U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

56–243 PDF 2010

THE STATE OF GLOBAL MICROFINANCE: 

HOW PUBLIC AND PRIVATE FUNDS CAN 

EFFECTIVELY PROMOTE FINANCIAL 

INCLUSION FOR ALL 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INTERNATIONAL MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

JANUARY 27, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–100 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON INTERNATIONAL MONETARY POLICY AND TRADE

GREGORY W. MEEKS, New York, Chairman 

LUIS V. GUTIERREZ, Illinois 

MAXINE WATERS, California 

MELVIN L. WATT, North Carolina 

GWEN MOORE, Wisconsin 

ANDRE ́ CARSON, Indiana 

STEVE DRIEHAUS, Ohio 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

GARY G. MILLER, California 

EDWARD R. ROYCE, California 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

MICHELE BACHMANN, Minnesota 

ERIK PAULSEN, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

January 27, 2010 .............................................................................................. 1 

Appendix: 

January 27, 2010 .............................................................................................. 35 

WITNESSES 

WEDNESDAY, JANUARY 27, 2010 

Annibale, Robert, Global Director, Citi Microfinance, Citi .................................. 17 

Cheston, Susy, Senior Vice President, Policy, Opportunity International .......... 11 

Diouf, Wagane, Managing Partner, Mecene Investment ...................................... 8 

Rhyne, Elisabeth, Managing Director, Center for Financial Inclusion at 

ACCION International ........................................................................................ 14 

Terry, Donald F., Senior Fellow, Morin Center for Banking and Financial 

Law, Boston University School of Law; Former Managing Director, Multilateral Investment Fund (MIF) ........................................................................... 22 

von Stauffenberg, Damian, Chairman and Founder, MicroRate ......................... 19 

APPENDIX 

Prepared statements: 

Annibale, Robert ............................................................................................... 36 

Cheston, Susy ................................................................................................... 45 

Diouf, Wagane ................................................................................................... 51 

Rhyne, Elisabeth .............................................................................................. 55 

Terry, Donald F. ............................................................................................... 60 

von Stauffenberg, Damian ............................................................................... 65 

(1) 

THE STATE OF GLOBAL MICROFINANCE: 

HOW PUBLIC AND PRIVATE FUNDS CAN 

EFFECTIVELY PROMOTE FINANCIAL 

INCLUSION FOR ALL 

Wednesday, January 27, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON INTERNATIONAL

MONETARY POLICY AND TRADE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:27 p.m., in room 

2128, Rayburn House Office Building, Hon. Gregory W. Meeks, 

[chairman of the subcommittee] presiding. 

Members present: Representatives Meeks, Watt, Carson, Maffei; 

Miller of California, and Paulsen. 

Chairman MEEKS. This hearing of the Subcommittee on International Monetary Policy and Trade will come to order. 

We will have opening statements first, and without objection, all 

members’ opening statements will be made a part of the record. I 

will take 5 minutes, Mr. Miller will take 5 minutes, and for the 

rest of the time, we will give 3 minutes for opening statements in 

order of seniority. 

We are delighted to have the expertise witnesses who are sitting 

at the witness table this afternoon, all of whom I will introduce 

shortly, but who come with great knowledge. I am anxious to hear 

their testimony. I think we are on the path of some good things in 

the future. We thank you for being here. 

First, let me say it is my hope today that today’s hearing will 

broaden the manner in which we discuss and consider microfinance. This hearing will be just the first of what I hope will be 

a series of hearings on mobilizing private capital to achieve international development. 

This series will look at access to financial services, relevant regulatory oversight, and the appropriate role of public and multilateral 

institutions in laying the foundation to mobilize private capital and 

the private sector to benefit development. 

Microfinance is a great example of what is possible. Early in the 

development of this industry when visionary leaders like Muhammad Yunus were redefining financial services for the poor, nonprofits and the bilateral and multilateral agencies invested a significant amount of resources to spear development of this industry, 

promoting innovation, investments, and outreach. 

2 

I had the privilege—along with a number of other members of 

this committee, Mr. Watt in particular—of visiting a microfinance 

institution in Rwanda last August, visiting the institution, speaking with the management and employees of this facility, witnessing 

the use of biometric systems, and engaging in discussions with clients. 

It was not just informative, but inspirational and generally uplifting. The visit confirmed the exceptional achievements and potential of microfinance. 

However, as the industry matures and it becomes increasingly 

diversified in terms of services, business models, and sources of 

capital, questions and concerns inevitably emerge. 

These include concerns about mission drift, social impact, 

benchmarking, capital crowding out effects, market distortions, and 

insufficient development of peripheral financial services. 

We hope to begin addressing these questions during today’s hearing and other questions about consumer protection, social impact, 

transparency, sustainability, regulatory oversight, and the moral 

hazard also emerging, that will be considered in future hearings. 

I will challenge all of us to think about these questions from the 

perspective of the Financial Services Committee. For me, it is a 

challenge to myself because I serve on both the Financial Services 

Committee and the Foreign Affairs Committee, but we want to 

make sure that we focus on this as the Financial Services Committee, not the Foreign Affairs Committee, not the State Department, not USAID. 

The work done there is critical and has been very successful in 

many ways, and I will continue to advocate for it in my capacity 

when I am on the other committee. 

In this subcommittee, we are going to focus on it in the context 

of financial services. 

I would like to consider the appropriate role for the development 

banks, regulatory oversight and financial reforms, consumer protection, and a need for developing the broader financial ecosystem, including currency, hedging, credit bureaus, relevant capital advisory 

services, middle and senior management capacity building, etc. 

A significant concern that I have when discussing microfinance 

is that industry leadership will be tempted to delay dealing with 

known issues in the hope that they will resolve themselves quietly, 

or generally an aversion to external scrutiny, yet doing so can put 

them the entire industry and sometimes the broader economy at 

risk, as happened here and around the world with the global financial crisis. 

Specific examples of some of these concerns that we will have to 

consider include transparency issues of some of the peer-to-peer 

lending platforms, for instance, reports of currency risks threatening entire investment portfolios, reports of abusive practices, 

moral hazard emerging with securitization, overindebtedness and 

financial literacy, continued assets of credit bureaus in most markets, and conflicting reports of social impact. 

I firmly believe that the microfinance industry and the financial 

services industry more broadly is far too critical a pillar of development to not actively promote best practices and responsible governance at every level. 

3 

The responsible expansion of the financial services industry is 

critical to achieving broader economic development in emerging 

markets. Therefore, let’s indeed give this industry and many of you 

present here today the praise you deserve for the exceptional work 

that you have done and the leadership you have demonstrated. 

Let’s also not shy away from tough discussions. Let’s tackle the 

problems proactively and demonstrate that we understand the 

problems and want to fix them, sometimes by legislation, sometimes by leadership, to avoid putting at risk the gains of the past 

4 decades. 

As a representative from the City that is so great they had to 

name it twice, New York, New York, the heart of the global financial system, the epicenter of the global financial crisis, I assure you 

I know a little bit about that issue and what I am talking about. 

Again, welcome. I now yield to the gentleman from California, 

Mr. Miller. 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. I really 

appreciate you taking the time to have this hearing today. 

This subcommittee and the full Financial Services Committee is 

responsible for oversight of the U.S. participation in multilateral 

development banks and the International Monetary Fund. Much of 

our focus in the past has been on large economic strategies of these 

institutions. 

It remains crucial that we also maintain and focus on the individuals in developing countries in efforts to reduce poverty in the 

microlending markets that have emerged in the developing world. 

This series of hearings promises to give members a better idea 

of what can be done for individuals, families, and small businesses 

and ways we can encourage development in poverty stricken countries in new and innovative ways. 

More than 2 decades ago, a radical idea began circling through 

the investment circle. Poor people, living on perhaps as little as 

$2.00 per day, could be lent small amounts of money for business 

development and they would pay it back in a reasonable amount 

of time. 

Microfinance was born, and as my colleagues and distinguished 

guests know, it has come to refer to a range of financial products 

offered to extremely poor and low-income people. 

Most notably among microfinance institutions and often synonymous with its practice is Grameen Bank in Bangladesh. Grameen 

Bank founder, Muhammad Yunus, began by setting up lending circles of 10 or so women in small rural towns and making small 

loans, with each woman assuming a part of the risk. 

Mr. Yunus has since won the Nobel Prize for his efforts which 

speaks volumes in the efforts microfinance has had with impoverished people. 

As of January 2008, there were 3,500 microfinance institutions 

who reported reaching over 150 million clients. Among the poorest 

of these clients, over 80 percent were women. Traditionally, funding has been dominated by donors and development finance institutions as well as funding from international financial institutions, 

such as the U.S. Agency for International Development. 

However, because of the microfinance industry’s continued success, interest has developed in the private market for developing a 

4 

commercially viable enterprise that promotes the goal of microfinance. 

These new efforts often are technology driven, with PDAs or cellular phones allowing easy access and organization in rural society. 

Increasingly often, they are funded on a for-profit basis by investors enhancing social values but still wanting to make money and 

demanding sound credit assessment for borrowers and lenders 

alike. 

Continued success in the microfinance market has yielded a set 

of very important questions. The client range for the institutions 

range from individuals below the poverty line to small- to mediumsized entities employing between 10 and 250 employees. 

One of the questions I hope to address today is which client 

range is the most effective way of tapping poverty in the developing 

world. 

Some additional challenges are presented to us today and I hope 

that we will have the opportunity to discuss them. 

Current data available remains unclear about how government 

and government institutions can most effectively maximize the impact of microlending. We have seen a positive impact on the developing world that government institutions can have. However, it remains clear that more must be done than simply writing a check. 

We must determine how to foster private enterprise in regions 

and economic conditions that are vastly underserved by financial 

services that many Americans consider standard. 

Among the problems we are faced with is availability of credit 

rating agencies. While a credit rating agency market has developed 

in areas served by microfinance, it remains a barrier to private 

entry into the market where protection of the borrower and the 

lender are paramount, as in this country. 

Additionally, the availability of well-trained employees and managers is sparse, and training and preparing these individuals who 

lack technical expertise can be time consuming and expensive to 

the point of deterring private investment. 

These issues among others make private capital difficult to attract. A financing institution must demonstrate a viable return 

when seeking capital and without reliable credit information and 

able personnel, this task can be daunting. 

One of the things I would like the panel to address is the question of the most effective way for the government to provide seed 

money to set up a viable infrastructure and regulatory infrastructure that will allow private enterprise to assume control of microfinance enterprises by developing countries. 

I would like to thank the chairman again for having this hearing. 

I am looking forward to the testimony of the witnesses, particularly 

Mr. von Stauffenberg and Mr. Terry, who have been pioneers in 

the field of microfinance. I look forward to all the testimony in future hearings on the subject, and I yield back the balance of my 

time. 

