erica Youngstrom

While students at the Yale School of Management have provided pro bono consulting services to New Haven businesses for years, some are now collaborating with students at other schools to assist entrepreneurs in more distant locales.

Global Social Enterprise, a recently-formed group of twelve SOM students, is working with students from Harvard Business School and other schools to promote the Global Microfinance Awards. The awards, part of the United Nations Capital Development Fund's International Year of Microcredit, recognize those in developing countries who have received small loans and used the money to generate economic activity in their communities. Judges in Afghanistan, Cambodia, the Dominican Republic, Indonesia, Mexico, Mozambique, Pakistan and Rwanda will choose to recognize between four and six entrepreneurs in each country next month.

According to the United Nations Capital Development Fund Web site, public and private institutions have provided microcredit to over 28 million poor people worldwide since the mid-1970s, but these are estimated to be only 6 percent of the people who could benefit from the service.

"The basic idea around the Global Microfinance Awards is to generate awareness about microfinance and to celebrate microentrepreneurs in these underdeveloped nations," Global Social Enterprise founder Natasha Walji SOM '05 said.

Those selected for the awards will ring the opening bells at major stock
exchanges around the world, including Bombay, the Netherlands and Zurich, Walji said.

Walji said the SOM students are working in teams to help attract contestants and recruit high-profile judges in Afghanistan, Indonesia, Mexico and Rwanda. They are also conducting an international publicity effort, she
said.

"I thought this was a good opportunity to work with other business schools," Global Social Enterprise member Shanthi Divakaran SOM '05 said.

Santiago Suarez '07, who is not officially a member of the SOM team, recently formed the Student Microfinance Initiative and is also collaborating with Global Social Enterprise to promote the GMAs.

"It's about changing people's mindset from seeing the poor as needing help to seeing them as needing opportunities," he said.

Suarez is a former member of the Yale Daily News business staff.

Both Walji and Suarez said the competition aims to change the business practices of institutions that participate in microfinance. Walji said they hope that as a result of their efforts more large commercial banks will become involved in providing financial services to microentrepreneurs.

The contest may be conducted differently in each country, and microfinance itself must be tailored to local cultures in order to be effective, Suarez said. He and Walji also said they hope the GMAs will be awarded to participants in more countries next year.

"The hope is to expand [the contest] to an additional 17 countries to make it 25 countries that have this running next year," Walji said.

Suarez said he hopes more undergraduates will become involved in assisting with the GMAs, and his organization is working to educate students about microfinance.

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Business Week – 28 september 2004

Tiny Loans, High Finance
By Manjeet Kripalani in Bombay with Cristina Lindblad in New York.

On a foggy September morning at dawn more than two dozen women wearing colorful saris, little green books in hand, are sitting in rows on the terrace of a private home in Pothaipalli village -- a poor rural area in the central Indian state of Andhra Pradesh. A young man patiently collects cash from each woman, then makes a notation in her loan book. The women are paying back tiny loans from Share Microfin Ltd., a Hyderabad microfinance institution that serves 415,000 households in four Indian states.

This kind of small-lot lending to the impoverished has been around since the 1980s. Time and again it has been proved that just $50 can make a huge difference for an entrepreneurial villager, who can build a business around a new cow, a sewing machine, or a chicken coop. Development economists have also long remarked on the near-zero default rates of these credits.

Now the women of Pothaipalli are linking up with global capital markets. Their loans are being bundled with thousands of others and sold off as part of a $5 million securitization deal. The microloans' move into the world of high finance is designed to raise money for more microcredit while at the same time parceling out risk and providing investors with a stable, income-generating security.

It works like this: The income stream from thousands of microloans is repackaged into an asset that mutual funds and insurance companies such as Life Insurance Corp. of India buy in the form of interest-bearing notes. If it takes off, the formula could revolutionize the world's estimated $10 billion microcredit market by bringing in new and cheaper funding derived from the sale of this paper. Securitizing microfinance loans "is the most effective way of [getting] market capital to the rural poor and pulling them out of poverty," says Subir V. Gokarn, chief economist of top Indian rating agency Crisil Ltd. "India's efforts could take microfinance to the next level."

India's pioneering program falls under the country's Securitization Act of 2002, which has not been fully implemented but has already spawned 221 deals worth $7.7 billion. The new legal structure and involvement of private banks lends India's model credibility that could help it spread throughout the developing world, says Priya Basu, a senior economist at the World Bank in New Delhi.

