Category Archives: Microfinance

Posts about the practice of microfinance

Next Billion Post: Energy to the BOP Made “Simple”

For my second post at Next Billion, I wrote about a company called Simpa Networks.  Simpa was founded by Jacob Winiecki and Mike MacHarg, two people I have known since I started out in the development game.  Here is a tangential story about the smallness of the world.

I used to work for a consulting firm in Boston.  I wanted to work in development but wasn’t sure how to get in the door.  I knew I was interested in solar energy and read about a lot of exciting things revolving around energy solutions in the developing world.  I went on NextBillion, a blog about market-driven solutions to poverty alleviation, and looked up posts on solar energy.   I came across a post on a Brazilian NGO called Ideaas, an organization that focuses on clean energy for the poor.  Mike MacHarg had posted a comment about integrating micropayments into the Ideaas business model.  He had a Duke email address, so I reached out to him to talk about what he was doing.  He happened to be passing through Boston on the way to a wedding in Vermont, so we met up for coffee.  He introduced me to Jacob Winiecki, who he’d been working with at Arc Finance, another NGO focusing on rural energy delivery.   We talked on the phone, I told him I was applying to Kiva.  Arc Finance, as it turned out, was trying to work with Kiva to get an energy loan portfolio going on the website.  They were piloting a solar lantern program with an MFI in the Philippines and wanted to get the loans up on Kiva’s site.

A month later I was accepted to the Kiva Fellows program and given my assignment in the Philippines.  As it turned out, I was placed with NWTF, the very same MFI that Arc Finance was doing a pilot with.  So, when I got down to Bacolod, I worked together with Kiva, Arc Finance, and NWTF to get the loans up on the website.  We were the first MFI in Kiva history to post clean energy loans.

Now, things have come full circle.  Jacob and Mike started Simpa, and I am writing a profile on the company for the website that started the cycle a year and a half ago.  You can read my full piece here.  Below is the transcript of an interview I had with Jacob Winiecki to write the piece.

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A Microfinance Documentary for the Empowerment of Women


About three months ago, I got an email from Rachel Cook, an alumnus from my alma mater, Duke University, who graduated with me in 2006.  A mutual acquaintance had read my blog and suggested she reach out to me to get my thoughts on microfinance.  She was flying to Paraguay to put together a pilot for a documentary.  Now, that pilot is complete and she needs our help.

I always thought it strange that a documentary had not been made about microfinance.  It is basically one giant human interest story.  It can be heart-breaking and uplifting, optimistic in a world of difficult realities.  The home turf of microfinance is the exotic third world – a slum in Mumbai, a village in Kenya, the plateaus of Bolivia and the mountains of Central Asia.  So it makes me happy that one of my own has taken on the mantle of filmmaker and decided to make my dream a reality.

I ask that my deep-pocketed, philanthropic-minded readers (and my poor and miserly ones) to show your love and help them out:

[W]e’ve launched our project, put together a crew – including Director of Photography Steve Hiller, who has worked on more than 50 studio Hollywood films, and Composer Matty Bernstein, who has produced for the Grammy-nominated Shiny Toy Guns – and we filmed in Paraguay, shooting some of the footage you see above. We saw microloans in action, and the ways in which they can transform lives. And we want to learn more.

We’ve funded this project so far through the generous contributions of friends and family who donated through our letter-writing campaigns, through our first Kickstarter Fundraising Drive back in February – which helped us put together the 22-minute demo we’re currently screening – and by dipping into our personal savings accounts. I’ve paid for about 1/3 of the cost of the project to date myself, but we need your help to keep going!

Go to her Kickstarter page here to donate!

Microbusinesses as Start-Ups and the Problem of Flexibility

In a blog post titled “The Rigidity of Microfinance,” Eva Pereira discusses how the structure of microfinance loans inherently stifle risk-taking among clients:

Compared to loans in developed countries, microloans have far shorter repayment cycles, oftentimes as short as a week. In Field’s 2009 study she analyzed the effects of allowing borrowers a two month grace period before repayments began. The study aimed to find out how borrowers would behave without the looming burden of an immediate debt repayment.

As it turns out, borrowers were more likely to start new businesses or invest in existing ones given the two month grace period. Exactly as they had suspected, with the immediate burden of liquidity gone, borrowers put their money into projects with higher profit expectations. While profits overall were substantially higher, the variability of outcomes increased. The high risk, high return bet did not pay off for all. Baseline default rates went from 3% to 11% after grace periods were introduced.

