Lars Thunell, Executive Vice President and CEO of IFC, a member of the World Bank Group, discussed sustainable banking today with the Middle Eastern banking community. He explained how the integration of social, environmental, and corporate governance objectives into financial institutions' strategy can help them better manage risks and create new investment opportunities.

Thunell spoke at a joint IFC and Financial Times dinner, where banks discussed how they can make sustainability a bigger focus of their operations. Thunell talked about the upcoming 2008 FT Sustainable Banking Awards and encouraged the region’s banks to submit applications.

"More and more Banks are recognizing that sustainability is a way of developing strong brand value and building new business lines," said Thunell. "Banks are differentiating themselves by offering innovative sustainable financial products. These include loans to women entrepreneurs, as well as microfinance or insurance for people without access to financial services."

The FT Sustainable Banking Awards will focus this year on the 'bottom of the economic pyramid', the 4 billion lower-income people worldwide who together represent a $5 trillion market but who, for the most part, have no access to financial services.

By Jeremy Khan

Bapi Das, seated next to an open sewer in a teeming slum on the outskirts of this Indian city, combs his hand through his hair, smooths his moustache, and prepares to enter the global financial system.

Das, a 42-year-old commercial painter, grins as a worker for a local micro-finance group frames his face with a digital camera and zooms in. It is an important moment. His photo will adorn a smart card that, with help from a mobile phone and a fingerprint reader, will allow Das to store money electronically, make small cash withdrawals, and send money to his family on the other side of the country. It is the first bank account he has ever had.

This might seem like a classic example of the Third World struggling to catch up with the First. After all, people in the United States and Europe have been using ATM cards and the Internet for years to perform the simple banking tasks Das is only now able to do. But look again: The technology used to bring slum-dwellers like Das their first bank accounts is so advanced that it isn't available to even the most tech-savvy Americans - at least not yet.

Soon, however, it may help you purchase groceries, withdraw cash from an ATM, or ride the T. Already in the past year, Citigroup has taken a mobile banking system it pioneered in India and brought it to the United States. And a host of other companies, from Ford to Microsoft, are following suit: piloting new technologies and ways of doing business in the developing world, and only then bringing these products and services to wealthier consumers in more mature markets.

This represents a stunning reversal of the traditional flow of innovation. Until recently, consumers in the Third World also had to tolerate third-rate technology. Africa, India, and Latin America were dumping grounds for antiquated products and services. In a market in which some people still rode camels, a 50-year-old car engine was good enough. Innovation remained the exclusive domain of the developed world. Everyone else got hand-me-downs.

But today, some emerging economies are starting to leapfrog ahead. Why build a network of telephone wires out to remote areas when you can go straight to a cutting-edge mobile network at a fraction of the cost? Why burn fossil fuels for electricity and cooking if cleaner - and in some cases cheaper - alternatives, like solar and biogas, are available? Why electrify rural villages with incandescent bulbs if longer-lasting, environmentally friendly options like LEDs or new fluorescent bulbs exist? In many cases, it is mature markets like the United States and Europe, tethered to older systems, that find themselves playing catch-up.

There are numerous industries in which the new new thing is being designed for the developing world, and only later reaching the United States or Europe. Motorola's Motofone, designed with emerging markets in mind, is thinner than its popular Razr, gets up to 400 hours of standby on a single battery charge, and has a screen specially designed for text messaging that works using reflected light, with no need for an internal lamp. Oh, and it will retail for just $30. Intel has begun field tests of a new wireless broadband standard that could connect billions in the developing world to the Internet cheaply - and, if it works, will probably become the standard for the rest of us. Cheap combination drug therapies that are easier for poorer, less educated patients to follow are pioneered in the developing world before arriving in our medicine cabinets. Improvements in water treatment and clean energy - for instance, producing biogas from household waste - are also emanating from the developing world.