In Share Microfin's case, India's biggest private financial institution, ICICI Bank, securitized $4.3 million from the microloan portfolio and wrapped it up with $1 million in crop loans from Basix, India's oldest microfinance institution. Two other banks snapped up 60% of the April offering. With the money from ICICI, which used the deal to meet part of its state-mandated rural-lending quota, Share was able to add $4.3 million to its $137 million microcredit budget. ICICI is currently working with 30 different microfinance groups to securitize their loans in the coming months and years. The upshot: Capital markets get access to the entrepreneurial spirit of rural India, and villagers get more loans to generate wealth. Twenty-nine-year-old Lata Dayala, for example, borrowed $435 last year and now earns $87 a month from the little provision store she has set up in Pothaipalli -- enough to send her three children to private school. She has even been able to repay two-thirds of her loan. "And now," she says shyly, "my husband treats me more like an equal."

Of course, $4.3 million does not a market make. And not all microcredit gurus are so sure securitization will take off. "Securitizing microfinance portfolios is beginning to develop, but you don't have a large enough portfolio in any given country that you can bundle it and put it out in the international capital markets," says Maria Otero, president of Accion International, a Boston nongovernmental organization that provides technical assistance to microcredit banks worldwide.

India's banks are mandated to extend 40% of their lending to rural areas, but because few actually meet that obligation they're interested in ICICI's program. Basix, for example, covers 4,000 villages and has 500 representatives, most of whom live in the villages they serve. "Basix is integrated into the lives of the villages. Regular banks simply don't have those structures," says Rupa Kudwa, chief rating officer of Crisil.

At the same time, ICICI's role has lent greater credibility to microfinanciers such as Basix, which has eased their access to capital. That's a far cry from the days when bankers wouldn't even give Share's founder, Udaia Kumar, a hearing. Now Kumar has big plans. "Over the next five years, I need $150 million to serve 1.1 million more customers," he says. With global investors pumping in new money through securitization, that goal may be within reach.

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The Economist – 21 August 2004
C.K. Prahalad thinks that big business is good for the poor; C.K. Prahalad thinks there can be a win-win relationship between business and the poor

"IF WE stop thinking of the poor as victims or as a burden and start recognising them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up." That "simple proposition" begins a controversial new management book that seems destined to be read not just in boardrooms but also in government offices. "The Fortune at the Bottom of the Pyramid.

Eradicating Poverty Through Profits" (Wharton School Publishing), is essentially a rallying cry for big business to put serving the world's 5 billion or so poorest people at the heart of their profit-making strategies. It has already been praised by everyone from Bill Gates—"a blueprint for fighting poverty"—to a former American secretary of state, Madeleine Albright—"if you are looking for fresh thinking about emerging markets, your search is ended."

Its author, C.K. Prahalad, is accustomed to rave reviews. (The C is for Coimbatore, the Indian town of his birth, the K for Krishnarao, his father's name.) After becoming a management professor at the University of Michigan via a job at Union Carbide and study at the Indian Institute of Management and Harvard, he wrote "Competing for the Future" (Harvard Business School Press) with Gary Hamel in 1994. This tome was regarded as perhaps the best business book of the 1990s—an accolade that, admittedly, may be less than it sounds, given the amount of rubbish published by the business-book trade (see page 77).

As the two gurus searched for their next hit, Mr Hamel stumbled across Enron, a then-thriving energy conglomerate that he eulogised in "Leading the Revolution" (Harvard Business School Press). Mr Prahalad, by contrast, "after searching for a couple of years, saw that the big idea was creating wealth at the bottom of the pyramid". He has been evolving his ideas about how firms should focus on the bottom of the pyramid—a phrase he shortens to BOP, to contrast with those wealthy folk at the TOP—since 1997, despite a spell running Praja, a business-activity-monitoring software firm that later had to be sold when it could not raise the capital it needed in the aftermath of the tech bubble. "Badly timed, but taught me a lot," claims Mr Prahalad.

He is a fierce critic of traditional top-down thinking on aid, by governments and non-governmental organisations alike. They tend to see the poor as victims to be helped, he says, not as people who can be part of the solution—and so their help often creates dependency. Nor does he pin much hope on the "corporate social responsibility" (CSR) programmes of many large companies. If you want serious commitment from a firm, he says, its involvement with the poor "can't be based on philanthropy or CSR". The involvement of big business is crucial to eradicating poverty, he believes, but BOP markets must "become integral to the success of the firm in order to command senior management attention and sustained resource allocation."

