Thursday, January 21, 2010

Microfinance 101: The Basics and The Benefits

As part of a series, the Consortum Finance Network sponsored a webinar Jan. 21 focusing on microfinance--a popular financial term, but not covered comprehensively in business schools, if at all. Suhail Awan, the chief technical advisor in microfinance at UNDP, gave an hour-long presentation entitled, "Microfinance: Introduction and Opportunities."

Awan approached the session as a b-school seminar to those with interests in the subject, but without in-depth background. Many know microfinance to be lending in small amounts to those in less-developed regions, but Anwan's presentation went far beyond that.

He was successful in covering two centuries worth of information in 60 minutes and getting listeners up to speed on an important topic. Participants included CFN members, Consortium students and alumni and others interested in the topic. Awan is based in Yemen and is an expert in the topic based on years of experience in the field.

In the first half, he provided basics and offered a history lesson. What is microfinance? What is the difference between microfinance and what we hear also as "microcredit"? How did both evolve through the years?

Awan described how microfinance dates back to the 17th-18th centuries when community or regional groups came together to provide loans in rural areas to support farming, especially in Ireland and Germany. Over time, microfinance evolved from farm-related loans to expanded efforts to support those in poor regions around the world. Until the 1990's, microfinance's primary goals were social--to "alleviate poverty and suffering" and to increase "productivity and incomes" to those in poor regions and in agriculture.

Awan explained how modern microfinance sprouted, based on the extraordinary contributions of and principles implemented by Dr. Muhammad Yunus in the 1970's, who formed what is now Grameen Bank and later won a Nobel peace price for his efforts.

Awan told how by the 1990's, as commercial institutions learned of both the social and economic benefits, microfinance's goals were expanded to include generating financial returns, as well. This was due to the large number of commercial interests involved (including private investors, fund groups, and commercial banks).

Commercial banks had not been pioneers in the field because they historically avoided the perceived high risks in these loans. (Anwan reminded participants that these "high risk" loans in some areas have had better performance than other commercial lending.) Since the 1990's, many commercial banks, he said, have become participants by "downscaling operations" in certain consumer-related businesses to accommodate microfinance activity.

Banks, institutions and funds learned returns could be reasonable and risks could be managed. Awan said, "There is a focus on a double bottom-line" (a focus on financial returns and social benefits (as measured by "social performance indicators")).

Microcredit is a subset of microfinance. While microcredit refers to lending activities, microfinance today now covers an array of financial services, including providing money transfers, savings and investments vehicles, and insurance to those in the target groups.

During the session, Awan described current issues and challenges in microfinance. For example, "Africa remains the biggest challenge," he said. Balancing on the spectrum between achieving social goals and financial returns will always require attention; many believe it is possible to achieve both.

Anwan also delineated many ways people can pursue in interest in microfinance if they have it--in a career, or as participants, contributors, lenders or volunteers. Because of the novelty of interest and because microfinance is not widely taught as a rigorous discipline in universities, the field hasn't always attracted people in numbers or with sufficient talents.

One of the best known business-model examples is Kiva, the microfinance organization that matches specific borrowers, who tell their stories on its website, with institutions, organizations and individuals who want to participate and lend. Anwan explained how Kiva has been effective.

For those interested in details of the presentation (including a recording or other information), please contact Rachel Delcau at the Consortium at Anwan welcomes follow-up questions.

In Part II of its microfinance series, CFN will present an actual case study Feb. 4 at 6 pm EST. Clint Wilson, based in San Francisco, head of CnCpartners, will explain the business model behind his microfinance organization and will show how those interested can follow up. His business focuses on microcredit and other microfinancial services in the Philippines. Those who are interested should register in at in the CFN group or contact Rachel Delcau.

Tracy Williams

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