As you might remember I have written a post in the past highlighting a campaign called Phones 4 Loans. I recently had a conversation with the leader of Recycle to Eradicate Poverty, Brian Weinberg. A summary of the campaign can be found at Digiactive.org soon. Brian is still a student at University of North Texas where he founded the campaign. He has told me that it has been difficult in the beginning. He told me that his greatest challenge was being patient through all the problems he had with website developers. Many times the website developers did not have enough bandwidth to develop the kinds of sites that RTEP wanted. This happened twice and he told me it wasted a huge amount of time that could have been used to focus on getting people involved with the campaign. I think that is part of the reason why the cell phone collection rate has been low in the past year and a half.
They have also told me that they have started to create videos to put up on Youtube. They are hoping to make more videos that are humorous in nature that will become viral. The videos have only been up for a week and I believe as they post more videos that are good quality the more people will eventually view them. If it is possible for musicians to start careers on Youtube it should be possible for a socially responsible campaign to become famous on Youtube.
Brian Weinberg also told me that he is travelling often to go to summits and conferences to meet other leaders in the microfinance field to learn from them and network with them. He hopes to be able to get more organizations informed about his campaign so he can be featured on sites like Global Microfinance Forum. The site is perfect for microfinance leaders to discuss issues and network with each other and collaborate together. I believe that Brian Weinberg is really passionate and dedicated to this project. Although he is young he will eventually learn and become more experienced especially if he is taking steps to contact other leaders in the field. I urge you to go to their website and get involved. This is a great idea and I would hate to see it go to waste.
Friday, May 15, 2009
CSFI Report
CSFI Annual Banana Skins Report on Microfinance
Every year for the last 10 years CSFI, The Centre for the Study of Financial Innovation, conducts a survey and writes a report on the results. The survey is to show what practitioners, investors, analysts, observers, and regulators believe as the top "banana skins" or threats to the microfinance industry. They send the survey all over the world. They show the results from the survey from the people that are surveyed and also the results from regions in the world. I thought this was very interesting and I am going to write about the top risks to the microfinance industry this year. But if you wish to read the whole report the link above will lead you to it.
The number threat or risk to the microfinance industry is management quality. There is much variance in the quality of mangement inn microfinance institutions. In all the regions that MFIs operate in MFIs are being stretched by hectic rates of growth. MFIs are dealing with more complexities in their business and feel pressure to become more commercially-motivated. One of the respondents even warned that any MFIs that do not have good management will fail in these competitive times. The people who were concerned most about management quality are investors and analysts. But the practitioners ranked it 7th in the list of risks. The most concerned regions were in Europe, North America, Africa, and Asia. MFIs are generally run by "visionaries" who are very charismatic but lack good management and organizational skills. As commercializing MFIs becomes more popular MFIs are getting stuck between their commercial goals and their social ones. Without good management these MFIs that are stuck will not excel in either of their goals and will eventually be knocked out by better managed MFIs. But in general this banana skin is not a rising risk but a falling one. People are effectively recognizing this problem and fixing it.
Corporate governance is the second highest ranked banana skin. This is also was a top concern for investors, analysts and regulators and not for MFI practitioners. Many MFIs do not know about basic coporate governance and are generally ignored in these organizations. It is possible that this is because they are worried about getting more investors and getting more clients rather than setting up official corporate governance rules. But investors are very concerned and this lack of corporate governance may lead to loss of confidence by their investors. Some of the shortcomings form of low calibre personnel, lack of experience, cronyism, and poor transparency. Many believe this area needs more professionalism. This is a particularly worrying area for commercial investors. These are the people that are worried about their investments and not about the results that could be shown from them. But there is a bright side to this risk. The risk is forcing people to raise their game and become more professional. Hopefully, this will also lead to better management.
These banana skins reports are very important, in my opinion. They need to analyze these problems and publish them publicly to help MFIs improve their business and help grow the industry. This industry is still young and needs more changes. These problems need to be recognized and addressed effectively. Please take a look at the report it is a great source of information and hopefully many of these MFIs are looking at it to.
Every year for the last 10 years CSFI, The Centre for the Study of Financial Innovation, conducts a survey and writes a report on the results. The survey is to show what practitioners, investors, analysts, observers, and regulators believe as the top "banana skins" or threats to the microfinance industry. They send the survey all over the world. They show the results from the survey from the people that are surveyed and also the results from regions in the world. I thought this was very interesting and I am going to write about the top risks to the microfinance industry this year. But if you wish to read the whole report the link above will lead you to it.
The number threat or risk to the microfinance industry is management quality. There is much variance in the quality of mangement inn microfinance institutions. In all the regions that MFIs operate in MFIs are being stretched by hectic rates of growth. MFIs are dealing with more complexities in their business and feel pressure to become more commercially-motivated. One of the respondents even warned that any MFIs that do not have good management will fail in these competitive times. The people who were concerned most about management quality are investors and analysts. But the practitioners ranked it 7th in the list of risks. The most concerned regions were in Europe, North America, Africa, and Asia. MFIs are generally run by "visionaries" who are very charismatic but lack good management and organizational skills. As commercializing MFIs becomes more popular MFIs are getting stuck between their commercial goals and their social ones. Without good management these MFIs that are stuck will not excel in either of their goals and will eventually be knocked out by better managed MFIs. But in general this banana skin is not a rising risk but a falling one. People are effectively recognizing this problem and fixing it.