Mr Prahalad reckons that there are huge potential profits to be made from serving the 4 billion-5 billion people on under $2 a day—an economic opportunity he values globally at $13 trillion a year. The win for the poor of being served by big business includes, he says, being empowered by choice and being freed from having to pay the currently widespread "poverty penalty". In shanty towns near Mumbai, for example, the poor pay a premium on everything from rice to credit—often five to 25 times what the rich pay for the same services.

Driving down these premiums can make serving the BOP more profitable than serving the top, he argues, and points to a growing number of leading firms—from Unilever in India to Cemex in Mexico and Casas Bahia in Brazil—that are profiting by doing precisely that.

BOP till you drop
But to be profitable, firms cannot simply edge down market fine-tuning the products they already sell to rich customers. Instead, they must thoroughly re-engineer products to reflect the very different economics of BOP: small unit packages, low margin per unit, high volume. Big business needs to swap its usual incremental approach for an entrepreneurial mindset, because BOP markets need to be built not simply entered. Products will have to be made available in affordable units—most sales of shampoo in India, for example, are of single sachets. Distribution networks may need to be rethought, not least to involve entrepreneurs from among the poor. Customers may need to be educated in how to consume, and even why—about credit, say, or even about the benefits of washed hands. The corruption now widespread in poor countries must be tackled (about which Mr Prahalad has penned a particularly useful chapter).

There are plenty of skeptics. Are the opportunities for profitable product re-engineering really as common as Mr Prahalad thinks? How much can private firms accomplish given inept or corrupt governments in many poor countries? "There is much less scepticism now than when I first started talking about the BOP," retorts Mr Prahalad. What the leading firms are grappling with now, he says, is not whether there are profits to be made, but how to serve the BOP on a big enough scale, and how to transfer what works from one part of the world to another.

Another challenge will be to persuade development experts to support a profit-driven strategy. Mr Prahalad worries that firms may be deterred from BOP strategies by fear of attracting criticism from activists. If a large international bank were to start lending to the poor at interest rates, reflecting higher risks and start-up costs, of say 20% (compared with around 10% in rich countries), "the whole anti-globalisation lobby would probably be against it. Yet the alternative is for the poor to borrow at 500% from a money lender. Whose side are the activists on?" If you are on the side of the poor, he says, "surely you need to help get rates down from 500% to 20%. After that, you can work on getting them from 20% to 10% like in the rich world."

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New York Times – 13 May 2004
Editorial: Dollars Without Borders

In the last five years, the age-old practice in which industrious folk send money from foreign lands to their families back home has become recognized as one of the most promising new ways to fight poverty. Unlike all of the other money flows from outside a country, these remittances go directly to poor people. The sums are huge. The $13 billion-plus that Mexicans send home from the United States in a year has surpassed tourism and oil as Mexico's largest source of income.

The total amount of money flowing from developed nations to developing nations through remittances has nearly quadrupled in the last seven years. But the systems by which emigrants send the money home have not kept pace. Too many people still rely on transfer agencies like Western Union. These agencies have become cheaper and safer, but much more can be done to foster the development of poor nations' financial systems, which still serve only one in 20 households that get remittance money.

Ideally, all such families should use their own countries' financial systems. Banks are a cheaper conduit than transfer agencies. More important, people with bank accounts enjoy access to money-saving services, like paying bills with checks instead of money orders. They are also able to build relationships with an institution that may help them start a business.

These financial institutions do not need to be big banks, although some Latin American banks that previously served only the elite are scrambling to capture remittances. But many poor people do not trust banks, and there are few banks in the villages that depend the most on remittances. Instead, small cooperatives and rural credit unions are springing up that receive transfers, hold savings and make small loans to develop small businesses.

Such cooperatives should be encouraged to grow. The countries that do not permit cooperatives to receive transfers should change their laws; all across the region, these institutions need strengthening. Remittances are already supporting big chunks of Latin America. If they are allowed to become a widespread source of loans for people who have no other access to credit, they will be an even more effective engine of growth for the poor.

