Category Archives: Microfinance

Posts about the practice of microfinance

Another Approach: Investing in SMEs

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This is the first in a three-part series about small- and medium-sized enterprises

The wikipedia picture for the "Small and Medium Enterprise" entry.

In March of 2008, James Surowiecki wrote an article for the New Yorker, titled “What Microloans Miss,” that suggests that the disproportionate amount of attention given to microfinance has steered funding away from other avenues for development.  A year and a half later, the Boston Globe included a piece on two recent studies on microfinance questioning its efficacy,  titled “Small Change.” Both articles revolve around the same central premise: microfinance, while effective at relieving some of the burdens of day-to-day living, does not create jobs.  It is rare that a microbusiness receiving a loan has paid employees.  In other words, microloans allow women to start a business, but more independent businesses do not help to alleviate poverty on a macro (national) scale.  Small- and medium-sized enterprises (SMEs), according to Surowiecki, are the engines of development.  Here he discusses what considers to be the problem of the cult of microfinance:

Both socially and economically, microloans do a lot of good, working what Boudreaux and Cowen call “Micromagic.” But the overselling of their promise has made us neglect the enterprises that could be real engines of macromagic. The cult of the entrepreneur that the microfinance boom has helped foster is understandably appealing. But thinking that everyone is, and should be, an entrepreneur leads us to underrate the virtues of larger businesses and of the income that a steady job can provide. To be sure, 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.

The benefits of increasing support for SMEs in a country are real and quantifiable.  Consolidation into the formal sector provides more people with steady jobs and offers workers better health and wage benefits, disability, pensions, etc.  These businesses help to reduce the size of black markets and generate taxable income.  What’s more, a majority of microentrepreneurs would prefer a steady paycheck with job security to their current situation.  I don’t disagree with the idea that vehicles of mass production – a factory, or a plant, or a farm – create strong upward momentum for poorer people without employment.  But every country has a different profile, and the success of the development approach depends on the different strategies of development.

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A Day in the Life

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The Ceres bus from Bacolod to Escalante

Today I woke up at 5:30 in order to make the 1.5-hour trip to Cadiz City before the first center meeting.  The bus passes by 100 or so kilometers of sugar cane farms and fields.  The loan officers arrive at the branch around 8 AM.   There will be 14 center meetings led by 7 loan officers.  Each loan officer is in charge of 1-3 meetings per day, depending on the proximity and size of the centers, which range from 6 to 85 members.  This morning, all the loan officers are heads-down, calculating the day’s payments from the clients.  It is important that this work is done ahead of time, as promptness and efficiency are a virtue when you are trying to meet with upwards of 100 clients per day.

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Who is Poor? Defining Poverty

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This was written for the Kiva Fellows blog.  Read the original here.

How do you define poverty?   A basic needs index looks at whether (and to what extent) fundamental needs are fulfilled – food, water, shelter, clothing – and whether people have access to critical services – education, information (newspapers, etc.), sanitation facilities, healthcare, financial services.  This is an absolute poverty calculation, which uses a standard threshold that can be compared across countries and continents.  Another method is to use a national poverty line, usually a percentage of median income.  For example, if the median income is $10,000 USD, and the poverty line is 60% of that, any family making below $6,000 is technically below the poverty line.  This is a relative poverty calculation, because it is country-specific.  Using this method, it doesn’t make sense to compare across countries, since the poverty line in wealthier countries with higher median incomes will allow for greater purchasing power than in much poorer countries.  In microfinance (and development in general), you often hear about the percentage of the population that lives on less than $1/day – the definition of extreme poverty – or $2/day, or some other defining statistic of poverty.

Statistics are important for microfinance institutions (MFIs).  When you know what you are dealing with, you can more effectively target the population with programs that are proven to work.  It is important for an MFI to understand its clients and where they exist on the spectrum of poverty.  This is actually more difficult to assess than you’d think.  It is not feasible to ask clients how many dollars a day they spend, or even try to determine their income relative to the rest of the population.   Instead, MFIs use social performance metrics – simple tools to help them to define exactly what they are as an organization and whom they are serving.  They are basically proxies, which, when examined in aggregate, give the MFIs a profile of the poverty level of their clients.

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25 Years and Counting

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In August of this year, Negros Women For Tomorrow celebrated its 25th anniversary.  The organization commemorated the occasion with an extravagant party titled “Handum” (Dream) with 6,000 attendees, including staff, borrowers, partners, and a pre-recorded message from the godfather of microfinance himself, Muhammad Yunus.  Yunus catapulted microfinance into the mainstream in 2005 when he won the Nobel Peace Prize for his work with Grameen Bank in Bangladesh.  Naturally, most people (including myself until a few months ago) think that it is a fresh, new approach to economic development and poverty alleviation.  At 25 years old, however, NWTF is hardly fresh or new.

As a means of immortalizing the 25-year anniversary, the organization created a book of 25 of the most inspiring stories from its borrowers.  In this blog, I’ve tried to lay out the history and mission of the organization to frame or provide context for other stories.  The foreword to the book, written by the founder of the organization Dr. Cecilia del Castillo, offers a much clearer description of the organization.  I quote it in its entirety here: Continue reading →

Yunus v. Compartamos

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The following is an article I wrote for The Inductive.