Corporate governance is the second highest ranked banana skin. This is also was a top concern for investors, analysts and regulators and not for MFI practitioners. Many MFIs do not know about basic coporate governance and are generally ignored in these organizations. It is possible that this is because they are worried about getting more investors and getting more clients rather than setting up official corporate governance rules. But investors are very concerned and this lack of corporate governance may lead to loss of confidence by their investors. Some of the shortcomings form of low calibre personnel, lack of experience, cronyism, and poor transparency. Many believe this area needs more professionalism. This is a particularly worrying area for commercial investors. These are the people that are worried about their investments and not about the results that could be shown from them. But there is a bright side to this risk. The risk is forcing people to raise their game and become more professional. Hopefully, this will also lead to better management.
These banana skins reports are very important, in my opinion. They need to analyze these problems and publish them publicly to help MFIs improve their business and help grow the industry. This industry is still young and needs more changes. These problems need to be recognized and addressed effectively. Please take a look at the report it is a great source of information and hopefully many of these MFIs are looking at it to.
How Well is Your MFI Doing?
Social Performance Indicators Survey
The Microfinance Information Exchange (MIX) has recently sent a survey to over 1300 MFIs all over the globe. They are trying to develop a standardized measurement of social performance. The social performance is analyzed through 22 core indicators like client poverty level, progress out of poverty, product design, and institutional policies and procedures. MIX is working together with the Social Performance Task Force from CGAP in making the questionnaire that was sent out to the MFIs. Their purpose is to analyze the social performance of MFIs across the globe. The SPTF have about 200 partners to help do this. One of the main problems with measuring social performance is that different measurments look at different areas of MFIs and it is hard to tell which factors are affecting social performance more than others. They have already done an experimental run with their current questionnaire with a smaller base group of 100 last spring. They have found success. I believe that it is important to figure out which methods and organizations are helping the poor than others so that MFIs can learn how to do their jobs better. The whole point of a MFI is to improve people's lives and help them out of poverty. But we must find out which way is the best way to do that in different areas. If we do not have an effective way of measuring success in the field of microfinance than how can we expect microfinance to improve? I hope that the larger study will be a success so that we can see more successful MFIs everywhere in the world. Read this paper if you wish to get a better sense of how microfinance social performance is being measured and why it is important.
The Microfinance Information Exchange (MIX) has recently sent a survey to over 1300 MFIs all over the globe. They are trying to develop a standardized measurement of social performance. The social performance is analyzed through 22 core indicators like client poverty level, progress out of poverty, product design, and institutional policies and procedures. MIX is working together with the Social Performance Task Force from CGAP in making the questionnaire that was sent out to the MFIs. Their purpose is to analyze the social performance of MFIs across the globe. The SPTF have about 200 partners to help do this. One of the main problems with measuring social performance is that different measurments look at different areas of MFIs and it is hard to tell which factors are affecting social performance more than others. They have already done an experimental run with their current questionnaire with a smaller base group of 100 last spring. They have found success. I believe that it is important to figure out which methods and organizations are helping the poor than others so that MFIs can learn how to do their jobs better. The whole point of a MFI is to improve people's lives and help them out of poverty. But we must find out which way is the best way to do that in different areas. If we do not have an effective way of measuring success in the field of microfinance than how can we expect microfinance to improve? I hope that the larger study will be a success so that we can see more successful MFIs everywhere in the world. Read this paper if you wish to get a better sense of how microfinance social performance is being measured and why it is important.
Thursday, May 14, 2009
Highlight: MicroPlace
MicroPlace
Today's highlight is on a peer-to-peer lending site, MicroPlace. I liked the idea of p2p lending when I highlighted Kiva.org so I went to look for another interesting p2p idea. MicroPlace is a p2p lending site that is run by Ebay. The Ebay founders have always been involved in microfinance. They have their own foundation that gives out millions in microloans. MicroPlace was started by Stanford graduate, Tracy Turner. Her experience working for the Bangladesh based Grameen Bank inspired her to start her own site for microfinance. The company was bought by Ebay shortly after. Microplace is similar to Kiva in that people give money to entrepenuers that are listed on the site. The first loan must be at least $100 but after that the loans can be as small as $50. Although it sounds very similar to Kiva there is one real difference. The lenders are actually investing in securitized funds. The lenders are more like investors. They invest in these securities then the funds from the sales are given to the MFIs. Then they are repaid the loan with interest. They can choose funds that have higher returns but more risk. They recently announced that they will be offering 6% returns on investments, which is a first for any microfinance institution. Investors can choose the type of people that will be getting their money but not as specifically like Kiva. The borrowers are categorized in man different areas like poverty level, green projects, rural areas, focus on women, fair trade, repayment schedule, geographical area, and financial return level. There is no guarantee on any returns but they are confident that borrowers have a great repayment rate. This is allowing people to smartly invest in something that they believe in. It is killing two birds with one stone. I think it is next place where microfinance will eventually head to. As microfinance becomes more commercialized and more regular investors get involved markets will form and demand will grow. It is possible that eventually there will be trading desks for these securities and it will become a global market. It is not a far fetched idea. Banks have traded weirder things than microfinance loans. It is almost like a subprime loan but safer...hopefully. I believe MicroPlace is putting itself smartly in front of any competition and will be more successful than other p2p lending sites that have come after Kiva.
