Innovations In Emerging Markets

Brazil Banks Are Global Leaders in Sustainable Finance

Many of the environmental, social, and political challenges that confront the financial sector are magnified in emerging markets. Environmental risk is generally less transparent, huge segments of the population are financially excluded, and socio-economic inequality is a major challenge. A recent publication from the UNEP Finance Initiative, Sustainability Management and Reporting, highlights the leadership Brazil’s banks have shown in addressing these risks.

Unibanco, the third-largest private bank in Brazil, has been actively involved in driving the sustainable finance agenda and has contributed significantly to its current growth. It was the first emerging market bank to start complying with the Equator Principles, a set of social and environmental criteria used to evaluate and approve credits for infrastructure projects, and was also one of the first emerging market banks to offer research reports on the social and environmental performance of firms in its home market.

Because Unibanco pays as much attention to the sustainability of its own business practices as those of other Brazilian firms, it was also one of the inaugural firms included in the Sao Paulo Stock Exchange’s new Corporate Sustainability Index. The BOVESPA exchange launched its sustainability index in December 2005 to provide asset managers and investors with a reliable and objective benchmark of the best corporate sustainability practices in the country. The sustainability index project was financed by IFC.

Using the BOVESPA ISE index as a benchmark, ABN AMRO’s Brazilian affiliate launched the first emerging market socially responsible investment fund. According to UNEP’s publication, ABN AMRO Fundo Ethical was awarded best performing SRI fund since inception out of 221 socially responsible funds tracked by Bloomberg.

Pushing the Boundaries of Microcredit and Peace to Innovations 'Beyond Credit'

When the world’s first microfinance institution, Bangladesh’s Grameen Bank, and its founder, Muhammad Yunus, were awarded the Nobel Peace Prize, it opened up new directions for the field of microcredit, BusinessWeek reports. The honor both raises awareness of innovative small-loan financing for the poor and gives banks and corporations incentive for creative new types of investment in the sector.

Already, multinational insurer AIG has partnered with global microfinance firm ACCION International in a $5.25 million deal to develop new financial products such as insurance, financial literacy, remittances, and other possibilities. AIG’s Ned Cloonan told BusinessWeek,

"We're calling the investment 'beyond credit' because we feel that the industry is ready for the introduction of additional products and services that go beyond straight lending, and we want to play a role in developing that capacity."

Other big players such as Citigroup have already entered the field, and Germany’s Deutsche Bank has an $80 million fund that invests institutional and pension funds in microfinance.

Meanwhile, the relief within the development committee about the Nobel Peace Prize's de facti establishment of microcredit as a viable financing mode with real potential to combat poverty is palpable. See the World Bank Group-affiliated Consultative Group to Assist the Poorest's take. Also, see the related post by our friends at the NextBillion.net blog.

Foreign Investors Stay Away from Firms with Poor Corporate Governance

A study on investment decision-making by U.S. firms finds that they shy away most from overseas companies with ownership structures that "are more conducive to outside investor expropriation." The study of 4,411 firms in 29 emerging and developed markets is carried by the Development Gateway. It notes that lack of information about firms and the state of national legal institutions are greater factors in investment decisions than a country's economic development.

In an era when foreign capital is an increasingly important source of financing for emerging market companies in particular, the study's findings go a long way toward answering the question of whether corporate governance matters and how to address it.       

Brazil, South Africa, India Lead Field in Sustainable Banking

Brazil's financial sector does it again: it's home to two of the four emerging market banks singled out for innovations in sustainable banking in the Financial Times 2006 Sustainable Banking Awards shortlist, released earlier this week. Brazil's Banco ABN Amro Real and Banco Itau were shortlisted for the "Emerging Markets Sustainable Bank of the Year" laurels, along with South Africa's Nedbank and India's Yes Bank.

The FT Sustainable Banking Awards program, held jointly with IFC, recognizes global banks that have actively integrated social and environmental objectives into their operations. For more on the program, click here.

Brazil is fast establishing itself as a hub of innovations on sustainable financing in emerging markets. In December 2005, it launched the Bovespa Sustainability Index, the first of its kind in Latin America. The index includes local companies listed on the Sao Paulo Stock Exchange and will track not only their economic and financial performance, but also their corporate governance and environmental and social performance.

Microfinance as a Growth Industry in China

Firms interested in doing business in China would do well to think outside the box and outside the big affluent cities. That, at least, is the take-away from two very different articles on growth opportunities in China. While one article focuses on the potential of commercial microcredit to China's rural population, the other argues for a second look at the needs of the country's emerging middle class.

Microfinance in China, published by the University of Pennsylvania's excellent knowledge website, notes that microcredit in the country suffers substantial hurdles, including lack of efficiency and absence of an enabling legal environment. However, it says, the microcredit industry is poised for large-scale commercial development. (A brief aside: ProCredit, an NGO with 19 microfinance banks around the world is providing consulting services in China. IFC has several joint projects with ProCredit. Here's one example.)

