The battle for the soul of microfinance

Type: Journal

Title: The battle for the soul of microfinance

Author: Tim Harford

Published by: FT.com

Year: December 2008

Summary:

Microfinance, the system of providing tiny loans and savings accounts to the poor, seems an unlikely and somewhat ironic candidate for Citigroup’s attention. It was because banks weren’t interested in serving the poor that the pioneers of microfinance saw a gap to be filled, back in the 1970s.

The most celebrated microfinance institution, the Grameen Bank, was born in Bangladesh in 1976 after a young economics professor, Muhammad Yunus, discovered that craftswomen were struggling to deal with the high costs of borrowing in order to buy raw materials. Village moneylenders charged up to 10 per cent interest per day. At such rates, a debt of a single cent would balloon to the size of the US economy in just over a year.

Yunus began lending – originally, less than a dollar each to a group of 42 families – and found that the poor were capable of investing the money, lifting themselves out of poverty and paying back the loans with near-perfect reliability. “All people are entrepreneurs,” he proclaimed.
From small beginnings, a global movement has developed, with perhaps $25bn of loans outstanding and 125 million-150 million customers of microfinance institutions. It has been blessed by the United Nations, which declared 2005 the International Year of Microcredit, and by the Nobel committee, which awarded the Nobel Peace Prize to Yunus and the Grameen Bank in 2006.

Now multinational banks at last see microfinance as a profit opportunity. “Colleagues asked me if was giving up a business role,” says Annibale, who became Citi’s first microfinance chief in 2005. “I’d say, ‘No, I’m taking up a new one’.” He plans to make money for Citigroup by providing technology, advice and investment banking services to microfinance lenders. And so far his division has been unaffected by this year’s market turmoil.