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The Financial Times – 30 April 2004
Commentary: How Wall Street Can Aid The Poor Of The World

By Nancy Birdsall, president, and Todd Moss, research fellow at the Center for Global Development in Washington, DC

The distance between a Wall Street bond trader and a two-year-old in a village in Mozambique is shrinking. What is bringing the two together is a recognition that it may be possible to reduce one kind of risk - the risk of disease that the Mozambican child faces - by buying and selling another kind of risk that is more familiar to those who trade, hedge and option for a living. Private capital markets use sophisticated instruments to cope with all kinds of uncertainty, especially the pricing and sharing of future risk. The financing of global development aid, which currently does not work very well, could benefit from these instruments.

Some countries are not good at employing development aid because of corruption or just plain incompetence. For them, no amount of financing in any form can make a real difference. The best-performing countries, such as Mali, Ghana, Mongolia and Bolivia, find that the problem of unreliable aid is compounded by the vulnerability of their exports to the constant risk of natural disasters and other shocks. The shocks that country officials cannot control often lead to bouts of inflation and political instability and scare off aid donors just when aid is most needed.

Now comes an idea from Gordon Brown, the chancellor, that invites private markets to help close the distance between global financial power centers and the world's poor. The proposal calls for an international finance facility to employ capital markets to tap private money now, borrowing against the promise of future legislators' appropriations of tax revenue to service the resulting debt. The UK sells Brown's proposal as a way to ramp up the amount of foreign aid quickly without asking legislators and taxpayers for more funds. But in fact the real benefits of tapping capital markets lie elsewhere. Such markets can create a virtual pot of accessible aid flows which ensures more predictability for well-performing recipient countries. Callable money also frees donor bureaucracies from the pressure to push money out of the door simply to buttress the case for the next legislative round.

Brown's proposal is meanwhile sparking other innovations to use private markets to improve the lives and prospects of the poor. The British government and the Global Alliance on Vaccines and Immunization (Gavi) are joining forces to address the problem of providing the poorest countries with steady vaccine supplies. The UK-Gavi plan would use capital markets to securities future aid for vaccines, ensuring demand and creating incentives for producers to invest in expanding capacity today. Since vaccines are bought in bulk on the global market, predictable funding can also translate into lower prices. It is a rare win-win situation in which poor children could benefit from better and cheaper vaccines and donors could save more lives for less money.
Other creative applications are possible: insuring Nicaragua and Uganda against coffee price volatility; shock-proofing the debt-service obligations of Bolivia and Ghana; securing a steady flow of funds to encourage the ambitious long-term planning needed to fight HIV/Aids in South Africa; guaranteeing secondary school stipends for first-grade girls who complete primary school in Cambodia and Pakistan. Proposals for these kinds of application are already in the works. In all these cases, risks are shifted from poor countries to the private market. The risk transfer, of course, comes at a cost, as the private market will insist on a profitable return. But with 2bn people still living in poverty, the cost of carrying on with business as usual is certainly higher.

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New York Times – 21 March 2004
Editorial: Small Victories in Afghanistan

The Taliban may be out of power, but the plight of Afghanistan's women goes on. There are trappings of new freedoms - foremost among them a constitution that recognizes women's rights - but in much of the countryside women and girls are still treated like chattel. As Carlotta Gall of The Times has described vividly, many young women find their lives so unbearable that they set themselves on fire to escape.

Amid this despair, it's heartening to see individuals and groups finding innovative ways to help rebuild the lives of Afghan women, often one or two at a time.

Parwaz, which means "take flight" in Dari, is one such effort. Directed by Katrin Fakiri, an enterprising Afghan-American who worked in Silicon Valley before 9/11, Parwaz has given loans of $100 or less to about 600 women who are trying to start very, very small businesses. That might mean buying a cart and fruit for the market or becoming a seamstress or turning the kitchen into a little bakery.

Like other groups working to teach women to read, or those rebuilding health facilities demolished by the Taliban, Parwaz has had to make some concessions to Afghan realities. Male relatives co-sign loan applications, as a way of making the men feel invested in the women's businesses, instead of threatened by them. The interest rate is cleverly called an application fee - spread over the term of the loan, of course - to comply with the letter of Islamic law. There is also the awkward fact that some of these women are in the burka-sewing business.

Mirroring microfinance's promising track record in other places, 98 percent of Parwaz's clients make their payments on time and in full. It is but one example of the current homegrown and international efforts to improve the lives of Afghan women. Far more are needed.

