Defeating Global Poverty

This is a continuation from Part I which focused on a recent New Yorker article.

New York Times Article

Elizabeth Malkin recent wrote an article in the New York Times called, Microfinance’s Success Sets Off a Debate in Mexico where she outlines some of the issues in the debate on the commercialization of microfinance. This article focuses on Banco Compartamos, a successful microfinance bank in Mexico, which went public in 2007 resulting in a large amount of publicity on investor returns from a bank which serves Mexico's poor.

First, if you'd like to get a deeper understanding of the Compartamos IPO, there is an excellent case study written by Richard Rosenberg and published by CGAP (Consultative Group to Assist the Poor ... part of the World Bank) called CGAP Reflections on the Compartamos IPO. I have read this article in detail and found it very helpful in unpackaging the complexities, nuances and unique circumstances of the IPO which is often lost in the sound bites of both supporters and critics.

Here are a few [of the many!] facts surrounding the Compartamos IPO:

• Compartamos didn't issue any new shares as this was a secondary offering. Rather, certain shareholders sold their holdings on the Mexican stock exchange.
• At the IPO, more than 2/3's of the shares of Compartamos were held by NGO shareholders who were (and are) committed to reducing poverty.
• $275M or about 5/8ths of the IPO sale proceeds went to NGOs to reinvest in their missions and the rest (about $150M) went to private shareholders.
  
• The IPO made public (and realized in the case of the stock sellers) the investor returns which had accumulated while the company was private. That is, while there likely was some upward bump due to market conditions in the value of the shares through the IPO process, most of the investor returns were not related to the IPO itself.
• At the IPO, the market valuation of Compartamos was approximately $1.5B which represents a roughly 100% per year compounded return for investors over 8 years.
• The interest rates charged by Compartamos in terms of yield in 2005 was 86.3% (when you add required VAT, the rate to borrowers is about 100%.)

Needless to say, with these type of numbers floating around in the same sentence as "the poor" there are lots of opinions on this transaction and whether this is a positive or negative event for microfinance and ending poverty. Supporters (and even CGAP) say that this is going to result in a lot more private capital being directed to the poor resulting in a broader variety and higher-euality financial services being delivered to the poor. Critics highlight the high interest rates as gouging the poor and the amount of profits pocketed by private investors (although somewhat reduced in this situation) as being exploitive. And most everyone agrees that optically high profits in serving the poor could be used by populist politicians to argue for regulations on microfinance which could reduce the availability of financial services to the poor.

Here are some additional facts on Compartamos:

• To survive the heavy devaluation of the peso and inflation in 1995, Compartamos was forced to raise its interest rates (to its current rate levels) in order to survive.
• When this macro economic financial turmoil subsided in 2000, Compartamos chose not to reduce their interest rates in order to fund rapid expansion to reach new [poor] clients. CGAP report notes Compartamos's growth rate of 46% per year post 2000 (vs. 24% in previous 4 years) would not have been possible without the higher retained profits from maintaining these interest rates.
• The interest rates charged by other Compartamos are about the mid-range range for what MFIs charge in Mexico and there isn't much difference between the high and low rates.
  
• Of the interest earned by Compartamos, about 25% of it is profit. That is, they would make no profit if their interest rate was ~65%. [Note: when I asked the CEO of Mexican MFI competitor why they didn't charge a lower interest rate than Compartamos, he said that this would only put them at the disadvantage in their ability to fund growth of client reach. That is, they would grow more slowly serving fewer poor clients.]
• Their single largest cost is "operating expense" which is relatively high because they are continuing to forward invest in opening new offices to expand their client base. They are more cost efficient than most MFIs in Mexico.
• Most of Mexico's population still have no access to bank services and credit in particular.
  

Here's another interesting perspective on commercialization of microfinance titled "What would Leland Stanford do?" by Jonathan Lewis of MicroCredit Enterprises.

All of this data is hard to get your head around ... yet alone come to a clear conclusion upon.

The question in my mind is whether in the long-run the Compartamos IPO will be a net positive or net negative for the poor in Mexico?

I think that on net it will result in a positive result for Mexico's poor. The main factor is that the IPO has raised awareness of the bankability (investability) of the poor and this will attract more private capital which is the only source large enough to support the development of a broad range of financial services for the poor. While I expect that in the short-run that interest rates for microloans aren't going to drop much, I do think that competition will drive down interest rates in the medium term as more players enter the market. I do hope that competition comes sooner rather than later in order to avert meddling by populist politicians.

Now there's lots of fodder in this post for some controversy. So, please post your comments with as much objectivity as possible ;-) Disagreements are fine.

Labels: microfinance

It is healthy and expected for any growing trend or endeavor to receive critique and microfinance is no exception. I've decided to do a mini-round up of some recent critiques for those of you who might not have seen them.

The New Yorker Article

The New Yorker recently published an article by James Surowiecki called What Microloans Miss. In this article, Surowiecki argues that while microloans definitely have positive impact they are not what poor countries need most in order to get richer. He observes that the majority of people in developed countries are salaried workers, not entrepreneurs, hence we need more new small/medium businesses which hire people (he calls the "missing middle".) He also states that microloans are often used for non-business activities including providing consumption credit during lower income periods. He calls for more focus on equity investments vs. loans to small businesses in addition to loans. In summary, he says "for some people the best route out of poverty will be a bank loan. But for most it's going to be something much simpler: a regular paycheck."

Microfinance network Pro Mujer CEO, Ben Moyer posted a response where he argues that "the goal [of microloans] is not to make “poor countries richer”; it is to bring desperately poor people out of poverty by helping them to become self-sufficient." He goes on to note that "For now, the impoverished semiliterate and illiterate women receiving microloans won’t benefit from investments in the 'missing middle.' Microcredit will continue to offer the best return on investment, because it eradicates poverty one person at a time."

I think that this isn't an either/or type of issue, but an AND ... that is, we need to encourage the continued growth of microfinance and new growing enterprises which create income for families in poor countries.

