The Challenge And The Response

According to the United Nations, only 5 percent of low-income households around the world have access to financial services, with most of such access provided by the informal sector rather than the formal banking system. Nearly three billion people around the world lack access to basic financial services, including some 103 million out of the 110 million poorest people in China, and some 900 million of the 1.1 billion people in India. Out of a population of almost 744 million, only 30 million people have access to financial services in sub-Saharan Africa. Less than 6 percent of people in the United Republic of Tanzania have access to a bank account and the number of loans per 1,000 people in Uganda is six. This implies that a very large underserved low- to middle- income population exists and lacks access to financial services to accumulate their savings and build their businesses. Quite often, the financial services that are available to the poor, such as money lenders, are exploitive in terms of cost and risk and, in the end, leave the consumer in a worse situation.

Small and medium size enterprises (SMEs) in developing economies are a major source of non-farm income and employment. In contrast to high income countries where SMEs represent 51.5 percent of GDP, SMEs in low income countries only comprise 15.6 percent of the economy. However, the “informal” micro-enterprise sector accounts for an average 47.2 percent of GDP in low income countries, but just 13 percent in high income countries. Growth of SMEs is increasingly viewed as a route to grow the wealth of local communities and increase the income of employed workers (SMEs typically employ anywhere between 10 to 250 workers, with unskilled workers often coming from poorer backgrounds). Lack of access to capital hinders the growth of the sector. Small business lending provides loans to SMEs in order to address their financial needs for asset acquisition or working capital.
 
ShoreBank developed an approach to small business lending domestically in the U.S. which was applied successfully to many emerging economies. Exchange is able to leverage 30 years of expertise in community development banking by calling on employees of ShoreBank and ShoreBank International (ShoreBank’s international consulting arm) to provide capacity building services to its client institutions.

Microfinance

Microfinance is the supply of loans, savings, and other basic financial services to the poor. Financial services needed by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services. This diverse range of financial instruments helps the poor expand their businesses, build assets and stabilize consumption. Microfinance services are designed to help the poor gain the financial help they need for investing in their businesses, households, communities, and most importantly, in their children as a means to break the poverty cycle.
 
Microfinance institutions worldwide are committed to providing financial services to the low income population. Providers of financial services to the poor include donor-supported, non-profit non-government organizations (NGOs), cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; wire services; and post offices. These institutions are financed through either their own savings operations or through loans, investments and grants from donor agencies, commercial and private investors.
 
Studies from Microfinance Information Exchange, Inc. (MIX) indicate that based on available data, there are 2,192 MFIs registered with MIX, representing 77 million borrowers in 101 countries. Furthermore, data shows that microfinance institutions are able to generate positive returns, making this a sustainable method of helping the poor and generating profits. MFIs have shown that the poor repay their loans and are willing and able to pay interest rates that cover the costs of providing the loans.
 
Exchange believes that microfinance and small business finance are parts of a continuum. Larger MFIs are increasingly venturing into the lower end of the small business arena, and banks are often looking to downscale to microfinance. Exchange is focused on building the capacity of banks that are engaged in both of these markets, recognizing that the operational challenges and capacity needs are surprisingly similar.

Other Industry Resources

• Microfinance Gateway
• Development Gateway Portal
• Consultative Group to Assist the Poor
• Microfinance Information Exchange, Inc.
• International Finance Corporation: Financial & Private Sector Development
• Small Enterprise Development Journal