Muhammad Yunus, founder of Bangladeshi microfinance pioneer Grameen Bank, has called on Asia’s regulators to make more effort to build frameworks in which microfinance can thrive.
“Conventional banking law is like the architecture for a supertanker. All we need is an architecture for smaller boats that can go into shallow waters. That is what microcredit is about”, Nobel laureate Yunus told Emerging Markets.
“I would strongly recommend that this legal framework be created and an appropriate regulatory arrangement be introduced.”
The Asian Development Bank’s principal microfinance specialist, Nimal Fernando, said that improving the enabling policy environment for microfinance in the bank’s member countries, and supporting the development of legal frameworks and supervisory systems, are vital. “Both are critical for commercial microfinance sector development,” he said.
Fernando said Asia presents “a very mixed picture” of conditions for microfinance. Bangladesh, Indonesia, the Philippines, Cambodia and Mongolia have favourable environments, while India and China still have hurdles including interest rate caps on small lending by commercial banks.
Yunus said he had been discussing microfinance initiatives “at the highest level” at the People’s Bank of China and the China Banking Regulatory Commission.
He complained that conventional banks excluded two thirds of the world’s population, and that such banks were missing an opportunity. “My campaign has always been to encourage conventional banks to fill the gap, but so far the response has not been as enthusiastic as I would like it to be,” he said.
But global banks are paying more attention to microfinance. Citigroup offers both philanthropic and commercial support: it has a structured finance programme under a venture with Grameen, has established partnership models with microfinance institutions in India, and has developed products such as the Citigroup Benamex- Compartamos life insurance product for microfinance entrepreneurs.
Bob Annibale, global director of microfinance at Citigroup, told Emerging Markets last night: “From a commercial perspective we are seeing that microfinance is viable as a business.”
HSBC has run several pilot programmes since 2004 from wholesale lending and credit lines to project support and foreign exchange handling. And Morgan Stanley and BlueOrchard Finance are about to launch a $108 million bond backed by loans to microfinance institutions, the first to be rated by Standard & Poor’s.
Bankers argue that commercial bank involvement need not, and indeed can not, only be philanthropic. “Unless it works as a business, it’s not going to work at all,” said one.
Microfinance faces many challenges to its credibility, among them governance, supervision, the auditing of the exceptionally low default rates often reported, and the changing risk profile of microfinance institutions. But many believe it has achieved a great deal.
Kumari Balasuriya, governor of the southern province of Sri Lanka in Galle, said the country’s Samurdhi Bank system, which operates on a similar model to Grameen, had lent to about 3.5 million people. “A [conventional] bank is like an umbrella that is not given to you in the rainy season,” she said.
“So many people who genuinely want to do something and borrow money are not given the opportunity. Our system is very successful and the repayment rate is extremely high.”