Nonprofit Mercy Corps is buying a commercial bank in Bali, Indonesia's tourist paradise, in a novel $33 million deal that could move tens of millions of people out of poverty in the next decade -- and create a new economic-development model.
Using a $19.4 million grant from the Bill & Melinda Gates Foundation, Mercy Corps will head a consortium to create Indonesia's first microfinance wholesale bank -- provisionally titled the "Bank of Banks," nicknamed BoB.
The deal, to be announced today, capitalizes on Mercy Corps' experience with microfinance programs, which typically extend small-business loans to people too poor to be served by regular banks. It also propels the Portland-based relief-and-development organization to a new frontier where nonprofits, foundations, government agencies and commercial entities collaborate to move beyond handouts in less-developed nations.
Mercy Corps, with investment from an arm of the World Bank and a Dutch fund, plans to convert a struggling Bali bank into an institution that can help thousands of small microfinance organizations attain stability and boost services. The Bank of Banks will enable the Indonesian organizations to move beyond offering microloans and savings accounts to provide insurance, mortgage finance, remittance services and mobile banking.
The bank and supporting institutions aim to help 16 million Indonesians build financial security by 2011, reaching them in new ways, via cell phones, ATMs and the Internet. Mercy Corps managers say that if successful, the strategy -- to be expanded to the Philippines -- could help 45 million people permanently move out of poverty during the next 10 years.
"Bank of Banks is expected to revolutionize the way microfinance works in Indonesia and beyond," said Neal Keny-Guyer, chief executive of Mercy Corps.
The deal represents several firsts for Mercy Corps. The Gates grant is the biggest it has received from the Seattle-based foundation. While Gates has supported Mercy Corps disaster-response initiatives, the foundation hadn't yet backed one of the humanitarian organization's non-emergency programs.
Mercy Corps has years of experience in microfinance, an approach that became widely known when Bangladeshi banker Muhammad Yunus and his Grameen Bank won the 2006 Nobel Peace Prize for their grass-roots financial programs.
In 2001, Mercy Corps co-founded XacBank, a commercial bank in Mongolia that extends financial services to yak herders and others across one of the world's most sparsely populated countries. Microfinance institutions started by Mercy Corps in Kazakhstan, Kyrgyzstan and Tajikistan have disbursed $240 million in loans during 10 years to businesses and communities.
Slipping in a window
The Bank of Banks will be different, as its provisional title suggests. Instead of directly serving poor people, it will provide sustainable access to capital and -- with an Indonesian foundation established by Mercy Corps -- offer technical assistance to microfinance institutions. The new bank arrives just in time for Indonesian nonprofit organizations whose loan authority is about to be curbed by a new law, said Kylie Charlton, global capital markets director for Unitus, a Seattle-based microfinance organization.
Mercy Corps benefited from another legal change, shopping for a bank as Indonesia raised requirements for the minimum amount of capital that banks must maintain. "There was a window of opportunity to find a bank that was struggling and buy it out," said Sasha Muench, Mercy Corps senior program manager for social innovations.
Muench and other Mercy Corps managers dreamed up the bank deal after trying for years to link reluctant commercial bankers with microlenders. Finding a bank to buy was a "long and challenging process," she said.
Mercy Corps settled on PT Bank Sri Partha, a commercial institution in Bali with two dozen branch offices. Other investors signed up, including the World Bank's International Finance Corp. and the Hivos-Triodos Fund, a Dutch microfinance organization.
The consortium will take over Sri Partha's banking license, moving the bank's headquarters to Jakarta, Indonesia's capital, according to International Finance Corp. documents. "In the Indonesia context, and for a country of that size, this is definitely a first," said Martin Holtmann, who heads International Finance's microfinance group.
"There are thousands of little microfinance institutions out there that very often are fledgling or don't really have the back-office or front-office operations to serve their customers well," Holtmann said. "The Bank of Banks that Mercy Corps is setting up is about to change that."
Nonprofit purchase of a commercial bank in a developing country proved legally complex, said Mercy Corps' Muench, and could pose operational challenges.
"The key thing," Muench said, "is to make sure that everybody working for this for-profit institution is infused with the same nonprofit mission. All profits will be plowed back into the microfinance sector."