ACCION CEO Nominated to Work in Obama's Administration
ACCION CEO Nominated
ACCION CEO, Maria Otero, has been nominated as the Under Secretary of Democracy and Global Affairs in the U.S. Department of State. She has not been confirmed by Congress but has indicated that she will take the position if she is allowed. She has been a leader in microfinance and social development over the years. She has taken ACCION and made what it is now. ACCION is now a global microfinance institution operating in more than 20 countries. She joined ACCION in 1986. From there she took the organization to another level. She brought up the clients from 460,000 to about 3.7 million. The active loans in ACCION's portfolio total almost $3.5 billion. She also has experience in being part of large microfinance boards and committees like Calvert Social Investment Foundation and the United States Institute of Peace. She has been an advocate of democracy and humanitarian projects all over the world. As Undersecretary of Democracy and Global Affairs she will be responsible for work on global issues democracy, human rights, labor, environment, refugees, and trafficking of persons. She will be working on issues that are very pertinent to the times facing us. I believe she is a great choice for the administration for this post. She has lots of experience in areas like this and will be very successful in her post. I hope that Congress will not delay any more nominations and let her get to work.
MFIs More Than Just a Bank?
MFIs need and want do more
In a recent survey by Microfinance Insights, a global publication on microfinance, more than 85% of MFIs and MFI investors believe that they should be looking wider social development outside of financial inclusion. In previous posts I have told you that microfinance is important for the people who have been excluded by conventional banks. But, as microfinance institutions are growing rapidly with their success in microcredit many of them are looking towards more ways they can help their clients in different social areas. Many of the surveyed MFIs are already working toward a wider view in social development. About 79% of the MFIs surveyed already offere products and solutions for their clients like community development, inclusion of minorities, and better employment and labor conditions. This drive for better social development programs may be stemming from the commercialization of the industry. As the commercialization proliferates people have started to believe that microfinance has drifted from its original goal of helping people out of poverty. Therefore, many of the microfinance institutions are looking to help communities to break some of these negative images of microfinance. I believe that microfinance institutions stand as a helping hand to struggling people in the countries that they operate in. I also believe that if a microfinance institution believes in what it is doing and is successful they should look for more ways of helping their clients in their fight with poverty. The Grameen Bank does this successfully by investing in hygenic products for their clients and educating their clients in better social behavior. Plus, as microfinance institutions help the community more people will grow to know the organization and it will most likely bring more clients. But what do you think?
In a recent survey by Microfinance Insights, a global publication on microfinance, more than 85% of MFIs and MFI investors believe that they should be looking wider social development outside of financial inclusion. In previous posts I have told you that microfinance is important for the people who have been excluded by conventional banks. But, as microfinance institutions are growing rapidly with their success in microcredit many of them are looking towards more ways they can help their clients in different social areas. Many of the surveyed MFIs are already working toward a wider view in social development. About 79% of the MFIs surveyed already offere products and solutions for their clients like community development, inclusion of minorities, and better employment and labor conditions. This drive for better social development programs may be stemming from the commercialization of the industry. As the commercialization proliferates people have started to believe that microfinance has drifted from its original goal of helping people out of poverty. Therefore, many of the microfinance institutions are looking to help communities to break some of these negative images of microfinance. I believe that microfinance institutions stand as a helping hand to struggling people in the countries that they operate in. I also believe that if a microfinance institution believes in what it is doing and is successful they should look for more ways of helping their clients in their fight with poverty. The Grameen Bank does this successfully by investing in hygenic products for their clients and educating their clients in better social behavior. Plus, as microfinance institutions help the community more people will grow to know the organization and it will most likely bring more clients. But what do you think?
Wednesday, May 13, 2009
Issue: US vs. Third World Countries
Today, I will be addressing another topic that I feel is very important in the field of microfinance. I have been saying that microfinance has been found as an effective way of helping the poor find a way out of poverty. But I have always been a bit wary of its effectiveness in the United States. The United States is definitely a different market than microfinance capitals like Bangladesh, India, and Mexico. These countries are certainly not as developed and have much more room for micro-entrepenuers to grow. There are many problems facing microfinance and microcredit in the United States but the Grameen Bank and President Obama think otherwise. I will be discussing the opposing views and what I think of them in this post.
