Profit Meets Dream of Obama’s Mother in Finance at Women’s World

By Simon Clark and Margaret Collins

The blue spiral-bound book in the Manhattan office of Women’s World Banking Chief Executive Officer Mary Ellen Iskenderian preserves advice from a little- known microfinance expert: President Barack Obama’s mother.

The report is as relevant now as when Ann Dunham, an anthropologist who campaigned for financial services for the poor, researched a rural credit program at Bank Rakyat Indonesia 20 years ago, Iskenderian says. Dunham wrote that a lender shouldn’t refinance loans just to boost its performance, or give customers more money than they can handle. The CEO says she’ll heed that counsel as she leads the nonprofit where Dunham once worked in a new direction, by starting a private equity fund.

The Isis fund, named after an ancient Egyptian goddess, will be “a delicate balance between only a profit motive and fulfilling a social objective,” Iskenderian, 52, says.

Microfinance — loaning small sums to the world’s poorest citizens — is increasingly funded by international investors as microcredit nonprofits become regulated lenders. One of them, India’s SKS Microfinance Ltd. (SKSM), backed by George Soros, last year raised 16.3 billion rupees ($348 million) in a share sale. The Boston-based Council of Microfinance Equity Funds has 23 members, including Citigroup Inc. (C)’s microfinance unit in London.

Muhammad Yunus, who won the 2006 Nobel Peace Prize for his work in founding Bangladesh’s Grameen Bank, is no fan of the evolution. “Microcredit in its true sense should be something which will help people get out of poverty, not a source for making money for rich people,” he says in an interview.

Only Way

Iskenderian says the only way to reach the 2.8 billion people around the world with no access to financial services is to tap investor capital. The Women’s World Banking fund, she says, will help her group ensure microlenders stay true to a mission of serving impoverished women.

The New York-based nonprofit is a network of 39 microfinance providers in 27 countries with 26 million mostly female customers. It’s establishing the $60 million fund to buy stakes in institutions that provide loans to people who live on a few dollars a day.

Investors may have to commit at least $1 million and pay annual fees of 2.5 percent and 20 percent of profits, according to a January presentation for the fund obtained by Bloomberg. A combination of annual fees and a share of profits are typical terms for private equity and hedge funds.

Some terms have changed since January, according to Iskenderian, who says she can’t provide details because of securities regulations governing fundraising. The fund’s chief investment officer, Christina Juhasz, who previously worked at Deutsche Bank AG (DBK) and Merrill Lynch & Co., declined to comment.

One Billion

The microfinance market may expand to one billion people and $300 billion in loans by 2019, the fund document says. More than 92 million microcredit borrowers now hold loans totaling about $52.6 billion, according to Microfinance Information Exchange, a Washington-based nonprofit that collects data on about 2,000 institutions.

Isis will promote “responsible commercialization” as risks of predatory lending, irresponsible pricing and coercive collection have increased, the investor presentation says.

The industry was shaken last year by reports of more than 70 suicides in India’s Andhra Pradesh state by borrowers who were unable to repay their loans, and the Indian central bank in May capped microloan interest rates at 26 percent.

President’s Mother

Microcredit rates are higher than for conventional loans because the administrative costs for many small loans are greater than for fewer large ones, according to the Washington- based nonprofit Consultative Group to Assist the Poor.

“The microfinance industry is at a point where it is trying to figure out how to find a balance between helping the poor and being a business that makes a profit,” says Asad Mahmood, managing director of the global social investment funds for Deutsche Bank.

Lenders won’t succeed by over-indebting clients or charging excessive rates, Mahmood says, because “ultimately the money you make comes from the work of the poor people.”

Dunham came to similar conclusions working with the rural poor. In 2009, Obama acknowledged her dedication in a speech at the Clinton Global Initiative meeting in New York.

“She championed the cause of women’s welfare and helped pioneer the microloans that have helped lift millions from poverty,” he said. “My mother understood that whether you live in the foothills of Java or the skyscrapers of Manhattan, we all share common principles: justice and progress, tolerance and the dignity of all human beings.”