Microfinance appears to be the best tool available to quickly grow the income of desparately poor families to the point which they can get above the poverty line. That is, they can become relatively stable in being able to provide for their basic needs. Microfinance requires relatively small amounts of capital and infrastructure which means that it can reach and serve large numbers of families very quickly. And you can start to see income improvements in terms of weeks, not years. So, while I agree that we should not over-hype and over-promise on how microfinance can reduce extreme poverty, I also think we should not underestimate the continued positive impact it is having. More importantly, there are many countries and regions where microfinance is almost non-existent, so we need to continue to encourage increased investment to bring this baseline financial service to these families.

There is indeed a dirth of financing options available for new small business ... even high-potential ones ... in emerging economies. I wrote previously about this "funding gap". Also, there is a good article by Vinay Ganti which dives further into this topic. The reality though is that this is a medium to long term contributor to emerging market income due to the nature of starting and growing these businesses. It doesn't mean we should not start investing now!

Also, to get perspective on the reality of timelines for dramatically changing systems, I recommend Hernando Desoto's groundbreaking book on the history, state and importance of adequate property rights described in his book, The Mystery of Capital. Desoto reviews the history and complexity of the development of property rights in the USA (and other countries) not to discourage more acceleration in property rights in other countries, but on the contrary to help articulate the lessons learned in order to accelerate property rights in emerging countries. We want to deconstruct (in order to understand) the accelerated success of new business starts in certain Asian countries over the past 50 years in order to better encourage similar growth in countries which have not yet participated in poverty reduction growth.

Read Part II

Please post your thoughts in comments.

Labels: microfinance, social enterprise

Well-run microfinance banks are now starting to attract new and interesting sources of growth capital from investors including Legatum, Unitus Equity Fund, AAvishkaar Goodwell, Vinod Khosla, Accion Investments, Sequoia Capital and many others. This is great news as the "elephant in the room" issue for microfinance is that globally microfinance is currently serving at most 15% of the demand. That is, 85 out of 100 families who could benefit immensely from microfinance have no access to microfinance. And most of those served are only provided basic microcredit business loans, not a range of helpful financial services. The only way this supply/demand gap is going to be narrowed any time soon is for global capital markets to be tapped ... there just isn't nearly enough philanthropic dollars to fund this expansion.

As I've written about earlier, I see microfinance banks as providing a new and large-scale, low-cost distribution channel to the world's poorest families (aka as "base of the economic pyramid" of "BOP") for products/services which provide opportunity for these families to step out of the multi-generational disease of extreme poverty.

The question is who is going to provide the most helpful and widely available new products and services for these distribution channels? History has shown us that it won't be the current large incumbent corporations which almost never innovate and have a very difficult time prioritizing investments in emerging market segments due to the high opportunity cost compared with their current businesses. So most of the innovation is going to come from entrepreneurs forming new companies to bring their innovations to market.

So who is going to fund these entrepreneurs? Most of the venture investors (like those listed above) start investing once a venture is off the ground with product in the market. These investors want to make an initial investment of at least $1-3 million and often higher as their investment funds are structured for these size of investments. [This is often referred to in venture speak as Series A round or later.]

What about an entrepreneurs first $25,000, $100,000 or even $500,000 capital to build out a solid business plan, attract the right key talent, build the first generation product offering and other investments required in order to attract these institutional-type investors? These monies are often called seed or angel investment monies and are critical for the bootstrap and startup phase of any business which is seeking to build a meaningful high-volume business with necessary upfront startup investments.

Traditionally, these seed funds either come from the entrepreneurs own savings and some of their close friends and family members. Essentially, people are betting on "you" the entrepreneur. Another source of seed capital is from individuals who seek out very early stage venture investing opportunities. These "angel investors" often invest on the order of $10,000 to upwards of $100,000 in promising new ventures. Often the angel investors also become active advisors and networkers to help an entrepreneur get their business off the ground.

This seed/angel pool is working ok (not, great) for established business segments like technology and pharmaceuticals, but there are very few seed investors for businesses targeting the BOP market. Additionally, many of the highest potential entrepreneurs focusing on BOP businesses live in the markets where they will be building their businesses and have both limited personal and personal network resources as well as limited options for angel investor capital.

There are a few pioneering organizations which are targeting early seed stage investments in BOP businesses including Ashoka, Echoing Green, Acumen Fund and Mercy Corps' Phoenix Fund. All of these funds are backed by philanthropic monies so they are quite limited in their fund size meaning that they can make either only very small investments or a few larger ones. They are also not setup to help their investees raise additional necessary capital which is often crucial to realizing the business (and impact) potential of these businesses.

Hence, there is a significant funding gap for seed level investment capital necessary to build the next high potential social businesses. I believe this provides a significant opportunity for developing venture-oriented seed funds which focuses investment in high-scale potential BOP businesses. Please post comments if you are aware of any additional seed investment funds in this category.

Labels: social business, social investing

I am increasingly convinced that businesses focused on serving the world's poorest 4 billion citizens are a very good investment whether you are looking for financial return and/or positive social impact return. That is, for those of us who seek to end poverty, the scale and sustainability potential of businesses focused on this "market segment" have enormous potential for doing good AND doing well. We don't live in a zero sum world.

Due to the recent increase in non-charity capital flowing to entrepreneurial microfinance banks, we are seeing continued and exciting new growth levels in access to microfinance for the world's poorest. Correctly, I would argue, most microfinance banks are focusing primarily on client base expansion with basic microcredit products. One of Unitus's microfinance partners, SKS based in India is now adding more than 100,000 new client every MONTH! This is creating a new large-scale, relatively low-cost distribution channel for delivery of products and services to the world's poorest families.

