Creating a "Bank of Banks"
June 16, 2008
Small business loans disbursed in the aftermath of the Indian Ocean Tsunami helped shops reopen their doors quickly and create additional jobs for survivors who had lost everything. Photo: David Snyder for Mercy Corps
Today, Mercy Corps is introducing a powerful new strategy to give impoverished Indonesian families a way to not only improve their own lives, but also transform their local economies.
We're spearheading an innovative approach to poverty reduction in Indonesia and the Philippines that will support the growth of the microfinance sector: a "bank of banks." This project includes the creation of a commercial bank that will partner with thousands of microfinance institutions (MFIs) and expand access to financial services for Indonesia's poor. These services, offered using state-of-the-art platforms like mobile phones, will give struggling families access to savings, loans, insurance and other resources to help build financial security.
This "bank of banks" is part of Mercy Corps' project MAXIS (Maximizing Financial Access and Innovation at Scale), which is receiving $19.4 million from the Bill & Melinda Gates Foundation's Financial Services for the Poor initiative. The foundation works with partners to make high-quality, low-cost financial services available in developing countries so the poor can manage life's risks and take advantage of life's opportunities.
By enabling MFIs to provide improved and expanded services, the bank and its supporting institutions aim to reach 16 million people in Indonesia by 2011. Longer-term goals aim to help 45 million people in Indonesia and the Philippines to move permanently out of poverty over the next ten years.
"Bank of banks is expected to revolutionize the way microfinance works in Indonesia and beyond," said Mercy Corps CEO Neal Keny-Guyer. "With support from the Bill & Melinda Gates Foundation, the bank will help make affordable savings, credit and other financial services available to many more poor people. This will help them take hold of their financial futures, and it will have a profound and lasting impact on their lives."
From fishermen to bakers, from tailors to shopkeepers, small business loans help local economies expand. Photo: David Snyder for Mercy Corps
The Gates Foundation grant will also fund the growth of MFIs that primarily work with poor clients, and build the range of innovative financial services through the support of the Microfinance Innovation Center for Resources and Alternatives (MICRA). MICRA, established by Mercy Corps in 2006, is an Indonesian foundation that provides a range of technical assistance and other services to MFIs. MICRA will expand its services to the Philippines later this year.
Bringing more opportunities to more people
The Indonesian microfinance sector is one of the world's largest, with more than 50,000 MFIs. Yet, the sector is fractured and poverty remains high, with nearly half of Indonesia's population living on less than $2 a day. While MFIs currently serve 50 million low-income Indonesians, 40 million more still lack access to any financial services.
Two key factors prevent expanded MFI outreach to Indonesia's poor. First, the majority of Indonesian MFIs lack sufficient access to capital and can only provide the most basic banking services. Second, most poor Indonesians are out of reach of the formal financial sector either because they live in underserved areas or are considered high-risk for loan disbursals.
The partnership of the bank and MICRA will help overcome these challenges by building the scope and efficiency of the Indonesian microfinance sector, and by providing sustainable flows of capital. MFIs will have access to state-of-the-art technology solutions to share information, offer new innovative products, and increase efficiency and transparency.
The bank will enable MFIs to provide diversified products beyond microloans and savings, including microinsurance, remittances, mortgage finance and mobile banking. These services will help the poor take advantage of business opportunities, protect against unexpected financial shocks, and determine their own financial futures.
"With its many microfinance institutions, Indonesia is a good place to test whether linking diverse and small financial institutions together is a commercially viable and effective way to make savings, loans and other products more widely available to the poorest people," said Bob Christen, Director of Financial Services for the Poor at the Bill & Melinda Gates Foundation. "Mercy Corps is well-positioned to move this innovative concept forward."
An investment for innovation
With the support of other strategic investors, including the International Finance Corporation, a member of the World Bank Group, and the Hivos-Triodos Fund, total funding for the bank and related programming will be approximately $33 million.
As the founder of the bank, Mercy Corps will play a leadership role in its operation and remain a driving force for its focus on poverty alleviation.
Mercy Corps has worked in Indonesia's microfinance sector since 1997. We also have a long history of launching successful microfinance institutions in difficult working environments such as Bosnia and Herzegovina, Afghanistan and Mongolia. As of May 2008, MFIs founded or co-founded by Mercy Corps have distributed more than a million loans worth in excess of one billion dollars.
Mercy Corps is committed to exploring cutting-edge ideas that will make financial services more accessible to the world's poor. Here are some other examples of our microfinance work in Indonesia, and around the world:
Over the last five years, more than 89% of resources allocated directly to programs.