Microfinance

The 2nd International "Convergences 2015" Forum, organised by ACTED, took place in Paris on 30 April 2009. The aim of this ongoing forum is to strengthen the synergies between microfinance experts and practitioners, gathering together the different players in the social economy, in finance, civil society or the new technologies.

François Debiesse, director of BNP Paribas Wealth Management, participated in the day's discussions, presenting on the subject of:
"Financing and support for microfinance: what are the respective roles of the public and non profit sectors, the private sector and social entrepreneurs?”

His speech was based around a number of fundamental concepts, drawn from his experience as a private banker, as Head of BNP Paribas Corporate Sponsorship as well as from his recent experience as an advisor for individual philanthropy.

Microfinance and philanthropy are different but very complementary.

“Maria Nowak often stresses the merit of a loan over a gift, as gift aid can lead to dependency whereas a loan creates a virtuous circle of economic independence. However, outright gift aid will always be necessary for financing projects that involve, for example, medical research or education, as the return on investment is remote and uncertain for these types of projects.

Microfinance is part of a wider trend in solidarity-based investment,

and a sector currently undergoing significant expansion, boasting growth in the order of 40% over the last 5 years, and €1.7 billion in assets under management under the Finansol label. Investing in microfinance or solidarity-based finance does not mean making non-recoverable investments. Microfinance, and solidarity-based investments in general, combine social impact with a robust economic model. Initially, institutions need to build capital with the support of social investors who are willing to take on a high degree of risk, such as Investisseur et Partenaire pour le Dévelopement or Acted / Oxus, or even individuals with private wealth. Then, in addition to increasing their capital by generating cash flow, institutions need to borrow to finance their growth.

Microfinance funds offer an interesting opportunity for social investors,

combining reasonable return and limited risk with a strong social impact. These funds are for the time being essentially debt funds, which lend to microfinance institutions. However, some equity funds are beginning to emerge, although they are faced with the valuation problems posed by unlisted assets.

Outlook
Over the last thirty years, the microfinance industry has gone from strength to strength and is still evolving. In this context, I would like to deliver three messages:

1) The importance of measuring social impact.
Even though experience shows us that microfinance funds such as ResponsAbility boast a recurring profitability that is higher than the money market, which is not bad at all particularly in the current climate, investors are motivated first and foremost by maximising social impact rather than maximising yield. Social impact must therefore be measurable using simple indicators: the number of customers reached, the percentage of women, the average loan amount etc. With this in mind, labels such as Finansol are important in that they provide private investors with a way of measuring the social impact of their investments.

2) The importance of ethics in microfinance.
We endorse, as do forty or so other institutions, the CGAP principles regarding responsible microfinance and the protection of micro-borrowers, in particular with respect to the issue of transparency concerning interest rates. We are in the process of incorporating these principles into our loan policy. As a banking group involved in microfinance, we can influence our partners but they must first familiarise themselves with these issues.

3) Microfinance funds represent an opportunity for the Paris market:
French banks are among the leading banks in the world in terms of financing microfinance for their own accounts, and Finansol has undeniable expertise in solidarity-based labelling of financial products. There are now approximately a hundred microfinance funds totalling around €4 billion. Luxembourg accounts for some 30% of the assets financed by microfinance funds, against less than 1% for France. Currently, microfinance funds in France are treated as products reserved for institutional investors, as microfinance assets may make up no more than 10% of the assets of funds for sale to the general public. The microfinance working group Paris Europlace, led by BNP Paribas, has submitted concrete proposals to the regulatory authorities for developing France's role as a major player in microfinance fund management. We eagerly await the implementation of a regulatory framework for microfinance funds which meets the expectations of a wide audience, not only within France but throughout the European Union.

Conclusion
Our experience as partners to some twenty microfinance institutions in twelve countries has shown us that microfinance is holding up well to the crisis. Given that global unemployment levels will rise by another 50 million people in 2009, we are convinced that microfinance can represent one of the paths out of the crisis by allowing the unemployed to create their own jobs.”

June 2009

On the 19th of March 2009, Emmanuel de Lutzel, Head of Microfinance at BNP Paribas was invited to speak at the United Nations' « Infopoverty » conference on the information technologies for the fight against poverty at the UNESCO headquarters in Paris.
Read on to discover the speech he made about microfinance, its aim and its implementation thanks to technology :

"The history of all hitherto existing society is the history of class struggles" said Karl Marx. To paraphrase him, one could say that the history of microfinance is the history of the struggle against financial exclusion. That is, to make financial services, such as savings, credit or transfers, of the highest quality accessible to the greatest number of people at a low price.