China's provinces and "second-tier towns" are the focus of the other article, this one in the May 31 Wall St. Journal edition (closed access). The article argues that China's middle class will be drawn from its countryside. It quotes a McKinsey principal as saying: "smart foreign companies will figure out ways to sell to the emerging lower middle class".

What are the main needs of those segments of the Chinese population? Rural, low-income families will be looking mainly for better access to credit, while the emerging lower middle classes are expected to seek more options for affordable health care, housing, utilities, as well as recreation and leisure.

Egypt's National Bank for Development: A Microfinance Leader among No Equals

Egypt's National Bank of Development is the only private bank that is doing any microfinance lending in the region -- a stunning fact gleaned from reading an interesting new survey in Making Microfinance Work in the Middle East and North Africa, posted on Development Gateway.

Granted, 60 NGOs and quasi-governmental organizations are involved in microfinancing programs throughout the region, but as the report's authors say: "Engaging the formal financial sector in microfinance will be the most efficient, fast, cost-effective way to fill the outreach and financing gap and serve the needs of the entrepreneurial poor."

How many entrepreneurial poor do the authors estimate are in dire need of credit in the region? At least 4.5 million entrepreneurial poor, out of the 60 million considered living below the poverty line, they say. And what is the size of the financing gap? A conservative estimate, according to the authors, is $1.4 billion. Private financial institutions and banks operating in the Middle East and North Africa may want to do the math.

Egypt's National Bank for Development comes in as "Single in Class" for its truly unique best practice work on microfinancing, while turning a profit in the process. Alexandria's Business Association, also Egyptian, is making the transition from NGO to formal financial intermediator. A trickle for the region, but clearly solid examples of what can be achieved in a region where jobs are about as scarce as private financial institutions engaged in the microfinancing industry.   

Financiers with A Mission -- Part II; India's Avishkaar

The link between innovation by microentrepreneurs and their access to credit through financiers is beautifully made in a recent post by the World Resources Institute:

"Finance is central to social and economic growth. While big businesses have easy access to diverse sources of funds, small and poor entrepreneurs find it extremely difficult to raise money. Capital constraints prevent many bright innovations from making it to the market. "

The post in Nextbillion.net features the example of Indian microlender Aavishkar. 

Financiers with a Mission: Cambodia's ACLEDA Microfinance Bank

Basic financial services in strife-ridden Cambodia were virtually nonexistent less than 15 years ago. That means that many of its people, let alone its poorest, could forget about a crack at a livelihood. Today, nearly 400,000 of the country's poorest have access to credit through a system of 17 banks (foreign and domestic, private and government-owned), and a globally recognized microfinance bank, the Association of Cambodian Local Economic Development Agencies (ACLEDA) Bank.

With about 3 billion people around the world seeking access to basic financial services, the process of getting credit into the hands of those who need it is just beginning. A recent book by the Consultative Group to Assist the Poor (a global resource center for microfinance advisory services) looks at the record of microfinancing in the past 10 years .

"Access for All describes where the microfinance field finds itself in 2006, as well as the opportunities and challenges ahead. The book examines all levels of the financial system and answers key questions about clients of microfinance - Who are they? What financial services do they want? What is the impact of financial services on their lives? "

The Cambodian experience is one of many around the globe, including in Africa, of what works. Microfinancing is a tangible reflection of where development intersects with finance -- a mission with a bottom-line attached to it: putting a chance at a livelihood into the hands of those who desperately want one.

ACLEDA is IFC's 2005 Client Leadership Award winner. 

Making Sure Microfinancing Is Not A Passing Fad

In emerging markets, limited access to credit is not confined to the very poor, says IMF economic counselor Raghuran Rajan in the March issue of Finance and Development. In many poor countries, he writes, the middle class also has limited access to finance. The same mechanisms that will expand their access will often achieve that for the very poor as well.

The author goes on to outline the steps needed to establish financial services and infrastructure which would provide credit access to all in emerging markets. He also notes the importance of the government's role in fostering competition within a sound regulatory framework. "Given the right environment, the private sector has the ability, the incentives, and the resources to develop innovative services for the poor. A number of banks around the world, including Citibank, ICICI Bank, and ING, have started doing precisely this," he writes.

Banks in China: How Commercial Are They Really?

China's state-owned banks have been the target of major reforms over the past few years. New governance structures have been introduced, recapitalization of 3 banks undertaken, and foreign strategic investors brought in.

How far have the Chinese banks come in shedding their state-led pedigree? The jury is still out, says an IMF Working Paper, which looked at Chinese bank lending patterns between 1997 and 2004. It remains unclear, the paper notes, whether lending decisions have started to be taken on a commercial basis. Furthermore, the "pricing of credit risk remains undifferentiated and banks do not appear to take enterprise profitability into account when making lending decisions." There have been improvements, including the slowing of credit expansion. More details in the IMF Working Paper.

Click here for IFC investments, technical assistance in China.