In an effort to stress the importance of having realistic expectations, Field drew comparisons to entrepreneurs in the first world, where as many as one in three startups fail. The rewards for success may have long term residual value for the proprietor and the community. Under the previous model of condensed repayment cycles, the loans had very little impact on the average incomes of the poor. The liquidity demands of the loans made it risky to invest in entrepreneurial ventures.

This is basically one of the core criticisms of microfinance.  Continue reading

The Changing Microfinance Industry in India

When most people think of microfinance (which most people do not), they envision a poor person in a faraway country borrowing a few bucks to buy a goat.  In an article titled “Microlender Forecloses on Goat,” The Onion proves once again that it has its finger on the pulse:

Representatives from One World Finance, a U.S.-based microcredit provider, confirmed Monday that they had initiated foreclosure proceedings on a goat in southern India following a borrower’s repeated failure to make her $2.20 monthly loan payments. “I tried to work with Ms. [Subha] Thangam on this, but once she fell a full $6.10 behind, I had to repossess the goat,” said loan officer Michael Conrad, who stated that he was just doing his job and that it was “not [his] fault” if certain subsistence farmers were living beyond their means. “I’d love to recoup the entire $22 loan at auction, but given the glut of foreclosed and abandoned goats in the area, I’d be lucky to get even half that.” Conrad also acknowledged that the owner had left the goat in “pretty bad shape” and had even stripped it of its hair for potential resale on the paintbrush market.

The article uses microfinance as an allegory for the housing and foreclosure crisis in the United States.  But, in parts of the world right now, microfinance is starting to look more and more like the recklessly over-extended financial sector prior to the economic meltdown in 2008.  In India, in particular, analysts are concerned that the glut of investment in the microfinance sector over the last several years could be feeding a bubble similar to that of the subprime mortgage in the U.S.

When I was in the Philippines, I attended a few microfinance conferences and had the chance to speak with representatives from a few microfinance investment funds from India and elsewhere.  In the eyes of investors, the Philippines could be the next big thing.  The microfinance market in India is overheated, they’d say, with a slate of recent IPOs and a huge amount of private capital flowing into the industry.  Collectively, the portfolio size of all the microfinance institutions in India grew from $252 million to over $2.5 billion in less than two years.  There are tens of thousands of organizations offering microfinance services, but fewer than a hundred have the scale to tap into the capital markets.  A dearth of good investments and an increase in the number of funders has probably driven up the price for good MFIs and simultaneously forced investors to look down-market at institutions they might not have considered in the past.

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Introduction to a Series of Essays

I am in my final month here, coming to the end of my road after a long trip.  I spent 7 months in the Philippines, two weeks each in Cambodia, Thailand, and Burma, a week in Vietnam, four days in Hong Kong, and an afternoon in Japan.  I am taking time to reflect on my time here and pull together everything I have learned into a set of coherent ideas of what it all means. I arrived in December of 2009 knowing next to nothing about microfinance, economic development, or the issue of poverty in developing countries.  I understood these things on a conceptual level, but, as faithful readers of this journal know, my views on what it is and what it does have changed with time.

I have come to the conclusion that poverty is a limitlessly nuanced and complex topic that only becomes more confusing as your understanding of its causes deepen.  It is the product of an interrelated confluence of factors that enable and exacerbate one another.  Everything is a chicken-egg situation.  Because there are no levers to pulls, there is no such thing as a silver bullet to end poverty, despite what some might have you believe.  Microfinance addresses a specific deficiency by increasing access to financial services for the poor.  Microfinance institutions use their position and reach to offer other services – healthcare, education, energy, etc. – but are limited in their ability to really make an impact in these areas.  That is because these services are the province of the state, and their deficiency is due to the failings of the government, whose politicians are democratically elected, but neglect to fulfill their promises of reform and development in the face of the promise of wealth.  Corruption is so deeply entrenched in the bureaucracy that it is immutable in the status quo.
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The Microfinance Narrative in Action

This is the opening paragraph from a recent article about whether or not microfinance is effective:

Yohane Mdeme owns a food market in Tanzania. Though poor and with little to no collateral, he applied for a loan of $850 through Kiva.org to expand his small business. Twenty years ago in such a place and for such a client, Mdeme would never obtain the capital to increase his business. No bank would have given out such a small loan, much less to a person without collateral.

