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Financing microfinance for impact
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A rather paradoxical description of funding situation for microfinance institutions, across developing countries, is akin to the poetic "water, water everywhere and yet not a drop to drink".
This, for active stakeholders in the fledging financial sub-sector, is patently true. It is safe to assert that two of every three conferences on microfinance in recent times focused on how microfinance banks and institutions could mobilise funds to refinance their portfolios. A fortnight ago, the Central Bank of Nigeria organised one.
There are large 'pots of funds' out there, yet, there is very little for most microfinance institutions, regulated and non-profit microfinance institutions for the purpose of on-lending.. Estimated amount with private and socially responsible investment funds was estimated at 19.32 trillion United States Dollars in 2005. The figure has certainly gone up. A better understanding of this puzzle requires a review of the history of funding of microfinance. Modern microfinance is essentially the creation of the search for meaningful development approach, a form of development, which includes and benefits all the people.
Funds for early microfinance institutions were therefore provided by development agencies. For instance, The Ford Foundation holds the distinction of providing early funding support for the famous Grameen Bank of Bangladesh while it was yet a fledging project in the 1970s.Ditto for successful early microfinance institutions in Nigeria. The United Nations Development Programme (UNDP) leveraged on its international reach to provide technical support for microfinance practice in Nigeria. A feature of donor funding strategy was the provision of grants for activities in addition to credit, an approach that is known as credit plus. These non-financial activities include gender sensitisation, HIV/AIDS prevention and support programmes and enterprise development. This grant-led funding approach was sufficient for the pilot projects cope of microfinance then.
Two decades of practice, times and scope of microfinance have changed and so the nature, quantum and sources of funds for financing microfinance have changed. Over time, sustainable institutions began to embark on expanding outreach of their operations. It is common to see microfinance institutions in developing world with millions of clients or customers. Grants are obviously insufficient to implement exponential growth plan. Emerging development challenges as environmental degradation and HIV/AIDS pandemic, which compete for traditional donors' resources and attention, has not helped the situation.
Expanding demand, dwindling donors' funding support and growing commercialisation led to the emergence of private investors and capital funds. A Microfinance institution, which desires to meaningfully scale -up its operations must seek private capital. Unlike grants, funds from private commercial sources are limitless. Unlike grants also, these funds come with tough conditions, which hitherto grant-dependent microfinance institutions are least prepared for. Here lies the dilemma. Investors and commercial banks are not known to play Father Christmas with their funds.
While commercial bank-like deposit mobilisation strategies being adopted by some microfinance banks are commendable, it will soon be obvious that deposits mobilized from the poor are always inadequate to fund their credit needs. Yes, the poor can save, however their capacity to do so is inadequate to provide enough fund for portfolio financing. The peculiar nature of microfinance as a tool for development requires a more innovative approach to funding than the free market financial intermediation of conventional banks. Despite the huge strides made in product diversification with emphasis on savings, microfinance is essentially credit- driven. For growth, micro-enterprises, the main target of microfinance banks, demand for more funds than they can save.
This fact shapes choices of refinancing approaches adopted in countries of Latin America and Asia where microfinance has made tremendous impact. First, is the setting up of a re-financing institution or trust fund. This institutional structure is required to pool resources from diverse sources and on-lend to requesting microfinance institutions and banks. Usually this financing model primarily seeks to grow the practice. It therefore makes provision for a 'funding window' for grants or very soft loans for small and fledging institutions. The explosive growth of microfinance in Bangladesh in 1990s was due to the availability of loanable funds through this model rather than any other factor.
This model was intended by the Central Bank of Nigeria with the inclusion of microfinance development trust fund in the microfinance policy. It is important however to highlight some of the success imperatives of this model. Its sources of contribution and management must be highly diversified with government agencies playing mere guiding role.
Instead the private sector, with universal banks leading, should play dominant role in funding, governance and management of the fund.
A second model is the linkage arrangement, which requires bilateral transactional relationships between universal and microfinance banks. This should be encouraged and promoted by the Central Bank of Nigeria through policy interventions. Banks should explore possibilities of on-lending approach which allows microfinance banks to on-lend funds provided by the universal banks. Compelling reasons for this model are many and mutually beneficial. For the Universal or commercial banks it is cost effective. Ordinarily commercial banks do not poses skills and orientation to reach micro-enterprises with responsive financial services. On the other hand, owners of micro-enterprises do not understand the ways of commercial banks. . The arrangement provides the much-needed funds by microfinance banks to bridge the gap between the huge demand for and little supply of financial services to the flourishing informal sector.
