Development Economics

Competition, Saturation, Interest Rates, and Microfinance

CGAP, the World Bank’s microfinance arm, turns 15 this year, having been formed ten years prior to Muhammad Yunus winning the Nobel Peace Prize.  In commemoration, Alexis LaTortue, the CEO of CGAP, wrote a summary of the state of the industry and the key transformations that have occurred over the last decade and a half.  There is a lot of to unpack for a 500-word article, but I want address one point in particular that I found interesting:

More institutions are sustainable.  Very few institutions were at the beginning, and there was even disagreement about whether they could be or should be.  Yet, today, once you take away clients served by state banks, about three-quarters of total clients are served by sustainable institutions.  In a few markets, we are even approaching saturation or real competition.
When I think about this statement, it leads to ask more questions about the implications of market saturation and sustainability for the microfinance community – the providers, the clients, the funders, everyone.    I had always assumed that saturated markets already existed, but the fact that, by CGAP’s own estimate, there are only 100-150 million microfinance clients globally and a potential market of billions.  It makes sense that, while some countries have relatively mature microfinance markets – Bolivia, Kenya, Bangladesh – most are far from being saturated in the way that, say, Boston is saturated with pizza shops.  But in the same way that Boston has damn good pizza, when microfinance markets mature and become saturated with sustainable institutions, they begin to offer damn good financial services to the poor. (more…)

Development Economics

The Movers vs. The Shakers: The Microfinance Debate

In the noisy echo chamber of the development community, there are a lot of arguments for (emphatically) and for (tentatively) microfinance as a tool of poverty.  The debate surrounds a series of experimental studies questioning the impact of microfinance in achieving its stated goals – specifically, empowerment of women and poverty alleviation.  The participants are the critics and the practitioners.  The practitioners tend to dismiss the critics as having blind faith in statistics and either ignoring or being ignorant to the realities on the ground, while the critics contend that the practitioners drank the Kool-Aid long ago and refuse to admit that, while microfinance is impactful, it is perhaps not to the extent they believed.  Those are both exaggerated overstatements and many people bridge the divide, but it is close enough.  The debate reached a fever pitch recently, with some of the biggest practitioners – Accion, Grameen Foundation, Finca, Opportunity International, Unitus, and Women’s World Banking – jointly issuing a statement defending the impact of their trade.  It is a short statement and worth a read, offering a distilled version of the practitioner argument.  The authors describe what they consider to be the major flaw in the critics’ argument:

Unfortunately, it is extremely difficult for studies to quantitatively demonstrate the impact of microfinance. Such studies face two fundamental challenges: their ability to capture and analyze all the benefits of microfinance, and the duration of the study itself.  To obtain quantifiable data, researchers have to ask narrow questions over relatively short periods of time–-14 to 18 months in one case–-which does not always allow the time necessary for impact to manifest itself. And because of the growing penetration of microfinance, researchers are finding it increasingly difficult to find homogenous geographical regions that contain both clients who have access to financial services and those who have none.
This is all true.  Statistics give an incomplete picture and do not pick up the nuanced effectiveness of microfinance, which is manifested in individual success stories rather than a large group of people moving out of poverty.  Negros Women for Tomorrow Foundation is a good example of this principle at work.  It periodically measures the poverty level of its clientele using the Progress out of Poverty Index (PPI).  Over the last five years, 22% have moved upward, 19% have moved downward, and the remaining 59% have remained pretty much the same.  On balance, there is a net upward poverty movement, but not by much.  Also, the number of clients that moved downward might have been much higher had they not been receiving microfinance services. (more…)

Microfinance

The Right Conditions for Microfinance

Across the world, there are a lot of poor people.  In the developing world, 1.4 billion people live on less than $1.25 USD per day.  While this catch-all gives an idea of who is struggling to get by, the impoverished are stratified in terms of desperation.  Some live in extreme poverty, racked by hunger and disease with little hope of “pulling themselves up by their bootstraps.”  Combating this type of poverty requires humanitarian and development aid.  But those higher on the ladder can be served by microfinance institutions.  But according to the latest statistics from the Microfinance Exchange (MIX), about 100 million people worldwide receive microfinance loans (these figures are self-reported, and the actual number is much higher).   There is still a large underserved population, and microfinance institutions (MFIs) are working to close the gap. (more…)

Microfinance

Microfinance and Job Creation

[caption id="attachment_858" align="aligncenter" width="450" caption="The staff of the NWTF branch in Puerto Princesa"][/caption]

"So health care reform and reducing taxes and reining in spending has got to accompany tax reductions, and tax relief for Americans, and trade — we have got to see trade as opportunity, not as, uh, competitive, um, scary thing, but one in five jobs created in the trade sector today. We’ve got to look at that as more opportunity. All of those things under the umbrella of job creation." - Sarah Palin

The international economic development community is constantly holding its own feet to the fire.  I sometimes describe the push for transparency and demonstrated as a circular firing squad.  It s probably an unfair characterization, since a lack of oversight leads to billions of dollars in squandered aid and international investment.  Microfinance, in particular, is a frequent target of scrutiny from economists.  It is the darling of the development world, and often mischaracterized as the long-awaited solution to poverty alleviation.  But the impacts of microfinance are nuanced and cannot be reduced to a simple formula (i.e. poor woman starts business, business earns money, woman no longer poor).  In reality, microfinance smoothes consumption, offers money for non-livelihood expenses, like tuition and home repairs, and, in a few cases, propels women above the poverty line.  The impact on poverty alleviation is real, but perhaps more muted than the literature would have you believe. (more…)

Microfinance

Microenterprise to SME: A Thought Exercise Pt. II

This is the third post of a three-part series on small- and medium enterprises.  It is the second of a two-part post.

