ADB $250 Million Risk Program to Help Expand Microfinance to the Poor

Asian Development Bank (ADB), 13 December 2010

MANILA, PHILIPPINES - The Asian Development Bank's (ADB) Board of Directors today approved a Microfinance Risk Participation Program, marking ADB's first large scale private sector microfinance initiative.

The program will allow ADB to partner with financial institutions that actively lend to microfinance institutions (MFIs) in ADB's developing member countries, and to share the default risk on underlying MFI loans. The proposed program will support the expansion of lending to MFIs, in turn enabling increased provision of financial services to the underserved. This will help address the significant unmet demand from the poor for financial services, and provide additional funding for micro-borrowers. Under the terms of the program, ADB will typically assume up to 50% of the default risk on loans made to MFIs, in aggregate up to a maximum of $250 million.

"Microcredit has been shown to play an important role in providing seed money for businesses and improving the lives of the poor," said Philip Erquiaga, Director General of ADB's Private Sector Operations Department. "This program will allow microfinance institutions to expand lending to segments of the population who currently lack access to funds."

The microfinance industry has boomed in recent years with Asian institutions estimated to have over 47 million borrowers as of the end of 2008, with outstanding loans of over $10 billion. Demand is enormous, with as many as 600 million to 1 billion poor workers worldwide needing services, including a large number in Asia and the Pacific, home to two-thirds of the world's poor. Microfinance businesses seeking to serve this market are hampered by limited access to finance from banks, exchange rate issues, and other barriers.

The risk sharing arrangement, proposed by ADB to a range of international and local financial institutions, will allow these participants to boost loans to microfinance institutions, which in turn will result in scaled up assistance to groups currently unable to access funds, such as poor households, women and cash-strapped small enterprises.

"Under this arrangement, commercial financing institutions which are developing microfinance operations will be able to achieve greater lending scale without overextending their risk exposure," said Mr. Erquiaga.

ADB's risk support will enable participating institutions to build up their microfinance lending operations, which will help extend the reach of the commercial microfinance sector as a whole, and contribute to the development of the private sector.

ADB has been a major supporter of the microfinance and microenterprise sector for almost two decades with up to $1.9 billion in aggregate assistance for approved projects since 1988. It has extensive experience in risk sharing activities through its Trade Finance Program, under which it provides risk coverage to international banks to support trade transactions.

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