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

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

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

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

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

On Tuesday, I participated in a dinner event sponsored by the Seattle International Foundation featuring Nobel Laureate Muhammad Yunus, founder of Grameen Bank and author of Banker to the Poor.

Professor Yunus shared a number of updates and answered questions. Here are some of my notes...

On Grameen Bank in Bangladesh:

• Now serving 7.5 million clients (avg. family size of 5 => 35M+ people)
• 27,000 staff
• Now 80% of poor in Bangladesh are offered microfinance (all MFIs) and targeting 100% coverage by 2012
  
• Most poor countries have 5-10% with the best being 15% coverage of microfinance for poor, so lots of work still to do
• Bank is owned by borrowers
• All capital loaned out comes from savings of the poor (and bank staff)
• Each branch must drive their own savings for capital to loan out ... require that each branch become profitable and capital self-sustaining within 1 year
• Microfinance is very empowering for women ... often first time in their lives that they have anything of their own. Borrowers (women only) decide who will inherit their savings if they die. Interestingly, most women choose their youngest daughter as she has the least opportunity.

On other Grameen-spawned businesses:

• Grameen Phone is largest mobile operator in Bangladesh with 16M subscribers
• Grameen Energy is focused on bringing solar energy solutions to the poor ... reached 100,000 households so far and now aiming for 1M. Cost of solar panels continues to slow down growth of this business. There is great hope that some technology breakthroughs will substantially lower the cost and enable them to accelerate deployment.

On social businesses:

• Yunus continues to be a strong proponent for social businesses ... that is, businesses which exist as commercial entities AND have a mission to have a strong positive social impact
• I think he is right and this is a great new opportunity for entrepreneurs
  

On microfinance in China:

• China has very little supply for microfinance and, next to India, has the largest unmet demand for microfinance
  
• Yunus recently met with senior people in China's central bank on their request to hear about his ideas on microfinance
• Central bankers were initially quite defensive ... holding up their cooperative model as being quite effective in channeling financial services to the poor
• Yunus said that that was quite interesting and that China must be doing something quite differently as in Bangladesh there was also a long-term cooperative system which was widely promoted by the government, but is completely ineffective due to corruption, bureaucracy and lack of relevance.
• This caught the central banker leader off guard and she surprisingly agreed with his assessment and said that they would no longer rely on cooperative model as the cornerstone of China's financial services provision for the poor.

Additionally, Grameen America was formally announced. See my earlier posting.

Labels: grameen, microfinance, poverty, social enterprise, yunus

In my recent trip to visit microfinance programs in India, I had the opportunity to meet with a number of microcredit borrower groups in both urban and rural environments.

One of the most interesting experiences I had was observing the personal confidence and empowerment of women who were engaged in ongoing microfinance borrowing. I met with a number of borrowers who had been borrowers for 3, 4 or more years. This means that most of them were on their 3rd, 4th or later loan cycle (as loan cycles are typically 1 year). These women were demonstratably excited to have us "foreigners" sitting down with them at one of their weekly center meetings. After they finished their formal/normal business or interacting with the microfinance loan officer, we had the opportunity to ask them questions through a translator. They were very eager to respond to our questions ... telling us [proudly] about their businesses, their challenges, what they were able to do with their profits, their new business ideas, what they would do with larger loans, etc. We were talking very much like peers--business person-to-business person--which I really enjoyed.

I contrast this with another group of borrowers I met with who were about 6 weeks into their first loan cycle. This group was very shy and would not offer us much in response to our questions -- even just simple ones about their needs, their families, etc. Now part of this is probably attributable to how early they were in being able to leverage their loans and drive results. I wondered if some of this was cultural ... were we meeting with women who were poorer, of a different religion or other cultural differences which would account for this difference in response? The loan officers assured us that this group was almost identical in their background to the other groups with the exception that they were newer to microfinance.

I had heard about how microfinance empowers women. Now I have seen it. The loan officers we met with say that they see this again and again as women grow in their confidence and self-worth as they continue to run their businesses, pay back loans and earn additional profits which they then get to invest in their families and to further expand their business efforts. But there's nothing better than experiencing this firsthand!