I personally believe that microfinance, especially microcredit, is difficult to make successful in the United States. It is not as easy to start a business selling small hand made crafts in the United States than in Bangladesh or India. It is much harder to get money together to start a business in the United States than in Third World Countries. In a paper written by Mark Schreiner and Johnathan Morduch, they address the problems of replicating the kinds of success seen in microfinance in developing countries and economies and the differences that may pose difficulties for the United States microfinance market (Link to paper). They named seven reasons why microfinance will have problems reaching the success of other countries' success. The first is the size of the microfinance sector. It is true that we have our own share of poverty in the country but the microenterprise sector is much smaller in the US than in Third World countries. Therefore, the size of the microfinance market is not as large. Many unemployed will look towards hourly wage jobs than starting their own business because it is less risky. In Third World countries, according to this report, most unemployed looks towards opening their own small businesses no matter how small they may be. The United States also has a functional welfare system that most of these Third World countries do not. This safety net allows people to live off welfare which makes microenterprises even less attractive. Moreover, large firms and enterprises are the main types of businesses in the United States. In many of the Third World countries, small vendors and shops are the main form of retail services. Although small businesses are not completely nonexistent in the US there are only a small number of these specialized services in America. Furthermore, the lack of social capital between people in the US compromises one of the strategies of microfinance, group liability. People in the US are more likely to look for individual success and will not throw their hat in with their neighbors. There is much less connection between neighbors on a block in a major US city than there is between fellow villagers in India. I agree that these problems are serious when thinking about expanding the microfinance activity in the states. It is most likely why no MFI in the United States can turn a profit.
But there are two points that the authors made that I do not agree with. One of the points is that many people in the United States have many options when it comes to banking services including the poor. But I cannot believe that to be true. Commercial banks are not in competition with MFIs. The main clients to MFIs are people that the commercial banks have shunned away because they do not have any collateral or any consistent use of their services. The second point that I do not agree with is the idea that MFIs in the United States do not use a self-chosen peer liability group. It may have been true when the article was written a few years ago but after the entrance of Grameen Bank America that has all changed. Grameen Bank America has brought all of their services from Bangladesh to New York City to try to help women who want to change their lives. They use the same concept of peer liability groups to ensure that people can repay their loans. In fact, Grameen Bank has announced recently that it will be expanding their loans in the United States. They have been able to get a 99.5% repayment rate. Last year they made over $1million of loans to over 400 women in New York City. Furthermore, each of the borrowers also opened up savings accounts with Grameen Bank. Grameen Bank believes that the trust people have in their neighbors and friends lives in New York just as it lives in the villagers in Bangladesh. They hope to be able to expand and give out an even larger amount of loans in 2009. This just shows that people are finding successful ways to bring microfinance into the forefront in American finance. It is especially important during these tough economic times. I have also mentioned in the past the belief Barack Obama has in microfinance. He also believes that it will help the United States bring more people out of poverty. He supports the efforts of MFIs abroad and in the States.
It is a tough call overall whether microfinance will really flourish in the United States as it did in South America or Southern Asia. It is obvious that the regulations that hold togethe businesses in the United States are not as friendly to microentrepenuers as the Third World countries. But I do believe that microfinance is a great idea and great ideas will be able to find a way to change lives anywhere it goes. I think microfinance can be adapted for the American culture and find a way to help people out of poverty.
I personally believe that microfinance, especially microcredit, is difficult to make successful in the United States. It is not as easy to start a business selling small hand made crafts in the United States than in Bangladesh or India. It is much harder to get money together to start a business in the United States than in Third World Countries. In a paper written by Mark Schreiner and Johnathan Morduch, they address the problems of replicating the kinds of success seen in microfinance in developing countries and economies and the differences that may pose difficulties for the United States microfinance market (Link to paper). They named seven reasons why microfinance will have problems reaching the success of other countries' success. The first is the size of the microfinance sector. It is true that we have our own share of poverty in the country but the microenterprise sector is much smaller in the US than in Third World countries. Therefore, the size of the microfinance market is not as large. Many unemployed will look towards hourly wage jobs than starting their own business because it is less risky. In Third World countries, according to this report, most unemployed looks towards opening their own small businesses no matter how small they may be. The United States also has a functional welfare system that most of these Third World countries do not. This safety net allows people to live off welfare which makes microenterprises even less attractive. Moreover, large firms and enterprises are the main types of businesses in the United States. In many of the Third World countries, small vendors and shops are the main form of retail services. Although small businesses are not completely nonexistent in the US there are only a small number of these specialized services in America. Furthermore, the lack of social capital between people in the US compromises one of the strategies of microfinance, group liability. People in the US are more likely to look for individual success and will not throw their hat in with their neighbors. There is much less connection between neighbors on a block in a major US city than there is between fellow villagers in India. I agree that these problems are serious when thinking about expanding the microfinance activity in the states. It is most likely why no MFI in the United States can turn a profit.