To achieve the growth rates and returns their shareholders demand, companies have increasingly begun chasing what C.K. Prahalad, a business professor at the University of Michigan, has called "the fortune at the bottom of the pyramid" - the vast aggregate purchasing power locked away in the 4 billion people who make up the world's poor. And as they do, companies are confronting the unique challenge of making high-tech products cheaply enough to make a profit. In some cases, this means shifting jobs for talented designers and engineers to the developing world - not just to save labor costs, but in order to better understand the markets they are now trying to reach.

"Developing markets offer the best opportunity for global firms to discover what is likely to be 'next practice,' as contrasted with today's best practice," Prahalad has written. "The low end is a new source of innovation."

Kanta, a stooped, middle-aged woman in the Delhi slum of Harsh Vihar, works part-time helping her children in their shop. What little she earns is mostly spent on food. Any money she manages to save, she hides in her apartment or on her person, where it could easily be lost or stolen. She earns no interest, of course. There are no commercial bank branches or ATMs in Kanta's neighborhood. (Like many Indian women in this area, she uses only one name.) Most banks wouldn't want her business anyway: it would cost them more to service her account than they could make off her small transactions.

Higher growth of the Small and Medium Enterprises (SMEs) can help cut poverty to a satisfactory level by eliminating various prejudices against labour intensive and creating jobs for the skilled manpower in the SME sector.

This was revealed in the just released Bangladesh Bank annual report for fiscal 2006-07.

The report said, the key reasons behind the SMEs are not entering into manufacturing are financial constrains, dismal state of utilities, technology and policy discriminations. On the others hand, Bank and others financial institutions generally prefer large enterprise clients because of lower transition costs, and greater availability of collateral.

The SMEs also fall outside the reach of micro finance schemes, and thus compelled to depend on formal sources of funds at much higher interest rates, the Bangladesh Bank report said.

The BB report, however, said that other interrelated problems like shortage of short and long term finance, lack of modern technology and lack of promotional support services are major obstacles in the way of development of the SMEs sector.

Every day 2.5 million people walk through the doors of a Wal-Mart (WMT) store in Mexico, generating nearly $20 billion in sales last year. Now they are potential customers of Banco Wal-Mart, the chain's new lending operation. So are the company's 12,000 Mexican suppliers, as well as its 155,000 employees. "We want to leverage this traffic we have in our stores," says Julio B. Gómez, Banco Wal-Mart's chief executive.

As in the U.S., Wal-Mart is Mexico's largest retail chain. It has 997 locations, including supercenters, food and clothing stores, and restaurants. It has diverted many Mexicans from traditional commerce and stirred occasional opposition from local merchants. But the president of Mexico's central bank, for one, publicly credits Wal-Mart's high-volume, budget-conscious retail strategy with helping tame inflation to the low single digits. Mexican regulators say they expect the newly chartered Banco Wal-Mart to spark competition that eventually could lower the cost of consumer borrowing.

The Credit Suisse Thought Leadership Conference 2007, organized by ISP for key clients, took place on November 20 in Zurich under the slogan "Entering the Next Level." One of the speakers was Professor C. K. Prahalad from the University of Michigan, USA. In an interview he talked about microfinance and market potential at the bottom of the income pyramid.

Cornelia Stauffer: Why are you campaigning for the market at the bottom of the income pyramid?

Professor C. K. Prahalad: Until a few years ago, multinational companies primarily focused their efforts on the one billion people who live at the top of the global economic pyramid. The other 80 percent of the world’s population that formed the base of this pyramid were ignored. With my work I want to draw attention to these 4-5 billion people, the majority of whom survive on less than two dollars a day. They have purchasing power and offer large companies the opportunity to engage actively and profitably in the latent market at the bottom of the pyramid.

Credit Suisse has been engaged in microfinance since 2003. What do you think about microloans aimed at low-income customers?

Poverty has three causes: First, poor people do not have the same access to information on markets and prices as rich people. Second, there is a lack of access to products of world-class quality. And third, they do not have access to credit on reasonable terms. So microfinance plays a key role in combating one and may be two of these three problems. Microloans can enable families to improve their livelihoods.