Have others out there found similar or different experiences?

Labels: empowerment, india, microfinance, poverty, women

In my recent trip to India (see other recent posts), we had the opportunity to visit a number of microcredit borrower group meetings. At Grameen Koota, a rural MFI partner of Unitus based in the outskirts of Bangalore, they meet weekly with the borrowers in what they call a "center meeting." Each center meeting consists of women borrowers from the same area (usually one village) who know each other and consists of 4-8 sub-groups of 5 women (so total of 20-40 women in a center.) There is one women elected the leader of each 5-person group and then one women is elected as the center leader by the entire group.

At each center meeting, the agenda is as follows and generally takes from 30-60 minutes:

• Speak pledges
• Take attendance (if more than 10% of center members are not present, then no loans can be disbursed that week)
• Borrowers make loan payments (principle and interest) which is recorded in their passbook. If anyone cannot make the meeting, they send along their payment with some who is attending. If someone cannot make their payment, the group must cover.
• New approved loans are disbursed.
  
• Loan officer requests any need for emergency loans and then disburses if approved by the group.
• New loan applications are collected for later review.
• General discussion on any issues/questions.
  
• Speak pledges again

I took some videos of our group of Americans visiting two center meetings. We had the opportunity to ask the women any questions we wanted through a translator and they were eager and excited to respond. We asked questions about their businesses, how they were using the profits, about their challenges and what other services they would be interested in.

Video: A center meeting in a rural, very poor village near Bangalore


Video: A center meeting in a small rural town near Bangalore

Labels: grameen koota, india, microfinance, poverty

As I noted in previous post, I just returned from 2 1/2 weeks visiting high-growth microfinance institutions (MFIs) based in India. I visited many group meetings where staff of a MFI would meet with clients to transact business ... generally, receiving loan payments, group savings, etc. and distributing new loans, withdrawals, etc. At the beginning and end of each meeting, there were pledges said by the MFI staff and the borrowers to state their commitments and values. I couldn't understand what they were saying as they were usually speaking in the local language, so we asked for a transcription of the pledge from one MFI, Ujjivan, an urban microfinance startup based in Bangalore.

Here are the pledges:

Customer Pledge
We will use the benefits of our loans to eliminate poverty.
We will repay our loans promptly.
We will save regularly for our family.
We will educate our children.
We will stand by our group in good times and bad.
We will work to build a long and mutually beneficial relationship with Ujjivan.
God is a witness to all our acts and deeds.

Staff Pledge
We will work with poor women towards eliminating poverty.
We will work without discriminating caste, creed or religion.
We will be truthful in all our activities.
God is a witness to all our acts and deeds.

I thought these were very powerful pledges! Wouldn't be great in other companies/organizations had pledges which they recited in front of their customers! I know this sounds so "out there", but it would surely help keep their values front and center.

Labels: microfinance, pledge, poverty, ujjivan

I just returned to Seattle from 2 1/2 weeks in India focused on microfinance. I was traveling on behalf of Unitus as a board member and chair of portfolio committee to visit a number of Unitus's microfinance partners based in India. I visited a total of 8 MFIs (Unitus now has 12 MFI partners in India) based all over India. It was quite a whirlwind trip (7 cities/areas) and thoroughly interesting to see so many talented entrepreneurial teams building social enterprises to provide extremely poor working women/mothers with useful financial services.

Here are a couple of things I observed:

• Continued focus on women clients. The women are better at repaying loans and have demonstrated again and again that they invest the profits in their family's best interest.
• Two distinct models emerging. 4 of the MFIs I met with have found great success in taking a very grassroots approach to hiring inexperienced first level field staff (generally, loan officers) and then promoting (to branch manager, area manager, district manager, etc.) exclusively from within as the field organization grows. The other 4 MFIs are taking much more of a traditional startup business approach hiring strong professionals to lead areas of the operation. Both of these models are working to drive extremely high growth and sustainability.
• New product development. There is a lot of effort being put into developing new and better financial services products beyond the basic productive loan offering. Examples include health insurance, a variety of specific purpose business and consumption loans, remittances, individual loans (no group involved) and savings-like products (note: traditional savings products are prohibited by India's central bank outside of chartered banks).
  
