Switzerland jumps on microfinance bandwagon

Secured funding could help microfinance institutions reach out to more poor people Keystone Archive

One of the goals of the United Nations' Year of Microcredit is to persuade the private financial sector to invest in microfinance institutions (MFIs).

Given the unreliability of foreign aid budgets, MFIs, which provide loans to low-income clients, are asking businesses to throw them a credit line by offering a secure source of funding.

The extra funds would allow these mostly charitable organisations to boost their infrastructure and finance their loan portfolios for the estimated 500 million so-called microentrepreneurs globally.

Microentrepreneurs, who come from low-income backgrounds, cannot afford to provide collateral for loans and are thus excluded from mainstream financial services. Many are in rural areas beyond the reach of banking services.

The MFIs plug the gap by offering microcredit to these individuals. Now the private sector is being tempted onboard with the promise of benefiting from the extensive networks and infrastructure they have built up.

Driving Swiss policy

The idea that the world of business could help solve the problems of developing nations is one that drives Swiss development policy.

Walter Fust, head of the Swiss Agency for Development and Cooperation (SDC), says that he has been a keen believer for the past decade in the adage of “poverty alleviation through business”.

The SDC already invests SFr25 million ($20.7 million) a year in the microfinance sector in around 20 countries.

Fust sees microcredit playing a vital role in getting the tsunami-hit areas of southeast Asia back on their feet.

He told swissinfo that developing nations have frequently asked Switzerland to participate in microfinance projects because of the reputation of the Swiss financial sector.

Fust added, that despite the success of MFIs, 80 to 90 per cent of poor households and small enterprises around the world still had no access to financial services.

“The main constraints for private sector [involvement] have been the risks and high costs,” said Fust, adding that he believed this was just an excuse.

The real reason, he explained, was the “lack of a clear engagement and strategy to serve the poor”.

To help the Swiss private sector jump on the microfinance bandwagon, the SDC and the State Secretariat for Economic Affairs have formed a partnership with a Zurich-based social-investment platform, responsAbility.

The initiative’s shareholders include four Swiss financial institutions: Baumann & Cie, Credit Suisse, Alternative Bank and Swiss Re.

Acceptable risks?

responsAbility has set up the Global Microfinance Fund, targeted at the socially minded investor, who is interested in a combination of moderate financial returns and social benefits. Generating a fixed income, the portfolio consists of direct loans to MFIs.

For Klaus Tischhauser, responsAbility’s managing director, the private sector has a clear role to play.

“Private investors are needed to take over from the public sector where the risk is acceptable,” said Tischhauser.

Proponents say that the private sector cannot afford to stay out of what is seen as a fast-growing industry with a vast client base.

Added to this are the limited credit risks – the loan repayment rate for microcredit stands at nearly 100 per cent.

And the icing on the cake: businesses get to help stamp out poverty.

Little goes a long way

responsAbility estimates that a loan of SFr100,000 ($84,000) to an MFI for a term of five years would result in microcredits worth SFr1 million.

“This [could lead to] a sustained improvement in the lives of around 10,000 microenterprises and indirectly in the lives of around 40,000 family members,” said Tischhauser.

One of responsAbility’s advisers is Geneva-based Blue Orchard, which says that it sees “no contradiction between social impact and commercial investments”.

This for-profit asset manager says its activities prove that it is financially worthwhile pouring funds into MFIs.

It manages the Dexia Micro-Credit Fund, said to be the first private worldwide and fully commercial microfinance investment fund.

With total assets of $58 million, the fund targets MFIs with short-term debt in 20 countries; so far, none has defaulted and there has even been a net return on its investment.

swissinfo, Faryal Mirza

Key facts

Microfinance refers to loans, savings, insurance, transfer services and other financial products for low-income clients.
Microcredit is a small amount of money loaned to a client by an institution often without collateral.
There are some 500 million borrowers worldwide.
Microenterprises make up 80% of all businesses in developing nations.