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
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
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
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.
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."
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,
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.