Microfinance

What Do I Think of Microfinance? Pt. 1

This is part one of a two-part post on microfinance. Through Kiva and Negros Women for Tomorrow Foundation, microfinance became my entrée into this world.  I knew very little about microfinance prior to finding Kiva, other than what I had seen on an episode of Frontline highlighting the company’s early Read more…

Microfinance

Saving as a Group

The following is a guest post by Gemma North, an associate with Saving for Change, a community finance program run by Oxfam America. ?In 2009, I worked for a microfinance institution called CREDIT in Cambodia.  On a field visit, I met a borrower who sold clothing and knick knacks to Read more…

Development Economics

The Battle for the Soul of Microfinance

Microfinance is going through some major growing pains right now, hitting its first major challenge since it hit the mainstream in 2005 after Muhammad Yunus won the Nobel Peace Prize.  The “silver bullet” of poverty alleviation that brought credit to those previously thought unworthy of a loan has seen an onslaught of criticism for failing to deliver on the lofty goals that its evangelists believed it could achieve (lesson: don’t overpromise). Studies have shown that the impact of providing credit to poor women does not have a dramatic effect on poverty alleviation, and the success stories, at least in recent months, have been trumped by tales of aggressive loan-recovery tactics and suicides among poor borrowers in India.  Portfolios of the Poor, a book written by four development economists with a healthy skepticism about the transformative effects of microfinance but optimism about its marginal impacts, showed that access to credit is actually less important than savings – access to a safe place to keep your money. The big schism in microfinance since 2008 has been about where to get the money for operations.  On one side, there is a group that believes microfinance must always focus on serving the needs of the poor and resist temptation to exploit borrowers with overly-exorbitant interest rates (I say “overly” because interest rates are, well, exorbitant).  This camp, led by Muhammad Yunus, the spiritual and, until recently, actual leader of the Grameen Bank, condemns a profit motive.  Instead, microfinance institutions (MFIs) should charge interest rates that will cover expenses and will finance expansion efforts.  In other words, MFIs should be financially and operationally sustainable, but nothing more. Proponents of the other side believe that, for microfinance to achieve its true potential and reach the billions of poor people without access to credit, it must tap into the vast financial coffers of the capital markets.  To do so, microfinance needs to become attract investors with, at the least, a hybrid model focused on financial returns and social impact.  There are still only a handful of MFIs of adequate scale to access the same type of capital that a normal company might access, at commercial rates. (more…)

Development Economics

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. (more…)

Development Economics

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.  (more…)

Development Economics

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. (more…)

Development Economics

Subprime Time: Microfinance Debt Hits the Stock Exchange

[caption id="" align="alignright" width="320" caption="Tell me more about this microfinance."][/caption] Right now, the hot topic in microfinance is the initial public offering (IPO) of SKS Microfinance, one of the largest microfinance institutions in India with a portfolio size of over US$1 billion.  This isn't the first time a major microfinance institution has gone public, but it is more interesting because the CEO is a disciple of Muhammad Yunus, who believes what organizations like SKS are doing undermines the social mission of microfinance.  But there is other interesting financial news in the microfinance world that is flying under the radar.  This, for example:
NYSE Euronext and Microfis plan to set up the first organised market for listing and trading of bonds based on debt from international microfinance institutions and solidarity businesses as defined by the Economic Modernisation Act (LME).

The new NYSE Euronext market segment will offer investors a range of products in an environment that is secure and transparent.  Microfis will handle origination, analysis and tracking of high-quality assets, as well as their transformation into tradable securities and their syndication.  Scheduled for launch in the last quarter of 2010, the market segment is dedicated to responsible finance. (more…)

Microfinance

The Argument Against Subsidized Interest Rates

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. (more…)

Development Economics

The Economics of a Cookstove

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. (more…)