The initial benefits of having microcredit loans have been HUGE for these poor households. Even while paying loan rates similar to their middle class fellow citizens (ranging from 25-75% in various countries), most borrowers are comfortably paying back their loans with significant growth in net income. And this occurs with generally nothing more than the loan ... that is, no business training, no additional education, etc. That is, the women (most borrowers are women) are putting their existing knowledge and skills to work with a very positive income growth result.

I believe that there are at least two additional categories of significant benefit for these poor families which are on the verge of taking off: (1) products/services which increase the earning potential of the families; and (2) products/services which increase the purchasing power of the families. The first category includes many new opportunities which enable families to earn more for the same labor input and/or protect their existing assets. Examples include skills training, micro-franchises, new tools, supply chain integration, insurance products, savings products and many other products/services optimized for these families. The second category includes leveraging the aggregate demand of these families to attract the R&D, manufacturing and distribution investments to bring new, better and cheaper products to these families thereby enabling their money to purchase more. Examples include affordable mobile phones and better/cheaper food and other staples.

And when you combine these new economic growth and stabilization products/services with a the microfinance financing mechanism, you open up even more opportunities. One example would be a small scale renewable energy electricity generation system which could be operated as a business by a micro-entrepreneur (e.g. micro utility), financed by a microfinance bank and resulting in decreased cost of energy for a family in a rural village.

These new businesses serving the world's poorest have huge scale potential ... that is, an extremely large potential customer base. This means that if operated well even a small profit per customer could result in a large total profit over time. So, you've now got an attractive destination for capital combined with potential for significant social impact.

Now, I know that some people are concerned that these businesses will end up earning profits from these poor families and they feel this is morally wrong. I ask though what a better alternative is? For I think it is at least as morally wrong for us to withhold (or delay) the benefits of opportunity for these families in the name of protecting them from potential abuse.

Please post your thoughts in comments.

Labels: poverty, social business, social investing

Mark Lange, a former speechwriter for President George H.W. Bush (don't tune out!), wrote a very interesting 5 part report called "An End to Poverty" summarizing some of the latest facts and thinking on extreme poverty and the road forward.

I think this is an excellent summary which challenges both the mainstream left and right attitudes and solutions to poverty. He calls us to focus on the "last billion" who are stuck in extreme poverty rather than to see all developing nations/peoples as in the same situation (which they are not.)

He has "borrowed" many of his stats from Paul Colliers new book, The Bottom Billion and added some new ideas. I just finished reading Colliers' book and I will soon write a book review with a strong recommendation to read.

Part I - A first step for the global poor – shatter six myths
Part II - Why so much aid for the poor has made so little difference
Part III - What it takes to open a door for the poor
Part IV - The risks of fighting poverty too well
Part V - Practical steps to end poverty

Please post comments about facts that surprised you and things that Mark raises which cause you to wonder if you need to rethink some things on how you're thinking about the best approaches to ending extreme poverty.

A Billion Bootstraps: Microcredit, Barefoot Banking, and the Business Solution for Ending Poverty

I think this the best book that I've read so far which provides an introduction to microcredit which is designed for a non-industry expert and, more specifically, for someone who is looking to get involved in microfinance.

The two authors, one the former CEO of Opportunity International, HOPE International and Geneva Global and another a "lay person" to microfinance provide a great combination in making microfinance more understandable and approachable for all of us.

Read my full review

Most people perceive that the world is a pretty rotten place and getting more rotten. We've got more wars/violence, more inequity, Africa getting poorer, climate change, etc.

The Economist recently published an article sharing statistics about how the world is doing looking at three categories: the underlying social condition in poor countries, poverty alleviation over the past decade and the incidence of wars and political violence. The net is that while there definitely are some rotten things going on, the net is that over all the world is a much better place for most people than it was a decade ago. Here are a few of items from the article (please read the article for more details as there are a lot!):

• 25 years ago in China, over 600M people were living on < $1/day. Today this number is 180M ... meaning 420M+ people are now above this level.
• Between 1999 and 2004, 135M people worldwide rose from < $1/day to above this level. This is more people, more quickly than at any other time in history.
• In South Asia, the number of people without clean water has halved since 1990.
• In 1975, 75% of people aged 15-25 were literate. Now the rate is almost 90%.
• In 1970, the fertility rate in East Asia/Pacific was 5.4 and now is 2.1 In South Asia, it was 60 and now is 3.1. Overall, global fertility has fallen from 4.8 to 2.6 in 25 years. Africa has all but one of the countries with fertility rates above 5.0.
• A World Bank study noted that every 1% increase in national income her person in an emerging country translated in 1.3% fall in extreme poverty.
• In 2007, the global economy entered its fifth year of over 4% growth -- the longest period of expansion since the 1970's. Also, trade grew 9% despite all of the challenges.
• Almost half of all humans lives in countries with growth of more than 7% per year (which doubles the economy every decade).
• Inequality has risen in both rich and poor countries overall, but there are examples where this is not true questioning whether globalization is the main culprit of inequality. The Economist argues that lack of [quality] education is likely the biggest culprit.
• In 1990, more than 25% of people in developing countries lived on < $1/day. At current rates, this will be 10% by 2015.
• Income is not the only way to quantify improvement for the poor. Monetary measures understate the real gains from things such as lower child mortality, safer water, literacy and other social achievements.
• A study shows that the number of conflicts (international and civil) fell from over 50 at the start of the 1990's to just over 30 in 2005. The number of international wars peaked in the 1970's and have been falling ever since. The death toll in battle fell from over 200,000 a year in the mid-1990's to below 20,000 in the mid-2000's. [The WHO has higher numbers.]
• The number of incidents of terrorism has increased since 2001 although the number is still very small.

I am not trying to say our efforts to accelerate the end of poverty should be reduced, but simply to notice and celebrate where progress has been made.

Were many of these data points a surprise to anyone else besides me?

Labels: poverty, poverty stats

A new survey by the World Health Organization on the impact of widespread distribution of free bed nets combined with anti-malarial medicines notes some very positive results. Here are some excerpts and summaries:

In Ethiopia, deaths of children from malaria dropped more than 50 percent. In Rwanda, they dropped more than 60 percent in only two months.

