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November 09, 2005
Consortium Advances Microfinance as an Emerging New Asset Class
    by William Baue

The Global Commercial Microfinance Consortium, with its $75 million fund, links mainstream financial institutions to socially responsible investment practitioners with microfinance experience.


Last week, microfinance took another step toward establishing itself in the mainstream as a new asset class with the launch of the Global Commercial Microfinance Consortium. Deutsche Bank coordinated the creation the Consortium and is managing its $75 million fund, which provides financing to microfinance institutions (MFIs) around the world. MFIs make small loans to the poor for starting up small businesses to help raise them out of poverty. The Consortium links well-known financial institutions such as Merrill Lynch, Munich Re, and State Street with socially responsible investing (SRI) practitioners such as Calvert Social Investment Foundation, Mennonite Mutual Aid (MMA), and Storebrand.

"I think it is quite important to get more of our traditional banking institutions involved in bringing microfinance to the necessary level of density to have an impact . . . on the individual lives of those who receive the loans," said President Bill Clinton, who spoke at the fund's unveiling ceremony. "[I]f we can get enough companies, like Deutsche Bank, involved in this, we can actually lift the whole structure of the economy in a lot of poorer [countries and] have a profound and lasting impact on national income in a way that will help the truly poor people more than anything else."

Academics who conduct research on microfinance also see significant impact potential for the initiative, predominantly on the positive side but also on the negative.

"I think it is an encouraging development," said Michael Barr, a professor at the University of Michigan Law School, whose recent papers include "Microfinance and Financial Development" and "Banking the Poor." "Having large, internationally active financial institutions participating in the provision of commercial finance to micro-finance institutions diversifies funding sources available to expand microfinance and may improve market discipline and transparency within the microfinance industry."

"At the same time, microfinance institutions may face increased market pressures not to serve financially marginal borrowers," Prof. Barr told SocialFunds.com.

Serving the poorest of poor presents significant challenges, and often hinges on the degree of technical support MFIs provide to help small businesses survive and thrive.

Microfinance practitioners welcomed the establishment of the Consortium.

"This Consortium is 'microcapital' at its best--first, expert management by Deutsche Bank's long-established and well-respected microfinance unit provides the leadership," said David Satterthwaite, CEO of Prisma MicroFinance and a moving force behind MicroCapital, a website that provides "honest, no-frills" information on microfinance. "Second, the investor group mixes mainstream investment banks, rational development agencies, and flagship social investment foundations."

"Third, the role of government as guarantor uses your tax dollars to support, not execute, for-profit, private innovation," Mr. Satterthwaite adds. "Fourth, the fund investment in MFIs is well-diversified across countries, regions, and types of MFIs."

The fund is capitalized with $15 million in equity, ten percent of which is provided by the UK Department for International Development (DFID), and $60 million in debt, a quarter of which has been guaranteed by the US Agency for International Development (USAID). Almost $30 million has already been committed to MFIs working in Peru, Kosovo, Nicaragua, Azerbaijan, Colombia, Pakistan, Mozambique, and India.

The collaboration between mainstream financial institutions and social investors with significant microfinance experience may prove key to the Consortium's success.

"The fact that microfinance, and the strength of the institutions providing microfinance services, are now on the radar of commercial financial actors is significant," said Eliza Mahony Erikson, investment officer for the Calvert Foundation. "These institutions have potentially enormous investment resources that could exponentially expand the capital available to poor, unbanked communities around the world."

"This initiative shows the world that microfinance is an opportunity for both social and commercial investors to produce powerful returns for their clients," Ms. Erikson told SocialFunds.com.

 

 
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