Innovation
Global Investor Focus, 02/2007 Credit Suisse
Global Investor Focus, 02/2007
Credit Suisse
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GLOBAL INVESTOR FOCUS <strong>Innovation</strong> — 23<br />
enabling environment so that financial<br />
institutions and technology providers can<br />
work. That generally involves legislation<br />
policy – the legal environment as well as<br />
the regulatory environment. Governments<br />
must create an environment where fair<br />
competition can take place on a level<br />
playing field and where there is accountability<br />
and transparency both on the public<br />
sector side and on the private sector<br />
side. In addition, governments can remove<br />
constraints, which the private sector players<br />
frequently see in terms of the regulatory<br />
environment or in the costs of doing business.<br />
On the other hand, governments<br />
should generally avoid extending credit directly<br />
to retail customers because that<br />
frequently becomes a political process and<br />
can also squeeze out the private sector<br />
if subsidies and other uneconomic activities<br />
are used for political purposes. That is<br />
not to say, however, that governments<br />
should never be involved in direct lending.<br />
Nor does it mean that governments cannot<br />
act ahead of the private sector, particularly<br />
where social problems need addressing<br />
and where purely commercial or purely<br />
private activities wouldn’t be able to manage<br />
effectively. A good example is rural areas<br />
that are very difficult to get to, or encouraging<br />
agricultural activities that may not be<br />
economically viable for the private sector<br />
alone. These types of subsidies or<br />
interventions by governments should be<br />
few and far between, and generally<br />
governments should avoid participating<br />
directly, unless it is necessary to encourage<br />
or stimulate private sector activity.<br />
The government plays a very important<br />
role in encouraging financial services<br />
infrastructure, payments systems, settlement<br />
systems, money transfer systems,<br />
and telecommunications systems. In these<br />
areas a variety of economic models<br />
may be necessary to establish the<br />
infrastructure to allow microfinance to<br />
function smoothly.<br />
How can we as average citizens and<br />
investors get involved? And what do you<br />
think about large institutions involved<br />
in microfinance on behalf of their clients?<br />
Richard Weingarten: There are large<br />
institutions, including Credit Suisse, who<br />
are providing vehicles for private individuals<br />
to put money into professionally managed<br />
funds, that will then lend those funds<br />
to microfinance institutions. This is probably<br />
the best way for individual people to<br />
get involved. I would caution individuals<br />
not to try to get involved in making microfinance<br />
loans directly or finding microfinance<br />
institutions on their own to support.<br />
It is a very difficult area, in which it is<br />
useful to have professional help. Diversification<br />
of microfinance institutions is a very<br />
important principle, so individual investors<br />
working through private money managers<br />
have an extremely good way of developing<br />
a diversified investment portfolio.<br />
How has microfinance changed the communities<br />
in the areas where you have<br />
worked?<br />
Richard Weingarten: Historically,<br />
microfinance lending has been geared<br />
towards women. And when women are the<br />
recipients of loans they frequently utilize<br />
the funds that they receive for their families.<br />
Extra income that comes in usually<br />
goes on food and improving the nutritional<br />
condition of young children and also<br />
Credit Suisse and microfinance<br />
In microfinance, loans that are often as small as USD 50 are granted to very<br />
small businesses in developing and newly industrialized countries. This enables<br />
these businesses, which are frequently run by women, to become<br />
firmly established or to significantly increase their profitability. In 2003, Credit<br />
Suisse and other financial services providers launched responsAbility Social<br />
Investment Services AG, which bridges the gap between the financial market<br />
and development cooperation. The company manages two investment funds;<br />
the Microfinance Leaders Fund, just launched in the end of 2006, and the<br />
Global Microfinance Fund. Microfinance institutions in the responsAbility<br />
portfolio generated funding for nearly 200,000 micro-business ventures.<br />
The Social Performance Report, published by responsAbility, shows that<br />
the clients supported by microfinance are able to significantly improve their<br />
personal circumstances and standard of living.<br />
www.credit-suisse.com/microfinance, www.responsAbility.com<br />
towards allowing children to attend schools.<br />
Consequently, those two benefits are<br />
also very important social benefits. Microfinance<br />
has managed to even out families’<br />
cash flow so that economic shocks or<br />
unexpected interruptions in cash flow are<br />
much more easily overcome. This has<br />
a very beneficial social and economic purpose:<br />
it makes life more balanced and<br />
it becomes easier to plan for the future.<br />
Generally, in the countries where<br />
we work, people are living on a dollar a<br />
day. If they get to two dollars a day<br />
as a result of microfinance, that is a very<br />
big improvement in their lives. And if<br />
people can get to three or four dollars, they<br />
have major improvements in their social<br />
conditions and the way in which they live<br />
with their families. So, it does not take<br />
much – that’s one of the beauties of<br />
microfinance. A small amount of money<br />
can go a long way in making a great<br />
improvement.<br />
What is the most interesting development<br />
in microfinance that you see today?<br />
Richard Weingarten: The most important<br />
innovation in microfinance is technology.<br />
It will reduce transaction costs and<br />
help to reach rural areas where there is<br />
none of the roads and other infrastructure<br />
necessary to tie people to the markets.<br />
There is excellent work being done in Latin<br />
America, as well as in Southeast Asia:<br />
technology facilitates access to a broader<br />
range of financial services and it also<br />
helps to reach illiterate people, because<br />
they can utilize those technologies to do<br />
financial services transactions even if they<br />
can’t read or write. The most important<br />
innovations will take place in mobile telephony,<br />
providing cheap access for people<br />
in rural areas that otherwise would not<br />
have access to financial services. There is<br />
also a lot of room for innovation in the development<br />
of new products and services. A<br />
lot of interesting work is under way in microinsurance<br />
where new credit and savings<br />
products are being developed. Here,<br />
the private sector can play an important role.<br />
Another field of innovation lies in the<br />
area of remittances, in turning remittance<br />
flows into development products. Here<br />
again, the private sector might think<br />
of ways to take large flows of money moving<br />
between developed and developing countries<br />
and turn them into development tools,<br />
so that they can help with societal<br />
development, rather than simply being of<br />
benefit to individuals.