[caption id="attachment_831" align="aligncenter" width="400" caption="Enterpreneurship training with Negros Women for Tomorrow"][/caption] The other day I discussed six actions or programs a microfinance institution (MFI) can take to help clients convert their business from a micro-enterprise to a small- to medium enterprise (SME).  Today, I will cover the final six. (more…)

Microfinance

Microenterprise to SME: A Thought Exercise pt. I

This is the third post of a three-part series on small- and medium enterprises.  It is a two-part post. [youtube=http://www.youtube.com/watch?v=6Z66wVo7uNw] A month ago, I attended a conference in Manila sponsored by the Microfinance Council of the Philippine Islands.  I wrote briefly about the level of cooperation among the participants, but have yet to share what I learned.  The conference – titled “Operationalizing Social Performance Monitoring (SPM)” – brought together a dozen microfinance institutions (MFIs) and lenders from across the country to discuss best practices for focusing on the social mission.  In the microfinance world, theoretical solutions to problems, like how to focus on the poor and remain financially sustainable, are often incompatible with the nuanced realities on the ground.  This gathering offered a chance for MFIs to share what has worked and what has not, so that the microfinance community at large can be more effective at addressing poverty alleviation in the Philippines. The keynote speaker, Prof. Ron Chua, functioned more as a facilitator and moderator than a lecturer.  He asked the MFIs to present a specific social goal and discuss the measures each would take to achieve it.  One nameless participant set an organizational goal of transitioning 30% of existing clients from micro-enterprises to SME (small- to medium enterprise) within five years.  They presented a laundry list of programs designed to aid in this process.  The underlying assumption behind each of these measures is that financial services (microcredit) must be complemented by the provision of non-financial services, including business development and support services and integrated community development.  Provision of financial services alone is not enough to bring people out of poverty.  This exhaustive list addresses all of the key issues in moving a client out of poverty.  I will present the first six here, and the remained six in the next post. (more…)

Microfinance

The Tradeoffs of Serving the Poorest

[caption id="attachment_767" align="alignright" width="300" caption="Groundhog's Day for a man of the torah."][/caption] This past weekend I went with four coworkers and a lecturer at Ateneo University Business School to a province called Aklan.  I woke up at 5:00 AM Friday morning in order to catch the ferry to Iloilo at 8:00.  We drove five and a half hours north to Kalibo, where we stayed in Sampiguita Resort, “where it’s Christmas everyday.”  It is the vision of Sam Butcher, the American founder and creative genius behind the Precious Moments dolls – a collectible item so sweet it will make your teeth rot. (more…)

Microfinance

What I Do: Borrower Interviews

As a Kiva Fellow, I go to the field to interview borrowers about the status of their loan and talk about the business, the family, and their dreams for the future.  Usually I do a short write-up to update the Kiva lenders, but sometimes I go overboard and write an essay.  This is not representative of most journal entries, but I found her to be such an interesting client that I wanted to share it.  I titled this journal update "Glenda's Business and the Economics of a Half-Hectare Farm."  It only went out to 13 people, so I'm hoping for a larger audience here*: (more…)

Development Economics

Green Products and the Triple Bottom Line

The core philosophy of microfinance is the double bottom line.  It refers to the goals of the organization, which are a) to be profitable, and b) to be socially impactful.  But there is another philosophy known as the triple bottom line, which adds ecological impact.  Sometimes referred to as "people, planet, profit," TBL promotes an environmentally-friendly approach to development.  To that end, there are a host of products that serve each of the three goals.  In this post, I will talk about one in particular: environmental cookstoves. (more…)

Microfinance

Branch Rollout in Cebu

[caption id="attachment_610" align="alignright" width="300" caption="The ubiquitous "Principles of Dungganon" sign."][/caption] This weekend I went to Cebu, an island east of Negros, for the Kiva rollout in the NWTF branches.  I traveled as part of a five-person team, including Massah, the photography consultant, Raymond, the research manager, Jubert, the IT manager, and Presy, the Kiva coordinator.  Pocholo, a friend of Raymond’s, needed a lift to Cebu and caught a ride with us.  The six of us loaded the infamous red van and left at 7 AM on Thursday morning.  The road to the port in San Carlos normally takes 3.5 hours, but we chose to take a shortcut through the mountains on a winding two-lane road cut neatly into the side of a cliff.  Unfortunately, by the time we arrived at the port, the ferry was full.  The next ferry didn’t leave until 2:30 in the afternoon, so we drove three hours south along a coastal road to another port in Aclan, where the ferry leaves every hour and takes 30 minutes to cross.  Once on the other side, we had another three-hour trip back up north.  Twelve hours later, we arrived in Cebu City and checked into a hotel. [caption id="attachment_637" align="aligncenter" width="300" caption="Our route, highlighted by the black arrows"][/caption] (more…)