World Bank/IFC: Thunell’s vision for microfinance
Microfinance has become one of the mainstays of the World Bank’s International Finance Corp arm and a passion of its Swedish chief executive Lars Thunell.
IFC is working with 110 MFIs in more than 50 countries. Its investee clients had an outstanding portfolio of nearly 8 million loans as of June 2011, worth just under $12.6 billion. Yet the feeling internally is that much more can be done; at best, microfinance reaches less than 20% of its potential market.
Microfinance can be defined in a number of ways, but to Thunell, it is chiefly about "the very base of the pyramid. It’s a way of providing access to finance and loans to these people." IFC’s role, as he sees it, is not just about pouring money in but helping to shape a sustainable industry, with proper training, improved capacity and a supportive regulatory infrastructure. And he likes the idea that microfinance can be an engine for gender equality. "Women are the ones who are picking up this opportunity and moving it forward. It allows them to create their business – which in certain cultures creates some tension – and we see that they reinvest the money and spend it on their children’s education, rather than going to a bar and spending the money there."
Some of the key debates internally at the IFC concern job creation and productive use of loans. Thunell sees microfinance as being a spur to self-employed entrepreneurs in particular, but wonders how many other jobs are created as a consequence. "The debate now is how we move some of the small informal companies into real companies and get them to grow," he says. There’s also an explicit goal at the IFC to ensure that microfinance lending goes into productive investment, not consumption. "But there is a question how stringent you should be about that," he says. "If an entrepreneur has a sick child, the best thing might be for him to use the money for that. It’s not all black and white, and you have to recognize that."
The IFC acknowledges the debate about interest rates. "The costs are high in terms of administering the systems – there is the cost of money and losses," says Thunell. "And we have to remember, what is the alternative? Not getting the money at all, or going to one of the peddlers and paying over 100%.
"As a development institution, of course we’d like interest rates to be lower, but at the same time we would like the microfinance institutions to be sustainable. In some countries, a government has come in and said you can’t have an interest rate higher than X. And in some cases that has meant the MFIs disappear. The interest rate came down, but the loan volume came down even more dramatically."
Asked about the possibility of encouraging a culture of indebtedness, Thunell speaks about improving financial literacy around responsibility, but also makes a more fundamental point about inclusion. "Who am I to decide that here in Europe and the US we should be allowed to borrow but we should not allow the bottom of the pyramid to?" he says. "These are intelligent people, capable people, and if you give them the right education and incentives they will handle it. I’ve been amazed when I’ve visited slums around the world, you see micro businesses all over the place. The question is how you bring those ecosystems into the bigger world to benefit from trade."
Thunell believes microfinance is "still at the beginning" and says there are "big parts of the world we haven’t really been able to reach". The financial crisis has made this worse still: as Western banks deleverage, the ability to source funds for MFIs is getting worse. A long-term answer is the development of local currency capital markets, but that takes time.
Part of the problem can be at the top. "There are many places where you still have governments that are either suspicious, or haven’t put in place regulations," he says. "You have banking regulators who are watching their turf. You need different regulation for microfinance; sometimes that’s hard to get."
Thunell adds: "In the long run, if we’re going to scale this and reach as many millions of people as we think we need to meet, then we need to make institutions sustainable."