Zambia had only about a 33 percent drop in overall deaths because nets ran short and many districts ran out of medicine. But those areas without such problems had 50 to 60 percent reductions.

“We saw a very drastic impact,” said Dr. Arata Kochi, chief of malaria for the W.H.O., “If this is done everywhere, we can reduce the disease burden 80 to 85 percent in most African countries within five years"

He estimates this 5-year campaign would cost about $10 billion and would reduce the death rate due to malaria to thousands per year rather than millions per year who now die.

Reporting on this report in The Economist and New York Times.

Labels: africa, malaria, poverty

Intellecap is running their 3rd annual business plan competition for social entrepreneurs based in India. They are offering prizes totally $US25,000 plus an opportunity to get support and assistance in refining your business application.

Check out details at Srijan 2008 web site.

I think business plan competitions serve a very helpful purpose in motivating entrepreneurs to get more concrete about their vision and prepare for the necessary infusion of investor capital. I believe that social entrepreneurs will continue to have to a tremendous (if not the largest) impact on ending poverty in the next decade.

Please post about other social entrepreneur business plan competitions or the like that you are aware of for the benefit of readers of this blog.

Labels: intellecap, social business, social entrepreneurs

There is a growing interest in a new kind of business that is now being referred to as a "social business" or "social enterprise" (I am going to use the former terminology.) I'd like to explain and unpackage this idea a bit and contrast different definitions/perspectives.

The key difference between a social business and a traditional business is that a social business explicitly sets expectations with investors (usually in its bylaws) that it will simultaneously pursue two objectives -- (1) specific positive social impacts/"returns"; and (2) financial returns. Generally, social businesses "warn" investors that the financial returns may be negatively impacted by the social objectives and therefore they seek investors who understand and support these dual objectives when they make their investment. By definition a business must be ultimately self-sustaining ... that is, generate a profit/surplus which can allow the organization to continue without indefinite infusions of investor capital. I say "ultimately" because many businesses have periods of operating losses as they startup or pursue periods of forward investing with the goal of being more sustainable long-term.

So far so good. Then the definitions of social businesses by different people start to diverge.

Non-Profits and Earned Income. There are a few people which consider non-profit organizations which have income generating activities to qualify as social businesses, but most agree that while these may be good activities they are not in themselves social businesses as they continue to rely on donor income to be sustained. I think it is increasingly important for the viability of most non-profits to have a diversity of income sources which include earned income.

Self-Sustaining Non-Profits. There are a number of institutions which have explicit missions to "do good" and have sufficient resources/income to be self-sustaining. These include private foundations, endowments (e.g. universities) and, more recently, operating businesses organized in a trust-type format. An example of the latter are a number of successful microfinance banks which generate profits, often are subject to tax, but are run by trustees (as there are no shareholders) who by law cannot have a personal benefit from the organization. Generally, the foundations and endowments are not considered social businesses even though some of them do have some operational components. For true operating businesses run inside non-share capital structures, these are increasingly viewed as social businesses even though they may face future limitations due to their inability to accept investor equity capital.

Corporate Philanthropy. Many companies have initiatives to "do good." Some organizations commit a specific [small] % of corporate profits to these initiatives. Examples of companies which have institutionalized this are Ben & Jerry's, Google (1% of equity, 1%profits) and RealNetworks (5% of profits). These come under what's known in the business world as the "corporate social responsibility" category. Generally, these initiatives are separate and unrelated to the company's business. There is much debate about whether these are essentially public relations efforts vs. serious attempts to make a meaningful/optimized social impact. See my post on Bill Gates on Creative Capitalism. Most people agree that simply having some "do good" social programs do not make the business a social business.

Yunus Definition of Social Business. In Muhammad Yunus' latest book, he argues for a much narrower view of a social business. He proposes that only two types of businesses are true social businesses: (i) businesses owned primarily/exclusively by the poor; and (ii) businesses where investors are limited to only receive back their invested capital and no more. He says that type (i) provide social impact through the returns they provide to the poor through shareholding and don't necessarily need to have a social mission (although having one would make them an even better social business.) For type (ii), he argues that if the investors have any potential for return above their investment that this will always trump any social objectives.

"Hybrid" Social Business. Then there's a form of social business which has clear objectives for both social impact and financial return. One of the most prominent examples are the many "for-profit" microfinance businesses sprouting up around the globe. These businesses explicitly operate as businesses (with investor capital) and focus on providing valuable products and services to the poor (if not the poorest) citizens/communities. Some argue that these are simply "regular" businesses which happen to focus on a certain market segment ... the poor. In some cases, businesses which focus on the poor/vulnerable are exploitive ... e.g. moneylenders and their re-branded breathern, pay day loan providers. While there definitely are exploitive business models, there are a growing number of examples of businesses which genuinely seek a material positive social impact. [I will cover some controversial examples of highly profitable microfinance banks in a separate posting.] There are a growing number of social investors who are seeking out quality social businesses of this nature ... a good example is Good Capital.

[There are some businesses which have a more indirect impact on a population ... example is mobile telcom operators which appear to increase GDP in emerging markets as subscriber penetration increases ... Merrill Lynch report 0.59% increase in GDP for every 10% increase in mobile penetration ... but generally these are not seen as social businesses.]