Yet Mdeme is well on his way to receiving his requested amount in full.

This process, called microfinance, has been put on a pedestal by development economists thanks to its high repayment rates and ability to provide capital and growth where it used to be nonexistent. But recent research links its success with national economic growth, suggesting it only succeeds in economies that are already beginning to bloom.

This is a good example of how, for better or for worse, the narrative surrounding microfinance is accepted as reality.  But the truth is probably a little less cut and dry.  In reality, Mr. Mdeme is a client of a microfinance institution and has probably never heard of Kiva.  He applied for a loan with the microfinance bank, which gets some of its money from Kiva, and, if he is asking for $850, it is probably not his first loan.  He will probably use much of that loan for growing his business, but some might be spent on his kids’ education, clothes for his family, a wedding or a funeral (the two biggest expenses in a person’s life), or something else.  It isn’t entirely false.  It is just a simplified version of the truth that lacks a bit of nuance.

Some might argue that it’s more important to tell it like it is.  David Roodman blew the doors off the Kiva community with a blog post highlighting Kiva’s lack of transparency.    The article made such a ripple that it got picked up by the New York Times in an article called “Confusion Over Where Money Lent to Kiva Goes.”

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The Profit in Serving the Poor

The philosophical and ethical quandary over the direction of microfinance is an interesting one that gets a lot of play here at Develop Economies.  A drive for financial sustainability and the prospect of making profitable investments in microfinance institutions has brought investors to the industry.  This development opens up a whole new source of endless capital, but brings with it a new set of conditions that were never there before.  For example, a number of private equity firms have begun taking ownership of MFIs, buying equity in the business in exchange for with the expectation of a return.  Depending on the mission, these investment funds expect 15-20% return on equity, at the lowest.  These are the funds with an explicit social mission.  Others may expect even more.

In contrast, the average return on equity for the 1,300 MFIs tracked by the Microfinance Exchange, an industry support organization, is 9.5%.  Granted, most of these are small-time operations, many of which are subsidized and are not financially sustainable.  The largest and most efficiently-run MFIs – ASA, SKS, and Share in India, BancoSol in Bolivia, Compartamos in Mexico, BRAC in Bangladesh, and others around the world – bring in much more than 15% ROE.  So most will not make the cut, unless they make concessions to their business and take a different approach to serving the poor.  Perhaps serve fewer of the poorest of the poor, perhaps move upmarket and take on non-poor clientele.  You can see signs of this in the numbers.  The size of the portfolio begins growing faster than the outreach (the number of borrowers) as the MFI starts serving comparatively wealthier clients that can handle higher loan amounts.  These loans are have a higher income and are less costly to service, increasing revenue and lowering operations costs.  The tradeoff?  The clients aren’t the poorest and are not necessarily the target clients of the microfinance institution.

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Creating a Credit Bureau for People Without Credit

In any industry, when an increasing supply serves a stable demand, the market becomes overheated.  The same is true in microfinance.  As more microfinance institutions serve the same number of target clients, those clients begin taking loans from multiple sources, using one line of credit to pay off the others.  All of a sudden, instead of working with a single bank, now the clients have several different banks to choose from, all of which are vying for their business.  And these microfinance banks, while not competitive as those of the private sector, are still looking out for themselves and rarely talk to one another about their client roster.  So there is no way to check whether or not a potential client has another loan outstanding, other than to ask them directly.  And, according to one of the speakers at this conference in Davao, one study in South America showed that 50% of microfinance clients lie when asked about their number of outstanding loans.  When a client has several loans, balancing the repayments becomes trickier and more burdensome.   The end result is a higher rate of default as the market slowly becomes a bubble, which will inevitably burst.

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Yunus on Microfinance: Commercialization is Code Word

For my non-microfinance readers, the number one debate in microfinance right now is whether or not organizations should be charging higher interest rates (or improving their operating efficiency) in order to access the capital markets, which opens the doors to huge amounts of money, but also an obligation to generate returns for your investors.  Over at the Big Think, a very cool site full of interviews with thought leaders, Muhammad Yunus shares his thoughts on the commercialization of microfinance:

Commercialization is a kind of code word. In plain, simple English it means “make money” by doing that. My position has always been microcredit should be an area for social business where you want to help poor people get out of poverty by doing business. You don’t lose money. You get your money back, but you don’t make profit out of it. Because with that money you want to give to the poor people so that they get out of poverty faster. That’s where the interest is. Continue reading