• Products to drive more profit margin or "livelihood". There are some great ideas for providing a "business-in-a-box" type product with built-in franchise-type branding/product and/or access to distribution channels. One example is that rural women are provided raw materials for creating incense sticks or clothing and there is a buyback of finished products to a large retail channel eliminating the middleman and therefore increasing the women's profits substantially. Another example is the creation of an optimized "dairy unit" consisting of 7 cows/buffaloes which is financed and operated by a group of borrowers which both doubles the yield of milk produced per day per animal and has built in profits through buyback with a dairy cooperative.
  
• Variety of entrepreneurial talent. I visited and interviewed many women clients across various rural, peri-urban and urban sites in India. Some of them had a lot of entrepreneurial and others had very little. Often the lower expectations were based on lack of transportation options/infrastructure limiting their markets to their local village. Most clients said that there lives were improving with access to financial services, but some were definitely improving faster than others.
• Urban starting to take-off. There is almost no urban microfinance in India. Unitus has partnered with three entrepreneurial MFIs who are pioneering the work to serve the urban slum dwellers. This is still early, but there are some positive indicators that this segment is primed to grow rapidly.

I am excited about what I saw and experienced. India still has some 100M extremely poor households without microfinance and another 100M of low income households with no access to financial services. So, there's still a lot of opportunity and work to do!

Labels: india, microfinance, poverty, trends

Very good question from KT on post of my recent interview ... just the kind of questions I like to ask! We need to have an open dialog on the outputs/results we are expecting/hoping for.

Dave, in the interview you mentioned: "microfinance has demonstrated, and it’s one of the few tools that I’ve been able to find historically that has had a large impact on actually lifting people out of extreme poverty on a sustainable basis and at a large volume". Do we have any hard evidence of that? In 2006, Economist magazine concluded that while "heart-warming case studies abound, rigorous empirical analyses are rare". Bangladesh is not one of the development success stories by any standards. Out of 7,000 MFIs around the world, fewer than 100 claim self-sufficiency.

I am not trying to criticise microfinance as such but it looks like the claims that it as a successful development tool are really exaggerated.

Here are a few thoughts:

• There have been a dirth of studies documenting the long-term impact of microfinance. I did write about one I read titled Measuring the Impact of Microfinance commissioned by Grameen Foundation. This has some data.
• I think there are a few reasons that there are few studies on microfinance impact:
1. Microfinance is a relatively new service. There have been a few organizations offering microfinance for 30+ years, but the huge growth in microfinance has occured in the past 5 years and so long-term results aren't available for most of MFIs.
2. Most of the successful (in terms of # of clients) MFIs have focused on growth, not impact research. For many of them the impact is just obvious to them on a daily basis as they see their clients' assets growing and lives improving. They'd rather invest their resources in opening new branches, raising more and cheaper capital and improving their internal efficiencies than running impact analyses.
   
3. Long-term impact studies are expensive with little return-on-investment value for the MFIs. Increasingly, the large MFIs have access to non-subsidized capital, so they aren't required by capital sources to invest in these kind of activities, so most don't.
   
• While I agree that ultimately for microfinance to help the poor long-term it needs to be sustainable (see my definition/criteria) ... and as you note most MFIs are not currently financially self-sustaining ... I'm not sure this has as much impact/relevance in the short-term. The reality is that there is subsidized capital available for many of the MFIs and so they are able to provide microfinance services for some time while running at a loss. Some might call this a "bubble" in financing.
  
• Ultimately, I think that for-profit microfinance is going to win-out and this will require sustainability. Today, most of the highest-growth MFIs are organized as for-profit. These larger, more efficient MFIs will absorb the smaller, less efficient ones and so it is likely that the financial services will have continuity.
  

Here is another post I wrote on a critique of microfinance impact.