Equity Stakes

The Isis fund will invest in Women’s World Banking network members as they become for-profit regulated enterprises and in other microlenders, the January document says. Investors will pledge their money for the 10-year life of the fund, according to the presentation.

Equity stakes in microlenders will give Women’s World Banking a greater say in how they are governed, and help them focus on women, says Roshaneh Zafar, founder of Kashf Foundation, a microlender in Pakistan, and a Women’s World Banking board member. Some microcredit institutions have steered their business away from women as they grew and became regulated banks, according to Women’s World Banking research.

“Having a role in the governance, the mission and the vision as a key minority stakeholder is important,” Zafar says. “The fund can help spread the message faster.”

Another goal is to encourage the microlenders in which Isis invests to sell services — such as savings accounts or insurance — that may generate revenue and help pay for the core duty of loaning money, Iskenderian says.

JPMorgan, Gates

“If you start to layer in other products, you can still very, very profitably maintain a focus on women,” she says.

Isis could also boost her organization’s own finances, she says. “We see it as not only an important way of maintaining our relationships with our network and keeping them very focused on women and their original mission but also helping the sustainability of our organization, which right now is entirely reliant on donations.”

The group, whose funders include JPMorgan Chase & Co. (JPM) and the Bill & Melinda Gates Foundation, has a budget of $10.7 million. It provides technical advice and loan guarantees to affiliates, which have $7 billion in loans outstanding and $3.5 billion in savings. The average network member’s loan is $1,200.

Women’s World Banking started in 1979 to promote financial services for women in countries from Kenya to Colombia.

Sewing Machines

“Many women in developing countries didn’t have access to a bank without a man’s signature,” says Michaela Walsh, the group’s founding president and a former Merrill Lynch broker. Targeting women is the best way to reduce poverty because they tend to spend more on their families than men, she says.

Studies of countries as varied as Bangladesh, Brazil, Canada, Ethiopia and the U.K. suggest that women generally devote more of the household budget to education, health and nutrition and less to alcohol and cigarettes, according to Isobel Coleman, a senior fellow at the Council on Foreign Relations and author of “Paradise Beneath Her Feet.”

In the Dominican Republic, Milagros Inoa de Perez was one of the first borrowers at Banco Adopem, a Women’s World Banking member. She used microloans to buy sewing machines for a children’s clothing business.

“Each loan has helped us to expand,” says her daughter Marcia, who works as an accountant in the business, which now has 42 sewing machines. Profits helped pay for Marcia and her two sisters to go to university, she says.

Javanese Blacksmiths

Obama’s mother, who died in 1995 at 52, worked at Women’s World Banking in 1993 and 1994 to promote microfinance before a United Nations conference on women in Beijing. “My personal interest is achieving greater impact,” Dunham said at a 1994 meeting, according to records kept by former Women’s World Banking colleague Niki Armacost. Dunham said she wanted to find ways to “affect the lives of women by a much larger factor.”

Her interest in the field was spurred during research in the 1970s and 1980s in Indonesia, says Michael Dove, a Yale University anthropology professor who knew Dunham there.

Her doctoral thesis was on the entrepreneurship of peasant blacksmiths in Java, and he says she found they were as entrepreneurial as Americans, just without financing to expand.

Dove says he isn’t sure Dunham, whose mother was a banker at the Bank of Hawaii, would endorse the Isis fund.

‘Pragmatic Woman’

“Ann would distinguish between an initiative whose primary goal is to bring the poorest of the poor into a banking economy and an initiative whose primary goal is to reap high profits,” he says. It “inevitably creates a different risk-reward ratio for the poor.”

Still, Maya Soetoro-Ng, Obama’s half-sister, calls their mother “a fairly pragmatic woman.”

“She definitely thought of the idea of diversifying sources of revenue,” Soetoro-Ng says in an interview, “and of securing support from non-traditional places as a way to move forward.”

Source: Bloomberg website (October 2011)