Microfinance -- making loans of as little as $150 to entrepreneurs in developing countries -- offers one of the most promising ways to foster growth and alleviate poverty. Microbanks funded by governments or aid organizations have sprung up all over the world. But now, in an unusual private sector twist, former World Bank executive Gil Crawford has raised $15 million for a private equity fund dedicated to financing microbanks -- and earning a profit.
Crawford’s MicroVest fund aims to bring market discipline to microfinance. He says that the most efficient microbanks produce returns on assets in excess of 20 percent and enjoy default rates of less than 1 percent -- numbers that some big banks would love to have. Yet the public institutions and charitable groups that run the banks haven’t kept pace with the surging demand for microloans and often impose burdensome restrictions on how the money can be used. Bethesda, Marylandbased MicroVest intends to provide more capital, with fewer strings attached, by buying preferred stock in the most efficient existing microbanks, while earning itself 7 to 8 percent annually.
“One of the saddest things I’ve seen in the field is walking into a well-run microfinance branch where someone comes in and pays $50 on their loan, and the lending officer literally walks that money over to the cashier so that they can then make a new loan to another entrepreneur,” says Crawford, 46. “That’s how starved for funding some of these banks are.”
Wealthy individuals provided about two thirds of MicroVest’s initial funding, with most of the remainder coming from Care and Mennonite Economic Development Associates. New York private equity giant Warburg Pincus also kicked in some capital.
Care hired Crawford, a former senior investment officer for the World Bank’s International Finance Corp., as a consultant in 1998 to help evaluate how it could play a bigger role in microfinance; that led to the creation of MicroVest. Bo Cutter, a Warburg Pincus partner and a longtime Care director, chairs MicroVest’s board. (Crawford is CEO.) “The best way to reach a large number of poor people is to approach these microfinance banks in a commercial fashion instead of with a donor mentality,” says Crawford. “We think they’re hungry for that.”
