    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                       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

                      U.S. GOVERNMENT PRINTING OFFICE
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
    CAROLYN B. MALONEY, New York         PETER T. KING, New York
    LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
    NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
    MELVIN L. WATT, North Carolina       RON PAUL, Texas
    GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
    BRAD SHERMAN, California             WALTER B. JONES, Jr., North
    GREGORY W. MEEKS, New York               Carolina
    DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
    MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
    RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West
    WM. LACY CLAY, Missouri                  Virginia
    CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
    JOE BACA, California                 SCOTT GARRETT, New Jersey
    STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
    BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
    DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
    AL GREEN, Texas                      TOM PRICE, Georgia
    EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
    MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
    GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
    PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
    KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
    RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
    CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
    ED PERLMUTTER, Colorado              BILL POSEY, Florida
    JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
    BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
    ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
    JACKIE SPEIER, California            LEONARD LANCE, New Jersey
    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

            Jeanne M. Roslanowick, Staff Director and Chief Counsel
            Subcommittee on International Monetary Policy and Trade

                      GREGORY W. MEEKS, New York, Chairman

    LUIS V. GUTIERREZ, Illinois          GARY G. MILLER, California
    MAXINE WATERS, California            EDWARD R. ROYCE, California
    MELVIN L. WATT, North Carolina       RON PAUL, Texas
    GWEN MOORE, Wisconsin                DONALD A. MANZULLO, Illinois
    ANDRE CARSON, Indiana                MICHELE BACHMANN, Minnesota
    STEVE DRIEHAUS, Ohio                 ERIK PAULSEN, Minnesota
    GARY PETERS, Michigan
    DAN MAFFEI, New York

                                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

                       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.
        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.
        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 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 medium-sized 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.
        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 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 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.
        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 sub-Saharan 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.
        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.
        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.
        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 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.
        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
    higher-risk 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
    currently 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.
        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 countries 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.
        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.
        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.
        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.
        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 investment 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.

     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 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.
        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 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 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?
        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.
        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 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.
        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.
        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?
        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.
        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.
        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.]

                               A P P E N D I X

                                January 27, 2010

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