Offbeat financal avenues find buyers slowly but steadily. With the global meltdown behind, European debt crisis ahead, global economists are busy pondering new sectors like microfinance, carbon finance, water credit and so on to find hope for market expansion.
Even the World Bank in its latest Global Economic Prospects 2010 report was circumspect about global recovery when it said Europe's debt crisis is likely to hamper global economic recovery. The report projects global GDP to expand between 2.9 in 2010 and 3.3 percent in 2011, gradually strengthening between 3.2 and 3.5 percent in 2012, but not sufficient to offset the 2.1 percent decline in 2009.
Turning its attention to developing economies, the report projected them to grow between 5.7 and 6.2 percent each year from 2010-2012 compared to high-income countries which are projected to grow between 2.1 and 2.3 percent in 2010 — not enough to undo the 3.3 percent contraction in 2009 — followed by 1.9 to 2.4 percent growth in 2011.
The firm advice from World Bank’s Chief Economist Justin Yifu Lin is quite significant: “The better performance of developing countries in today’s world of multi-polar growth is reassuring... But, for the rebound to endure, high-income countries need to seize opportunities offered by stronger growth in developing countries.”
And what are the opportunities? Achieving financial inclusion of one-third of the world's population which has no financial access is the first one.
Moving away from the old market base that is fast shrinking is another way. The first contrarian to the popular belief that the rich only pay back loans, was the US-educated economics professor in Bangladesh Mohammad Yunus who happened to visit Jobra village next to his university campus in mid-1970s to explore the idea of relieving a woman carpenter from the clutches of a moneylender.
The woman, Sufia Khatun, earned only two cents a day for her bamboo products that displayed her beautiful craftsmanship. She used to borrow from a moneylender who bought her products at a price that leaves her with two cents in her hands as profit. Being a poor woman, she had no access to money that was available to the rich in this poor country.
Probing her mind, Prof Yunus asked whether she could earn more profit if she was freed from the moneylender and she said, “Yes, I can.” Professor Yunus soon found out that nearly 42 women in villages around Jobra faced the same fate.
Unlike the conventional banks which provide loans on collateral and that too not in small amounts, he gave them all $27 to get free from moneylenders and be on their own to buy their raw materials like bamboo that was used to make stools.
When they began selling their wares to the highest bidder, their profits soared from two cents a day to $1.25 a day. All they needed was an average of 68 cents each.
Thus began the movement of microfinance, and its pioneer Prof Yunus went on to receive the Nobel Peace Prize in 2006. Nearly eight million members of Grameen Bank that was set up by him benefited from it and more than 40 million people are now members of many such banks in Bangladesh.
“Poverty has been created by the deficiencies in institutions that we have built, for example, financial institutions. Financial institutions refuse to provide financial services to merely two third of this population. For generations they claim that it could not be done and everybody accepted that. Grameen Bank questioned this assumption and demonstrated that lending money to the poorest in a sustainable way is possible,” he said while delivering a lecture in New Delhi early this year.
“While big conventional banks with all their collateral were collapsing, microcredit programmes, which do not depend on collateral, continued to be as strong as ever,” he said and reminded the world that was grappling with the credit crunch.
In a typical Grameen model advocated by Muhammad Yunus, microfinance loans are made to a group of borrowers, mostly women, without any collateral, usually for a year or two. The group is liable to repay, in the sense, if one member defaults, other group members have to pay, thus ensuring high repayment rate.
Numerous microfinance institutions, some within the Grameen model and others following self-help group model emerged in the last three decades to provide microloans, some of them connecting borrowers and lenders online like Kiva.org.
The success story of Grameen Bank has triggered new thinking among many philanthropists, who are now looking at what happened in microfinance and probing avenues to emulate the model. “They are saying 'can we do this: this change from philanthropy to business much more quickly than (what) happened with microfinance which took 30 years, in areas like basic healthcare for the poor, education for the poor, clean water provision, a whole series of different areas?’” says Matthew Bishop, US business editor and New York bureau chief of The Economist, and co-author of 'Philanthrocapitalism: How Giving Can Save the World'.
Washington-based Consultative Group to Assist the Poor (CGAP), a microfinance research organization, estimates that MFIs’ demand for capital stands at $2.5 billion to $5 billion annually. And many microfinance institutions (MFIs) have gone commercial recently tapping capital from equity markets, while others have initiated several bond offerings, securitizing microloans in the form of collateralized loan obligation.
The risk involved in making loans without collateral is, nonetheless risky but many MFIs charge a high interest rate arguing the labor-intensive effort to provide tiny loans to large groups of members. The interest rate varies from 21 percent to 86 percent.
While many MFIs in South Asia charge 21 to 60 percent, Mexican microfinance firm Compartamos charges 86 percent and in some cases more than 100 percent. CGAP which initially helped Campartamos to set up microfinance operations was among those to criticize Campartamos for its high interest rates. Even Prof. Yunus condemns the latest commercial model.
Another angle of microfinance is that too many MFIs are chasing the same small groups, resulting in over-indebtedness and eventual delinquency, that was witnessed recently in parts of Latin America where the so-called No Re-payment Movement is still strong and in some southern pockets in India where some groups refused to repay based on a fatwa (religious decree) by local mosques, leaving aside numerous instances in Bulgaria and some African countries.
But none of these concerns have come in the way of microfinance which is fast emerging as the most-sought-after sector by investors, global funds and social fund investors. From Vinod Khosla to Bill Gates, all those heading non-profit foundations have enlisted organizations working in the sphere of microfinance for aid.
Fund flows and investments into the microfinance sector have made it a billion dollar industry that is doubling almost every two years. India alone saw an average annual growth rate of nearly 80 percent since 2007. Indian MFIs accounted for about 40 percent of all private equity deals in the last two years, according to a Venture Intelligence report.
With more than 1,800 MFIs reporting to Microfinance Information Exchange (MIX), a global information facilitator for the sector, there are nearly 77.4 million borrowers with $40 billion gross portfolios worldwide. And their future is a hope for all industries from mobile technology to retail companies, which badly require new markets to survive.