Chairman MEEKS. Mr. Watt? 

Mr. WATT. Thank you, Mr. Chairman. I know we want to get to 

the witnesses and I will not take the full time for an opening statement. 

5 

I did want to say how important it was to travel with the chairman to Rwanda to visit a microfinance entity there, and remind 

him that we also stopped at one in Senegal that was headed by the 

wonderful performer, Youssou N’Dour. That was a wonderful experience. 

I think rightfully the chairman and the ranking member have 

had a microfinance hearing focused on micro issues that need to be 

talked about, but I want to put this in a slightly different frame 

here, if you all do not mind. 

I think one of the things that the minority members, racial minority members of this committee have been emphasizing to the 

full committee as we have gone through all of these discussions 

about systemic risk is that is not all about global things. That is 

a micro approach to the way we look at this. 

We have tried to focus the committee on risks that are systemic 

in particular communities that are very much exposed. When we 

talk about microfinance, we have the ability to bring it down even 

to a smaller group of people who are exposed to risks that may not 

create a risk for the entire system of an economy or a financial system, but for the individuals in a household, the individuals in a 

community, the individuals in a city, is no less important for us to 

focus on. 

While we have spent a tremendous amount of time focusing on 

the macro impact of systemic risk, this is a wonderful opportunity 

to refocus our attention on the systemic risks that people incur in 

their daily lives, the smallest of enterprises that need credit, maybe 

a dollar a day to buy some materials to reproduce and sell for 

$1.10, and multiply that and make a profit. 

This is our opportunity to put this in the context of the systemic 

risks that are taking place in small communities both domestically 

and in other countries that are struggling, particularly in Africa 

and some of the underdeveloped countries. While we may not be talking about even a $1,000 loan or $100,000 loan or $1 million loan, it is no less important to the people who are trying to develop these small enterprises and get them 

off the ground to have available to themselves the small amounts 

of capital and financing that are reflected and will be talked about 

today. 

I use this opportunity at a microfinance hearing to put it in a 

macroeconomic context because I think at the end of the day, most 

of the jobs in our country, most of the jobs in Africa and some 

places, certainly all of the jobs in a particular household are created by that micro entity that is there, and we cannot lose sight 

of that. 

I thank the chairman for convening this hearing because I think 

it is as important if not more important than all of the hearings 

we have been having about systemic risk and systemic finance and 

the freezing up of our credit markets. 

I yield back, Mr. Chairman. 

Chairman MEEKS. Thank you. Mr. Paulsen? 

Mr. PAULSEN. Thank you, Mr. Chairman. I want to thank you 

also for holding the hearing today. 

Microfinance is no doubt a strong success story where we have 

seen a tremendous rise actually in popularity over the past decade 

6 

and it is pretty impressive to think that over 150 million people 

worldwide have been helped in some capacity by microfinance. 

I am hoping that the hearing today will offer some insight on 

how we can expand and improve the practice of microfinance. We 

have seen its success certainly in some countries like Bangladesh 

with the well-documented case of the Grameen Bank. There are 

still some other areas that do need help. 

Research shows that microfinance and microenterprise investments in poor women create increased participation in household 

management, families tend to be better off, children are better fed, 

they go to school, and families invest more in their own homes, 

which is important as well. 

There is an entire spectrum of financial services that are targeted at helping the poor, and there are innovative programs 

across-the-board that link informal approaches to much larger, 

more traditional microfinance institutions. 

I believe we must focus microfinance more on the asset building 

in order to create the growth and ultimately that self-sufficiency. 

I am interested in hearing from the witnesses today how we can 

incentivize that basic creating building block in innovative financial systems that can serve well, I think, in providing the crucial 

first rung in the economic ladder to prosperity, and then link them 

to the existing formalized institutions. 

I look forward to the testimony today and thank you, Mr. Chairman. 

Chairman MEEKS. Thank you. Mr. Carson? 

Mr. CARSON. Thank you, Mr. Chairman. Financial markets have 

played a role, a key role, in the development of the rural world. 

There is a strong correlation between reductions in poverty and the 

development of the financial sector. 

Achieving well-functioning financial markets and institutions 

which leverage savings and channel them into productive investments should be a policy priority for governments and development 

financial institutions alike. 

While India and China have witnessed historic progress and 

growth in the past decade, large segments of society remain excluded from their country’s formal financial system. With limited 

access to financial services, this comes at a large cost. 

The strengthening of China and India will impact the way we all 

live our lives, which is clear that this growth needs to be sustainable and this is where financial inclusion is vital. It means not just 

the provision of loans but also a range of products suited for the 

rural clientele which enables and supports those with meager incomes tiding over in tough times and securing their livelihood. 

As the microfinance sector expands out of the not-for-profit sector 

into the commercial sector, we need to ensure the industry enhances their accountability and transparency. 

The range of institutions providing microfinancing cannot develop fully without a regulatory environment conducive to their 

growth. Without such an environment, fragmentation and segmentation will continue to inhibit the institutional transformation 

of microfinance institutions. 

A transparent inclusive framework for regulation will preserve 

the market specialties of different types of microfinance institutions 

7 

and will promote their ultimate integration into the formal financial system. 

Thank you, Mr. Chairman. I yield back. 

Chairman MEEKS. Mr. Maffei? 

Mr. MAFFEI. Thank you, Mr. Chairman. I appreciate you holding 

this hearing. It is extraordinarily important. 

Despite all of the accomplishments of microfinance, and there are 

many, and I know we are going to hear about many of them today, 

there are still huge gaps in the availability of microfinance funding. 

Roughly, only 14 percent of investment capital is estimated to go 

to Africa and Asia combined. The lack of access is particularly severe in sub-Saharan Africa. 

The Financial Access Initiative estimates that 2.5 billion adults 

worldwide still do not have a savings or credit account with a traditional or alternative financial institution. 

Some of the work that I am doing as a Congressman is indeed 

trying to get more microfinance, not in central Africa, but in central New York. That is not what this particular hearing is about, 

but these tools have been used in many settings due to their success. 

Research has shown that when financial services are available, 

in particular to women, there are far reaching benefits for families 

and communities. 

Empowering women is especially helpful in fighting infant and 

maternal mortality, disease, and religious extremism. When women 

have increased participation in household resource management, 

families tend to be better off. Yet, of course, in many countries, 

women still cannot open bank accounts or do any financial transactions without a male co-signer: husband; brother; father. 

Moreover, in some areas, women still cannot hold property independently or have any kind of inheritance rights. 

This requires greater creativity on the part of financial institutions since these things are so often used for collateral and other 

purposes to get larger loans. 

I do hope that the panel will address what their organizations 

are doing to ensure these kinds of barriers preventing women from 

accessing formal financial services are removed, and also what they 

would recommend that the United States Government do, and we 

as this committee do, to ensure that policies that specifically assist 

women are put into place. 

I thank you again for holding this hearing, Mr. Chairman. 

Chairman MEEKS. Thank you. I neglected in my opening statement to say thank you to Ranking Member Miller and his staff for 

helping us to put this together. You were very helpful in working 

together. 

Our first witness is Mr. Wagane Diouf, who is the managing 

partner of Mecene Investment, the fund manager of AfriCap Microfinance Fund. He is responsible for managing the operations and 

implementing the Fund’s investment strategy. 

Mr. Diouf joined Mecene Investment at its inception in late 2001 

as an investment officer. He contributed to the design of the Fund’s 

strategy and to the building of the portfolio. 

He is a board member of Equity Bank Ltd. in Kenya, First Allied 

Savings and Loans in Ghana, and Socremo in Mozambique. 

8 

Mr. Diouf was promoted to managing partner in June 2005. He 

joined Mecene Investment after a 14-year career in senior management of technology companies and early stage ventures in Europe, 

North America, and Latin America. 

He holds a Bachelor’s degree in computer science and a Bachelor’s degree in finance from Ecole—my French is terrible—from a 

great institution in Paris. 

[laughter] 

Chairman MEEKS. And an executive MBA from Georgia Institute 

of Technology in Atlanta. 

Mr. Diouf? 

STATEMENT OF WAGANE DIOUF, MANAGING PARTNER, 

MECENE INVESTMENT 

Mr. DIOUF. Mr. Chairman and members of the Subcommittee on 

International Policy and Trade, ladies and gentlemen, thank you 

for providing me with this opportunity to speak to you regarding 

microfinance in Africa and the role that development institutions 

can play. 

This is an exciting moment in Africa microfinance development 

and I look forward to sharing my experiences with you. 

I would like to begin by telling you a story that I think demonstrates the power of investment in microfinance, that microfinance can have on the African Continent. 

In 2001, the fund management company now known as Mecene 

Investment, along with several development finance institutions 

and non-governmental institutions, including ACCION International represented here, launched the AfriCap Microfinance 

Fund. 

It was a $13 million fund dedicated to equity investments in subSaharan Africa. At the time, many doubted that this fund would 

actually achieve its objective of investing in microfinance institutions and rumor has it that many of our investors wrote off the investments shortly after the closing hoping for a social impact but 

not expecting any financial returns. 

Two years later, in 2003, we invested $1.6 million in a small 

Kenyan microfinance institution called Equity Building Society. 

This investment allowed the company to pursue ambitious expansion plans. As equity investors, we played an active role in improving the strategic direction and governance of the company. 

The company went public in 2006 on the Nairobi Stock Exchange 

under the name of Equity Bank. It is now the largest microfinance 

bank in Kenya with 3.5 million clients and a market capitalization 

of approximately $700 million as of December 2009. 

Without a doubt, this is one of Africa’s great microfinance success stories. The Equity Bank experience has helped to prove that 

commercial microfinance in Africa can be spectacularly successful 

and has helped to draw additional private capital into the space. 

AfriCap was recapitalized in 2007 to $50 million. Its shareholders include social investors such as Calvert, Blue Orchard and 

Nordic MicroCap, microfinance networks such as ACCION International, DFIs such as European Investment Bank, Finfund, 

Swedfund, Norfund, etc. 

9 

To date, AfriCap has invested roughly $30 million in MFIs and 

MFI-related technology companies across 17 countries in Africa. 

In 2008, the current and former AfriCap investees disbursed in aggregate $1.5 billion in loans to more than 800,000 borrowers and 

counted as clients more than 4 million savers. It is obvious that 

Equity Bank represents a significant portion of that. Every dollar that AfriCap has invested has attracted $6 in investments from private sources, mainly local investors. 

To fully understand the potential of microfinance in Africa, we 

must consider why development aid has been ineffective to this 

point. Consider a country where the great majority of workers live 

and work in the informal sector. Not only are these people ignored 

by most businesses but government is rendered nearly meaningless. 