I think that the most likely sources of impact analysis are:

• Independent specialized NGOs (or government anti-poverty agencies or university-related research initiatives) who care about this and are funded to do this kind of analysis and reporting.
• Emerging credit ratings services which are greatly needed to improve the efficiency of credit granting ... primarily to reward those who have proven themselves as credit worthy. There will be enough value that these can be run on a commercial basis.

Please post comments on what you think.

Labels: microfinance, poverty, poverty impact

I was recently interviewed by Levi Hug, an economics student at Eastern Oregon University. Here’s a sampling of the Q&A...

Levi: What do you see that’s particularly special about microfinance, when compared to other forms of development?

Dave: I write a blog (defeatpoverty.com) and one of the things I’ve been particularly interested in and been doing a lot of research on is things that can help people get out of poverty on a sustainable basis, versus simply putting bandages on situations—helping someone through a short-term thing, but not necessarily helping them long-term. These things aren’t bad, there are lots of needs for people to be given relief in dire circumstances. But, ultimately what’s much better is to have people be sustainably out of poverty.

Number two, I’m really interested in things that have the potential for scale. One of my heroes is Muhammad Yunus, and one of things he talks about in his book is how some people haven’t liked his approach in pushing for very high volume in serving people. Some people say, “small is beautiful.” And, Yunus’ response is, “well, the reality is that small is small.” Helping five or ten or even 100 people is fine and good, but it’s still small impact. If you want to help a village, an area, a state, a community, a country, whatever scale you’re thinking of, that’s going to require something that can scale. So, microfinance has demonstrated, and it’s one of the few tools that I’ve been able to find historically that has had a large impact on actually lifting people out of extreme poverty on a sustainable basis and at a large volume. So, I’m really interested in things that meet that criteria and microfinance is one of the most interesting ones that I’ve observed. But, there are other things that are starting to be experimented with and are starting to show promise that may have the same characteristics.

Read full interview

Labels: interview, microfinance, my story, poverty

Unitus announced last week that they’ve raised a US$23 million private equity fund to invest in microfinance. I was able to catch up with Chris Brookfield, Director of Unitus Equity Fund, last week to find out more about this announcement.

Dave: What is Unitus announcing today?
Chris: Unitus is announcing the closing the Unitus Equity Fund (UEF). UEF is formed just like the other venture funds I have been a part of. The difference is that UEF is committed to investing into sustainable microfinance enterprises. It is our hope that by demonstrating that microfinance can scale rapidly and produce returns for investors that much greater amount of investment capital will follow. By increasing the capital available to microfinance companies, we increase the number of borrowers that can be served. So each new investment dollar in will translate to a new opportunity for a poor person to become an entrepreneur.

The 'close' means that we have exceeded our goal and will now be focused 100% on finding new MFI's to invest into. We closed on $23 million.

Dave: What are Unitus' key objectives for UEF?
Chris: We have 5 key objectives:

1. Demonstrate that non-profit microfinance banks can transform into sustainable commercial companies.
2. Show that 'professional' investors are willing to invest in microfinance.
3. Begin the formation of microfinance as an investable asset class.
4. Attract larger, upstream investors to the space, and
5. In the end, show the microfinance is a dynamic, high growth business and that the poor are an attractive market for future investment.

Dave: What is unique and ground-breaking about this announcement?
Chris: There a couple of firsts (as far as we know):

• UEF is the first equity fund in microfinance to be financed 100% in the private market. Most others have capital provided by development agencies and the like. This distinction is important because of the UEF's more 'professional' the investors, our results will have better demonstration effect and be more relevant to other professional investors.
• We are taking a unique venture capital portfolio approach. Our intention is to partner with the best managers in microfinance and encourage them to innovate and grow rapidly.
• The UEF is global in scope, but focused on India, Mexico, Brazil, Indonesia and Pakistan.
• The UEF is a pioneer in creating a hybrid socially responsible investment vehicle that is also managed for risk appropriate returns.

Dave: How are the UEF monies going to be invested?
Chris: The UEF will invest in 8-10 microfinance companies and allocate $2-3 million per company. More than 50% of the companies will be in India, with the rest spread amongst other countries.

