IFC, the private sector arm of the World Bank Group, in collaboration with KfW, Germany’s development bank, has signed a strategic partnership agreement to support microfinance institutions through the new Microfinance Initiative for Asia.
Over the next three years, IFC, KfW, and other partner institutions will support microfinance institutions throughout Asia by committing up to US$1bn for debt and equity investments, structured finance, and advisory services.
This bold strategic partnership, the first microfinance initiative of its size to target the poor in Asia exclusively, will also have a catalytic impact.
Asia has been at the forefront of establishing microfinance institutions, in large part due to the groundbreaking work of pioneers such as Nobel Peace Prize winner Muhammad Yunus. But the financing needs of low-income households and microentrepreneurs in the region still remain largely unmet. Demand for financial services among entrepreneurial poor people is extensive. But the supply of microfinance, estimated at US$4bn and serving 22mn borrowers, is limited and concentrated in just a few countries and institutions, with an overall market penetration rate of only 6 %.
Speaking at the signing, Heidemarie Wieczorek-Zeul, German minister for development cooperation, says, “This initiative will establish the necessary financing mechanisms to link microfinance institutions to the domestic and global capital markets, helping them expand their outreach to the poor. I am convinced that the strategic direction by IFC and KfW will increase access to finance and contribute to poverty alleviation.”
Lars Thunell, head of IFC, adds, “The primary constraints on increasing financial access are a lack of institutions and the absence of adequately structured risk capital. The Microfinance Initiative for Asia will tackle both constraints, achieving another landmark in promoting commercial microfinance. By offering long-term local currency loans and equity participation, together with advisory services, the initiative aims to increase microfinance outreach by over 5mn new clients by 2009.”
A report recently co-published by IFC, The Next 4bn: Market Size and Business Strategy at the Base of the Pyramid, discusses the market opportunities for serving the 4bn people at the bottom of the economic pyramid – those with annual incomes below US$3,000 in local purchasing power.
Asia’s 2.86bn people in this category represent 83% of the region’s population, the vast majority of who lack access to financial services. The findings show the importance of the joint IFC-KfW investment strategy, which will seize market-based opportunities that better meet the needs of those at the base of the pyramid, increase their productivity and incomes, and empower their entry into the formal economy.