But there are two points that the authors made that I do not agree with. One of the points is that many people in the United States have many options when it comes to banking services including the poor. But I cannot believe that to be true. Commercial banks are not in competition with MFIs. The main clients to MFIs are people that the commercial banks have shunned away because they do not have any collateral or any consistent use of their services. The second point that I do not agree with is the idea that MFIs in the United States do not use a self-chosen peer liability group. It may have been true when the article was written a few years ago but after the entrance of Grameen Bank America that has all changed. Grameen Bank America has brought all of their services from Bangladesh to New York City to try to help women who want to change their lives. They use the same concept of peer liability groups to ensure that people can repay their loans. In fact, Grameen Bank has announced recently that it will be expanding their loans in the United States. They have been able to get a 99.5% repayment rate. Last year they made over $1million of loans to over 400 women in New York City. Furthermore, each of the borrowers also opened up savings accounts with Grameen Bank. Grameen Bank believes that the trust people have in their neighbors and friends lives in New York just as it lives in the villagers in Bangladesh. They hope to be able to expand and give out an even larger amount of loans in 2009. This just shows that people are finding successful ways to bring microfinance into the forefront in American finance. It is especially important during these tough economic times. I have also mentioned in the past the belief Barack Obama has in microfinance. He also believes that it will help the United States bring more people out of poverty. He supports the efforts of MFIs abroad and in the States.
It is a tough call overall whether microfinance will really flourish in the United States as it did in South America or Southern Asia. It is obvious that the regulations that hold togethe businesses in the United States are not as friendly to microentrepenuers as the Third World countries. But I do believe that microfinance is a great idea and great ideas will be able to find a way to change lives anywhere it goes. I think microfinance can be adapted for the American culture and find a way to help people out of poverty.
Highlight: Kiva
Today's highlight is on a innovative firm called Kiva. Kiva is known as the world's first person to person microfinance firm. It hopes to connect people through their website. It is an easy and convenient way for people to get personally involved in helping a struggling individual through microfinance. Lenders can go online on the site and browse through various entrepeneurs' profiles that are provided by microfinance institutional partners. They choose the entrepeneurs that seem the most promising and use PayPal to send the funds to the institution that will provide the entrepenuer with the money. Over time the entrepenuer will pay back the loan and once the loan is repaid the lender may reloan to another entrepenuer or donate their funds to Kiva or whatever they want. Kiva has also enabled lenders to form and join groups that can align people to a certain cause or interest. For example, the top two lending groups are the Atheists and the Christians. The groups can pool their money or find entrepenuers individually to lend their money. Kiva keeps track of all the donations made and posts the totals on their website. This competition could fuel the groups to donate more than if they were just individuals. Kiva also has ways that allows lenders to get personally involved with the lives of the entrepenuers by becoming a Field Partner. This allows them to be on the ground right by the entrepenuers to see how they are doing and to help Kiva with anything that may come about. There is also a program for volunteers to work with a partnering microfinance institution called Kiva fellows. This allows people to get a first hand look at the impact of microcredit in the lives of the borrowers. Kiva holds extensive training sessions and sends many people abroad all year. Moreover, I thought it was exciting and fun how people can write about the people that they have lended to in the past and add any comments they want to entrepenuers' profiles. Kiva is an extremely innovative and unique way of providing debt for microfinance institutions. It is incredibly easy to use and get involved. I also think it is more engaging because the individual lenders can choose which person will get their loans. I believe that there needs to be more person to person interaction so that the lenders can get a sense of involvement. I think it would also help if people saw the actual results from the loans that they have given. I believe that eventually Kiva will work toward that goal. All in all, Kiva is a different kind of microfinance organization. They are basically the middle men between lenders and borrowers. They are not actually a regular microfinance institution. I think this an interesting position to be in and I believe there needs to be more initiatives like this one. Please check out Kiva and get involved.
Microfinance Event: Panel in New York
Panel in New York
On May 18th, there will be an important panel held in New York City. The panel will discussing the effects of the global financial crisis on the microfinance firms around the world. The panel is being hosted by the Women Advancing Microfinance (WAM-NY). WAM is a young organization that is focused on helping women in microfinance. They look to educate women in leadership and business so that microfinance may help the women more. They have been able to bring in some top names from the microfinance industry for the panel. Barbara Magnoni is the President of EA Consultants. EA Consultants works with access to finance and banking services including micro versions of these services. She has been an advocate for various microfinance projects and has years of experience. They also have the CFO of Compartamos, Fernando Alvarez Toca. I have spoken extensively of Compartamos and it will be interesting to hear his opinions on the effects of the global economy on microfinance. Moreover, they have Pilar Ramirez on the experienced panel. She is now the general manager of LOCFUND, the Local Currency Microfinance Fund for Latin America and The Caribbean. She has over 20 years of microfinance experience and brings much insight on this issue. This is great local event to go to. They will be addressing many issues that have been discussed thoroughly in the past few years but will be going into much more detail behind what is happening in the microfinance industry during these tough financial times. It will be interesting to find out the opinions of the different panelists because they have come from different areas of microfinance. I hope many of will check it out.
On May 18th, there will be an important panel held in New York City. The panel will discussing the effects of the global financial crisis on the microfinance firms around the world. The panel is being hosted by the Women Advancing Microfinance (WAM-NY). WAM is a young organization that is focused on helping women in microfinance. They look to educate women in leadership and business so that microfinance may help the women more. They have been able to bring in some top names from the microfinance industry for the panel. Barbara Magnoni is the President of EA Consultants. EA Consultants works with access to finance and banking services including micro versions of these services. She has been an advocate for various microfinance projects and has years of experience. They also have the CFO of Compartamos, Fernando Alvarez Toca. I have spoken extensively of Compartamos and it will be interesting to hear his opinions on the effects of the global economy on microfinance. Moreover, they have Pilar Ramirez on the experienced panel. She is now the general manager of LOCFUND, the Local Currency Microfinance Fund for Latin America and The Caribbean. She has over 20 years of microfinance experience and brings much insight on this issue. This is great local event to go to. They will be addressing many issues that have been discussed thoroughly in the past few years but will be going into much more detail behind what is happening in the microfinance industry during these tough financial times. It will be interesting to find out the opinions of the different panelists because they have come from different areas of microfinance. I hope many of will check it out.
