At a Glance Microfinance today is about building entire local financial markets that meet the diverse financial needs of poor people.
Three decades after Muhammed Yunus founded Grameen Bank, microfinance institutions serve about 160 million people in developing countries. Still the majority of people in developing countries are “unbanked”—they have no access to formal financial services.
Nearly three billion people in developing countries have little or no access to formal financial services that can help them increase their incomes and improve their lives. Access to a range of microfinance services—savings, loans, and money transfers—enables poor families to invest in enterprises, better nutrition, improved living conditions, and the health and education of their children. It is also a powerful catalyst for women’s empowerment.
But it requires more than just being able to get a loan. All types of financial services—deposit services, money transfers, credit, and insurance—are fundamental tools for managing a poor family’s well-being and productive capacity: to smooth expenditure when incomes are erratic (occasional work, seasonality of crops), to build purchasing power when expenditures are variable (school fees, buying seeds), or to protect against emergencies (natural disasters, death in the family).
The field of microfinance is evolving rapidly, with many new investors and new providers of financial services. New technologies promise to reduce transaction costs and increase access to hundreds of millions more people. In order to do that, the industry is developing a better understanding of what poor clients need and want. The World Bank Group is helping regulators balance consumer protection with innovation, and work with phone companies and banks to create viable business models.
The World Bank Group’s work focuses on supporting equitable local financial markets and building a strong microfinance sector in developing markets. The different members of the World Bank Group play complementary roles in achieving our goal of universal access to finance.
- IFC is the World Bank Group’s lead investor in microfinance, more than doubling its investment in commercial microfinance in the last two years. IFC is the top International Financial Institutions investor in terms of outreach to Microfinance Institutions (MFIs), reaching 130 clients by 2009. IFC is also one of the top three investors in terms of volume. IFC microfinance projects reached a cumulative committed volume of US$1.29 billion in FY09 (record of US$378 million alone in FY09). As of CY 08, IFC’s partner MFIs disbursed of 12 million loans for more than $16 billion. In 2009, 65 percent of micro-loan borrowers were women.
- The World Bank (International Bank for Reconstruction and Development (IBRD)/International Development Association (IDA)). The Bank (IBRD/IDA) offers policy advice and provides finance to governments to support lending and market development. Investment lending supporting micro and small enterprises totaled more than $280 million per year (totally $1.4 billion).
- Consultative Group for Action on Poverty (CGAP), a multi-donor partnership for microfinance created by the Bank in 1995, contributes to the advancement of microfinance by building consensus on industry standards, funding innovation, and disseminating best practices. Today CGAP is widely recognized as the leading industry resource mandated to work with stakeholders to set standards and identify best practices, advise governments on formulating policies that address the needs of poor people locally, and provide technical assistance to financial institutions.
Overview Traditionally, microfinance focused on providing very small loans (microcredit) to the poor to help them engage in productive activities. But a much broader range of financial services—deposit services, money transfer services, and micro-insurance—can help poor people to build assets, increase their income and reduce their vulnerability to all types of risks. Microfinance allows poor people to manage their financial lives and plan for their own futures. In most developing countries, less than half the population has an account with a formal financial institution, and in many countries less than one in five households does. Even in countries that have seen substantial development in recent years, the numbers remain stubbornly low: 20 percent in Sub-Saharan Africa; 25 percent in East Africa; 30 percent in Europe and Central Asia; 35 percent in Latin America; 32 percent in the Middle East and North Africa; and 25 percent in South Asia. Although a huge variety of institutions now provide microfinance, including state-owned banks, postal, agricultural, and savings banks, and other entities such as savings and loan cooperatives, the vast majority of people in developing countries do not have access to formal financial services. On average only about 26 percent of people around the world have access to formal financial services. The World Bank Group’s Work in Microfinance The World Bank Group has is committed to expanding access to finance for the world’s poor. The different arms of the Bank play complementary strategic roles in helping to advance microfinance—investor, advisor, innovator, and researcher. IFC
IFC’s focus is on creating and supporting commercially viable microfinance institutions that can attract the private capital needed. IFC plays a catalytic role by demonstrating the business case for commercial microfinance, enhancing the sector with innovative financial products, and promoting it as an asset class.
IFC is the number-one international investor in terms of outreach to microfinance institutions (100+ MFIs), operating in more than 60 countries, including in 14 Sub-Saharan African countries. IFC is working to ensure that microfinance reaches the people and places where it is most needed, including in fragile and conflict-affected countries. IFC is already active in fragile or conflict-affected countries including Afghanistan, Kosovo, DRC, Sierra Leone, and Liberia. Project examples: BRAC (One of Bangladesh’s largest MFIs). As of June 30, 2009, BRAC had a loan portfolio of about US$810 million to 194,000 borrowers and member savings of US$953 million from 536,000 savers. IFC has structured a partial credit guarantee of US$18 million to back a local currency loan provided by Citibank Dhaka.
