[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




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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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