It does not collect taxes and its decisions do not influence economic activity. It should come as no surprise then that the development aid it receives often does not reach the people who need it 

the most. 

This is precisely the case in Africa where the informal sector represents between 70 and 80 percent of the population of most countries. 

Unlike traditional banks, microfinance institutions actively serve 

this market in a sustainable manner. Through the extension of financial services to the low-income population, therefore, we create 

a trusted channel to the informal sector. 

Beyond credit, microfinance institutions provide a variety of important services, including savings, insurance, housing finance and 

money transfers. 

As people become financially independent, they begin to hold 

their government accountable and make their voices heard. In this 

way, microfinance effectively promotes democracy by empowering 

the individual. 

Donors and DFIs were instrumental in getting the microfinance 

industry off the ground. As the AfriCap experiment proves, however, microfinance can serve clients profitably. Africa needs to continue to build strong financial institutions that do not require foreign aid. Due to the strong investment returns, the private sector 

is beginning to help build these institutions. 

In my decade of experience in African development finance, I 

have grown to believe that the most appropriate and effective 

method for institutional investors to support the microfinance industry in Africa is through partnerships with dedicated microfinancial intermediaries, namely microfinance investment vehicles. 

These intermediaries play a critical role in the development and 

scaling of the microfinance industry. In addition to injecting capital, microfinance investment vehicles also help management face 

the challenge of rapid microfinance growth. With strong governance 

support and capital investment, microfinance intermediaries can 

spur the development of local and regional companies. 

These companies have a transformational effect on African economies by encouraging local investment, creating employment, and 

exponentially increasing economic activity. 

AfriCap’s experience with Equity Bank is evidence of the promises offered by this approach to development. 

10 

Still, the issues and barriers facing the African microfinance industry remain great. The global financial crisis has taken its toll 

on microfinance banks in Africa, leaving many of them weak and 

undercapitalized. 

Governments and international donors still have an important 

role to play in the development of the industry but they must tread 

carefully to avoid crowding out emerging private sector investments. 

Any contributions offered to public funders must be both incisive 

and catalytic, capable of yielding effects that are proportionally 

greater than the initial investments. 

We have just referred to the benefits of investing in financial 

intermediaries. Beyond these investments, public funders looking 

to support the industry should aim to improve the environment for 

both organic industry growth and for private sector investment on 

the continent, rather than try to pick winners among competing 

MFIs. 

Currently, the three most important industry level interventions 

that grant funding can address include credit bureau development, 

information and technology infrastructure, and management capacity building programs. 

First, credit bureaus. A functioning credit bureau can transform 

a country’s financial sector. By enabling microfinance institutions 

to share information about their clients, credit bureaus help to 

streamline lending processes, reduce overindebtedness among clients, and ultimately increase the overall stability and growth of the 

industry. 

Globally, access to credit bureaus has been proven to cut loan 

processing time, operating expenses, and default rates by more 

than 25 percent. Because sub-Saharan Africa displays the lowest 

rates of credit bureau penetration in the world, the region’s MFIs 

are disadvantaged relative to their global peers. 

Second, donors can fund information and technology improvements. Information and technology has revolutionized the financial 

services industry, greatly reducing the cost of services. 

Unfortunately, many microfinance institutions in Africa lack the 

resources to invest in management information systems, relying instead on paper and spreadsheet based solutions. 

Poor core information and technology systems limit the growth 

and profitability and prevent microfinance institutions from taking 

advantage of innovative technologies, such as branchless banking. 

Funding provided for the development of industry-wide information and technology infrastructure could transform the African 

microfinance landscape. 

The third area that development groups could consider is human 

capital development. A 2008 global survey revealed management 

quality as the global microfinance industry’s most severe risk. The 

problem is magnified in Africa where demand for quality managers 

far outstrips supply. 

When microfinance institutions develop managers, they are often 

poached by commercial banks. Development institutions can help 

by establishing management capacity building programs to help 

train local African microfinance managers. 

11 

The African microfinance industry holds tremendous potential for 

poverty alleviation. While it is developing quickly and beginning to 

attract private capital, there remains a place for development institutions. 

The best way to invest is through private financial intermediaries who understand the market and can provide targeted 

value-added services. 

Additionally, development institutions can benefit the industry 

by helping to improve the microfinance environment such as supporting the creation of credit bureaus, improving information and 

technology systems, and developing human capital. 

Thank you very much for your time. It has been a pleasure 

speaking to you. 

[The prepared statement of Mr. Diouf can be found on page 51 

of the appendix.] 

Chairman MEEKS. Thank you very much. I did not say earlier 

and you were close to the time, but for the rest of our witnesses, 

and I am going to have some leeway, but to stay around the 5- 

minute mark, so that we have time for questions, etc. 

Our next witness to testify today is Ms. Susy Cheston, who is a 

senior vice president for policy at Opportunity International. 

She has previously served as senior vice president for policy and 

research of the Opportunity International Network, overseeing cutting edge research and policy development on client impact and 

transformation, increasing outreach and financial sustainability. 

She joined Opportunity in 1991 as a field director of its newly 

formed Women’s Opportunity Fund pilot project in El Salvador. 

In 1993, Ms. Cheston moved back to the United States to serve 

as the founding executive director of the Women’s Opportunity 

Fund, where she oversaw the development of Opportunity’s Signature Trust Group model. 

She was honored with the title of executive director emeritus of 

the Women’s Opportunity Fund in recognition of her contributions. 

She has written a number of articles on women and microfinance. She also serves as co-chair of the Microenterprise Coalition, made up of leading microfinance networks headquartered in 

the United States. 

The Microenterprise Coalition advocates for high-impact, cost-effective policies on microfinance and microenterprise development. 

Welcome. 

STATEMENT OF SUSY CHESTON, SENIOR VICE PRESIDENT, 

POLICY, OPPORTUNITY INTERNATIONAL 

Ms. CHESTON. Thank you, Chairman Meeks, for the opportunity 

to testify and for your leadership on this issue. Thanks to all the 

members of the committee for your interest. 

I would like to request permission to summarize my written testimony. 

Chairman MEEKS. Without objection. 

Ms. CHESTON. I would like to make three basic points. First, as 

has been said by several of the members of the committee already, 

this is not your grandmother’s microfinance. 

Microfinance is going up market to reach small and medium enterprises. It is going down market to reach even poorer clients. It 

12 

is going into rural areas to address agriculture and agro business, 

and even micro credit is no longer just for enterprise. It is being 

used to address health, water and sanitation, education, transportation, consumer finance, and a number of other issues. 

I know a remarkable woman in Ghana named Vivian Adama. 

She is one of Opportunity’s education finance clients, a poor widow 

who started a little school in her home that now is serving several 

hundred children in poor communities. This was fueled by her 

drive but also by Opportunity’s micro education finance loans. 

VisionFund of World Vision is doing something really remarkable, providing microloans specifically for bikes that can carry up 

to 100 kilograms of products to markets and thousands of entrepreneurs in Tanzania and Zambia are getting their goods to markets faster because of this particular kind of loan. 

A decade ago, microinsurance was virtually unknown, but today, 

14.7 million Africans living on less than $2 a day are covered by 

insurance, an 80 percent increase since 2005. 

MicroEnsure is a wholly owned subsidiary of Opportunity International that provides health, life, property, and weather index 

crop insurance to over 3.5 million clients. 

One of MicroEnsure’s innovations is a health insurance policy in 

India that is cashless at point of service, covers the policy holder, 

spouse and children, has minimal exclusions, covers maternity and 

preexisting conditions from day one of the policy, all for $8 U.S. per 

year. 

Deposit services have increased to 58 million people in just the 

top 100 microfinance institutions. Opportunity’s regulated bank for 

the poor in Malawi has a ratio of six depositors for every loan client, similar to the AfriCap experience. 

Others such as CARE, are innovating with savings approaches 

that reach even poorer clients at a grassroots level. Within 10 

years, CARE plans to reach 30 million of Africa’s poorest people, 

mostly women, with their innovative Village Savings and Loan Associations. Even youth are finally being included through products 

such as children’s savings accounts that are being innovated by 

Save the Children and others. 

Technology, as my colleague has already said, is dramatically 

changing the landscape of financial inclusion. 

Picture branchless banking in Africa in which an ATM is carted 

from village to village on a truck, point-of-sale devices accept deposits and payments, and mobile phones allow customers to make 

electronic transfers of funds. 

In Malawi, poor people have financial identity for the first time, 

thanks to Smart cards using biometric identifiers, as Chairman 

Meeks saw in Rwanda as well. 

CGAP, the microfinance resource center of the World Bank plans 

to bring mobile banking services to 25 million low-income people by 

2012. 

The Gates Foundation is providing funding for 11 million of the 

un-banked to get their first savings accounts using this kind of 

emerging technology. 

In Ethiopia, World Vision plans to dispatch savings officers on 

motor bikes into rural areas just using PDAs. 

13 

Legislation and oversight need to take into account this full 

range of services and delivery vehicles today. 

My second point has to do with the mix of public and private 

funding of microfinance. What we all want to hear is that the U.S. 

Government has done its job and the private sector can take it 

from here. 

I believe that will largely be the case at some point in the future, 

but we are not there yet. There are still gaps in the market that 

must be filled by public funding. One gap is the lack of human capacity to manage the private funds that are available. The Microfinance Capacity Building Act of 2009, H.R. 1987, focuses on building capacity with public funds in order to leverage significant private capital for the poor. 

I would like to offer my sincere appreciation to Chairman Meeks 

for your leadership in co-sponsoring H.R. 1987 along with Mr. 

Boozman of Arkansas. 

The real question is who is still excluded from microfinance programs. Most investment funds reach clients who are not as poor. 

The hardest to reach, those who are most marginalized and in remote areas, or who suffer from some sort of discrimination such as 

ethnic minorities, remain without access to services. Even among 

microfinance providers, larger regulated institutions reach a lower 

percentage of women than smaller NGO providers. 

In many countries in sub-Saharan Africa, less than 10 percent of 

the population has an account with a financial institution. The 

amount of investment capital for Asia and Africa, focusing in just 

on Africa, Africa receives only 6 percent of private foreign investment in microfinance. There are gaps. 

USAID could do much more to fill these gaps by targeting the 

very poor, women, and immature markets, such as those in sub-Saharan Africa, and to respect the focus on financial services that 

Chairman Meeks has laid out. 

USAID could also do much more to leverage public/private partnerships and to incentivize matching funds honoring the sense of 

Congress in P.L. 108–484. 

Microfinance is one of the great success stories, nevertheless, of 

U.S. foreign assistance, and USAID has a strong track record of leverage and sustainability. 

Of the microfinance institutions USAID funded in the 1990’s, at 

least 90 percent of them are still in existence and have grown their 

assets significantly. Many of those were founded by members of the 

Microenterprise Coalition. 