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TIME magazine – 24 November 2003
Why Micro Matters: Wall Street is figuring out how to profitably package tiny loans to Third World entrepreneurs
By Julie Rawe

"Lending money to the world's poorest people? With no collateral? You must be out of your mind." That was the typical response Deutsche Bank's Asad Mahmood says he used to get when he tried to sell Wall Street on the concept of expanding microcredit in developing countries as a viable investment rather than charity work. But throw in a projected risk-adjusted return of 14%, and suddenly the Sheratons, ADPs and CalPERS of the world are more willing to consider what has long been the province of venture philanthropists and NGOs. As director of Deutsche Bank's Community Development Group, Mahmood is also using a generous safety net to attract skeptical investors. With a so-called first-loss cushion of 50%, his soon-to-be-launched $50 million debt fund could lose $25 million before commercial investors lose a dime. By employing what he calls a belt-and-suspenders approach, Mahmood says, "we're making it difficult to say no to these opportunities."

Having been shown the money, Wall Street is starting to embrace on-the-ground economic development in the form of microfinance. Over the past three decades, the practice of lending as little as $50 to poor, self-employed individuals, the vast majority of them women, has proved its sustainability through near perfect repayment rates. Plus, the short-term loans turn over several times a year, lifting tortilla makers in Mexico and basket weavers in Benin out of poverty along the way. With 3 billion people living on less than $2 a day, there's a huge market for this kind of seed capital. And although microfinance institutions (MFIs) tripled the number of borrowers to 27 million from 1997 to 2001, they are still reaching only a tenth of their target audience - hence the need to scale up by tapping into capital markets, which is no easy feat.

In New York City last month, a nonprofit group called Women's World Banking organized a three-day conference at Goldman Sachs that the hosts dubbed "Wall Street Meets the World of Microfinance." As a subset of socially responsible investing, microlending has a compelling "double bottom line": make a profit and alleviate global poverty. Pension funds, university endowments and large corporations have been sniffing around for opportunities, but all - understandably - want to see good track records first. That's starting to happen. Moody's, Fitch, and Standard & Poor's have begun either to rate microfinance transactions like bond issuances or to rate the institutions themselves. A Fitch report even detailed how MFIs in Bolivia fared better than commercial banks in the aftermath of that country's recent financial crisis. Meanwhile, Unitus, a new source of venture capital for MFIs run by a former Microsoft executive, touts the fact that it joins the board of the firms it invests in, while Cyrano Management, a Peruvian microcredit-fund manager, boasts of monthly checkups on MFIs.

Deutsche Bank is recruiting corporate investors for its pioneering for-profit microcredit venture by pointing to its successful four-year trial run with a private donor-backed fund. Both funds seek to lend credibility - in the form of hard-currency collateral - so that MFIs can establish relationships with local banks and get better loan rates. Likewise, Citigroup has used its branches in places like Kenya to make local-currency loans to MFIs, with the hope that conservative local banks will follow suit.

Until emerging markets develop the confidence (and liquidity) to lend local currency to MFIs, First World financial institutions will have to bridge the gap. In the U.S. there are retail products to help do that with an investment as small as $1,000. Both Oikocredit USA and Calvert Community Investment Notes offer 2% returns for a 12-month term, which, incidentally, beats the average one-year CD's 1.6%. Given the perpetual recycling of microfinance money to make more jobs and better lives, even hardened Wall Street types could start to feel warm and fuzzy - and, oh yeah, to make a buck too.

http://www.time.com/time/globalbusiness/article/0,9171,1101031124-543818,00.asp

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New York Times – 19 November 2003
Editorial: Banking for the World's Poor

Microcredit — tiny business loans extended to poor people in developing countries — is a proven development strategy, expected to benefit 100 million of the world's poorest families by 2005. But the world's poor desperately need access to a broader range of financial services — microfinance is the more apt term — to improve their living standards.

The staggering flows of money sent home by migrant workers are a case in point. The Inter-American Development Bank estimates that remittances from Mexicans working in the United States this year will total $14.5 billion, more than Mexico earns from tourism or foreign investment.

Too often, however, those who get the money are victimized by rapacious fees and exchange rates. Governments can help by reducing transaction fees, but what the recipients need most is a place to put their money. In many countries, the poor, especially in rural areas, lack access to commercial banks. Mainstream banks need to make an effort to extend their reach. Until they do, established microlending organizations can help fill the void in ways that encourage private saving and, equally important, enlarge development capital in poor communities.

Stanley Fischer, the noted economist and former deputy director of the International Monetary Fund who is now a vice chairman at Citigroup, reminded those attending a microfinance conference earlier this month that during the 1990's East Asian financial crisis, a large Indonesian bank suffered nearly 100 percent default rates in its corporate portfolio, but only 2 percent in its microfinance portfolio. Mr. Fischer, once a microcredit skeptic, is on the board of Women's World Banking, which sponsored the conference to drum up Wall Street interest in microfinance.

