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August 05, 2004
Microcredit Development Fund Helps Transform Household Scraps into Sustainable Entrepreneurship
    by William Baue

The Deutsche Bank Microcredit Development Fund seeks to alleviate poverty worldwide by helping microfinance institutions grow to scale and achieve sustainability.

Imagine: rising early every morning, leaving a household of three sons and a husband with tuberculosis, and scouring the slums of Guntur, India, to secure a loan from a money lender to finance that day's work gathering and selling household scraps. This was the life of Dhanamma before learning about Spandana, a microfinance institution (MFI) that loaned her 4,000 rupees ($85) to pay off her debts and buy a pushcart and medicine. A second loan six months later allowed her to establish a shop, and a third loan helped her expand the business. Now, Dhanamma can afford to cover daily expenses while also saving some profits and send her children to school, and her husband has recovered enough to help with the business.

Support provided to Spandana allowing it to make such microloans came in the form of a $75,000 loan from the Deutsche Bank (Deutsche Bank) Microcredit Development Fund (MDF). The MDF was established in 1998 with the sole purpose of alleviating poverty by making loans to MFIs to help them increase their borrowing capacity to reach scale and achieve long-term sustainability.

"Microfinance experts agree that unless MFIs achieve mainstream status by becoming profitable businesses, they will fail to reach the necessary scale to truly effect change for the world's poor," said Asad Mahmood, director of DB's Community Development Group (CDG). "The DB-MDF's strategy was not to lend money outright to microfinance institutions, but to provide catalytic financing that has garnered resources on a leveraged basis from local commercial banks and provided the impetus to germinate a relationship between local commercial banks and microfinance institutions."

In other words, instead of turning around and lending the MDF money directly to small businesses and individual entrepreneurs amongst the poor, MFIs use the money as collateral to leverage at least double the amount loaned by MDF from local banks. In the case of Spandana, the MFI leveraged quintuple the collateral amount, securing $375,000 from UTI Bank. Another India-based MFI, Society for Helping and Awakening Rural Poor through Education (SHARE), leveraged its $75,000 loan to $750,000, a 1:10 ratio. This step also exchanges the money into local currency, ready to lend to local microentrepreneurs and small businesses.

MDF will loan MFIs a maximum of $250,000, with a one- to three-percent interest rate and a one- to five-year maturity. Since its inception, the MDF has invested nearly $3 million that has been leveraged to more than $42 million by some 30 MFIs in 18 countries, including Albania, Benin, Colombia, Haiti, Mongolia, Pakistan, Samoa, Uganda, and even the US.

A unique aspect of the fund is its non-profit status.

"All returns are reinvested pursuant to the mission of the DB MDF," Mr. Mahmood told "The DB MDF is capitalized through donations and social investments from Deutsche Bank Private Wealth Management clients, other wealthy families and individuals, the Deutsche Bank Americas Foundation, and Deutsche Bank Citizenship UK."

The minimum donation amount is $50,000, though the MDF also began accepting social investments (called Program Related Investments, or PRIs) in minimum amounts of $100,000 from qualified tax-exempt US foundations.

"All services involved in managing the DB MDF are provided on a pro bono basis by the Deutsche Bank Community Development Group in New York," Mr. Mahmood added.

The success of MDF has inspired Deutsche Bank to replicate the model in the commercial realm

"As a next generation of the team's involvement in microfinance, Deutsche Bank has also structured a separate $50 million facility, the Global Commercial Microfinance Consortium, which intends to attract commercially motivated investors to the sector and would provide returns for their investments," said Mr. Mahmood.

The US Agency for International Development (USAID) is so impressed with the model that it recently committed to provide a $10 million guarantee to the Consortium. The Consortium is raising an equivalent amount from social investors, including venture philanthropists, development agencies, philanthropic foundations, global corporations, state pension funds, and university and foundation endowments.

"As a result of the resources provided by these socially motivated investors, the risk to commercial investors is minimized," said Mr. Mahmood. "The $10 million equity and the $10 million USAID guarantee provides a 50 percent first loss cushion for commercial investors and caps their losses at 75 percent of their invested capital."

The introduction of the new microcredit fund will increase support for microfinance institutions worldwide, which in turn multiplies support for entrepreneurs such as Dhanamma who are bootstrapping their way out of poverty.


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