Since 1993, USAID has provided $77 million in grant funding to 

Opportunity International and those dollars have been multiplied 

with investment and donor funds and the deposits of the poor resulting in 3 million loans valued at $2.1 billion in just the 18 partners that received USAID funding—$77 million in grant funding 

leveraging $2.1 billion. 

Today, however, with the influx of investment capital, my view 

is that the Congress should support USAID in focusing on higherrisk programs. 

I will just wrap up with a comment about the World Bank. The 

World Bank, as with USAID, could do much more than it is curVerDate Nov 24 2008 17:45 May 25, 2010 Jkt 056243 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\56243.TXT TERRIE
14 

rently doing. Since 2003, the U.S. Congress has urged the Bank to 

increase resources to support financial access for the very poor. 

In December 2008, 93 Representatives and 21 Senators wrote 

President Zoellick encouraging more investment, including the establishment of a new $200 million flexible grant facility to build 

the capacity of microfinance providers. 

Initial responses were positive but the initiative seems to have 

stalled out. This deserves ongoing conversation with the World 

Bank and with the Treasury Department. 

Thank you. 

[The prepared statement of Ms. Cheston can be found on page 45 

of the appendix.] 

Chairman MEEKS. Thank you. Next, we have Ms. Elisabeth 

Rhyne, who is the managing director of the Center for Financial Inclusion. The Center is a focal point for collaboration among the 

microfinance industry and private sector on industry-wide challenges, including the Smart campaign for client protection in microfinance. 

As senior vice president of ACCION International from 2000 to 

2008, Ms. Rhyne led ACCION’s initial entry into Africa and India, 

directing the organization’s research efforts to develop new financial products and manage the publications in educational activities. 

Ms. Rhyne has published numerous articles and books on microfinance including her new book, ‘‘Microfinance for Bankers and Investors,’’ McGraw-Hill 2009. She also is the co-editor of the New 

World Microenterprise Finance, which provided the introduction to 

microfinance for many of the field’s current professionals. 

She was director of the Office of Microenterprise Development of 

the U.S. Agency for International Development from 1994 to 1998, 

where she developed and led USAID’s microenterprise initiative, 

and her experience includes 8 years living in Africa, consulting on 

microfinance policy and operations for governments and international organizations and microfinance institutions. 

Ms. Rhyne holds a Master’s degree and Ph.D. in public policy 

from Harvard University. She earned a Bachelor’s degree in history 

and humanities from Stanford University. 

Ms. Rhyne? 

STATEMENT OF ELISABETH RHYNE, MANAGING DIRECTOR, 

CENTER FOR FINANCIAL INCLUSION AT ACCION INTERNATIONAL 

Ms. RHYNE. Thank you, Chairman Meeks. I would very much 

like you to have a copy of my book. 

Chairman MEEKS. I would be delighted. 

Ms. RHYNE. Maybe you will even read it some day. 

Let me just start by introducing ACCION. ACCION is a nonprofit founded in 1961 that works in Latin America, Africa, India, 

and China to provide financial services to low-income people. 

ACCION is now serving 3 million borrowers, approximately a similar number of savers, and a total loan portfolio of $3 billion. 

I would just like to mention one of ACCION’s partners, Sogesol, 

a Haitian microfinance institution. ACCION and its entire network 

of partners are coming together now to help Sogesol as it struggles 

to help its own clients rebuild their lives. 

15 

I think the story that is relevant for today about ACCION is the 

story of the key moments in the development of commercial microfinance. ACCION really kicked that off with the creation of 

BancoSol in Bolivia, which was the first commercial bank devoted 

to microfinance, in 1992. That has really been the opening salvo in 

what has been a continual evolution of microfinance from NGO 

roots into what is now a strongly commercial oriented industry. 

I am going to skip over some of the stuff in the testimony about 

the state of microfinance today and the effect of the crisis on microfinance, but I want to turn to two of the key questions that the 

committee is particularly interested in: The first one is the role of 

public versus private funds; and the second one is the question of 

keeping the social mission strong as microfinance becomes more 

commercial. 

The reason microfinance now reaches something like 150 million 

people rather than about 10 million people is because it learned 

how to finance itself from commercial sources. 

Another story of leverage,—and you have already heard a couple 

of stories of leverage—the BancoSol story, is that the USAID and 

IDB put in about $5 million of grant money, into the precursor of 

BancoSol and today, BancoSol has $340 million in loan portfolio, 

and serves 127,000 borrowers and 254,000 savers. This is just one 

more to add to the list of stories about how a relatively small 

amount of foreign assistance money was leveraged, and that is the 

big story of microfinance. 

I would not stand here and suggest that the government should 

put money into BancoSol’s operating expenses or loan capital today 

because the industry has moved on, and moving on challenges the 

public sector to find the new frontier. 

Here is the question: Where is the frontier? I see that the history 

of microfinance has gone through three levels of frontier. I am 

going to call them the absolute frontier, the risk frontier, and the 

market phase. 

If we look at the absolute frontier, that is a time in which things 

are not proven and grant money is needed. At first, microfinance 

was not profitable. Nobody had business models worked out and 

grants were absolutely necessary to fund the launch. 

The risk frontier is the frontier that comes along when profitability is proven but it is not demonstrated strongly and consistently enough to be able to attract private funding, and then the 

market phase is when profitability is both demonstrated, has a 

track record, and clearly private money is able to come in. 

This is the path that microfinance has traced over time, and if 

we look at this path, we see a basic decision rule facing anyone in 

charge of determining where to place public funds: Find the frontier and help push it out. 

In other words, re-deploy public monies to riskier uses and away 

from any activity that can be privately financed. 

The question today is, where is the frontier? I think we have already heard that well expressed by our first two witnesses. 

I am going to put several things into each of the categories. At 

the absolute frontier, where grant funding is still needed, services 

to marginal groups, R&D for new products like savings and microinsurance, R&D for new technology, capacity building in the counVerDate Nov 24 2008 17:45 May 25, 2010 Jkt 056243 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\56243.TXT TERRIE
16 

tries and regions where microfinance institutional structures are 

lagging, industry infrastructure such as credit bureaus and regulatory reform, and financial education. 

At the risk frontier, which is something that I think Damian von 

Stauffenberg will probably talk about a little bit more,—I hope so— 

I would put there equity and debt in the second and third tier, the 

smaller MFI, especially those operating in riskier countries. Mechanisms that help support the entry of private capital such as foreign 

exchange hedging, and standing by as an emergency lender. 

In 2009, when the credit markets seized up, the international financial organizations stepped in and kept finance flowing to many 

MFIs. This was very important. The challenge now is for them to 

recognize that it is time to yield back to the private investors. 

In the market phase, we have debt finance for second tier, some 

of the debt finance for the second tier MFIs, especially those in less 

risky countries, debt and equity in first tier MFIs, and deposits in 

profitable regulated MFIs. 

I am going to skip to look at very briefly the issues of keeping 

the social mission in microfinance. I see three important ways to 

do that as microfinance becomes increasingly provided by the private sector. 

First, social performance management. That means monitoring 

the social activities. The microfinance industry has been working 

very hard on this and has made some progress. 

A newer area is client protection. I really want to urge all of you 

to take a look at The Smart Campaign. This is a worldwide effort 

to get client protection principles embedded in the fabric of the 

microfinance industry in all kinds of different ways, including tool 

development and resources. We are going to continue to push this 

campaign and work with people in this campaign until we really 

have succeeded in getting it to be part of the DNA of the industry. 

Finally, social investment. I would just say there is a tremendous 

desire on the part of many investors across the United States to 

invest in ways that have social good attached to them, and one of 

the things that I think the committee could really help on is looking at ways to help provide channels for such investment to flow. 

I will stop there and would be eager to hear any questions or 

comments you all might have. 

[The prepared statement of Ms. Rhyne can be found on page 55 

of the appendix.] 

Chairman MEEKS. Thank you very much. Our next testimony 

comes from Mr. Robert Annibale, who is the global director of Citi 

Microfinance. He leads Citi’s commercial relationships with microfinance institutions providing financing and product partnerships 

to institutions that serve the poor and the unbanked. 

He joined Citibank in 1982, and after an first assignment in Athens, he held a number of senior treasury risk and corporate positions in Citigroup in Bahrain, Kenya, London, and New York. 

Bob completed his B.A. degrees in history and political science at 

Vassar College and his Master’s degree in African history at the 

University of London, School of Oriental and African Studies. 

He has served on a number of external boards and councils including the Board of Advisors for the United Nations Commission 

on legal empowerment of the poor. 

17 

He is currently serving on the University of London’s Institute 

of Commonwealth Studies and the University of Oxford’s St. Anthony’s College, Centre for Study of African Economies. 

He also represents Citi on the Board of the Microfinance Information Exchange, the Council of Microfinance Equity Funds, the 

Seed Network, the Microfinance Network, the Executive Committee 

of World Bank, and the Citi Foundation. 

Welcome. 

STATEMENT OF ROBERT ANNIBALE, GLOBAL DIRECTOR, CITI 

MICROFINANCE, CITI 

Mr. ANNIBALE. Good afternoon. Thank you, Mr. Chairman, and 

members of the subcommittee for this opportunity to share our 

thoughts with you. 

Microfinance is not new at Citi. Citi has been engaged through 

its Foundation for Microfinance for nearly 30 years and with the 

goal of expanding access to financial services around the world. 

Our first grant was in 1982 and it was to ACCION International. 

It has worked ever since on financial education, building transparency and product innovation in this sector. 

Six years ago, we launched Citi Microfinance, which was dedicated to servicing microfinancing institutions and networks and investors as clients and partners to go beyond just philanthropy and 

to treat these institutions as clients and serve them as such. 

With a presence in over 100 countries, we serve microfinance institutions locally, whether in Citibank in Bangladesh or Uganda, El 

Salvador, Jordan, Brazil, Mexico, it is on the ground in the local 

market that we work closely with the microfinance sector. 

Today, we serve over 100 microfinance institutions and networks 

as investors and clients in over 40 countries with products and 

services that span the spectrum of financial services credit but also 

savings, insurance, and remittances. 

Our clients and partners come from a wide range of institutions. 

Interestingly, some of the most sustainable scaleable microfinance 

institutions are still nonprofit institutions. They reach millions of 

people, Grameen Bank and others. 

The range is extensive. They go from nonprofits to cooperatives 

to specialized banks, but they all are designed to serve the poor 

and the underserved and the majority of them continue to do that. 

We also provide hedging services. Many microfinance institutions, as mentioned before, sustain risks from borrowing from 

international organizations or donors or investors that are leaving 

them with risks that are difficult to hedge and manage, and that 

has been one of the areas we early on started working with. 

