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U.N. Secretary General Kofi Annan declared 2005 the “Year of Microcredit” to raise international awareness of the potential for tiny loans to help the poor. On Monday and Tuesday, I attended one of the final activities pursuant to this declaration, a conference in the basement of the U.N. building called the Forum on Building Inclusive Financial Sectors. That title is a mouthful but for insiders it signals an important shift from the narrow focus that gave rise to the naming of the year. The challenge is not just how to create and expand institutions like the famous Grameen Bank to give more small loans to more poor people. It is how to make the entire financial system, spanning from private equity firms in New York to domestic banks in Uganda, deliver an array of financial services to the poor -savings accounts, crop insurance, money transfers, letters of credit, and more.

One striking trend apparent at the meeting was that big private money is getting seriously interested in microfinance. Within the last year, Citigroup set up a microfinance group in its commercial, not charitable, operations. There was general agreement that bringing financial services to everyone who could use them was impossible without the private sector - but also that the risk-adjusted returns would probably never compete with traditional investments, meaning that private capital would have to be motivated by a double bottom line of financial and development performance. Speakers at the conference included Bo Cutter, Managing Director, of Warburg Pincus, who runs a private equity fund that invests in microfinance, and Arthur Vayloyan, Head of Private Banking in Switzerland for Credit Suisse. The recent news that eBay founder Pierre Omidyar has given $100 million to Tufts University to support microfinance was frequently mentioned. Cutter explained what might seem like a strange choice - a U.S. university - for channeling microcredit. In his experience, the custodians of the billions of dollars in university endowments have little interest in good works. That is the job of other university departments. They politely decline to invest in his fund. Omidyar’s program will be run by people who demand accountability for financial and social performance. If it succeeds, it could alter perceptions of the possible and unlock billions more for microfinance.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.