Gates grant to aid Redmond-based Unitus in improving microfinance

Oct 2006
United States , October, 20 2006 - Microcredit, giving tiny loans to very poor people to help them build businesses, has reached millions of people around the world since the concept was pioneered by Bangladeshi economist Muhammad Yunus, winner of this year's Nobel Peace Prize.

Yet most people living on less than $2 a day still do not have access to microcredit or to any conventional financial services, including insurance or savings accounts.

A new initiative between the Bill & Melinda Gates Foundation and Redmond-based Unitus seeks to strengthen and expand those services by making the business of microlending more efficient and competitive. The Gates Foundation has given Unitus, a nonprofit that acts as a consultant and investment bank for microlenders, a $1.5 million grant over three years to look for ways to improve microfinance, starting in India and Latin America. Microlenders include credit unions, cooperatives, commercial banks and nongovernment organizations making loans that are usually less than $100. Borrowers — typically women operating shops or raising livestock — are organized into small groups to provide support for individuals as well as peer pressure. If one member can't repay the loan, the entire group is penalized. Repayment rates are higher than 95 percent, Unitus says.

Despite success stories of how loans can help lift people out of poverty, one major criticism is that the interest rates charged borrowers are too high. Annual rates exceeding 60 percent are not uncommon. Higher interest is related to the higher cost of administering small loans.

Governments in Uganda and India have moved to cap interest rates recently, accusing local microlenders of exploiting desperate borrowers. Many microfinance supporters argue that imposing a rate ceiling could drive institutions out of business or from the country, cutting off any reliable credit source for the poor. By identifying ways microlenders can reduce costs, the Gates-Unitus project ultimately aims to lower rates for borrowers, said Gates Foundation program officer Priya Jaisinghani.

"This is a great opportunity for us to learn about microfinance institutions and ways to make the delivery of financial services more effective and more efficient," she said. "I think the interest rates will fall with competition, with technology and with gains from economies of scale."

Four financial analysts from Unitus will begin by visiting several microlenders in India. They plan to study the entire microloan process, from the client's initial application to the bank's management of cash.

Unitus was started in 2000 by former Microsoft executive Mike Murray, who spent a week with Yunus at his headquarters in Bangladesh in 2001. Unitus aims to create a new business model to speed development of microfinancing by opening it up to investors, raising a much larger pool of capital than donations alone. Unitus charges a fee to guarantee loans for its microfinance partners and offers a modest return to its own investors.

Around the world, it has 10 microfinance partners that charge borrowers between 26 and 75 percent annually. This is comparable with local credit-card interest rates and far lower than rates charged by black-market money lenders, said Howard Brady, Latin America relationship manager at Unitus.

Managing microloans is labor intensive. The administrative cost of making $100 loans to 3,000 different borrowers is much higher than managing one loan of $300,000, Brady said. One idea to improve the system may be to organize borrowers into larger groups, so that a single credit officer in India can visit 1,000 clients a week instead of 600, he said. In some cases, staff costs make up half of the microlender's overall budget, so automating processes could save money. Unitus plans to study how technology can make a difference in recording payments, tracking loans and sharing information among lenders.

"Let's say we introduce a faster way of processing loans in the field," Brady said. "Maybe it involves some kind of technology such as a handheld device, cellphone or laptop computer instead of handwriting numbers back and forth."

Both Brady and Jaisinghani said they are encouraged by Bolivia's example. Interest rates there have fallen from about 60 percent 10 years ago to less than 30 percent today, primarily because of increased competition, Brady said. It's useful to remember that interest rates were also very high in the U.S. 50 years ago, said Jaisinghani. "In a competitive, thriving financial system, those rates go down."


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