Our strategy has also been to work closely with institution network partners through our local branches, connecting them to their 

own domestic investors, domestic capital markets in local currency, 

in local languages, under local law. 

We have executed a number of innovative financial structures 

with leading microfinance institutions and some very small ones. 

We have embedded microfinance into our DNA with the help of 

many of the institutions that are here today, and with a lot of humility as a traditional banker working on this sector. 

18 

It is reflected in our credit policies and our debt rating models 

and in our products that we have a specialized focus on microfinance across our businesses today. 

Private sector banks and investors are more active today in funding and investing in this sector, but the public sector and public 

support is still very evident and necessary for some aspects of the 

sector. 

In the last few years, we have seen phenomenal growth in microfinance. It has grown at a pace which has also brought challenges 

to the sector, and most specifically the need for credit bureaus and 

other sources of consumer protection and technology to bring down 

the operating costs of institutions that are growing at 50 to 200 

percent a year in some cases. 

The clients of microfinance are also being challenged by increasing food prices and fuel prices in much of the world and slowing 

remittances. There are pressures on household incomes. 

This has increased the need for bringing in a range of financing 

for the microfinance sector. We have worked on innovations from 

securitization of $100 loans in Bangladesh to syndications in Pakistan or bond issues in Peru and Mexico all from microfinance institutions. 

Key to us has been encouraging and engaging domestic investors 

in those markets themselves. 

Also, we have worked innovatively with groups like OPIC. Citi and OPIC launched a global $100 million program to co-finance 

microfinance institutions around the world about 3 years ago, and 

we have exceeded that. We reached over $230 million at this point. When I looked at $200 million of those loans in local currency financing 26 institutions in 15 countries, the average loan borrower 

in those institutions was $177, and 95 percent of their clients were 

women. The funds are reaching the segment we had set out to 

reach. 

We have also just finished a deal with BURO in Bangladesh. 

This is a nonprofit organization that reaches just under a million 

people. We did a bank syndication for a nonprofit accessing $21 

million for microfinance going into agriculture. 

Even closer to home, we have tried similarly with groups like 

ACCION Texas. We did a deal with ACCION where Citi will risk 

participate on $30 million of finance that they originate and relationships they have led on with start-up institutions of microfinance entrepreneurs, mostly Hispanic and minority start-up businesses and have a phenomenal success rate relative to what the 

commercial sector has been able to achieve in the same space. 

We should not stop there. Microfinance is about more than credit. We have also worked with a number of institutions on introducing savings products, whether it is with BASIX in India where 

we have introduced biometric identified savings accounts. These 

are institutions that cannot take deposits themselves but their clients require savings deposits. Those clients now have a Citi account that can be accessed biometrically. 

Or ourselves in Queens, New York, with Grameen America 

where we are opening savings accounts for every account that 

Grameen is making a loan to, microfinance entrepreneurs in our 

own backyard. 

19 

We are trying to work across the geographies with what we can 

learn. 

Finally, I wanted to just conclude by saying there has been a real 

range in diversity of the kind of institutions that are involved in 

microfinance today, and an increasing role for private funding, both 

social finance and commercial. 

The role of the U.S. Government should not be understated. I 

think it has taken a leadership role for many years. USAID’s programs in building early capacity, building standards and policies, 

technology and other forms have paid off. OPIC continues to be a 

risk participant and encouraging institutions to go out longer, private sector investors, and to go into new names that they would 

not have reached otherwise. I think that is important. 

Citi will continue to work with those institutions and networks 

on this table today as partners. We have gone through this whole 

approach by partnering with the microfinance sector rather than 

assuming we could go it alone, and we have learned a great deal 

in doing that. 

We are committed both from our Foundation and our business to 

continue to grow our work in this sector, and I will lead that to 

continue to do it in the years ahead. 

Thank you very much. 

[The prepared statement of Mr. Annibale can be found on page 

36 of the appendix.] 

Chairman MEEKS. Thank you. Next, we have Mr. Damian von 

Stauffenberg, who is the founder of MicroRate, the world’s first rating agency specializing in microfinance. 

Through its Latin American and African operating subsidiaries, 

MicroRate has conducted hundreds of ratings of microfinance institutions in Latin America, Africa, and Eastern Europe. 

Before dedicating himself to microfinance, he worked for 25 years 

in the World Bank and its private sector affiliate, the International 

Finance Corporation. 

In the past, Mr. von Stauffenberg has been closely associated 

with a number of institutions that have played pioneering roles in 

connecting microfinance to capital markets. 

He has been president of Seed Capital Development Fund, chairman of the Investment Committee Profund, the first ever microfinance equity fund, and chairman of the Executive Committee of 

MicroVest and a member of the Executive Committee of the Latin 

American Challenge Investment Fund. 

Welcome. 

STATEMENT OF DAMIAN VON STAUFFENBERG, FOUNDER AND 

CHAIRMAN, MICRORATE 

Mr. VON STAUFFENBERG. Thank you for the introduction, Mr. 

Chairman. Mr. Chairman, I would also like to ask for your permission to summarize the main points of my presentation. 

Chairman MEEKS. Without objection. 

Mr. VON STAUFFENBERG. There are two main points, and I chose 

them because I thought those were probably the most relevant ones 

for your deliberations. 

20 

The first one concerns the role of donations. You hold the power 

of the purse. The U.S. Government’s way of intervening, of supporting microfinance, largely takes the form of grants. 

Let me mention to you that in the hundreds of ratings that we 

conduct, we have found whenever we walk into a microfinance institution, there is a direct correlation between the degree of donor 

dependence, grant dependence and its inefficiency. 

There is nothing particularly surprising or secretive about it. If 

I get a bunch of cash plunked on my desk, well, my entrepreneurial 

edge gets dulled. You can rely on that. Exactly the same thing happens in microfinance situations. 

I am not saying that grants are always bad. What I am saying 

is, before you grant grants, keep in mind that they have a toxic effect on the institution that received the grant, and be very sure 

that you balance the positive things that you try to achieve. 

Ms. Rhyne has summarized much better than I could where 

grants are still needed, but on the whole, and this is a strong statement, on the whole I would say much more damage is done today 

through grants in microfinance than good is done. 

The second point concerns a phenomenon that is commonly 

known as ‘‘crowding out.’’ You might be surprised to hear that overall, there is too much money chasing too few microfinance institutions today. This is part of the tremendous success microfinance 

has had. 

A whole new industry has grown up that specializes in mobilizing money from investors in rich countries and taking that 

money and through MFIs, through microfinance institutions, channeling it to the poor in Nairobi or in Calcutta or in Lima, take your 

pick. Money flows in huge amounts today straight from investors 

here and in Europe into the pockets of the poor. 

That is a tremendous success, and just to give you numbers, in 

2008, these so-called microfinance investment vehicles, MIVs, grew 

by $1.2 billion, and yes, this is 2008, the year of the crisis. They 

grew by $1.2 billion to a total of $5 billion. Today, their assets 

probably exceed $6 billion. 

That probably lets you understand how it is possible that there 

is too much money. It does not mean that every microfinance institution is swimming in money, far from it, but on the whole, there 

is too much money there. As you, the members of the Financial 

Services Committee, know better than anybody else, that is a dangerous situation. 

Contributing to the situation is that the international financial 

institutions, the international development institutions, are engaging in what is somewhat informally known as ‘‘trophy lending.’’ A 

trophy loan typically is a loan that the recipient does not really 

need but the lender needs badly to make a point. 

In this case, it is the international lending institutions who really want to polish their developmental credentials. They want to 

show that they are developmental. 

Just at random, yesterday, I looked up what were the last two 

loans made by the InterAmerican Development Bank for microcredit. There are two $10 million loans, one for a commercial bank 

in Chili, a $16 billion commercial bank in Chili, commercial and inVerDate Nov 24 2008 17:45 May 25, 2010 Jkt 056243 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\56243.TXT TERRIE
21 

vestment bank, and the other $10 million loan is to by far the largest microcredit institution in Peru with $1.3 billion in assets. 

That in itself is bad enough because there are plenty of MIVs 

who would kill for a chance to lend to institutions like that. 

It is even worse because the international organizations have 

taken to sweetening their offers by putting grants into these loans. 

In the case of the Chilean loan, I saw that yesterday, this large 

Chilean commercial bank is getting a $600,000 grant from the Multilateral Investment Fund. The Peruvian institution is getting a $3 

million grant. 

Use your grants differently. 

There are, however, and maybe I will end on that note because 

I see my time is up—here in this town, there is OPIC. OPIC, who 

is a relative newcomer to microfinance, is doing what I think these 

international organizations and bilateral organizations should be 

doing, they are relatively innovative. They try to go where the private sector fears to tread and they then mobilize private sector 

funding for microcredit. 

My hat is off to them. Others, my own former employer, the IFC, 

their cupboard is full of trophies, with more accumulating. 

The World Bank, however, to their credit, has kept a fairly low 

profile. Here, I disagree with Ms. Cheston who pleaded for more involvement of the World Bank. The World Bank was wise enough 

to know they are not equipped to deal with financial intermediaries 

and have kind of kept low. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. von Stauffenberg can be found 

on page 65 of the appendix.] 

Chairman MEEKS. Thank you very much. Last but by far not 

least, we have Mr. Don Terry, whose work focuses on international 

development finance, particularly remittances in microfinance. 

Mr. Terry was the general manager of the Multilateral Investment Fund of the InterAmerican Development Bank from its inception in 1993 until July 2008. The $1.8 billion fund sponsored by 38 

donor countries promotes broad-based economic growth and poverty 

alleviation through private sector development. 

Under Mr. Terry’s leadership, the MIF helped to transform Latin 

America microfinance into a commercially sustainable industry. 

He is a leading advocate for leveraging remittances as a development tool and consults with the World Bank, the African Development Bank, the International Youth Foundation, and provides strategic advisory services to bilateral donors and several multinational 

organizations. 

He is also a senior fellow at the Morin Center for Banking and 

Financial Law and is an adjunct professor at Boston University 

Law School. 

Before joining MIF, Mr. Terry served as Deputy Assistant Secretary of Treasury for International Affairs where he received the 

Department’s meritorious service award in 1980. From 1982 to 

1993, Mr. Terry served as a senior staff member on several congressional committees, including the Joint Economic Committee, 

the House Committee on Small Business, and the House Committee on Banking and Financial Institutions. 

Welcome home. 

22 

STATEMENT OF DONALD F. TERRY, SENIOR FELLOW, MORIN 

CENTER FOR BANKING AND FINANCIAL LAW, BOSTON UNIVERSITY SCHOOL OF LAW; FORMER MANAGING DIRECTOR, 

MULTILATERAL INVESTMENT FUND (MIF) 

Mr. TERRY. Thank you, Mr. Chairman. I am so old, there used 

to be only two rows when I was here previously. I cannot come into 

this room without mentioning one of my mentors in my life, Dr. 

