Defeating Global Poverty

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