Saturday, May 2, 2009
Issue: For Profit vs Non Profit
As I have told you in my overview of microfinance piece, microfinance has become widely popular over the past 20+ years. Dr. Yunus of the Grameen Bank won a Nobel Prize for his work in starting microfinance all those years ago. Now it has become a booming business. According to estimates made by several organizations the total assets of all microfinance institutions was about $33 billion dollars last year. Although this is only a small percentage of the trillions of dollars in banking in total it has grown rapidly. These small loans that were once intended to help the poor are now helping companies and banks rise up and take a bigger position in the developing countries that the MFIs are located. As you may have been able to tell from my previous posts I am a firm believer of microfinance as a way to help individuals and communities raise themselves out of poverty rather than a place to invest money and make money. But there are many companies that look at microfinance with money signs in their eyes rather than kindness. I understand that might not be fair to say since many of them still say that they exist to help people in need of small, quick loans. Many of them are still cheaper than local loan sharks and other unofficial players. Microfinance started as a helping hand rather than a greedy one. It has been recognized throughout the world because it allows people an opportunity to make a huge difference with what some people would consider pocket change. Microfinance is a chance for the bank neglected to get safer and more secure services as I have mentioned in previous posts. But now it is being looked at as a valuable investment opportunity for many banks. Moreover, even though many companies are not for profit it does not mean that many of these organizations are making a profit. Many not for proft organizations are very successful but they are reinvesting all of their earnings to bring out more loans to their clients. This is why I believe this is one the most important issues when dealing with microfinance. Today, I hope to present both sides of the argument and what I think of it all. To reprsent both sides I have chosen two organizations that are at the forefront of both sides. The for profit representative is Compartamos, a Mexican based microfinance bank. The not for profit representative is the Grameen Bank. Both exemplify their sides perfectly and I hope to use it as a type of case study.
Compartamos, meaning "let's share", originally started as a not for profit donating food and clothing to the poor. Jose Ignacio Alvalos Hernandez is the founder and the one that decided that Compartamos needed a change. They decided to convert the organization into a small microfinance institution that started lending small amounts of money to clients. Their clients are mostly women that are in groups of 12 or more according to a Businessweek article written last year (Businessweek). They can only borrow to help a struggling business or to start their own small business. The group structure is important because it ensures that the organization gets their money back. If the borrower is not able to pay back the loan the group will make up the difference. The peer pressure is a better social way of enforcing the loan repayment instead of scary collection agents. This peer pressure is very important because the people they lend to have very little to use as collateral for their loans. But this risky lending causes greater costs for these microfinance firms including Compartamos. Compartamos presents itself as a helping hand in the communities they act in. They claim nothing has changed since their initial public offering and a for profit company in 2000. They believed that it would help them get more money invested in the bank to allow for more loans and more profits. The IPO, in fact, was very successful and raised about $400 million. Alvalos, made hundreds of millions of dollars as did many of the early investors. He sold parts of his investment in the company and remains on the board today. They claim that making large profits will develop the industry. The profits will attract more investors to enable to give their clients more (Economist). The profits that they have been earning over the years have attracted more competition that have caused them to reduce their interest rates. When Compartamos first became for profit many borrowers experienced extremely high interest rates. The rates could reach over 100%. Compartamos does not represent these high interest rates at all. Even though they have reduced their interest rates they are still much higher than many other not for profit microfinance institutions. I personally think it is wrong for them to charge such high interest rates when they have so many investors willing to invest in them. They are no longer the helping hand they claim to still be. They are obviously more concerned with earning money and impressing investors than lifting people out of poverty. If they wanted to help more they could lower the interest rates and take smaller profits. But since they are public now they can reduce their profits but instead look for more ways to increase profit. Compartamos representatives that supervise borrower groups earn bonuses up to 120% of their normal salary based on their growth in the number clients and size of their loans (Businessweek). This incentivizes representatives to urge borrowers to take out more loans as they repay them. Most likely the borrowers still need more money to get weekly supplies for their businesses and will listen to their representatives. This pressure to borrow more is keeping these poor people constantly in debt and having to worry about that huge interest rate. But yet Compartamos is able to grow in remarkable rates. According to "The Economist" Compartamos has been able to grow from 61,000 clients in 2000 to over 900,000 in 2008. There is no denying that the people of Mexico must trust Compartamos. Compartamos is definitely more trust worthy of an opportunity than loan sharks and other more dangerous people that their clients might have used in the past. The collection process is definitely not as frightening as those unofficial lenders. As Compartmos grows more people will learn of the availability but is this the best way of doing business? Preying on the poor is definitely wrong in my book but it is possible that Compartamos is not doing so. There have been articles written that Compartamos targets a population between the poorest of the poor and the conventional bank users. Compartamos gives out larger loans than not for profit organizations. The people they target are not the poorest of the poor according to many sources. But, even if they are not the large amounts due in interest payments must still be daunting. The goal for Compartamos is to reduce costs and make more profit for their investors. It has commercialized itself. Personally, I think it has sold out the idea that microfinance originally came into prominence with. The Grameen Bank is the perfect example of the original idea.