Microfinance Enhancement Facility (MEF): Although commercial microfinance as a whole continues to perform well, the private capital it had started attracting in recent years is now virtually unavailable. To help this critical industry rebuild market confidence and maintain its momentum in the fight against poverty, IFC and German development bank KfW created the Microfinance Enhancement Facility US$500 million fund to support strong MFIs during the crisis. Three of the industry’s leading private fund managers — BlueOrchard Finance, responsAbility Social Investments AG, and Cyrano Management — serve as investment managers, ensuring rapid deployment and cost efficiency. MEF has already disbursed US$108 million to 22 MFIs and will support more than 100 during the life the facility.
First Microfinance Bank of Pakistan: A pioneering bank, jointly sponsored by IFC and the Aga Khan Development Network, which has more than 50 branches in the isolated north and the rest of Pakistan, providing loans to nearly 200,000 low income households and micro-enterprises.
IBRD/IDA IBRD/IDA provides financing through credit lines to governments, broader lending support for market development, and technical policy advice. During the last three years IBRD/IDA’s investment lending to support microfinance amounted to more than US$250 million per year (just over 1 percent of IBRD/IDA lending). It is sometimes difficult to distinguish between lending that ultimately benefits microenterprises as opposed to small and medium-sized enterprises. Investment lending supporting MSMEs totaled more than $560 million per year (or 2.4 percent of IBRD/IDA lending). Project examples:
· Microfinance Investment Support Facility for Afghanistan (MISFA). Set up after the war, MISFA was designed by CGAP and the Bank to help build a strong and sustainable microfinance sector in Afghanistan. By creating a facility that other funders could join, the aim was to stimulate entry of microfinance organizations and to build local capacity, with best practice performance and reporting standards from the beginning. Today, MISFA has transformed into an independent organization that supports 15 microfinance institutions, with a network of 280 branches in 24 provinces, with almost 500,000 active savings and loan clients. Sixty-five percent of the clients are women, and the loan repayment rate is 96 percent. The microfinance sector has so far disbursed more than 1 million microloans, is expanding into other financial services, and employs 4,500 Afghans.
· In Andhra Pradesh, India, with the support of an IDA project, the number of poor rural households accessing loans increased from less than 500,000 in 2000 to 6 million during a six-year period. Nearly 8 million poor women in rural areas have been organized into nearly 800,000 self-help groups and 30,000 village organizations. The groups manage their joint savings and provide small consumption loans to members. As a result of the project, incomes have increased for nearly 90 percent of the households. Cumulative savings of poor households reached US$292 million in 2006. And more than 3.3 million rural poor families now have death and disability insurance coverage. CGAP: The Consultative Group to Assist the Poor CGAP was created by the Bank in 1995 as a multi-donor partnership for the advancement of microfinance. CGAP provides market intelligence, promotes standards, develops innovative solutions, and offers advisory services to governments, microfinance providers, donors, and investors. Today CGAP is widely recognized as the leading industry resource mandated to work with stakeholders to set standards and identify best practices, advise governments on formulating policies that address the needs of poor people locally, and provide technical assistance to financial institutions. Working through a network of worldwide partners, CGAP develops innovative solutions that help microfinance more effectively serve the needs of poor people. CGAP distributes vital industry information and research through a variety of free publications and Web sites. Project examples: New delivery technologies improve efficiency and reduce costs. Many large microfinance institutions and banks serving the poor now use technology such as ATMs, credit cards, and mobile phone banking, enabling customers to make payments, transfers, and cash withdrawals outside of branch offices. With more than 4 billion cell phone connections in the world and more users in the developing world than in the West, these new technologies offer the potential to reach many more people with affordable financial services. With backing from the Bill & Melinda Gates Foundation, CGAP is working with partners in Colombia, Ecuador, India, Kenya, Maldives, Mongolia, Pakistan, the Philippines, and South Africa to design new, technology-driven channels to be able to serve rural and remote areas and very poor households. We are also providing research and advice on new policy issues introduced by these technologies, and potential policy and regulatory responses, with engagements in nine developing countries to date. More than 200 microfinance institutions, banks, and technology providers have applied to CGAP's Technology Program to get advice and funding for deploying technology and new business models to reach clients they cannot reach today.
Reaching the Poorest. Microfinance generally does not reach people living on less than $1 a day. Ongoing subsidies and greater efforts to increase institutions’ outreach to very poor people are needed to reach those who lack appropriate shelter, income and even sufficient food. Safety net programs in the form of cash transfers, food aid, or guaranteed employment schemes can help meet the immediate consumption needs of the poorest people. However, such initiatives are often unable to develop long-term income-generating activities or build assets to move people out of poverty in the long-term.
“Graduation” programs may create a pathway out of poverty for chronically poor and destitute people. The World Bank Group’s graduation programs offer a carefully sequenced combination consumption stipends, transfer of assets such as goats or chickens, with livelihoods training and savings services. The goal is to “graduate” recipients out of extreme poverty and to enable them to access mainstream microfinance. Pilots in Haiti, West Bengal, Andra Pradesh, and Pakistan, already show promising results, while other pilots are getting off the ground in Honduras, Peru, Ethiopia, and Yemen. Pilots are accompanied by thorough qualitative research and several sites also have rigorous randomized impact assessments underway.
Media Contacts: Una Gallagher Pulizzi, (202) 758-4290, upulizzi@worldbank.org Lotte Pang, (202) 758-4290, LPang@ifc.org Updated September 2009 |
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