The second panel of the day featured John Fischer, Vice President, ACCION Investment Management Company; Rick Halmekangas, Vice President, Opportunity International; Mauricio Moura, Executive Manager Microfinance, Unibanco Brazil; and Robert Townsend, Charles E. Merriam Distinguished Service Professor of Economics, University of Chicago. The panel was moderated by Rhonda Schaffler, Media Outreach Coordinator, “International Year of Microcredit 2005,” United Nations Capital Development Fund. Here are excerpts:

Schaffer This panel is titled “The Next Stage in Evolving Models for Microfinance Services and Products.” We will now open this up to some questions from the audience.

Audience Member Are microfinance clients looking to go into the commercial financial world and use its services, or are they continuing to resist using those services to improve their lives?

Halmekangas Many microfinance institutions are really changing the way people see financial services in many of these countries. If you live far from an urban center and you don’t really have any interaction with that center, chances are you’ve had no experience with formal financial institutions at all. All you know from your bank is that this loan officer came out on a bike and started offering you loans. Their whole concept of the formal financial sector is quite different. I think over time this concept will change. One of our goals is to see the formal financial sector become much more inclusive and service poorer segments than they traditionally have served in the past. In many cases, we thought the best way to do that is not necessarily from the NGO (nongovernmental organization) perspective—outside of that system—but rather to participate in the formal financial system and change it.

Moura It’s very interesting because we have many clients who, when they go to a department store and buy a refrigerator, feel they have credit from that department store. But they are very resistant in terms of getting credit from our bank. Like Rick said, loan officers make this relationship much more personal. Those kinds of people do not usually go to a bank branch.

Audience Member If larger amounts of money are coming in, are the traditional revolving credit loans and sense of social capital disappearing?

Townsend With Progresso, an education program in Mexico to pay parents to keep their kids in school, there were concerns that the program’s funding might undercut other local mechanisms. In this case, it turned out not to have discouraged local networks and lending, but that potential is certainly there. It’s something to worry about.

Just to be a little argumentative, sometimes social capital is not necessarily a good thing. You can take out group loans, hopefully exploiting social capital with the idea that these borrowers are going to monitor each other and help each other out in bad times, but they may collectively default. They may find that when push comes to shove, they value their cousins and brothers more than they value access to formal credit. In many cases, we can show that repayment rates actually go down, the less local enforcement mechanisms there are. Those are inversely correlated with how many family members are in groups. This is not, perhaps, too surprising.

Schaffer Everyone is nodding up here, so we all have this experience.

Townsend I’mnot saying it’s uniformly bad either. I’m just saying it could go both ways. There’s this myth about microcredit or group lending, that somehow it’s a miracle cure. As another panelist said this morning, it works in practice.

Does it work in theory? Through the lens of theory you can understand these group practices and whether or not they’re really helpful to welfare, as well as to the lender.

Schaffer Anyone want to add to that? Does anyone have personal experience in the field?

Moura In Brazil, experience shows that group lending works pretty well in the countryside and in small towns, but functions terribly in metropolitan areas. It’s very hard to have group lending in São Paulo or Rio. But in the countryside of Brazil, the group lending works much more effectively.

Halmekangas I’d like to mirror that input. In the past, group lending was the only thing out there, so it had very high repayment rates. But over time, in urban centers especially, individual lending became more and more available and people began opting out of group lending programs. I wouldn’t say that means group lending is bad or doesn’t work. I think if it’s done very well, in the right context, it works very, very well.

Audience Member As microcredit commercializes, do you see this developing more into a banking institution or what we would recognize as a subprime lending institution that doesn’t finance through deposits?

Fischer What we’ve seen is our affiliates are typically funded through term deposits rather than savings deposits. Our goal is to develop the local currency portion of the capital structure: savings deposits, term deposits, and local currency bonds in the local capital market. InMexico, Peru, and Colombia we have seen that as a very effective way to get local currency funding.

When you analyze the difference between a commercial bank and a typical microfinance institution, there’s still a pretty striking divergence in their capital structures. Microfinance institutions tend to be much more weighted towards term deposits and loans than a typical commercial bank would be. This idea of securitizing microfinance loans has been out there since the mid-1990s. It has a certain cachet— a certain appeal—to it. ACCION looked into it extensively and it’s a difficult thing to put into place. One of the issues is volume. You may get the volume when you securitize portfolios across a whole range of countries, but then you’re talking about different legal regulations and different loan structures that may not be compatible for a true securitization of the underlying microcredit loans. There has been securitization of large loans to microfinance institutions— Blue Orchard has been very successful in securitizing loans to microfinance institutions. But the goal of really having the securitization connect the microloan to an investor on Wall Street has been much more elusive.

Halmekangas I would second all of that and just add a little bit.We just recently did a projection of where our funding flows will come from over the next few years, how much money is going to be needed for these affiliates, and what type. It came out to a very small amount of equity—actually a very large amount of debt and an increasing amount of deposits. That just reflects the nature of our organizations in that we don’t have a lot of deposit-taking organizations right now. But long term we’d like to see a good deal of loan funds come from the local deposit base.