The Grameen Bank was the first major microfinance institution. It was created in the 1970s by the Nobel Prize winner, Muhammed Yunus. The Grameen Bank has many similarities to the Compartamos bank. They target mostly women and they are required to be in borrowing groups. As individual group members are able to pay back the loans more group members are allowed to borrow. According to the Grameen Bank "credit should be accepted as a human right." They certainly act that way. As I browsed through their website Grameen Bank had a different feel to it than Compartamos. Compartamos did not have any information on how the process worked, what their code of ethics was, or how they plan on helping people life themselves out of poverty. The Grameen Bank is inherently different. According to their website, "the overarching objective of a conventional bank is to maximize profit. Grameen Bank is...to help them fight poverty, stay profitable, and financially sound" (Grameen). They also have located many of their branches in rural areas where people are in great need of capital to turn around their businesses. Compartamos focused on major urban areas like Mexico City. Grameen Bank is not just a lender they are a resource for the people who are looking and willing to change their life. The Grameen Bank chooses women borrowers not because they are more trustworthy but because the women are the ones in the family that want to change their lives for their family, especially their children. The Grameen Bank also instructs clients on financial issues but also on issues like hygiene. The Grameen Bank actively gives credit build houses, latrines, and other community necessities. The bank also never allows interest payments to become larger than the loan. If a client is having trouble paying a loan they can go to representatives in branches in various small villages in rural areas to work out a better payment plan. They do not want to become a burden on their clients like other institutions would be when their money is at risk. Everything Grameen Bank does is to help people break out of the cycle of poverty. They want to teach them how to live a better life and stay above the poverty line. I think this is a more noble objective.
In conclusion, it is a tough call when it comes to microfinance. Microfinance burst onto the scene as a benevolent and innovative way to help people out of poverty. But after years of success people have found the monetary value behind these operations. Capitalism will always find its way to where the money is. Companies and organizations are going to have to make a decision as to what their belief system will be. Although I personally believe in the non profit route I also believe that if people wish to make money off these legitimate loans that is their own decision. I am business student so I understand where there is a demand there should be a supply and not all the supply will be as benevolent as the Grameen Bank. The demand for microcredit loans has been estimated to be about $250 billion but only a portion of that has been given out. If companies can find a way to supply loans and make a profit in the process that is great for them. But I do not believe we should be profiting off people who are struggling. However I do have a problem with the way that Compartamos has presented itself. It has a history as being non profit and a donator to the community and I believe they have tried to leverage that as a means to get more borrowers and investors. But, it is obvious that they no longer believe in that kind of system anymore. If a company is in it for profits then they should not try to present themselves in a different light. Although they are helping people get capital they need they are doing so at a great cost to the borrowers and I do not believe that is fair. Dr. Muhammed Yunus is a firm believer of this and has said microfinance should be about "protecting the poor from the money lenders, not creating new ones" (The Economist). If the "father of microfinance" believes that it is just another form of loan sharking then I am going to take that seriously. Also, with microfinance still being relatively new there are very few regulations put on it throughout the world. We have seen what can happen when greedy people look for new ways of making money in a relatively unregulated environment. This may cause more harm than good. You may think differently but I thought I would take my first crack at this issue that has been stirring in world of microfinance.
