Author Archives: Josh

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"Josh Weinstein is a visionary. I read his blog every day." - Bono

How Profit Supports the Microfinance Social Mission

A CHF International loan officer and her client

Among some in the microfinance community, there is almost a reflexive tendency to dismiss profit as a bad thing, a corrupting force that causes microfinance institutions (MFIs) to abandon the social mission that underlies their reason for being.  I have thought a lot about the issue over the last few months and have seen a lot of upsides and downsides to the different arguments.  But more and more I have come to the conclusion that the two are really inseparable.  The idea that higher interest rates that produce extra income beyond what is needed to just continue doing business is exploitative to the poor belies the priorities of microfinance clients.  Interest rates are important in their decision-making, but more paramount is receiving a good product with attentive service from the loan officers and the ability to continue taking loans.  When higher interest rates give MFIs additional capital to pay their employees higher salaries, expand operations to new regions, and invest in technology that enhances their ability to offer their services on-time and on a larger scale, the end result is more capacity serving a larger market.  I will address some of the points one-by-one.

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The Argument Against Subsidized Interest Rates

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Microfinance institutions (MFI) the strive for operational and financial sustainability.  The former is an indicator that the MFI can, at the very least, break even based on its current operations and sources of funding, including loans, grants, and donations.  The latter takes into account where an MFI gets its money.  Since money from donors is basically free, an MFI that receives grants and is just barely breaking even would be unsustainable were that source of money to dry up.   In a perfect world, MFIs would not need to rely on any donor funding and could get all of their capital through loans at commercial rates.  To reach that point, MFIs need to operate efficiently and reduce the costs of doing business, but also charge interest rates that will allow them to make enough money to cover their costs.   When subsidized interest rates are introduced, it be damaging to the microfinance market as a whole.  Joanna Ledgerwood explains this dynamic in the Microfinance Handbook, the bible of microfinance practitioners:

Subsidized lending programs provide a limited volume of cheap loans.  When these are scarce and desirable, the loans tend to be allocated predominantly to a local elite with the influence to obtain them, bypassing those who need smaller loans (which can usually be obtained commercially only from informal lenders at far higher interest rates).  In addition, there is substaintial evidence from developing countries worldwide that subsidized rural credit programs resulti n high arrears, generate losses both for the financial institutions administering the programs and for the government and donor agencies, and depress institutional savings, and consequently, the development of profitable, viable rural financial institutions. Continue reading →

Golfing in Burma’s New Capitol

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Burma is a strange country.  It feels like the clock stopped in the 1950’s, and most forward progress along with it.  In the capitol city of Rangoon, everything is old – the cars, the buildings, the infrastructure, the money.  And this is the capitol, where most of the wealth in the country is concentrated.  Very little has been invested in modernization, mostly because it is tightly controlled by an authoritarian military junta that keeps the country isolated from the rest of the world.  Foreign Policy just included the country in its list of the 20 least free places on earth.  With the exception of other reclusive nations and kindred spirits, like North Korea, and trading partners trying to gain access to the country’s abundant natural resources, Burma keeps its distance.  A fraction of the money coming from the lucrative contracts with neighboring Asian countries for oil and gas exploration is reinvested in developing the country.  Despite money coming in, the country has its share of problems. Continue reading →

The Economics of a Cookstove

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The other day I went to the NWTF branch office in Hinigaran to interview clients that recently purchased an Envirofit cookstove. Cookstoves have received a lot of positive publicity recently as a cheap and effective solution to the problem of indoor air pollution – a problem that claims 1.4 million lives every year. The predominant stove in use by the poor – a basic design with a fire lit beneath a pot resting on three stones (a “three-stone stove”) – burns inefficiently. Much of the heat from the stove is lost due to lack of insulation and the fuel – sticks or charcoal – does not burn completely, requiring more to produce the same amount of heat. What’s more, partially-burnt fuel produces smoke containing particulate matter that is particularly harmful to the lungs when inhaled. The Envirofit cookstove, designed in conjunction with researchers at the University of Colorado, is the product of air-flow modeling and rigorous testing. It is designed for efficiency.

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Interview with Erik Wurster of E+Co

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In researching my article on carbon financing in the developing world, I had the opportunity to speak with Erik Wurster, the carbon finance manager at an organization called E+Co.  E+Co has been on the forefront of this industry and has been one of the leading innovators.  Newsweek recently highlighted their efforts to distribute clean-burning cookstoves – a topic I have discussed in this journal – in Ghana.  It provides a great overview of how this complicated process works.  In an article for Next Billion, Tracy Smith of E+Co describes the company’s focus:

E+Co, a mission-driven clean energy investor in developing countries, is working to implement strategies that enable Wall Street investors to put capital to work in developing countries through the carbon markets.  Unlike more traditional carbon finance developers, however, E+Co strives to ensure that dollars flowing from carbon credits make it to the bottom of the pyramid.

I asked him a series of questions about some challenges facing organizations trying to break into this space.  Be warned that it contains more technical jargon than I usually have in the Journal.  I have included the answers to all of his questions here.  Continue reading →

Zimbabwe’s Diamonds and the Natural Resource Trap

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In my last post, I discussed why access to abundant natural resources is actually counterproductive to the development of poor countries.  The idea comes from Paul Collier, a development economist who penned the book The Bottom Billion, a summary of his findings from thirty years in the industry.  While much of the world lives below the poverty line, there are only a handful of countries that have made no progress in terms of economic development over the last few decades.  In fact, most of these “bottom billion” countries have actually regressed, posting negative GDP growth.  According to these countries, each of these countries has fallen into one or more “traps,” which produce a self-perpetuating cycle of stagnancy, at best, or decline.   Access to natural resources is one of these traps.  Here is an overview of why this is so:

Natural resource wealth, in addition to increasing a country’s propensity for civil war, also creates its own trap. In Collier’s view, natural resources can be a curse, because of “Dutch Disease”, which makes a country’s other export activities uncompetitive, and causes commodity price volatility. Countries of the bottom billion are often too poor to harness the wealth they gain from natural resources, such that other sectors of the economy remain stagnant, prohibiting future economic development.