Paul Nelson, who was the staff director of this committee for many, 

many years. 

When I was at the InterAmerican Development Bank, we used 

to talk all of the time about how we could do a much better job 

than we were doing. That was Paul’s basic view of the entire world. 

Let me in that vein sort of channel the late Dr. Nelson. One of 

the advantages of going last is that most of what I wanted to say 

has already been said, only said better than I possibly could, so let 

me take a few minutes to be provocative, I hope, but in a positive 

way. 

Let me do this in the following way. The adjectives describing 

the growth of microfinance over the past decade in particular but 

really over its life of now almost 40 years, I agree with all of them. 

It has been a stunning spectacular success. It is not nearly enough 

and it is not nearly what it could be or should be or hopefully will 

be in the future. 

Microfinance started in the early 1970’s because the world’s financial system was basically totally completely irrelevant to the 

overwhelming majority of the people living in the world. 

Today, that is still the case. The financial system, as you in this 

room look at all of the time, is essentially irrelevant to the lives 

of the overwhelming majority of people living in the world today. 

Almost 40 years ago, microfinance started, and for a number of 

years it was the altruistic demand of NGOs and their sponsors who 

basically were putting together supporting revolving loan funds 

that were reaching a few hundred or at most a few thousand families in developing countries. 

That was the model. That is when microfinance was essentially 

microcredit. When we talk about microfinance now, as has been 

mentioned previously, we are talking about a tested business model 

that can offer a variety of financial products including working capital, savings accounts, remittances transfers, payment services, 

microinsurance, and housing finance. 

I just want to mention—microinsurance has been mentioned previously, but when I was at the InterAmerican Development Bank, 

we thought it was a pretty good idea to actually survey the people 

we were trying to help, and find out what they wanted. 

We did surveys of more than 75,000 Latin Americans living in 

all the countries that were major remittance recipients. We asked, 

‘‘What financial services would you like to have that you do not 

have now?’’ 

I thought the answer would be a small business loan, something 

to improve our housing. Overwhelmingly, in every country, the 

number one priority was insurance. I do not think we fully appreciate the type of uncertainty that is in the lives of the poor. If they 

can get insurance, microinsurance, and it has been described how 

23 

you can do that affordably. This is also part of the microfinance 

role. 

I want to be clear on what the market is for microfinance in the 

world today: about 6.5 billion people. We know about the two- to 

two-and-a-half-billion people who live in developed countries. They 

are in some ways overbanked. The 10 or 15 percent of the elite’s 

in developing countries. That is two- to two-and-a-half-billion people. That leaves four billion people who are essentially outside of 

the financial system. 

About two billion of those people are engaged in some form of 

economic activity, some productive activity. They are not the poorest of the poor. That is the other two billion. 

I think we need to be clear that microfinance for the most part, 

not exclusively, but for the most part is targeted at that middle two 

billion, the ones who need productive finance and can use it. 

For all the spectacular success of microfinance over these years, 

we are currently reaching 10 to 15 percent at most of that two billion. We can celebrate it is an accomplishment to have gone from 

small NGOs to where we are today, 100 million-plus people is not 

bad, but we are only scratching the surface. 

As we have gone through this process, we have learned what 

works and what does not. I have tried to summarize at least what 

we learned about what worked in Latin America and the Caribbean, but I want to make as quickly as I can these three points. 

If you do not have the right legal and regulatory frameworks, 

nothing works. 

Given the success of microfinance over these past 30 to 40 years, 

how come the legal and regulatory environments are not as good 

as they should be in these countries? That is not money. 

That needs to become a top priority. We all know that when the 

Secretary of State of the United States or the President or the head 

of the InterAmerican Development Bank or the head of the World 

Bank goes to a country, they have a number of things on their list. 

Microfinance is typically not number one or number two. It 

might be number three or number four. As we know, you never get 

to number three or number four. 

Legal and regulatory frameworks can be improved. If they are 

improved, we can go a lot further than we have so far. Without it, 

you cannot make it happen. 

Second issue: What is the proper role of public versus private financing. This is one of the center points for today. In real estate, 

it is location, location, location. In development, in my opinion, it 

is leverage, leverage, leverage or scale, scale, scale. Microfinance is, 

I think, unique in the development world for its possibilities for 

being scaled-up. 

We know the billions in terms of the target market but there is 

not enough official development assistance in the world to meet 

those targets. We have to figure out, as Ms. Rhyne said, what are 

the frontiers, that is where official development systems should be, 

that is where official development assistance was in the past in 

terms of transforming NGOs into regulated financial institutions, 

you want them to be regulated financial institutions. Everybody in 

NGOs is going to heaven, not so much the regulated financial institutions, but anybody in NGOs are going to heaven. 

24 

They cannot take deposits. Once you start taking deposits, that 

is the source for much of the microlending that goes on. If you are 

not taking deposits, for the most part, you are not going to be able 

to reach scale. I think that is important. 

Legal and regulatory environments, the role of the private sector 

versus the role of the public sector. The role of the public sector is 

to take the risks and be on the frontiers, as noted before. 

There is a lot of stuff in here. I am going to finish by saying this: 

Microfinance works. We know how to do it in a commercially sustainable way, which can attract private investment in partnership 

with public sector financing, which can reach the scale that is necessary to make a difference. 

I want to take 30 seconds and finally say this. When I was head 

of the Multilateral Investment Fund, there was a terrible hurricane 

more than a decade ago in Honduras and Nicaragua, Hurricane 

Mitch. Everybody was focused on what we could do immediately in 

the immediate aftermath. 

We looked at what was going to happen to the microfinance institutions in those countries 6 months out, a year out. They were 

going to collapse. We did some things to help. 

What has just happened in Haiti is unprecedented. Two weeks 

ago, there were 140,000 micro entrepreneurs being serviced by 

about 5 terrific microfinance organizations in Haiti. The future of 

those microfinance institutions lays in the rubble of the earthquake. 

I think Damian von Stauffenberg would agree that it is an appropriate role of grant financing, and I just want to bring to your attention that the Multilateral Investment Fund at the IDB is seeking to put forward a grant fund to first rebuild what was there 2 

weeks ago, and even more importantly perhaps, to build on that 

over the next 5 years so that we can go from 140,000 to 300,000 

families in Haiti having access to microfinance by the year 2015. 

We are going to be putting forward some grants for that and they 

are going to seek matching funds and partnerships from the private sector in that regard. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Terry can be found on page 60 

of the appendix.] 

Chairman MEEKS. Thank you very much. Thank you for your 

very insightful testimony. 

Let me start out by asking a question that I want to ask Ms. 

Rhyne, and probably Mr. von Stauffenberg also, in the area of social performance benchmarking, which I felt was interesting. 

My question is, is it credible to create objective auditable and understandable social impact metrics, does it make sense given your 

points about pushing development and subsidized capital, to chase 

the margin to eventually link development bank aid and capital to 

these social benchmarks? 

And I will just throw in, who should bear the cost of auditing 

these benchmarks? 

Ms. RHYNE. That is a complex question. In my own view, there 

is social performance management which is attempting to do what 

you say. I think it is an uphill battle, for reasons that it is very 

difficult to measure social performance, and there is a real variety 

25 

of social goals. You do not expect one institution to have exactly the 

same social goals as another. It is not like you can measure 

everybody’s bottom line in the same currency the way you can 

measure financial returns. 

That said, I would say that there has been progress in coming 

up with frameworks that are more about measuring how well an 

institution stacks up against what it says it is trying to achieve 

and the social ratings that have been coming up are doing that. 

I think that is a feasible way to go. It is never going to be in my 

opinion as solid or rigorous as a financial bottom line. 

Mr. VON STAUFFENBERG. Maybe if I can add, Mr. Chairman, we 

have been doing social ratings for 3 years now. Initially, it was experimental. I think we are starting to learn to walk in that field. 

I would fully endorse what Ms. Rhyne has just said. This is still 

far from being anywhere near precision and probably we should not 

even have the ambition to be particularly precise. 

At this point, it is good enough to be able to tell whether a microfinance institution does what it claims to be doing, helping the 

poor, are they actually having some kind of impact. Let’s not then 

get overly ambitious and measure that impact on a very finely 

graded scale. 

Chairman MEEKS. Thank you. I have to say to Mr. Annibale that 

I appreciate the work you are doing in Queens. I do not know 

whether someone told you to throw that in there because I am from 

Queens, but I like that. They are doing some great work seriously 

in Queens to help the poor in that regard and some individuals 

who are in my district. 

Maybe you can just expound upon that a little bit as to how it 

operates and how do you see it in the longer run of Citi playing 

in microfinance throughout. 

Mr. ANNIBALE. Thank you, Mr. Chairman. It comes from something I think I would just refer to, the Treasury, something that 

I would say is a parallel. 

There is an Assistant Secretary of Treasury, Michelle Green, 

whose title was Assistant Secretary for Financial Education. They 

changed her title from ‘‘Financial Education’’ to ‘‘Financial Education and Financial Access.’’ I think what we are looking at is all 

about that. It is about organizations such as we are working with 

in Queens and in Brooklyn and now in Manhattan and it is 

Grameen America. 

It is about giving them access to financial services and giving financial empowerment, but then opening an account, giving people 

access to a basic bank account. 

We are looking at, how do we go from financial education to an 

account and financial services, the same in Dallas with the YWCA, 

the same with ACCION Texas in San Antonio and around the 

State. 

We are partnering with organizations that go deeper into civil society that frankly have contacts and have the trust of communities 

beyond what the banks have achieved. Banks have a lot of reason 

with humility to look at that and say their organizations are trusted and know the capacity and the needs of individuals. 

We are trying to match that with financial services that are appropriate. Individuals who are going through financial training and 

26 

empowerment, they need to have access to a basic bank account or 

entrepreneurs who have strong positions who are not getting access 

to capital might through some of our partner organizations we 

work with. 

We frankly think their knowledge and ability to access those individuals are even greater than what the banks have so far been 

able to demonstrate when you get to very specific communities or 

geographies. 

Domestically, also looking at groups like the community development finance institutions. In many ways, they look like microfinance institutions in a much more complex environment here in 

the United States. They reach many communities deeply that 

banks do not always reach. 

Partnering with organizations like that is a lot like we have done 

internationally, it is to partner with an institution that can then 

take it deeper, and whether we bring a product such as savings, 

because those institutions cannot take deposits, or we bring financing and they extend finance to entrepreneurs and small enterprises, it is the model that we are trying to embed here in the 

United States, as we have been trying to do around the world. 

Chairman MEEKS. Mr. Miller? 

