Defeating Global Poverty

Sevak Solutions is a non-profit which is researching practical means of using the latest technologies to improve the feasibility of delivering sustainable financial services to the rural poor ... especially needed in places with lower population densities.

Microfinance has mostly flourished in higher-density rural and urban environments and has struggled to develop in lower population density locations. This is due to the critical need to keep the operational transaction costs low in order to keep the microloan interest rates low. Operational cost management is a critical issue when you are dealing with small loan transaction amounts on a high volume. Think how much more work would be involved in servicing a single $100,000 loan to one business (with monthly payments) vs. 1,000 loans of $100 each (with weekly payments.) Over a period of 90 days, the single larger business loan requires 4 customer interactions (1 loan disbursal and 3 loan payments.) Over 90 days, the microloans require 14,000 customer transactions (1,000 loan disbursals & 13 loan repayments for each of the outstanding loans.) So, you can imagine the need to keep the cost of each customer interaction/transaction as low as possible for microloans!

Sevak Solutions has been building what they call a Remote Transaction System which uses wireless technology (think: cell/mobile phones) to turn individuals into mobile ATMs and bank branches. This would allow a bank employee (or an agent) to interact/transact with customers in remote locations in a seamless manner. I understand that Omidyar Network has funded a trial of this technology in Africa to prove its viability.

I think that mobile technology, while initially gaining interest for low population density scenarios will also be invaluable as it is applied to other higher density market segments.

Labels: mobile banking, poverty, technology

I am very hopeful for the potential impact of microfinance in helping the poor sustainably earn their way out of poverty. I am also a fan of listening to constructive and thoughtful critique on my ideas and perspectives. Previously, I reviewed a study which concluded that microfinance was having a generally positive impact on defeating poverty.

Another study by Thomas Dichter, long-time practitioner in the international development industry and author of "Despite Good Intentions: Why Development Assistance to the Third World Has Failed," takes a critical look at the microcredit movement and argues that it has done more harm than good.

A few highlights of arguments that Dichter makes:

• Many microfinance institutions (MFIs) are over-hyping their impact (using unrestrained superlatives) in order to continue to raise donated capital.
• Very little impact assessment of microcredit on poverty is actually being done because it is too expensive and complex to perform.
  
• It has become standard practice for many/most development-related projects to now have a microcredit component in order to be cutting edge and get funded even if a microcredit component makes no sense or is ill-conceived.
• He notes that incoming smoothing and empowerment are the only benefits consistently delivered and wonders if this justifies the cost of (monies invested in) microcredit.
• Why do we expect to find so many entrepreneurs in poor countries when (he asserts) we have so few successful entrepreneurs in developed countries?
• He argues that there are other more structural issues which need addressing (e.g. stable governance, less corruption, better schools, better infrastructure, etc.) before business credit capital can be used well.

He concludes with the following:

To move forward the best operators of microcredit need to become banks, move more seriously into savings mobilization, and learn to deal with banking policy and other (institutional) aspects of the enabling environment. And they need to come to terms with the constraints imposed by political correctness - by being unafraid of lending to real businesses, and unafraid of abandoning the subsistence activities in the informal sector.

My response:

• I think that many of these are fair criticisms of the industry.
• I think he is right that microcredit is by itself insufficient and wholeheartedly agree that the provision of broader financial services for the poor are required.
• From what I have observed, entrepreneurship is a matter of degree and scale. When you're talking about growing something into a large business, few people have the genes. When you're talking about running a one-person/family business which enables you to earn enough for basic necessities, I've seen almost everyone in a developing country able to succeed at this as failure = perishing.
• I don't think a MFI has to abandon the poor clients (and just serve wealthier clients) to succeed long-term. Many MFIs are now demonstrating business sustainability in serving even the extreme poor.
  
• MFI's run as NGOs and without the customer service, financial and operational discipline required of real businesses are going to quickly be eclipsed by a new breed of MFIs functioning as customer-driven banks for the poor ... and the poor are going to benefit!
• Finally, I think that this article is severely lacking in detailed examples to back up incredibly broad generalizations. I look forward to reviewing a more substantive set of objective objections ... the same challenge he is making about microfinance.
  

Labels: microfinance, poverty, poverty impact

Our family recently decided to put some savings to work for social good ... more particularly for helping out extremely poor entrepreneurs. We made two investments. Yes, investments, not donations. We didn't get a charitable contribution receipt and we expect to get our investment monies back with earnings.

1. Unitus Equity Fund (UEF). This is a very innovative private equity fund just launched by Unitus -- the global microfinance accelerator. UEF recently made the first close of US$9 million on an expected US$20 million fund. We chose this fund because it is the first (that I'm aware of) equity fund which has the following combination of characteristics: (a) raising purely private monies, (b) focused exclusively on equity (not debt) investments in microfinance institutions (MFIs), and (c) focused on very high-growth MFIs (= providing microfinance to the poor who are not currently served.) The fund is structured like a venture capital fund so your money is locked up (providing immense poverty impact) for up to 10 years and they're targeting a return of 8-12% per annum ... not bad! Our hope is that UEF will be successful as a demonstration effect for social investing and encourage more private capital to flow to social enterprises. I'll write in a separate post about why equity investments are so critical going forward for MFIs.

2. MicroVest mPower Investment Program. MicroVest was founded by three non-profit institutions: CARE, MEDA and Seed Capital Development Fund to focus on capitalizing microfinance institutions. They have setup shop with Calvert Foundation to administer a debt fund called mPower. You make an investment (min. US$1,000), pick a term (1-10 years) and then pick an interest rate (0-3%) to be paid each year. This is a lower risk type investment (more like a bond.) The monies are then lent out to MFIs who in turn lend these monies to poor entrepreneurs. The entrepreneurs then repay their loans to the MFI, the MFI repays MicroVest and then MicroVest repays you, the investor. It is amazing to think that your savings can actually be put to work helping poor people in another country whom you will likely never meet!

So, finally, we've put our money where our mouth (really, heart) is.

Labels: microvest, poverty, social investing, uef