So the money gained from natural resources is not properly invested in improving other industries, such as manufacturing and agriculture, causing them to atrophy.   Once the natural resources dry up, these industries – the real economy – are unable to sustain the false productivity levels during the natural resource boom, to the detriment of the economy as a whole.  Continue reading →

Electric Dirt

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It is called “Dirt Power.”  Or, more specifically, as the scientists call it, a microbial fuel cell.  A team of undergraduate researchers at Harvard, a small liberal-arts university in New England, invented a battery that runs on dirt.  Actually, it runs on microbes that like to hang out and dine on the decaying organic matter that exists in the dirt.  The team that invented this technology – an organization called Lebone – won the MIT IDEAS competition and, recently, their creation was called one of the 10 most brilliant inventions of 2009 by Popular Mechanics.  First, the problem:

There is currently a dramatic shortage of electrical power in Africa. One billion Africans, constituting a sixth of the world’s population, generate only 4% of global electricity. In most African countries, 95% of the population is living off-grid with no access to electricity (World Bank Millennium Goals Report, 2006). This has a devastating effect on socio-economic development, education, health, and safety. Imagine a village at night in which students are walking to distant highways to study under streetlights, where small merchants are investing half of their resources to pay for kerosene lighting to run their operations, and where emergency health workers, if operating at all, are trying to stitch up wounds and perform surgeries by candlelight. Lack of energy is one of the Africa’s biggest obstacles to development, and a major deterrent for foreign investors. Continue reading →

The Volatility of $2 a Day

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Portfolios of the Poor: How the World Lives on $2 a Day has become one of the most talked-about book in the world of development.  It is an analysis of how poor – specifically, the poorest – people live.  The authors chronicle how people make and spend their money – tracking the inflows and outflows to better understand the daily routine.  The subjects keep detailed financial diaries of everything having to do with money in their lives.  The results are as illuminating as they are beneficial in the practice of development.  Here is the description from the website:

Portfolios of the Poor: How the World’s Poor Live on $2 a Day (Princeton University Press, 2009) tackles the fundamental question of how the poor make ends meet. Over 250 families in Bangladesh, India, and South Africa participated in this unprecedented study of the financial practices of the world’s poor.

These households were interviewed every two weeks over the course of a year, reporting on their most minute financial transactions. This book shows that many poor people have surprisingly sophisticated financial lives, saving and borrowing with an eye to the future and creating complex “financial portfolios” of formal and informal tools.

Indispensable for those in development studies, economics, and microfinance, Portfolios of the Poor will appeal to anyone interested in knowing more about poverty and what can be done about it.

The reason research like this is so useful and even groundbreaking is that it blows the doors off the misconception that the poor live on $1-2 a day, everything. Continue reading →

The Complexities of Poverty and Development Strategies

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A recurring theme in this journal is the amount of self-criticism within the development community.  There is no shortage of critics of an academic mind to point out the flaws in an approach to development without offering a reasonable alternative.  One common criticism is that microfinance doesn’t really offer a sustainable long-term economic solution to the problem of poverty.  It is too focused on the individual and not enough on the big picture – what is good for the population as a whole.  Most micro-businesses will never grow to a meaningful size because the capital provided by microfinance is not enough to bring them to scale.  So, the reasoning goes, poor people are destined to amble along without actually making their financial situation any better, while the small and medium enterprises (SMEs) that actually create the jobs needed to move the needle on macroeconomic development and poverty alleviation are neglected.

This critique is too simplistic.  For one thing, the argument that microfinance institutions operate at the expense of SME financing is a straw man.  It is true that there are a limited number of aid dollars in the world and allocation is a zero-sum game, but that is irrelevant here since the largest microfinance institutions are financially sustainable, raising money through unsubsidized loans at commercial rates, public equity, and their own operations. The World Bank, the IMF, and NGOs around the world do provide a lot of money for research, seed capital for smaller MFIs, and pilot programs for non-financial services.  But, for the most part, there is not much diversion of aid funding as a result of microfinance.  This is more of a gripe with how some critics frame their arguments.  The more important point is that there is a tendency among critics on both sides of the debate to ignore the complexities of the issues and create false tradeoffs in order to simplify the debate.  It is easier to argue in black and white than deal with shades of gray. Continue reading →

Expansion and a Poverty Trap

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One criticism of microfinance is its inability to produce meaningful poverty movement on a macro level. The belief is that providing credit for micro-entrepreneurs produces some incremental change on an individual basis, but doesn’t produce the substantive change needed to lift a community out of poverty. By substantive change, I mean employment, infrastructure, commerce, and improvements in healthcare and education. In this post I want to focus specifically on the idea of microfinance’s inability to produce businesses of adequate scale.

In theory, microcredit aids people starting or maintaining small businesses to generate extra income for the family. (In reality, recipients of microfinance loans spend the money on expenses unrelated to the business altogether, but this is a different topic). Where microfinance is deficient is in shepherding these small businesses to become something bigger than just a micro-enterprise. For any business to grow, it needs to do two things: reduce the amount it spends and increase the amount it brings in. But micro-entrepreneurs can get stuck in a trap created by a lack of resources. For many of the poor communities served by microfinance, the cards are stacked against them. Let me explain with an example.

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