Mr. MILLER OF CALIFORNIA. I want to thank you for the testimony. It was wonderful. I am kind of a history buff. 

Mr. von Stauffenberg, are you related to a Colonel von 

Stauffenberg in any way? 

Mr. VON STAUFFENBERG. You are probably referring to the film. 

Mr. MILLER OF CALIFORNIA. No, I read the original book, and I 

have read a lot about him. 

Mr. VON STAUFFENBERG. The answer is yes; he is a cousin of my 

father. 

Mr. MILLER OF CALIFORNIA. He is the man who tried to blow Hitler up. I would love to have had lunch with you or bought you dinner, because I have a tremendous amount of questions. I am a real 

buff in that area. You should be very, very proud of him and very 

proud of that name. He was quite the hero. 

I have a question for you. Many private sector microfinance 

funds are too small for institutional groups and yet they are too 

large for individual groups. Is there room for a fund of funds type 

of program and if so, how would that work? 

Mr. VON STAUFFENBERG. Yes, we already have fund to funds. 

They have sprung up. You have approximately 880 of these microfinance investment vehicles that are very much concentrated, the 

top 10 account for about half, even a little bit more of the total assets. 

Yes, there are a few fund to funds that have developed. 

Mr. MILLER OF CALIFORNIA. They are working fairly well? 

Mr. VON STAUFFENBERG. They are working very well, except 

their spreads are too narrow, as you would expect if there is too 

much money. Their interest rates on the whole probably do not 

really reflect the risks they are taking, I am afraid. 

Mr. MILLER OF CALIFORNIA. I know it has to be a really difficult 

task in underwriting these loans in these impoverished countries 

that you are trying to deal with. How do these organizations effectively underwrite those loans to make sure the investors are safe? 

27 

It is difficult because we look at underwriting in this country and 

the cost of doing that when the people make $1 or $2, how do you 

deal with individuals in the countries that must be associated with 

the underwriting at a much lower pay grade? 

Mr. VON STAUFFENBERG. That is the big trick of an MFI, a microfinance institution. The microfinance institution—by the way, I 

take exception to a tendency that has crept into what was said 

here today, to assume that any small loan to a poor person is 

microcredit. 

If that were the case, there have been money lenders around for 

thousands of years who have made small loans to poor people. 

The modern version of the money lending I consider to be consumer credit. You now have a whole wave of consumer credit agencies that present themselves as microfinance institutions. 

To make consumer credit, it is fairly easy, because all you need 

is collateral and if the collateral is okay, you get the loan. In the 

case of microcredit, what you have to do is figure out whether the 

borrower can use that money, not to go and have a beer, but to increase her income, and in the end, have enough money to repay the 

loan, repay the interest, which is always high, and better herself, 

have something left for herself. 

Mr. MILLER OF CALIFORNIA. There is a cost in determining that, 

too. 

Mr. VON STAUFFENBERG. There is a cost in determining that and 

you have to keep that cost very, very low, otherwise your operating 

expenses go through the roof. That is the trick in microfinance. 

Mr. MILLER OF CALIFORNIA. That was a concern I had. 

Mr. Terry, you talked about the crowding out of private microfinance capital by international organizations. Why does it happen, 

how serious a problem is it and how do you suggest we deal with 

that? 

Mr. TERRY. Mr. von Stauffenberg referred to trophy lending, I 

guess. I do not know that I would describe it exactly in the same 

terms, having perhaps been involved in some of that myself. 

The point is this, public money, whatever the source, should be 

where private money will not go, not where it will go. In the case 

of a multilateral investment fund, when we started to make loans 

in equity participations in the early 1990’s, we made a point that 

whenever there was private sector interest in those companies, we 

sold. We sold our investments. 

Mr. MILLER OF CALIFORNIA. Is that applied industry-wide, would 

you say? 

Mr. TERRY. It is not. I think that is unfortunate. I think this is 

one of the ways that you can get more private sector involvement. 

When we first said that we were going to sell our shares, the 

microfinance institutions were not happy with that, actually because they liked the idea of having the InterAmerican Development 

Bank there, and frankly, I think what happened sometimes, if we 

want to call it ‘‘burnishing the portfolio,’’ these are development institutions and everybody loves microfinance, so people tend to keep 

those perhaps longer than they should. 

We should be where private money will not go, not where it will. 

I think this is absolutely an issue. 

28 

Mr. MILLER OF CALIFORNIA. My time has expired. Thank you 

very much. 

Chairman MEEKS. Mr. Watt? 

Mr. WATT. I just wanted to thank the witnesses for being here. 

Mr. von Stauffenberg, I was a little concerned about your analysis. 

It would seem to me that if we analogize to what you were saying, 

we would not be having any additional big institutions either, given 

what we have been through the last year. 

I just do not know that we ought to be holding the microfinance 

part of our economic system to a different standard that we did not 

hold to others. 

I will not belabor that. I do not want to get into a philosophical 

discussion with you about that. You obviously come from a different place on that and perhaps some other issues, too. 

I do want to follow up on Ms. Cheston or Ms. Rhyne who indicated that the World Bank—a number of Members of Congress 

bipartisanly have encouraged the World Bank to take some steps. 

I wanted to find out what the current status of that is and what 

specifically we ought to be doing in encouraging the World Bank 

to do in this microfinance area, other than stay out of it as Mr. von 

Stauffenberg suggests. 

Ms. CHESTON. The current status is that there has been an exchange of letters going back and forth between Members of Congress and Representative Holt’s office met with the World Bank 

staff most recently in November of 2009. 

At that meeting, there was no new information forthcoming 

about the status of this. President Zoellick had originally responded very favorably in writing to Representative Holt, and in 

principle, expressed an interest in three different steps, and one 

was this flexible grant facility. 

I should clarify if I did not before, focused on the very poor, and 

on centers of excellence to encourage cross learning, and a sub-Saharan Africa funding mechanism to help microfinance institutions, 

focusing on the very poor’s access to capital. 

Mr. WATT. Those were three concrete suggestions. Any of those 

you object to, Mr. von Stauffenberg? They seem pretty consistent 

with what you are saying. We are not just throwing money at a 

problem and throwing more and more money out there. It seems 

pretty systematic. 

Do you oppose that? 

Mr. VON STAUFFENBERG. No, I do not oppose that at all, but it 

is a tall order to now find areas where you provide something other 

than funding. After all, the World Bank is a financial institution, 

and measures its success in terms of dollars and cents. I think the 

temptation will be enormous to start pumping money. 

This I know from observation, money— 

Mr. WATT. I think that is everybody’s inclination to solve every 

problem including the big institutions. It sounds to me like the approach that has been encouraged here is pretty systematic, suggesting things that make good sense. 

Does anybody else disagree with that? That we ought to be trying to push in that direction? Ms. Rhyne? 

Ms. RHYNE. I do not disagree with the aims of this, but I think 

one of the characteristics of microfinance that works well is that 

29 

the government is not a provider of financial services, and one of 

the difficulties that the World Bank has in providing grant capital 

is it has to work through governments and governments have a difficulty setting up the mechanisms that really work to support the 

private sector. 

Mr. WATT. You think the World Bank ought not be involved in 

this? 

Ms. RHYNE. I think the World Bank should be involved in this, 

but I think it— 

Mr. WATT. How? That was the question I actually was asking. 

What are the specific things we should be encouraging the World 

Bank to do? 

Ms. RHYNE. I like the aims of the initiatives that are being proposed and I would suggest mechanisms that are separate from government or working through government agencies. 

Mr. WATT. I am not sure I understand that. 

Ms. RHYNE. That has been one of the problems, that the World 

Bank has difficulty under its charter setting up those kinds of facilities. 

Mr. WATT. You are saying it should be done through something 

other than the World Bank? 

Ms. RHYNE. It could be done by the World Bank depending on 

how creative the World Bank can be. 

Mr. WATT. I have asked my last question. I would like to get Mr. 

Annibale’s views. 

Mr. ANNIBALE. I think, and this is something Don Terry mentioned, that the World Bank can be helpful, also on the whole legal 

and regulatory sharing between governments, on how to create 

some of the context for what are very innovative institutions that 

in many cases do not just look like banks in the microfinance sector. 

They have many of those characteristics, but we need to also understand them from their own origin and to say there is a role 

where I think the World Bank is able to convene around issues like 

legal and regulatory. 

The other is there is a group that I serve on, it is a consulting 

group to assist the poor, CGAP. That is part of the World Bank 

group, the U.S. and other donor governments work with it. They 

were very much with private sector funding also, Gates and others, 

on sort of technology, bringing down the cost of delivery in microfinance, using mobile cell phones and other forms of delivery to 

rural and other communities. 

I think there are arms of the World Bank that perhaps creatively 

are working on microfinance that could continue to lead on some 

of these areas. 

Mr. WATT. These three specific suggestions, you endorse or do 

not endorse? This is not a trick question. I am just trying to figure 

out where we ought to be trying to exert pressure or trying not to 

exert pressure. I do not have a particular— 

Mr. ANNIBALE. I broadly support it as does CGAP. I think we 

ought to be—there is emphasis in there that we should re-look at 

in terms of, as Beth has said, there are some specific areas. 

30 

I think the World Bank in this context, it is not a funding context necessarily of institutions, but of capacity building and of the 

sector, it still has a role to play. 

Chairman MEEKS. Mr. Carson? 

Mr. CARSON. Thank you, Mr. Chairman. This question is for all 

the panelists. Transparency promotes accountability and is a powerful tool for improving the quality of microfinance institutions and 

their services to clients. 

In your opinion, how transparent is the microfinance industry 

currently? 

Ms. RHYNE. Out of the six principles of client protection, transparent pricing is number two. It is one that we are really focusing 

on. I think the industry has been transparent but maybe unintentionally not as transparent as it should have been. 

The challenge is quite difficult of figuring out exactly—transparency is not just disclosure, it is also understanding by the client, 

and interest rates is a very complicated subject. 

I think you will find microfinance institutions complying with the 

law, whatever the law is in different countries which require disclosure of interest rates. 

I think we still have a ways to go in terms of ensuring that the 

clients understand what they are looking at and are able to, on the 

other side, compare institutions, one against another, because everybody quotes interest rates in different ways. 

I think there is a lot of work to be done in this area. I also think 

this is probably an area where regulation is ultimately needed 

around disclosure. What we find is the microfinance institutions, 

they say we want to be transparent but we do not want to be competitively disadvantaged by being transparent. 

When you get in a situation like that, you are going to need everybody to take the step all at the same time and that means either the associations need to come together and do this or regulation is going to be needed. 

Mr. VON STAUFFENBERG. We are in the business of transparency 

as a rating agency. When we started in 1996, people would tell us, 

look, you are nuts, why should they show you their books, why 

should they let you through the door? 