Mr. Ehigiamusoe is the CEO of LAPO, a successful development microfinance institution.
Email : godwin.ehi@gmail.com
There are large 'pots of funds' out there, yet, there is very little for most microfinance institutions, regulated and non-profit microfinance institutions for the purpose of on-lending.. Estimated amount with private and socially responsible investment funds was estimated at 19.32 trillion United States Dollars in 2005. The figure has certainly gone up. A better understanding of this puzzle requires a review of the history of funding of microfinance. Modern microfinance is essentially the creation of the search for meaningful development approach, a form of development, which includes and benefits all the people.
Funds for early microfinance institutions were therefore provided by development agencies. For instance, The Ford Foundation holds the distinction of providing early funding support for the famous Grameen Bank of Bangladesh while it was yet a fledging project in the 1970s.Ditto for successful early microfinance institutions in Nigeria. The United Nations Development Programme (UNDP) leveraged on its international reach to provide technical support for microfinance practice in Nigeria. A feature of donor funding strategy was the provision of grants for activities in addition to credit, an approach that is known as credit plus. These non-financial activities include gender sensitisation, HIV/AIDS prevention and support programmes and enterprise development. This grant-led funding approach was sufficient for the pilot projects cope of microfinance then.
Two decades of practice, times and scope of microfinance have changed and so the nature, quantum and sources of funds for financing microfinance have changed. Over time, sustainable institutions began to embark on expanding outreach of their operations. It is common to see microfinance institutions in developing world with millions of clients or customers. Grants are obviously insufficient to implement exponential growth plan. Emerging development challenges as environmental degradation and HIV/AIDS pandemic, which compete for traditional donors' resources and attention, has not helped the situation.
Expanding demand, dwindling donors' funding support and growing commercialisation led to the emergence of private investors and capital funds. A Microfinance institution, which desires to meaningfully scale -up its operations must seek private capital. Unlike grants, funds from private commercial sources are limitless. Unlike grants also, these funds come with tough conditions, which hitherto grant-dependent microfinance institutions are least prepared for. Here lies the dilemma. Investors and commercial banks are not known to play Father Christmas with their funds.
While commercial bank-like deposit mobilisation strategies being adopted by some microfinance banks are commendable, it will soon be obvious that deposits mobilized from the poor are always inadequate to fund their credit needs. Yes, the poor can save, however their capacity to do so is inadequate to provide enough fund for portfolio financing. The peculiar nature of microfinance as a tool for development requires a more innovative approach to funding than the free market financial intermediation of conventional banks. Despite the huge strides made in product diversification with emphasis on savings, microfinance is essentially credit- driven. For growth, micro-enterprises, the main target of microfinance banks, demand for more funds than they can save.
This fact shapes choices of refinancing approaches adopted in countries of Latin America and Asia where microfinance has made tremendous impact. First, is the setting up of a re-financing institution or trust fund. This institutional structure is required to pool resources from diverse sources and on-lend to requesting microfinance institutions and banks. Usually this financing model primarily seeks to grow the practice. It therefore makes provision for a 'funding window' for grants or very soft loans for small and fledging institutions. The explosive growth of microfinance in Bangladesh in 1990s was due to the availability of loanable funds through this model rather than any other factor.
This model was intended by the Central Bank of Nigeria with the inclusion of microfinance development trust fund in the microfinance policy. It is important however to highlight some of the success imperatives of this model. Its sources of contribution and management must be highly diversified with government agencies playing mere guiding role.
Instead the private sector, with universal banks leading, should play dominant role in funding, governance and management of the fund.
A second model is the linkage arrangement, which requires bilateral transactional relationships between universal and microfinance banks. This should be encouraged and promoted by the Central Bank of Nigeria through policy interventions. Banks should explore possibilities of on-lending approach which allows microfinance banks to on-lend funds provided by the universal banks. Compelling reasons for this model are many and mutually beneficial. For the Universal or commercial banks it is cost effective. Ordinarily commercial banks do not poses skills and orientation to reach micro-enterprises with responsive financial services. On the other hand, owners of micro-enterprises do not understand the ways of commercial banks. . The arrangement provides the much-needed funds by microfinance banks to bridge the gap between the huge demand for and little supply of financial services to the flourishing informal sector.
Mr. Ehigiamusoe is the CEO of LAPO, a successful development microfinance institution.
Email : godwin.ehi@gmail.com
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