Why I Like the "Hybrid" Social Business Model

While I have a lot of respect for one of my current day heroes, Muhammad Yunus, I disagree with his narrow view of a social business because I think it is too limiting on the potential for social impact through the social business construct. Here are a few of my thoughts:

• Investor expectations do matter. If you select investors who are incompatible with your objectives (e.g. they don't value your social impacts), you're going to have a challenge keeping focused on your social objectives. But, this is true for any business ... you need to find the right investors and set expectations very clearly.
• Investors take a portfolio approach. Almost all investors seek to have some diversity in their investment portfolio in order to mitigate risk. If I want to be a social business investor, I'm going to want to invest in multiple social businesses realizing that returns/results will vary. So, if I invest in 10 social businesses and 5 fail (no return, not unusual), 3 have modest returns and 2 have strong returns, I have less risk. I also potentially receive my capital back plus a return (both financial and social.) This means that the successful social businesses are overcompensating me in return (financial and social) and the unsuccessful social businesses are undercompensating me. If I agreed to only received my invested capital back with no financial upside, then I would be losing 50% of my invested capital in this scenario and this should be structured a charitable donation.
• Social entrepreneurs may serially fail. As noted above, it is not uncommon for 50% of businesses (any type of business) to fail. Let's say we have a very eager social entrepreneurs who starts 5 social business which fail and it's only her 6th social business which succeeds. Let's say that she creates huge personal indebtedness in starting the all of these businesses. Why shouldn't she be able to have a reasonable financial return on the 6th business in order to compensate her for the risk and expense she took in developing all of these businesses? Aren't we going to dissuade social entrepreneurs from the necessary risk-taking if they have no financial upside from their personal investment?
• Accessing investment capital. While there is a considerable amount of money in foundations, donor advised funds and other like pools, these funds represent a very small amount of the overall investment capital pool. Most people need/expect to earn a financial return if they are going to commit monies from [their much larger] investment capital "pocket" (vs. their much smaller philanthropic pocket.) So, if you want to attract this capital, you need to offer a financial return even if it is potentially somewhat lowered due to the additional social impact return objective.
  

Since I believe that social businesses should not be artificially limited in their ability to provide financial returns to investors and staff, I am going to use the term "social business" (with the "hybrid" adjective) going forward to refer to businesses which have an explicit and material social objective in their DNA.

Labels: social business, social enterprise, social entrepreneurs, yunus

Muhammad Yunus, 2006 Nobel Peace Prize recipient, has recently released his second book, Creating a World Without Poverty. The centerpiece of this book is Yunus proposal for a new kind of institution called a "social business" which is a for-profit business which has as its top objective a social objective/mission. Yunus makes a passionate argument for the benefit and role of social businesses in helping us move extreme poverty to museums.

Read full book review

Labels: microfinance, social enterprise, social entrepreneurs, yunus

Bill Gates shares his vision for "creative capitalism" at the World Economic Forum in Davos this past week. His speech is 20 minutes long, but very worthwhile for people interested in what the leader of the world's largest foundation is thinking.



Here are a few of his points I noted:

• Bill is an optimist ... he sites examples of how overall the world is getting better including improved rights for women, doubling of life expectancy in the past century, access to medicines and more ... but he is an impatient optimist as there is a lot more than can be done
• About 1 billion people live on < $1/day ... most of these people don't get enough food/nutrition, clean water or have access to electricity
• Market incentives enable benefits in inverse proportion to need ... that is, the most less off benefit the most and the least well off benefit the least
  
• He believes we need an innovation in the capitalist system ... a new form of incentives for businesses to serve the 1/3 of humanity who benefits the least from capitalism
• He calls this new endeavor, creative capitalism
  
• Capitalism encourages self-interest ... creative capitalism adds interest in caring for others ... especially the poorest others
• He proposal is that companies who engage in serving the poor should be given public recognition as their reward for these investments
• He encourages companies to compete with each other to do the most good (in addition to making profits) and governments should create market incentives for this behavior
• He challenges companies to contribute their "best minds" for innovation and their core expertises and not just their cash to these efforts
  

If you prefer reading a summary of what he talks about, here is Wall Street Journal article.

This idea is clearly aimed at big companies and government which is fine and good. I'm going to write more about social entrepreneurs as I believe they could even have a more significant long-term impact on bringing beneficial products and services to the poorest.

Do you agree with Bill Gates? Post a comment with your response.

There are two recently released reports on the top global microfinance organizations:

• 2007 MIX Global 100
• Forbes Top 50 Microfinance Institutions

Both of these are based on data collected by Microfinance Information eXchange, Inc. (MIX) which is leading market research publisher of microfinance data. Forbes rankings are also accompanied with some additional articles on microfinance.

First and foremost, I want to commend MIX for publishing this superb report. This is an invaluable tool for getting a snapshot of the microfinance industry at the end of 2007.

Here are a few highlights from the more thorough 2007 MIX Global 100 report:

• Top 100 expanded grew client base an overage of 75% in 2006
• Top 100 institutions which could accept savings (a minority) on average now have 2 savers for every borrower (yes, the working poor do want to save!)
• India is leading the client growth with many MFI's growing by more than 100%. Additionally, India MFIs are leading the way in cost efficiency plus interest rates with low profit margins.

A couple of quick observations on the MFIs/reporting that could be improved/refined:

• Transparency. Many organizations have a transparency ranking of 100%. Frankly from my personal experience in working with many of these organizations, there is a significant need to improve transparency so the bar must be too low for the "perfection" grade. For instance, quality and independence of board of directors is an important factor.
  
• Staff Efficiency. Banco Popular do Brasil claims 7,200 borrowers per staff member -- the #1 ranking. The #2 ranking is 1,400 borrowers/staff member. Frankly, I don't believe anything above 1,000 borrowers/staff member is an accurate report. Either the numbers are just wrong on they are outsourcing some roles which should be reflected in this ratio. Overall, I'd like to see the staff efficiency metric move to something like "margin per staff member" as many of the more innovative MFIs are launching a broader set of financial products/services which can reduce borrower/staff efficiencies, but ultimately create improved staff productivity as increased value for the client.
• Portfolio at Risk. The top 57 (of 100) portfolio quality MFIs have a portfolio at risk (PAR) of 0% and the average for the top 100 is 0.0% (rounding to only one decimal). While I'm a big fan of portfolio quality, I think that this means the these organizations are not taking much risk and therefore they are not reaching their social impact potential. Somehow I think we want to discourage MFIs from having too low of a PAR (as well as too high of a PAR) to encourage innovation and risk taking.
• Profitability. This is a good way to expose the MFI who have very high profits (remember from whom they are making them). I would also like to see publishing of average yield on loan portfolio as this would expose the effective interest rate that the MFI is charging borrowers and could again help outsiders' insight. In general, I'd like to see more transparency on MFI interest rates with accompanying explainers on their cost of capital and operating costs to explain their profitability targets.
• Savings. I think we're going to start to see a lot of pressure on central banks to allow more institutions in this sector to have options for collecting and then mobilizing (re-lending) savings for the working poor. This will also have a significant positive impact on the MFI cost of capital and therefore the opportunity to lower borrower interest rates further.
  

