Banks should look at micro markets

Following the award in December 2006 of the Nobel Peace Prize to Mohamed Yunus and the Grameen Bank, the model of microfinance set up and developed by Mr. Yunus - providing tiny loans to help people bootstrap out of poverty by running small businesses - is in the spotlight.

There are two classes of reasons why the banking and finance sector should become involved in microfinance: intelligent and collective consciousness reasons, and rational and economic reasons. The first class of reason can be also called international solidarity: being an accomplished banker or financial person does not prevent one from being concerned by worldwide problems.

Secondly, besides the willingness to take part in the global improvement of the world population conditions of living, rational and economic kind of reasons are also calling for the banking and finance sector to be involved.

80% of the worldwide population has no access to the traditional financial services: this represents a huge market for the banks to extend their client base. 30 years of experimentation with microcredit have proven that the poor are bankable, able to manage a bank account, to save money and to repay loans.

The microfinance sector is quickly expanding: consultancy agencies predict that the microfinance market will grow from US$11 billion now to $20 billion in 2008.

Even if relatively few microfinance institutions are profitable at the time being, they are on the way to profitability. Through the support of organisations like PlaNet Finance, they are becoming more professional, growing and will finally become autonomous organisations, allowing them to source their funding from the money markets.

Various ways are open to banks and the finance sector to enter the market. Banks can downscale and open an inhouse microfinance department or they can set up a new microfinance institution. They can also invest in or lend funds to existing microfinance institutions.

On the funds side, microfinance is now a new asset class with around 60 funds or investment vehicles investing in microfinance institutions in the Third World.

Most of these funds have been set up by American or European companies such as the Omidyar Network, a mission-based investment group run by eBay founder Pierre Omidyar, or the Gates Foundation, endowed by Microsoft founder Bill Gates. The Omidyar Network supports only for-profit microfinance enterprises, a tactical decision demonstrating belief in the market strength of microfinance.

The responsAbility Fund, advised by PlaNet Finance, links mainstream financial institutions to socially responsible investment practitioners with existing microfinance experience.

The Middle East and North Africa (MENA) region, although prosperous with an exceptional economic growth between 5 to 6 % in recent years, counts 23% of its population living under the poverty line of $2 a day, with 7% living on less than $1 a day. In other words, one Arab in five lives in poverty.

Behind very satisfying growth due mainly to record oil prices, high disparities exist between Middle East countries in terms of standard of living measured by per capita GDP or the HDI (Human Development Indicator) ranking. The MENA region is an economically diverse region that includes the oil-rich economies in the Gulf, resource abundant and populous countries such as Algeria and Iran, and countries that are resource scarce in relative to population size, such as Egypt, Morocco, and Yemen.

The MENA region is where microfinance is least developed, with only 900,000 micro-loan beneficiaries.

Helping countries pursue faster sustainable growth is a crucial component of the banks' role in the MENA region, as sustained economic growth raises incomes and creates jobs for the poor, helping to alleviate poverty.

Claire Cabanel Rey is executive director of PlaNet Finance UAE, a not-for-profit organisation that contributes to the professionalism and financing of the microfinance sector through four main services: training, rating, financing, and investment. Contact her at This email address is being protected from spam bots, you need Javascript enabled to view it .

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