Dave: UEF has already made some investments. Can you please describe a couple of those and what impact you are expecting?
Chris: Our investees are SKS (India), Ujjivan (India) and Credex (Mexico). Overall, Unitus has chosen to partner with these MFIs because of the potential for very high growth. You can see some of the detailed goals on Unitus’ web site.

Dave: Who are the investors in UEF and why they have invested?
Chris: The UEF investors break out into roughly 4 groups each contributing about 25% of the capital:

• Unitus board members and friends.
• Omidyar Networks, the investment vehicle of Pierre Omidyar.
• Professional investors who are leaders in technology VC, private equity and health care.
• A group of socially responsible investors managed by Abacus Wealth Management.

Dave: Some people think that for-profit microfinance is (or can be) predatory or immoral ... that is, earning returns for wealthy investors from the financial services provided to the working poor? How do you respond to this?
Chris: I believe that investors of all types need to practice the highest ethical standards in all that they do. The investors in UEF, its management and our Investment Committee are deeply committed to sustainable investing that will create ongoing opportunities for people in all of the markets we invest.

To this end, UEF places a strong emphasis on valuing its investment on a basis of the long term health of the underlying customer bases. Our banks can only do well they customers and communities do well. That's really our bottom line.

Profits means that microfinance is sustainable in the long term. Not hostage to the whims of political agenda or the grace of donors. If microfinance can continue to grow sustainably, then it will be able to attract investment from the global capital sources. This is the only way microfinance will be able to serve the 2 billion people who need it.

Dave: Why do you like working with Unitus and the UEF?
Chris: This has been one of the most rewarding challenges of my life. It is not easy to raise money for an industry most people have never even thought exists or to make investments in multiple countries. While my international travel regimen is quite grueling, I am very energized. I can't wait to see how the story of microfinance develops and what role our investments will play.

Labels: brookfield, equity, interview, microfinance, poverty, social investing, uef, unitus, venture capital

A recent Economist article, Time to take credit, critiques the philanthropic supporters of microfinance for focusing on the slower-growing, profitable, larger microfinance institutions (MFIs) instead of supplying capital to the entrepreneurial startup MFIs who are pioneering access to microfinance in areas which are un/underserved.

Why are they doing this? Well, for one thing it is less risky. These MFIs are making impact with increasingly little risk to the investors so it is easy to provide a "good report" on social return. In some cases, these funders invested in microfinance when it was unproven (and risky) and they haven't moved on. It is hard for philanthropic investors to know when it's time to leave and move on to the next challenge even when their "children" outgrow them (and more importantly, their mission.)

There are two major "elephants in the room" with microfinance: (1) less than 20% of people who qualify and could benefit from microfinance have access to microfinance services; and (2) in most situations, most MFIs are effectively quasi monopolies which limits the quality of microfinance products and services available. The only way to materially impact these issues is to support entrepreneurial efforts to start/expand small MFIs much like the venture capitalists make risky investments in new business ventures in other industries.

One organization which is focused on the venture investing model is Unitus. Unitus is willing to take risk in order to dramatically accelerate small MFIs with entrepreneurial leadership teams to bring access to microfinance to underserved markets and to create microfinance products (loans, insurance, savings, etc.) which serve the working poor. We need more investors like Unitus which are taking the risk to bring the redemptive power of quality microfinance services to those that need them.

Please post comments about other organizations who are taking this venture capital approach to microfinance.

Labels: economist, microfinance, poverty, venture capital

Grameen Trust, the Bangladesh-based charitable arm of the Grameen Bank, is starting up a microfinance business in the USA called Grameen America. [I couldn't find a web site for this yet although there is a job posting for a CEO.] Grameen Bank has been a pioneer in microfinance and recently was awarded the Nobel Peace Prize along with its founder Muhammad Yunus.

Here are some of the highlights from a business plan overview I have seen:

• It will be a for-profit social enterprise business setup as a joint venture between Grameen Trust and a large financial institution [likely to be H&R Block] with Grameen Trust having a controlling interest. They expect positive cash flow in 4-5 years.
  