If you have other comments and/or observations, please respond in comments.

Labels: forbes, microfinance, mix

I recently finished reading David Bornstein's book, How to Change the World: Social Entrepreneurs and the Power of New Ideas. This book is a very fun read filled with stories of innovative social entrepreneurs tackling and making large scale progress on many national and global social issues. In a world where the media focuses mostly on what's not working, it is encouraging to see what is working under the radar.

Read my full review.

Labels: ashoka, book reviews, bornstein, poverty, social entrepreneurs

After spending time in India and the Philippines over the past few months with some of the world's most innovative and fast-growing microfinance organizations from around the globe, I have a few thoughts on the next phase of microfinance which we are about to see flourishing over the next 3-5 years. I will refer to this as "Microfinance 3.0".

"Microfinance 1.0" (M1) is the model used to start most microfinance programs in most countries. M1 is generally started as a non-profit entity which is funded by donors and primarily focuses on developing a successful model for deploying microloans to poor entrepreneurs ... which includes having a high repayment rate on loans and starting to move towards getting enough clients (scale) in order to become break-even with lessening reliance on donation capital. Most MFIs (I would guestimate 95%+) never graduate beyond M1 status.

"Microfinance 2.0" (M2) is a new phase for microfinance which is characterized by high-growth of operations combined with professionalization, systemization, access to capital markets and new product development. The credit model proved in M1 is now rolled out at a dramatic new pace ... opening new branches, hiring staff, implementing internal controls, etc. which require investments in computer systems, experienced management and access to capital which quickly outstrips the capability of donors. M2 orgs must build substantial business relationships with banks and investors who have the resources to support this new level of growth. This also means more accountability including a strong board of directors and much more detailed financial reporting to all stakeholders. Additionally, development of new and enhancement of existing financial products begins in order to better serve the clients.

"Microfinance 3.0" (M3) is the next phase that is starting to emerge. In the few mature markets for microfinance like Bangladesh and Bolivia, many of the more mature MFIs have converted in regulated banks which is one of the options available to mature, sizeable MFIs. Generally, though becoming a regulated bank is not a feasible short or medium-term option for most late stage M2 MFIs. Instead, I am seeing "mature" M2 MFIs starting to pursue the following strategies:

• Supply Aggregation. Selling the aggregated supply of their borrowers in order to increase the income of their borrowers. As one senior exec at a large MFI in India told me ... the #1 business we are financing for our borrowers is milk-producing cows and buffaloes -- we can organize the selling of their milk for a better price than they can receive today. Another MFI is providing the raw materials to their borrowers for making incense sticks which they agree to purchase back at a higher price than they could get themselves. The MFI then sells the incense sticks to retail and wholesale purchases cutting out many middlemen who historically took most of the profit/margin.
• Demand Aggregation. Aggregating the buying power of clients/members in order to lower prices paid for goods by clients/members. This is similar to the Costco member model in the USA where members get access to products at a lower price due to their collective buying power. A MFI senior exec told me that they are seeing many opportunities to provide both products and services to their clients which save their clients money (e.g. on food staples) and give them new benefits (e.g. health insurance) at affordable prices and with improved quality over their current choices (or for the first time.)
• Business-in-a-box. Anyone who has visited microfinance borrowers is struck by how hard they work to run their businesses to further their livelihoods. The fact though is that many of these people are not very entrepreneurial ... that is, they are running businesses which have an upper limit to the profit potential. There are now a large number of true entrepreneurs developing very interesting self-employment (or a few employees) businesses which are like microfranchises. That is, where the business model, inventory supply, branding, portable kiosk, etc. is provided and with a little training an individual can without extraordinary entrepreneurial skills run an even more profitable mini-business.
• Savings programs. Despite the central bank limitations of providing savings to the poor, many MFIs are actively investigating new ways to provide safe and helpful savings programs. One of the huge benefits of enabling savings is that a MFI can lower its cost of capital which they can then pass along in lower interest rates to borrowers. [I realize that savings are a much larger topic which I will expand in a future post!]

Is every market ready for M3? No. Many markets/countries are almost exclusively in the M1 stage and will be for some time. I am providing this proposed M1/M2/M3 framework to explain the evolution of financial services to the poor as it matures in specific markets over time. I am excited to see that the poor are increasingly being viewed as "investable" ... a good and reasonable investment. While this has the risk of potential for exploitation (like with payday lending in the USA), I think that there are many more upsides overall which benefit the world's poorest.

Labels: demand aggregation, microfinance, microfranchise, poverty, supply aggregation

Ebay recently opened a new web site called MicroPlace which enables individuals to make loans to the world's working very poor. This enables what I refer to as Socially Responsible Investing version 2 ... choosing to make a positive social impact with your investing.

Here's generally how it works:

• You can preview the investment options ... currently there are 15 choices of microfinance institutions (MFIs) across 11 countries. The term of the loans ranges from 2-4 years and the interest rate paid ranges from 1.5-3% per annum.
  
• To make an investment, you create an online account...email address, password and then [unfortunately] a lot of personal information which they are required to capture as a securities broker.
• You can then invest a minimum of $100. This means that almost anyone can invest which is great! You fund your investment through Paypal (another Ebay company) or directly with a checking account transfer.
• Once you've made your investment, you can track it on their web site.
  