What is your opinion about microcredit for small and medium-sized companies (SMEs) in emerging markets and at the bottom of the pyramid?

Mobile phones are making life better for people in remote, underserved areas of India. They no longer have to walk kilometers to public call offices to use a telephone-an essential tool for buying and selling goods based on the latest market data, getting credit from lenders and other commonplace activities. So far, most of the benefits have come from one of the phone's simplest features: voice calls.

With more than 250 million mobile users and 6 million new ones added each month, India now has the "teledensity" to support more-sophisticated mobile technologies, which could have a big impact on Indian society and the economy in the next few years. (An extra 10 mobile phones per 100 people in a typical developing country leads to an additional 0.59 percentage points of growth in GDP per person, according to a London Business School study.) These include "voice broadcast" services that would let a truck owner inform residents of a village about a scheduled trip to the city, or doctors announce the availability of polio vaccinations. A more complex system would allow a small business, say, to keep track of shipments. What's holding up these services is the lack of mobile banking.

By Robert S. Katz & Ana P. Escalante

For Babu Rajan, a fisherman in Pallipuram, India, a new mobile phone brings substantial improvements to his daily existence. Rajan used to arrive at port with his daily catch and take whatever price the fish dealers were offering, according to Washington Post reporter Kevin Sullivan. If he tried to find another buyer with a better price it would take too long, and his fish would spoil. Local buyers knew these fishermen had no choice, and they colluded to keep prices artificially low.

Now, thanks to ever-cheaper mobile phones, fishermen like Rajan call several ports and dealers while still at sea and find the best prices before deciding on a market. Armed with information, Rajan reaches port with the best offer, maximizing his profits and contributing to a more efficient marketplace overall. A study of market performance of South Indian fishermen by Robert Jensen and recently published in the Quarterly Journal of Economics showed that once mobile phones became available to Rajan and his compatriots, fishermen’s profits rose by eight percent on average and consumer prices fell by four percent on average.

The fourth Arab Meeting for Small and Medium Industries, which was held in Sana’a from 25-26 November, has recommended establishing an Arab Investment Bank to finance small and medium industries, to be approved at the next pan-Arab summit. The meeting called on Arab countries to set up a legal framework to organize small and medium industries and to unify government efforts to assist this sector.

It was recommended that Arab countries should create financial mechanisms which cover the operational needs of small and medium industries through setting up co-operative banks, on the lines of those found in European countries.

Sensing a huge potential in the mass segment, foreign banking major Barclays Bank will soon launch a banking product aimed at the unbanked and under-banked segment in the country.

Unlike its other foreign peers which entered the Indian market by tapping high networth clients, Barclays, a late entrant, believes there is a fortune to be made at the bottom of the pyramid.

By Otaviano Canuto

Thomas Trebat was right when he remarked here yesterday "an enormous share of the Latin American wealth generated in recent years has piled up in the hands of a privileged few that may or may not be playing a useful role in turning the present boom into self-sustained economic growth". Ultimately, the current cyclical upswing will mean more than collecting low-hanging fruits only to the extent that it is accompanied by institutional changes leading to sustainable patterns of capital accumulation and productivity growth, what will necessary require a departure from the historical rent-seeking traits of capitalism in the region. However, while Tom searched for answers to the questions he posed by looking at the top of the pyramid of income distribution – e.g. whether globally competitive high-value brands, products and companies are emerging in the region – I would rather suggest that, in the current Latin American context, the bottom of the pyramid is the best place to look for yardsticks regarding progress and sustainable growth.

Good News from the Bottom

Let me start by highlighting some news that may certainly raise the hope that the current boom will yield at least some long-bearing fruits. I refer to the lower income concentration and poverty incidence that have come hand-in-hand with the low-inflation-cum-higher-growth experience of the latter years. In the case of the two largest economies in the region, which between them add up to more than 50% of the region’s 560 million people, as The Economist observed: "the incomes of the poor are rising faster than those of the rich in Brazil (where income inequality is at its least extreme for a generation) and in Mexico.