General Board's Investments in Microfinance Help to Advance International Economic Development and Peace
Over the past year and a half, the General Board of Pension and Health Benefits (General Board) has invested approximately $50 million in microfinance. We believe our microfinance investments increase opportunities for some of the world's poorest citizens and, in doing so, provide our participants with market-based investment returns commensurate with risk.
What is microfinance?
Microfinance is the provision of financial services—primarily lending, savings and insurance—to persons who are normally prevented access to such services because of their lower economic status.
Why is microfinance needed?
Approximately 3 billion people in the world live on less than $2 per day. The poorest of the world's poor historically have been inadequately served by financial institutions. Their inability to financially improve their situation could be due to various factors, such as:
- lack of a safe place to store money,
- lack of insurance,
- costly or nonexistent housing,
- high interest rate financing with sometimes unscrupulous terms, and/or
- difficulty in sending money to their home countries from abroad.
The countries in which these people reside often complicate matters with high or volatile inflation rates, missing legal frameworks and inadequate regulation of financial institutions.
What is the history of microfinance?
Microfinance has been evolving since the 1970s as an alternative model by which the poor can receive financial services. In 1976, Professor Muhammad Yunus, head of the Rural Economics Program at the University of Chittagong in Bangladesh, launched an action research project to make small, uncollateralized loans to local villagers. He named his project the Grameen Bank Project. (“Grameen” means “village” or “rural” in the Bangla language.) Similar projects began concurrently in Brazil.
The Grameen Bank Project proved that borrowers could be relied on to pay back the loans. The bank remained sustainable and profitable, and it evolved into an independent bank in 1983. Today, Grameen Bank is 90% owned by its borrowers and 10% owned by the Bangladesh government. Grameen Bank recently reported that it has 6.6 million borrowers, and over 96% of them are women. It has loaned a cumulative $5.7 billion since inception, and it has a 98.85% rate of recovery on those loans. Grameen Bank's positive impact on helping its clients rise from poverty has been documented in several independent studies.
In October 2006, the Nobel Peace Prize was jointly awarded to Professor Yunus and Grameen Bank. “Lasting Peace cannot be achieved unless large population groups find ways in which to break out of poverty,” the Nobel Committee said in its citation. “Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development….Development from below also serves to advance democracy and human rights.”
How are microfinance services provided today?
Grameen Bank is one of thousands of microfinance institutions now in existence, and lending is their most active and visible work. Different business models exist, but many microfinance institutions use group lending, small loans, short terms and frequent payments to encourage repayment. In group lending, six to eight borrowers typically guarantee each others' obligations. If one borrower does not repay, the group is responsible for the payment and is restricted from borrowing additional funds. In this way, peer pressure encourages repayment.
Frequent loan monitoring, as well as frequent payment collection from remote areas, often results in high business costs for microfinance institutions. To operate profitably, many charge their borrowers interest rates ranging from 30% to 70% per year. While these rates seem high compared to U.S. interest rates, they are significantly lower than the 300% to 3,000% annual interest rates sometimes charged by informal moneylenders, in the absence of microfinance institutions. Additionally, studies have shown that the rate of return that the poor can earn from businesses funded by these loans is typically much higher than the interest rates charged by microfinance institutions. When quality microfinance services are offered, borrowers generally take advantage of them. As microfinance is becoming more prevalent and competitive, microfinance institutions have been investing in technology and infrastructure to allow them to operate more competitively and less expensively.
How are microfinance initiatives financed?
According to industry estimates, of the approximately 3 billion people who could benefit from microfinance services, about 500 million are currently served. Many microfinance efforts to date have been supported by U.S. and foreign government grants and loans, as well as private donations.
Donor and subsidy capital is not unlimited, though. In order to grow enough to serve its market, the microfinance industry needs to become more self-sufficient in financing. Recently, structured financings for microfinance institutions have been developed that offer market-rate returns to investors that are commensurate with risk. The General Board has participated in three of these transactions. In each case, we participated as a lender to an entity that provides or enables funding to selected microfinance institutions. Our assurance of subordinate repayment from the microfinance institutions is enhanced by equity investors and lenders. For example, in one of the transactions, we received a partial guarantee from a government development agency.
Our participation in these transactions has reached more than 50 microfinance institutions and has benefited more than 1 million people. We believe that these transactions are paving the way for more in the future. Ultimately, microfinance institutions may be able to access the public financing markets in order to meet demand.
In summary...
Microfinance has taken great strides in reducing poverty and improving the lives of the world's poor, but it has the potential to accomplish much more. Beneficiaries of microfinance increase their own economic self-sufficiency and are better able to provide for the health care and education of their families. The General Board is among the first institutional pension funds in the U.S. to make meaningful investments in this area. Our financial participation in microfinance has enabled a social good, while providing investment returns to participants commensurate with the risk level inherent in the transactions. We hope that these private-market transactions will pave the way for increased financing to the microfinance industry—initially through private, but ultimately, through public, financial markets.
About the General Board
The General Board of Pension and Health Benefits is a not-for-profit administrative agency of The United Methodist Church, responsible for the general supervision and administration of the retirement, health and welfare benefit plans, programs and funds for more than 66,000 clergy and lay employees of the Church.
The General Board manages and invests over $14 billion dollars in assets.
As a socially responsible investor, the General Board is actively involved in shareholder advocacy, proxy voting, portfolio screening and community investing.
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