I have written previously about Kiva, another way to provide loans to microentrepreneurs. I thought it would be helpful to compare and contrast these two services.

Here's a summary comparison ... Kiva let's you loan directly to a specific borrower which is much more personalized. The downside of Kiva is that you are receiving no interest on your loan. On the risk (of getting your loan repaid) side, with Kiva you need to manage your own risk by splitting up your loans across multiple borrowers whereas you're investing in a fund with Microplace so your risk is already diversified across a group of borrowers (although typically with one MFI). Generally, Kiva loans are shorter duration. Currently Kiva provides many more countries and MFI partner options ... although because of its popularity there are often on a few borrower loans listed at any given time.

More resources

• BusinessWeek article on Microplace launch
  

Labels: ebay, kiva, microfinance, microplace, poverty, social investing

I have recently completed reading a detail-filled book about the transformation of [2006 Nobel Peace Prize winning] The Grameen Bank over the past few years.

This book is titled, The Poor Always Pay Back, chronicles how the bank developed "version 2" of the widely now copied Grameen model of microfinance ... including offering loans with group guarantees, customized (vs. one-size-fits-all) loan products, insurance products, pension products and much more.

See my book review.

Labels: book reviews, grameen, microfinance, poverty

I just ordered two laptop computers ... for a total of $399 plus $25 shipping. One gets shipped to me and one gets delivered to an impoverished child.

NOTE: This is a special offer which started today and goes through Nov 26th only. So, if you're interested in seeing (and supporting) what is an amazing breakthrough in bringing computers to the bottom of the pyramid, check it out @ LaptopGiving.org. You can also just purchase laptops for children if you like @ $200/laptop.

This is the brainchild of the One Laptop per Child (OLPC) initiative which I previously wrote about. This has previously been referred to as the "$100 laptop". $100 is still the goal, but will require more volume to achieve that level of cost structure.

Founder Nicholas Negroponte says "It's an education project, not a laptop project." OLPC's goal: To provide children around the world with new opportunities to explore, experiment and express themselves. More...

The laptop truly is a breakthrough in thinking. Read New York Times review or watch the New York Times video review below.



See more videos on OLPC at OLPC.tv

So, do I really need another laptop? No. I'm buying this laptop so that I can be a better ambassador for this initiative. The green laptop will catch a lot of attention!

My challenge: Why don't you consider doing this as well?
Please post a comment if you take on my challenge.

Labels: children, computers, laptop, Negroponte, OLPC, poverty, social enterprise

I previously wrote about how there is growing widespread support for indoor residential (not crop) spraying of [small amounts of] DDT as the most effective (cost and results) way of decreasing malaria in many countries and especially Africa.

Dr. Roger Bate, board member of Africa Fighting Malaria, comments that "DDT is probably the single most valuable chemical ever synthesized to prevent disease. It has been used continually in public health programs over the past sixty years and has saved millions from diseases like malaria, typhus, and yellow fever. Despite a public backlash in the 1960s, mainstream scientific and public health communities continue to recognize its utility and safety."

He goes on to say, "Developing nations are skittish. Their populations have been scared by environmentalists into thinking DDT causes cancer and birth defects; and their farmers have been frightened by EU officials and segments of the Western chemical industry into believing their crop exports will be boycotted. As a result, many African leaders have delayed re-introduction of DDT, perhaps indefinitely. Over the past three years, for example, two different Ugandan health ministers have wanted to deploy DDT indoors, but fearful of Western trade reprisals, their farmers have blocked all attempts to do so."

Find out more on advocacy site FightingMalaria.org

What ideas do you have in helping to overcome the misperceptions of DDT?

Labels: ddt, malaria, poverty

One of the key metrics tracked closely by microfinance institutions (MFIs) is the percent of the loan portfolio at risk (PAR) after 30 days. That is, what % of the loans outstanding are in arrears more than 30 days. This is viewed as an important indicator of the "health" of a loan portfolio and the health of the MFI.

In some countries, there is a perception/expectation that 30-day PAR (PAR30) should be almost zero. For instance, in India, most the high-growth organizations have PAR30 of less than 2% and some have very close to zero. This is achieved through a number of methodology implementations including manageable loan sizes/payments, group guarantee/social capital, frequent repayments, etc. In other countries (e.g. many countries in Latin America), the typical PAR30 is in the 5-10% range. There are no absolute right or wrong levels (although getting above 10% can have some potentially very negative tipping point issues), just different models in different locales.

At the recent Unitus Leadership Summit, there was an interesting discussion amongst some of the world's fastest-growing and innovative MFIs around what the target rate for PAR30 should be. On one hand, low PAR indicates that your system is working well and you don't have to have your in-good-standing clients paying more to subsidize your delinquent borrows. On the other hand, it is very difficult to innovate in without experimenting ... and experimentation often leads to, at least, some short-term decrease in PAR as you're ironing out the process.

Some of the innovations under development are:

• moving from weekly to bi-weekly repayments ... this is an oft-requested feature by clients as it would reduce the amount of time spent on transactions
• individual loans instead of group loans ... essentially not using a group incentive model
• loans to men ... most MFIs only loan to women
• different repayment installment models ... e.g. rather than typical equal amount of principle and interest on each repayment, offer some balloon repayment options
• agriculture-related loans ... most MFIs currently don't provide this type of loans due to the high risk of crop failures and the seasonality factors
• higher loan size ... ramping up size of loan more quickly based on individual needs and capacities ... most MFIs have fairly similar loan size increases purely based on how long you have been a borrower in good standing
• early repayment options ... requested by some borrowers who want to pay off early to lower interest payments and, in some cases, accelerate to next larger loan size
• new financial products such as insurance
  

I think that we should encourage MFIs to be more innovative in developing and experimenting with new financial services for the working poor even if this results in some marginally higher default rates in the short-run as ultimately the innovations will provide more value/benefit to the clients.