Large global banks are starting to think of microfinance as a viable business, not just a trendy charity. Deutsche Bank, for instance, is about to open a $50 million fund to provide capital for microfinance organizations. A real microfinance revolution could further empower the world's poor.

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International Herald Tribune – 13 July 2001

Sending a Lot of Money Home
By Enrique V. Iglesias [Enrique V. Iglesias is an Advisor to the International Year of Microcredit]

WASHINGTON Europeans and Americans probably are unaware that every day they cross paths with members of one of the most dynamic and promising forces for development of Latin America and the Caribbean. People of Latin American origin living in Europe and the United States send billions of dollars a year back home. Given the outlook for international migration, Latin America and the Caribbean may receive as much as $300 billion in this way in the coming decade. Such resources would outstrip the financing provided by multilateral institutions like the Inter-American Development Bank and the aid donated by rich nations.

In six Latin American countries, income from remittances represents more than 10 percent of GDP. For the smaller ones, like El Salvador, these transfers are vital. This year Salvadoran expatriates will probably wire $2 billion back home, a sum that would exceed the economic damage caused by the earthquakes that struck their country in January and February.

In larger countries like Mexico, remittances represent a lesser portion of national income, but they make a huge difference in many impoverished communities.

Not too long ago, experts regarded remittances as a phenomenon that created dependence, stifled enterprise, fed consumerism and deepened income inequality. More recently, researchers have started to acknowledge the benefits of these resources. Remittances can provide housing for families left behind, sustenance for the elderly and infirm, better schooling for siblings and seed capital for small businesses. On a national scale, remittances can have a multiplier effect on a developing country's economy, even when they are spent on consumer goods and services. These capital flows have nearly quadrupled in the Western Hemisphere in the past decade, largely without any major public sector intervention. There are two major areas in which the public sector could add value. First, by helping cut transaction costs, chiefly by encouraging more competition in the remittances market. And second, by supporting creative ways in which migrants' money can bolster long-term development and raise productivity of small businesses.

Transfer fees have decreased in the past few years, but costs continue to be relatively high and vary widely. On average, Latin American migrants wire home around $250 a month. Depending on the cost of the service they use, their relatives may receive as little as $200.

Using market forces, governments could ensure that greater proportions of these modest capital flows end up in the pockets of the intended beneficiaries. One way would be to encourage greater participation in this market by banks and credit unions.

Spain and Portugal's thriving credit unions were built largely on remittances sent home by migrants working in other European countries in the 1960s and '70s. Portugal's BPA Bank charges its depositors no fees on remittances.

U.S. credit unions and even some major banks are starting to reach out to Hispanic migrants. In Durham, North Carolina, one credit union signed up hundreds of Mexican workers at a poultry plant as clients. Those migrants can now deposit money in accounts that their relatives can access in Mexico using ordinary ATM cards.

The Inter-American Development Bank, through its Multilateral Investment Fund, plans to help Latin American and Caribbean countries clear legal, economic and regulatory barriers that prevent more participants from entering the remittances business. It will especially promote the participation of credit unions and microfinancial institutions by helping them acquire the technological platforms needed to operate efficiently and securely with their counterparts in the developed countries where migrants reside.

Attracting migrant money to development projects is a greater challenge, since family remittances tend to be earmarked for very specific needs in humble homes. Migrants may be understandably wary of putting their hard-earned savings into government-supported ventures in their homelands. Naturally, the burden of proof will be on the public sector.

New democratic leaders like President Vicente Fox of Mexico are determined to win the trust of migrants. Mr. Fox has offered them a three-for-one deal: For every peso that migrants contribute to community development funds, the federal and state governments will chip in two pesos.
The writer is president of the Inter-American Development Bank. He contributed this comment to the International Herald Tribune.

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Assaad Jabre

Assaad Jabre,
Acting Executive Vice President,
International Finance Corporation
“The poor deserve access to essential financial services just like everyone else. With it, they have a much better chance of working their way out of poverty and gaining a base for self-sufficient living. We applaud the Year of Microcredit for helping focus the world's attention on this crucial concept, and we are committed to working with our partners in the banking industry and development community on bringing microfinance closer into the mainstream of the financial services industry throughout the developing world.”
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