MONEY IS THE OXYGEN FOR ENTREPRENEURSHIP” How microfinance can help those otherwise left behind By Nicholas K. Smith, OPEC Fund MICROFINANCE “
A welder in Colombia, a baker in Kenya and a carpenter in the Philippines – people use their skills in different ways to support their communities with goods and services, satisfying basic needs and creating room for growth. One man’s or woman’s talent can quickly develop into a lifeline for others: “Entrepreneurship”, it has been said, “knows no borders”. Access to finance, however, unfortunately does. Micro-sized enterprises, which can have fewer than 10 employees, have very different financing needs than a company many times their size. They may borrow smaller amounts, but servicing micro- enterprises takes no less groundwork, risk appetite and regulatory clarity. Micro, small and medium-sized enterprises (MSMEs) are by far the most frequent form of businesses in developing countries. In Peru, for example, they account for 98 percent of all private enterprises, contributing 42 percent of GDP and accounting for 60 percent of employment. The International Finance Corporation (IFC), the private sector arm of the World Bank, estimates the total of MSMEs in developing countries to be more than 165 million. The demand for financing is huge. According to IFC, 65 million MSMEs have unmet needs of US$5.2 trillion. In different terms, that amount is 1.4 times the present amount of global lending to small businesses. The financing gap varies from region
to region: East Asia and the Pacific region have a greater need to catch up than Europe and Central Asia, for example. Worldwide, significantly more than half of all registered MSMEs, along with informal enterprises, do not have access to traditional forms of credit. Microfinance offers a pathway into credit access for MSMEs by providing lending types usually not offered by traditional banking such as smaller, short-term loans that sometimes do not offer collateral or are group-based. Banking the “unbanked” started as a charitable effort. Muhammad Yunus is considered the father of microfinance. In the 1970s, a drought in Bangladesh and its devastating aftermath prompted the economist to think of ways to lift his country out of poverty. A US$27 pilot loan to a group of 42 families led him to later found Grameen Bank, the world’s premier microfinance institution. In 2006, Yunus won the Nobel Peace Prize for his efforts. “In 1974, I found it difficult to teach elegant theories of economics in the university classroom in the backdrop of a terrible famine in Bangladesh,” Yunus said in his Nobel Prize acceptance speech. “Suddenly, I felt the emptiness of those theories in the face of crushing hunger and poverty.” The Grameen model showed that microcredit can yield more than merely micro results. Recognizing the work that the “Banker of the Poor” had sparked, the United Nations designated 2005 as the International Year of Microcredit.
The OPEC Fund strongly supported and quickly adopted the concept of microfinancing. Over the years numerous loans to microfinance institutions for on-lending to local clients were provided. The OPEC Fund also entered into a long-term engagement when it signed a US$20 million investment in the Microfinance Enhancement Facility (see box) in 2009 and committed a further US$20 million in 2014. Launched in the aftermath of the global financial crisis the facility provided much-needed liquidity and affordable credit at a crucial time for the world economy. Tareq Alnassar, OPEC Fund, Assistant Director-General, Private Sector and Trade Finance Operations, says: “This engagement demonstrates how we can act counter-cyclical in direct response to our partners’ urgent needs. The facility was also a great example of international cooperation as we joined forces with IFC
and Germany’s Kreditanstalt fuer Wiederaufbau as well as the Austrian development bank OeEB and its Swedish peer SIDA. It shows that also in microfinance the saying is true: ‘The whole is greater than the sum of its parts.’” The World Bank’s
Global Findex Database 2021 report presented
Mohammad Yunus, the father of microfinance
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