It has not been a problem. Microfinance institutions, with very 

few exceptions, were kind of happy that somebody came and asked 

and looked at their books. 

Where they do have a problem with transparency is, as Ms. 

Rhyne said, in the area of how much they charge, but there they 

are kind of between a rock and a hard place because their real 

competition is the money lender and the money lender charges 

1,000 percent or 500 percent, so even if they charge what to us appears exorbitant rates say approaching 100 percent, which we have 

seen, in fact, we recently saw one, a government funded microfinance institution in a sub-Saharan country fully development oriented charging an effective rate of over 300 percent. 

Of course, that, they are trying to hide. On the other hand, there 

is the hard place that Mr. Miller alluded to, the cost of analyzing 

these loans is comparatively high. It is not that they go for unconscionable spreads. They have to charge relatively much. 

31 

The average rates charged in the institutions that we track approaches 40 percent, 38 point something percent. 

Mr. TERRY. If I could just add to that, we are talking around an 

issue that microfinance rates are typically expressed in monthly 

terms because when you multiply times 12, people just sort of step 

back sometimes. 

For instance, in Bolivia and in Peru, in Latin America, you get 

down below 2 percent a month, 1.5 percent, for microfinance, and 

that is about the same as you are going to get at a bank, a commercial bank. 

In other places like Mexico, you are doing 7, 8 or sometimes 9 

percent a month times 12. 

The answer, I think, is as Damian suggests, you have to look at 

the competition, the alternative, these two billion people who do 

need access to finance. The alternative is not 100 percent a year. 

The alternative is 100 percent a week. 

We have to be careful about instituting interest rate caps or 

something like that. What we need to do is promote more competition in those countries which does bring down the interest rate 

costs, but it is an issue for sure. 

Mr. DIOUF. I think the microfinance industry is not uniform. The 

top tier microfinance institutions are indeed very transparent, they 

report financial statements. Where the concern is are the second 

and third tier microfinance institutions. I get seriously worried 

when these institutions start mobilizing funds from institutions 

that attract capital from individuals in the United States and other 

western countries. 

Some institutions have Web-driven mechanisms to attract investments, but the financial reporting of the institutions that are the 

recipients of those funds are not up to standard at all. They are 

very poorly regulated. 

Ms. CHESTON. Just to add one more point. Obviously, when you 

are talking about transparency, you are looking primarily at financial issues, but I think the issue that has been brought up by several of the other witnesses about social performance management 

is also important. 

Since one of the things that we are doing, our whole rationale for 

even attracting public funds, is we are trying to do some kind of 

good for poor people in the world. It is important to look at whether 

or not that is happening and have transparency about that issue 

as well, along with financial performance. 

Chairman MEEKS. It is interesting listening to this discussion. 

Mr. Annibale, you were, I think, was talking about securitization 

and some other things in your testimony. 

It is as if even microfinance now is getting maturing in essence, 

and given the crisis that we currently had here in the United 

States and around the world and the different developments in different areas, A, B, and C, the question then comes, are we suffering a risk right now or is there a risk that is existing without 

some appropriate regulatory oversight of these developments, and 

without them, could we be headed down the road where we could 

have a crisis in the microfinance area that we had in the formal 

banking sector? 

Mr. Annibale? 

32 

Mr. ANNIBALE. Thank you. When I mentioned, for example, 

securitization, it was one of the largest microfunded institutions in 

Bangladesh, one of the largest in the world. 

What it really caused was an enormous amount of transparency 

of their books also. It meant a number of private sector investors 

and agencies, including their capital markets authority and others, 

had to really open the books and say, are these numbers real? Is 

this 99 percent repayment true in standard accounting terms? 

It happens to be probably one of the best institutions in the 

world and also is a nonprofit institution. 

Of course, as we said earlier, the legal and regulatory context is 

going to make a big difference, and I think Don is right to say getting institutions into a regulated context will not only give them 

the power to do more for their clients in terms of products and 

services, but they will be more transparent. They will have to be 

more transparent. 

I think the sector has responded positively to that on the whole. 

Where we have seen the most challenges of institutions perhaps 

with concerns of overfunding have often been in some ways as 

Damian has said, in a few countries where bilateral or other flows 

went into a very significantly high level, Morocco, Bosnia. 

It was not about new old institutions or new financial structures. 

It was the old story and it was in that sense, I think, perhaps too 

much liquidity going into markets from the same sources he spoke 

of. 

Chairman MEEKS. Mr. Diouf, did you want to add anything on 

that? 

Mr. DIOUF. Just going back to the same point, as long as we are 

dealing with tier one institutions that are large, well-regulated institutions, everything is fine. When we start putting together complex financial schemes for institutions that are poorly regulated 

and that are not transparent, then we run a risk of running into 

a systemic problem. 

Mr. VON STAUFFENBERG. If I may add, this is indeed a concern 

we have, not that we are seeing microfinance funds, MIVs, are 

crumbling, but we see the potential. Basically, the microfinance 

funds on the whole with some exceptions are not terribly transparent. 

If you go onto their Web sites, you will find beautiful pictures of 

what is going on in Bangladesh or in a poor country, but you will 

not get the kind of information that you would take for granted in 

any funds that you invest in here in the United States. 

That is worrying. If people invest because it is microfinance and 

microfinance is good, that is sowing the seeds for trouble. I think 

yes, a lot more transparency is needed in this field of microfinance 

funds. 

Chairman MEEKS. Mr. Diouf, let me ask you, and this will be my 

last question, and I will go around again if anyone has any further 

questions before we close out, one of the things that we try to 

preach now in the United States a lot is financial literacy, and one 

of the keys to financial literacy is understanding your credit rating, 

as put forth by the three major credit reporting agencies. 

33 

I noticed that in some of your written testimony, you talk about 

the need of having some credit reporting agencies. You talk about 

both within country and regional. 

I just wanted to get the benefit of your thoughts on that before 

we close out. 

Mr. DIOUF. I believe it is a fundamental element in the growth 

of microfinance to make sure that microfinance does not actually 

have adverse effects on the poor countries’ economies. 

It has been very successful. In Peru, for instance, there is a credit bureau implemented that had a very positive effect on the whole 

industry and the industry has grown significantly since then with 

very little failures. 

I think that public funding in my view should go as a priority 

on projects that builds infrastructure to make the industry safer 

and protects the consumer. A credit bureau protects the lender. It 

also protects the consumer. 

I would seriously encourage all donor agencies and institutional 

investors to help build that infrastructure and credit bureaus 

should be a priority in my view. 

Chairman MEEKS. Thank you. Mr. Miller, anything else? 

Mr. MILLER OF CALIFORNIA. Yes. It sounds like the industry is 

developing a system of best practices for development banks. Is 

that accurate or not? Developing a system of best practices for development banks, so you have some kind of a system out there that 

they are working under. 

Is that occurring now? 

Mr. VON STAUFFENBERG. International development banks? The 

World Banks and IDBs? 

Mr. MILLER OF CALIFORNIA. The development banks that are involved in the microfunding. 

Mr. VON STAUFFENBERG. The trouble is none of them would 

admit that what I said this afternoon is remotely true. They all 

play lip service to being subsidiary to the private sector. 

The rules are in place, which are very, very clear, of what they 

should do or what they should not do. The real difficulty is that in 

practice, these rules are not observed. 

Mr. MILLER OF CALIFORNIA. The comment was you would prefer 

to see the government funds start to pull out and the private sector 

funds be more involved in these types of loans, that there was a 

glut of funding. Is that occurring? 

Mr. VON STAUFFENBERG. Yes, absolutely there is a glut of funding. 

Mr. MILLER OF CALIFORNIA. Mr. Bernanke, before the recession, 

talked about how there was a glut of savings, global savings, and 

that was driving interest rates down. Generally, when there is a 

glut of financing available, it also drives interest rates down and 

risks up. I think I heard the yield on these loans are 38 to 40 percent? 

Mr. VON STAUFFENBERG. The poor people pay 38 to 40 percent on 

average. Some of them pay much more. 

Mr. MILLER OF CALIFORNIA. There is a very low rate of default 

on these loans, too. 

Mr. VON STAUFFENBERG. A very low rate of defaults. 

34 

Mr. MILLER OF CALIFORNIA. You should have more money than 

you know what to do with, with that kind of return. 

Mr. TERRY. It is a good business. 

Mr. VON STAUFFENBERG. It is a good business, but the average 

operating cost is about 28 percent, so 28 cents on every dollar loan, 

you spend on loan analysis. 

Mr. MILLER OF CALIFORNIA. How long does it take for an investor 

to start to see a yield on their investment? 

Mr. VON STAUFFENBERG. Today, where there is no experimentation involved any longer, you see a yield very quickly, in year 

two, in year three, maximum. 

Mr. MILLER OF CALIFORNIA. I have more, but I do not want to 

delay it. I know we want to let them go. I yield back. 

Chairman MEEKS. We want to let them go. However, I would be 

remiss, Ms. Cheston, if I did not ask you about capacity building. 

Ms. CHESTON. I think Mr. Diouf has made a very compelling case 

for this whole issue. There is a lot of money out there available for 

microfinance, as has been established, from private sources. 

One of the significant obstacles in accessing that funding is that 

we do not have a CEO who knows how to manage the loan portfolio 

in a lot of places in the world. 

It is an area where the human capacity to run a microfinance institution or even some of the more informal microfinance providers, 

and this is just kind of across-the-board, is lacking in many environments and more so in Africa probably than in other places. 

I think one very strategic use of public funds could be to invest 

in that human capacity building for a short time with the goal of 

leveraging significant private investment as a result. 

Your H.R. 1987, I think, is exactly what the doctor ordered in 

terms of bringing that about. 

Chairman MEEKS. Thank you. The Chair notes that some members may have additional questions for this panel, which they may 

wish to submit in writing. Without objection, the hearing record 

will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record. 

We thank you and this hearing is adjourned. 

[Whereupon, at 4:21 p.m., the hearing was adjourned.] 

(35) 

A P P E N D I X 

January 27, 2010 

36 


56243.001
37 


56243.002
38 


56243.003
39 


56243.004
40 


56243.005
41 


56243.006
42 


56243.007
43 


56243.008
44 


56243.009
45 


56243.010
46 


56243.011
47 


56243.012
48 


56243.013
49 


56243.014
50 


56243.015
51 


56243.016
52 


56243.017
53 


56243.018
54 


56243.019
55 


56243.020
56 


56243.021
57 


56243.022
58 


56243.023
59 


56243.024
60 


56243.032
61 


56243.033
62 


56243.034
63 


56243.035
64 


56243.036
65 


56243.025
66 


56243.026
67 


56243.027
68 


56243.028
69 


56243.029
70 


56243.030
71 


56243.031