Compartamos, meaning "let's share", originally started as a not for profit donating food and clothing to the poor. Jose Ignacio Alvalos Hernandez is the founder and the one that decided that Compartamos needed a change. They decided to convert the organization into a small microfinance institution that started lending small amounts of money to clients. Their clients are mostly women that are in groups of 12 or more according to a Businessweek article written last year (Businessweek). They can only borrow to help a struggling business or to start their own small business. The group structure is important because it ensures that the organization gets their money back. If the borrower is not able to pay back the loan the group will make up the difference. The peer pressure is a better social way of enforcing the loan repayment instead of scary collection agents. This peer pressure is very important because the people they lend to have very little to use as collateral for their loans. But this risky lending causes greater costs for these microfinance firms including Compartamos. Compartamos presents itself as a helping hand in the communities they act in. They claim nothing has changed since their initial public offering and a for profit company in 2000. They believed that it would help them get more money invested in the bank to allow for more loans and more profits. The IPO, in fact, was very successful and raised about $400 million. Alvalos, made hundreds of millions of dollars as did many of the early investors. He sold parts of his investment in the company and remains on the board today. They claim that making large profits will develop the industry. The profits will attract more investors to enable to give their clients more (Economist). The profits that they have been earning over the years have attracted more competition that have caused them to reduce their interest rates. When Compartamos first became for profit many borrowers experienced extremely high interest rates. The rates could reach over 100%. Compartamos does not represent these high interest rates at all. Even though they have reduced their interest rates they are still much higher than many other not for profit microfinance institutions. I personally think it is wrong for them to charge such high interest rates when they have so many investors willing to invest in them. They are no longer the helping hand they claim to still be. They are obviously more concerned with earning money and impressing investors than lifting people out of poverty. If they wanted to help more they could lower the interest rates and take smaller profits. But since they are public now they can reduce their profits but instead look for more ways to increase profit. Compartamos representatives that supervise borrower groups earn bonuses up to 120% of their normal salary based on their growth in the number clients and size of their loans (Businessweek). This incentivizes representatives to urge borrowers to take out more loans as they repay them. Most likely the borrowers still need more money to get weekly supplies for their businesses and will listen to their representatives. This pressure to borrow more is keeping these poor people constantly in debt and having to worry about that huge interest rate. But yet Compartamos is able to grow in remarkable rates. According to "The Economist" Compartamos has been able to grow from 61,000 clients in 2000 to over 900,000 in 2008. There is no denying that the people of Mexico must trust Compartamos. Compartamos is definitely more trust worthy of an opportunity than loan sharks and other more dangerous people that their clients might have used in the past. The collection process is definitely not as frightening as those unofficial lenders. As Compartmos grows more people will learn of the availability but is this the best way of doing business? Preying on the poor is definitely wrong in my book but it is possible that Compartamos is not doing so. There have been articles written that Compartamos targets a population between the poorest of the poor and the conventional bank users. Compartamos gives out larger loans than not for profit organizations. The people they target are not the poorest of the poor according to many sources. But, even if they are not the large amounts due in interest payments must still be daunting. The goal for Compartamos is to reduce costs and make more profit for their investors. It has commercialized itself. Personally, I think it has sold out the idea that microfinance originally came into prominence with. The Grameen Bank is the perfect example of the original idea.
The Grameen Bank was the first major microfinance institution. It was created in the 1970s by the Nobel Prize winner, Muhammed Yunus. The Grameen Bank has many similarities to the Compartamos bank. They target mostly women and they are required to be in borrowing groups. As individual group members are able to pay back the loans more group members are allowed to borrow. According to the Grameen Bank "credit should be accepted as a human right." They certainly act that way. As I browsed through their website Grameen Bank had a different feel to it than Compartamos. Compartamos did not have any information on how the process worked, what their code of ethics was, or how they plan on helping people life themselves out of poverty. The Grameen Bank is inherently different. According to their website, "the overarching objective of a conventional bank is to maximize profit. Grameen Bank is...to help them fight poverty, stay profitable, and financially sound" (Grameen). They also have located many of their branches in rural areas where people are in great need of capital to turn around their businesses. Compartamos focused on major urban areas like Mexico City. Grameen Bank is not just a lender they are a resource for the people who are looking and willing to change their life. The Grameen Bank chooses women borrowers not because they are more trustworthy but because the women are the ones in the family that want to change their lives for their family, especially their children. The Grameen Bank also instructs clients on financial issues but also on issues like hygiene. The Grameen Bank actively gives credit build houses, latrines, and other community necessities. The bank also never allows interest payments to become larger than the loan. If a client is having trouble paying a loan they can go to representatives in branches in various small villages in rural areas to work out a better payment plan. They do not want to become a burden on their clients like other institutions would be when their money is at risk. Everything Grameen Bank does is to help people break out of the cycle of poverty. They want to teach them how to live a better life and stay above the poverty line. I think this is a more noble objective.
In conclusion, it is a tough call when it comes to microfinance. Microfinance burst onto the scene as a benevolent and innovative way to help people out of poverty. But after years of success people have found the monetary value behind these operations. Capitalism will always find its way to where the money is. Companies and organizations are going to have to make a decision as to what their belief system will be. Although I personally believe in the non profit route I also believe that if people wish to make money off these legitimate loans that is their own decision. I am business student so I understand where there is a demand there should be a supply and not all the supply will be as benevolent as the Grameen Bank. The demand for microcredit loans has been estimated to be about $250 billion but only a portion of that has been given out. If companies can find a way to supply loans and make a profit in the process that is great for them. But I do not believe we should be profiting off people who are struggling. However I do have a problem with the way that Compartamos has presented itself. It has a history as being non profit and a donator to the community and I believe they have tried to leverage that as a means to get more borrowers and investors. But, it is obvious that they no longer believe in that kind of system anymore. If a company is in it for profits then they should not try to present themselves in a different light. Although they are helping people get capital they need they are doing so at a great cost to the borrowers and I do not believe that is fair. Dr. Muhammed Yunus is a firm believer of this and has said microfinance should be about "protecting the poor from the money lenders, not creating new ones" (The Economist). If the "father of microfinance" believes that it is just another form of loan sharking then I am going to take that seriously. Also, with microfinance still being relatively new there are very few regulations put on it throughout the world. We have seen what can happen when greedy people look for new ways of making money in a relatively unregulated environment. This may cause more harm than good. You may think differently but I thought I would take my first crack at this issue that has been stirring in world of microfinance.
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