Labels: innovation, microfinance, poverty

Last week, I was in the Philippines for the Unitus Leadership Summit, an annual gathering of some of the globe's top social entrepreneurs running many of the most innovative and fastest-growing microfinance institutions in some of the poorest areas of the world. It was a privilege to listen in on sessions where they shared what was working, what wasn't, their challenges and their aspirations. While some of them are considered competitors, they shared very openly about the experiments they were doing in areas such as mobile banking, product development, increasing operational efficiency, raising capital, high-capacity staff recruiting and training and more.

One of the most fascinating topics was their focus on innovating to increase the productivity of their largest group of staff, loan officers. Loan officers are the front-line staff who directly provide financial services (including microcredit) to their bottom of the pyramid customers and make up 70%+ of their staff count. If they can increase loan officer productivity, their whole cost structure goes down and ultimately they can pass the savings on to the customer in the form of lower interest rates. So, this is a very important metric!

Many MFI's are happy if a single loan officer can serve 300 clients at a time. [Remember the loan officer goes to the client and often they meet once per week with every client, so the number of touchpoints and travel time is significant.] The conversation started off with how they were not satisfied that 750 (!) clients per loan officer was the maximum productivity. Many of them are now reaching this level of productivity. They get to the 750 number as center groups of 50, 3 center meetings per day and 5 days per week. Of course, there's the recruitment of new members, new member training, follow-up on members, data entry, various paperwork, etc. which also needs to be done.

So, we had a brainstorming session on ways to further increase productivity without overloading a loan officer. Here are some of the ideas that came up:

• Reduce the maximum radius to client location to 10km (usually now further)
• Collections every 2 weeks (half the # of trips/meetings)
• Deploy handheld/wireless devices to loan officers to reduce paperwork and cash-handling time and cost of float (and reduce group meeting time)
  
• Create pre-printed stickers to put in client passbooks (rather than having to handwrite each entry in each passbook...loan officer has to do this as most women are illiterate)

But then the discussion went in a different direction ... rather than focusing on the # of clients per loan officer as the productivity metric, why not focus on margin generated per loan officer? This has a number of implications and issues including:

• This would encourage innovation around offering additional products to clients so that meeting times have a lower relative transaction cost. e.g. if you also provided insurance products or health products in the same client meeting, there is a much smaller incremental cost as the meeting is already scheduled.
• Would loan officers be able to handle a broader range of products well?
• Would this type of focus increase or decrease client retention long-term?
  
• Will loan officers then seek to focus on less poor clients who have capacity for say larger loans with more margin?
  

So, there wasn't any silver bullet and with every attempt to innovate there is going to need to be experimentation and refinement. But, I really liked the continuous improvement attitude that they demonstrated and the willingness to challenge the current status quo thinking.

Labels: innovation, microfinance, poverty, productivity

I had the opportunity to visit microfinance superstar Bandhan in Kolkata (formerly Calcutta), India last month and then had the opportunity to catch up with C.S. Ghosh, Bandhan's CEO last week in the Philippines. Mr. Ghosh handed me a pamphlet highlighting some of their latest progress.

Bandhan one of the world's largest AND fastest growing microfinance institutions. This is usually an oxymoron as most the larger microfinance organizations are growing very slowly. Here are a few of their stats: over 750,000 clients, over 400 branches, over $120M disbursed, over 2000 staff. And they are growing at something like 30,000+ clients per month!! Five years ago they didn't even exist and now they're serving 750K families or about 3,750,000 people!

But, what I found the most interesting was a study of the impact of microfinance services on their clients by Mr. Ranesh Buswas and Mr. Soumik Ghanta of the Indian Institute of Forest Management, Bhopal, India, April-June 2007.

Here is a chart of the impact on their clients through 3 loan cycles (each 1 year)


Here are a few of my observations:

• By the third loan almost all of the women (90%) have access to a savings facility (critical to help with unforeseen or special expenses)
• 100% have reduced their dependency on moneylenders by the 3rd loan (moneylenders charge at minimum 100% and often 300-500% interest with daily repayment required)
• 90% have increased their income by the 3rd loan (meaning that they've pretty much all figured out how to run a business which provides enough income for them to repay their loan plus interest and have surplus)
• Many (60%) of them have started to grow their liquid assets by the 3rd loan (owning productive animals are one of the key methods for doing this)
• Some (30%) are starting to be able to acquire (or buyback) more land by the 3rd loan, but it will take longer for the majority.
  

What do you observe? [post a comment]

Oh, and a bonus... a short video I made while visiting a group of Bandhan borrowers in September. Look at their beautiful saris!

Labels: bandhan, microfinance, poverty, poverty impact

A couple of weeks back at the International Forum on Remittances, a study was released which reported that global foreign remittances in 2006 totaled three times all aid provided by donor nations to developing countries (as reported by OECD). Global remittances totaled more than $300B while donor aid was $104B. Remittances even topped foreign direct investment in developing countries which totaled $167B (reported by the Institute of International Finance).

Remittances are the money transfers that foreign workers in developing countries send home to their family and relatives. Most of the transfers are between $100 and $300 at a time.

Remittances to India topped the list at $24.5B, followed by Mexico at $24.2B; China, $21B and the Philippines and Russia, $13.7B each.

And, guess what is growing the fastest? Your right, remittances!

This tells me that even if foreign does rise, it is likely to become an increasingly smaller contributor to capital transfer to developing countries and can never match the growing impact that migrant workers are having on the shifts in global capital.

How about we encourage easier, more secure and better priced options for people to send money back to their home countries? For many people, an ATM or Paypal or a mobile money transfer option would be a welcome solution.

I first read about this in the Philippine Daily Inquirer. Yes, I was in the Philippines last week ;-)

Labels: poverty, remittances

The Economist recently wrote about (article: With reservations) the current debate within India about whether the existing affirmative action (called "reservations" in India) quota legislation for the poor should be extended from higher