Technology can significantly contribute to achieving this goal of making financial services accessible to the greatest number of people. Before entering into the heart of the subject of this conference, allow me first to put microfinance in context.

Microfinance in context

I would first like to dispel a misconception. Microfinance is not a magic wand in the fight against poverty. It has only an indirect impact on poverty. The importance of Microfinance is in its fight against financial exclusion, which indirectly helps fight poverty. In practice, the number of those excluded from the financial system are far larger than those of the poor. I'll give you an example: in Africa, 95% of the population has no bank account, while the poor (those with incomes of less than USD 1.25 per day) represent only 51% of the population.

Globally, microfinance affects one person in six. According to statistics from the 2008 Microcredit Summit, microfinance affects 155 million borrowers. If we take into account that a micro borrower supports a family of at least five people, there are more than a billion people who are currently affected by microcredit.

Microfinance is a growth industry, with a growth rate on the order of 30% per year for the last ten years. In the financial industry, this sector is unaffected by the credit crisis. Nevertheless, the financial crisis will have the indirect impact of reducing the growth rate, which will probably reach only 10% in 2009.

Over the last dozen years, a number of bridges have been built between microfinance and conventional finance. Approximately fifteen international commercial banks are involved in supporting this sector. For a bank like BNP Paribas, microfinance is a natural arena in which to exercise our corporate social responsibility; it's a field in which we can act as bankers and generate a positive social impact at the same time. As pioneers in this subject for the last 15 years, BNP Paribas now helps to finance approximately twenty partner institutions in a dozen different countries, in addition to France, where we support ADIE (Association pour le Droit à l'Initiative Economique), an association which provides start-up loans to young, economically disadvantaged entrepreneurs and the long-term unemployed in France.

Microfinance is the only idea in the financial industry, to the best of my knowledge, which was developed in the South and was imported to the North. Several Latin American countries compete with Bangladesh in claiming to have created the idea in the 1970's. Today, Europe and the United States make up less than 1% of global microfinance, which remains a characteristic feature of emerging economies.

In fact, microfinance is a far older idea, invented in Italy. Gli inventori della microfinanza sono Italiani! Franciscan monks developed the “monts de piété,” or “charitable funds” at the end of the 15th century, enabling them to make loans to the poor at reasonable interest rates – a real social and moral revolution, comparable to the discoveries of Galileo or Leonardo da Vinci in the same era.

Microfinance and Technology

Regarding the importance of technology in microfinance, I'd like to give you examples in three fields:

1)  The mobile phone has opened new prospects for microfinance, enabling the transfer of funds and loan creation. The global penetration rate of mobile telephony has more than doubled in five years (2002-2007) and has now reached 50%, with considerable growth in emerging economies (x7 in Africa). In the Philippines, with a population of 90 million, there are now more than 50 million subscribers, and mobile banking now reaches 6 million people. Unique alliances have developed between traditional banks and mobile telephone operators, as in West Africa for BNP Paribas with Orange. In India, there are now more than 400 million mobile phone subscribers, with a growth rate of more than 10 million per month; and yet 85% of the rural population has no access to financial services. This gives us an idea of the considerable potential that the mobile telephone can offer.

Philippe Torres at L'Atelier BNP Paribas develops the subject in his "New Tech" column by analysing Wizzit, a community-based mobile telephone bank in South Africa.

2)  The Internet also offers interesting prospects, though these are more distant given that they require access to a computer. In five years (2002-2007), global internet access has doubled to reach 21%, but the Digital Divide remains a reality in the majority of emerging economies. However, programs exist which are reducing the price of a computer to less than $100. In addition, the internet is a new way of enabling savers in the North to invest directly in microfinance in the South, as demonstrated by Kiva in the United States or Babyloan in Europe.

3)  The computerisation of the management of microfinance institutions enables these institutions to lower their costs while achieving economies of scale. Today, procedures for granting credit, payment and recovery remain largely manual. Rather than reinventing the wheel, the IMF can adopt methods from retail banking or consumer credit organisations to achieve economies of scale. BNP Paribas' experience with its Microfinance Without Borders initiative, a program which enables the bank and microfinance institutions to share expertise, provides valuable experience in this regard.

At the beginning of the 20th century, only a minority of wealthy European and American individuals had access to a bank account. Technology has made it possible to provide financial services to the largest number of people while reducing costs.

In the emerging economies, we are at the start of a technological revolution which will make banking services accessible to the greatest number of people, and will fight against poverty by including these people in the economic system. The absence of traditional banking networks is an opportunity to develop electronic networks.

However, we must not forget one essential factor: finance is a human relationship between the banker and his client. As indicated by the origins of the word credit, credit is based on confidence. Whatever technological developments may arise in microfinance, nothing can replace this human relationship.

April 2009