Within the international development community, a debate for the heart of the movement recently came to the fore with the IPO of Compartamos, the largest microfinance institution in Mexico.  Divisive and controversial, Compartamos’ decision to sell shares and publicly list on an exchange is perhaps the clearest manifestation of where the two sides diverge.  One side, led by Muhammad Yunus, founder of the Grameen Bank and winner of the Nobel Peace Prize in 2005, contends that, at its core, the sole fundamental mission of microfinance is poverty alleviation.  The other side argues that the goal must be maximizing profit and, more specifically, ROE (return on equity) – extending services to a previously unbanked population and expanding via revenue growth.  Just about everyone has an opinion on the decision and, at the very least, it allows for a great philosophical and economic debate about the most effective way to assist the billions of people who live below the poverty line.

It’s necessary to first give a little background on microfinance and its role in economic development.  Without going into too many specifics, microfinance describes the provision of financial services to individuals below the poverty line with no material collateral.  Microcredit, specifically, refers to the disbursal of small loans – generally between $50 and $1,000, depending on the sophistication of the institution and the industry in general (average loan with Compartamos is $623) – to individuals that cannot access credit via the traditional banking system.  Given their small size, the cost of servicing these loans, as a percentage of the total, is high.  Remember: it costs the same amount to service a $10,000 loan as it does a $100 loan (salaries, office materials, etc.), and these microfinance institutions often have to track down the borrowers on a weekly basis to collect the interest and principle.  In other words, interest on microfinance loans are higher than one might think appropriate.  In the United States, 50% for a loan may seem exorbitant.  But, when you look at it relative to the alternatives (up to 800% from loan sharks) and the fact that these loans are expensive to service, high interest rates are a necessity.  But at what level are interest rates exorbitant, even for an MFI?  This is the question at the heart of the Compartamos debate.

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Grameen Bank Replication and the Principles of Microfinance

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For a brief overview of the GBR (Grameen Bank Replication) methodology and its use by NWTF/Project Dungganon, see here.

Microfinance institutions (MFIs) are often affiliated with larger networks, which help to secure funding, offer back-office services, and provide an operations model.  These organizations – Grameen Foundation, FINCA, Accion International, and World Vision, to name a few – partner with MFIs across the world to replicate the model, be it village banking, the Grameen model, or another.  These networks span countries and continents, and operate as umbrella organizations for the global microfinance community.

NWTF founder Cecilia del Castillo with Muhammad Yunus.

Negros Women for Tomorrow Foundation (NWTF) is affiliated with Grameen Bank.  Its founder, president, and CEO, Dr. Cecilia del Castillo, received her doctorate in psychology in the United States before returning to the Philippines to create an NGO that would serve women in her native island of Negros Occidental.  A meeting with Muhammad Yunus convinced her to found NWTF in 1984, with the goal to “help women achieve self-sufficiency and self-reliance, particularly in Negros Occidental’s low-income and depressed urban and rural communities.” In 1989, NWTF introduced Project Dungganon (“honorable”) and Dungganon Bank Inc., NWTF’s traditional microcredit lending program, which most people associate with microfinance.  (In reality, microfinance describes a much larger suite of financial services, including savings accounts, insurance, and rural energy delivery, capital equipment assistance, and personal loans, but that is for another post). Continue reading →

The Galvez Family, Pt. 1

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Success in microfinance is difficult to measure because progress occurs incrementally and may take a generation or more to manifest.   Usually, the benefits of microfinance – improvements in healthcare, education, and quality of life – are only visible over a longer timeframe.  For industry practitioners and evangelists, the tangible success stories among recipients of microloans are valuable proof of its efficacy.  On a recent trip to Valladolid, I was fortunate enough to meet one of the most successful NWTF clients in the foundation’s 25-year history.

The Galvez family around the dinner table

The visit to the Galvez family farm was the last stop on a three-day trek through Pontevedra and the surrounding communities.  The borrowers I’d met previously mostly operate small businesses that are reliant – directly or indirectly – on the rice- and sugar-farming industries that dominates the region.  Homes are modest in size, made from bamboo, aluminum and concrete, with few rooms and, more often than not, earthen floors.   And of course, like 80% of NWTF’s clientele, the women live below the poverty line.  The Galvez family – Milagros, the matriarch, Lorito, her husband, and their three children, Lawrence, Lori, and Lori Mae – once lived a similar life, until a loan from Project Dungganon (NWTF’s microcredit loan program) allowed them to grow their small sari-sari store into an empire.  Eight years ago, the family lived in a house made of bamboo.  With the profits of their many businesses, the Galvez’ were able to upgrade to something better.

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In The Field

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The road to a borrowers home

I spent the last three days in “the field,” a term used to describe the front lines of microfinance where the money is distributed to the clients of the banks.  Beginning early Tuesday morning, I set out for the town of Valladolid, a rural municipality about 50 km from Bacolod City.  The road snakes along the coast through increasingly less urban communities, until reaching Pontevedra, where the NWTF (Negros Women for Tomorrow Foundation) Valladolid branch is located.  Linda, the branch manager and former loan officer, took me to see the first of 15  borrowers we would try to track down over the course of the three-day trip (with a 67% success rate).  Riding in the metal grates on the back of a tricycle, where I’d spend most of my trip, we rode to small village called a barangay to interview several women about their business and loan.  The community here is small, and stopping for directions usually produced a guide that brought us directly to the home of the borrower.  Home constructions vary from 2-3 room bamboo nipa huts, to shanties with roofs of corrugated aluminum and floors of dirt, to cement frames with electricity, running water, and decorations on the walls.  Over the course of the week, I’d see all types represented.  Housing loans are popular among borrowers, and many homes have been built with loans from NWTF.

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