• A long-term Grameen executive, Prof. H. I. Latifee [see his recent whitepaper], the managing director of Grameen Trust will head up the initial "build, operate and transfer" team to setup and then hand-off operations to a USA team. The thinking is to transfer the know-how and DNA of Grameen Bank to seed this organization.
  
• The business plan references the Association for Enterprise Opportunity which estimates that there are more than 750 existing microfinance organizations/programs in the USA. Most of them are characterized as "social welfare programs" and none are financially self-sustaining [without donors] with the best running at only 70% cost recovery.
• Their initial focus will be on recent immigrants who have an entrepreneurial spirit. Micro-business loans will start at $500 and grow from there based on a positive repayment history. The borrowers will support one another in groups although they won't guarantee each others loans.
• It sounds like the focus is going to be on urban areas with the first test market of New York City. They are planning to take advantage of credit cards to simplify credit access and lower transaction processing costs (for borrower and themselves).
  
• They expect to later offer a number of membership benefits including networking, member discounts, visa and citizen information, credit establishment and more.
• They are hoping to ultimately create a lot of grief for the credit services for the working poor offered in the form of payday loans, loan sharks and other unscrupulous bottom feeders who prey on the vulnerable.
  

I am a big fan of introducing more competition and reasonable credit choices for the working poor in the USA. Grameen America has a lot of the right thinking on this including starting with a business (=sustainable) mindset, establishing a beach head with a likely-to-succeed client segment, partnering with a deep pocketed financial services company and taking advantage of technology to enable scale and cost containment. I think that the challenges of business licensing, regulations and tax reporting will likely require more of an incubator-type structure, but this is something that can evolve over time.

What do you think?

Reference: previous post on Microfinance in the USA

Update: Here is Grameen America's web site.

Labels: grameen, grameen america, microfinance, poverty, usa

I made a microfinance presentation on Saturday at Off The Map's Revolution Conference. As requested by participants, here are the Powerpoint slides I used to for my session called "The Microfinance Revolution".

A few other references I made in our discussion and links on microfinance:

• Introduction to microfinance
  
• Banker to the Poor -- autobiographical book by 2006 Nobel Peace Prize winner, Muhammud Yunus
• Kiva.org -- Inside scoop on future directions for Kiva's microfinance marketplace and my experience investing with Kiva
  
• Trend towards for-profit microfinance
• Results/impact of microfinance and a critique on microfinance's effectiveness

Please posts comments here on feedback on this session.

Labels: microfinance, poverty, presentation

Last week, I made a presentation on microfinance at Bellevue Community College to a group of about 50 college students and a few faculty. The room was packed! Most of the students were 18-22 age group and were very ethnically diverse which I was excited about (having presented to mostly middle-age+, white audiences previously). The Business Leadership Club sponsored the event and has done a fantastic job of setting up and promoting a fundraiser for Unitus microfinance throughout the campus. To make it fun and to lower the barrier to entry, they are running a raffle with some great prizes that they secured as donations from businesses.

I led off with some of the stark facts of global poverty – 4 billion people living on < $4/day. We then watched the Unitus Introduction to Microfinance video which helps the audience connect with individual humans struggling to overcome poverty. Then we discussed the big problem with microfinance – it works to defeat extreme poverty, but less than 15% of the people who could benefit from microfinance actually have access to it. And, finally, the innovative approach which Unitus is taking to dramatically accelerate access to microfinance for the unserved 85%.

Here are a few observations and takeaways:

• I was surprised at how few people in the room knew that Muhammad Yunus had just received the Nobel Peace Prize for his work in microfinance. I guess a lot of younger people just don’t watch or read international news. I thought the Nobel Peace Prize might have more resonance/interest with younger people.

• Microfinance requires multiple layers of explanation – ranging from the personal impact that access to financial services has on individuals, their families, their extended families up through to their community/village and even regions and countries. That is, microfinance has both micro and, over time, macro economic impacts. This is hard to explain concisely!

Overall, I was excited to see the interest and engagement of this age group in learning about microfinance ... what's working, what the challenges are and how they might participate. These are our future leaders!

Labels: microfinance, poverty, presentation