My previous entry presented various statistics explaining that while very few poor people have access to savings accounts, there is a strong desire to utilize such financial schemes. It is estimated that 3 out of 4 adults in developing and middle income countries do not have bank accounts and worldwide, it is the poor, women, and rural residents who are the least banked. Only about 10 percent of the 2.5 billion people living on less than $2 per day have access to a bank account. Rather than illustrating a dire picture, these statistics demonstrate the opportunity that exist in broadening savings services to a large segment of the most underserved people worldwide; otherwise known as financial inclusion. (Photo: Bill & Melinda Gates Foundation)
At the Global Savings Forum in Seattle, the first global gathering focused on the role of savings in the developing world, the Bill & Melinda Gates Foundation pledged $500 million over the next five years to expand savings. Foundation co-chair Melinda French Gates noted that a package of six new grants totaling $40 million are part of the $500 million pledge. The grants support projects and partnerships to improve access to savings and other financial services, including:
Expansion of bank and microfinance services to include savings accounts;
Implementation of new approaches to reach the poor with savings, such as branchless banking and mobile money; and
Research to identify how people use formal and informal financial tools, including savings, credit, insurance, and payment services, and to analyze the impact of financial services on the lives of the poor.
“Savings doesn’t just help people mitigate the risks posed by a medical emergency or a bad crop,” said Mrs. Gates. “It also gives them the ability to marshal their resources to build something better for themselves and their children. It allows them to fund their own businesses, to look ahead with confidence. Savings helps families to take the giant leap from reacting to events to planning for a healthier, happier future.”
Explained by a Gates Foundation press release, “Technologies such as mobile phones are already providing safe, reliable, and easy options for people to access financial services. Sixty-nine percent of the developing world already has a mobile connection, and this number is expected to climb to 98 percent within five years.”
Emerging technologies such as mobile phones and innovations that enable banking services to be provided in post offices, neighborhood shops, and other convenient locations are creating a historic opportunity to deliver affordable, quality financial services to the doorsteps of the world’s poor. In Kenya, a service called M-PESA allows nearly 12 million people to transfer money and link to bank accounts using mobile phones. In Mexico, a network of government-operated convenience stores is serving as a platform to offer banking services to the rural poor. In Malawi, a bank is reaching thousands of first-time banking customers by mounting mobile banks on the back of pickup trucks. Here is a video detailing the Foundation’s program of promoting financial inclusion in Mexico:
From November 16-17, 2010, the Seattle, Washington-based Bill and Melinda Gates Foundation hosted the Global Savings Forum, the first global gathering focused on the role of savings in the developing world urging urged leaders in government, banking, mobile communications, and international development to work together to build a new kind of financial infrastructure to bring savings to the poor. The conference produced several interesting statistics about the unbanked—people who do not have access to a savings account.
It is estimated that 3 out of 4 adults in developing and middle income countries do not have bank accounts and worldwide, it is the poor, women, and rural residents who are the least banked. Only about 10 percent of the 2.5 billion people living on less than $2 per day have access to a bank account. Sub-Saharan Africa is the least banked region in the world with 80 percent of its population lacking access to a bank account. This is followed by the Middle East/North Africa and Latin America/Caribbean at 68 and 65 percent, respectively.
There is a misconception that poor people do not save. The truth is that poor people actively save in cash and through informal mechanisms, but these tools inadequately meet their specific needs. According to a series of studies, over the course of a year, a typical poor household in Bangladesh, India or South Africa uses no less than four and typically closer to ten types of financial instruments. Rotating Savings and Credit Association (ROSCA) membership rates among adults have been estimated at between 50 and 95 percent of adults in Cameroon, Côte d'Ivoire, Democratic Republic of Congo, Gambia, Liberia, Nigeria, and Togo and similar group savings schemes are widespread outside of Africa as well. (ROSCA is a group of individuals who agree to meet for a defined period of time in order to save and borrow together.) Furthermore, a study of 1,500 people in Uganda showed that 99 percent of respondents failed to reach their savings goals when using informal methods, either because the money was stolen or lost, or because they were too tempted to spend the money when it was stored as cash in their home.
The conference presented overwhelming evidence that savings accounts are in high demand by poor people. Interestingly, savings accounts are being engaged at rates up to 12:1 compared to loans, even when both services are available from the same institution. In Uganda, for example, 43 percent of people said a savings account is their greatest financial need compared to 31 percent who cited credit. A Consultative Group to Assist the Poor (CGAP) study of six microsavings-focused institutions also found rapid growth in savers. During a six-year time period, 20 million new accounts and $4.3 billion in savings volume were added, representing an increase of 87 percent and 71 percent respectively.
Several participants noted that safe savings options help people to manage risks, like illness, increase investment in livelihoods, and empower women. A study in the Philippines showed that access to certain savings products increased women’s economic empowerment, including decision-making power over purchases, family planning, and children’s education. Farmers who were given the option to put aside money toward the next planting season increased productivity, enhancing investments in farming inputs by 32-39 percent. A randomized control trial in Western Kenya found that women who had access to a formal savings account were able to save and invest 45 percent more in their businesses after six months, leading to increased purchasing power for food and personal expenditures. The same study revealed that women with formal savings accounts were better able to afford emergency health services without depleting the money invested in their businesses. For most poor households, using savings to pay for large expenditures is cheaper and more efficient than taking a loan. For instance, even microfinance institutions (MFIs) often charge over 50 percent annual interest on loans. Fees for small deposit accounts, however, often equate to zero or positive interest payments to savers.
Poor households with access to savings accounts are more likely to invest in education, increase productivity and income, and reduce vulnerability to illness and other unexpected events. The challenge remains that very few MFIs offer savings accounts, and more than 90 percent of the world’s poor still lack access to financial services and resort to risky, expensive, and inefficient ways to save. In my next blog entry, I will present a number of solutions discussed during the two-day forum that will increase savings mechanisms to a large underserved market.
PRI’s “The World” produced a report about a fair-trade clothing factory is the West African country of Liberia, which is recovering from a 14 year civil war. With an estimated unemployment rate to be as high as 80 percent, there is a great for job growth should Liberia maintain peace in the long-term. The World’s Jason Margolis visited a sewing factory in Liberia’s capital of Monrovia that is making t-shirts bound for the United States. With a high unemployment rate, it is easy to take advantage of people by employing them in sweatshops with working hours beyond reasonable limits and paying low wages. (Photo: PRI)
Chid Liberty, who owns the t-shirt factory, was born in Liberia, but his family fled to the United States after a military coup in 1980. With Liberia’s civil war over, Mr. Liberty “decided he wanted to return to his native country and help it rebuild,” explains Mr. Margolis. “Two years ago, Mr. Liberty decided it was finally safe to return. And when he started his apparel company, he was determined to make it good for the workers. He says he’ll take no profits from the Monrovia sewing project. He earns his living through a trading business back in the States. Liberty says all future earnings in Monrovia will be put into a fund.” Mr. Liberty says that “these women actually decide where that money goes in terms of building schools, roads, health clinics in their communities.”
There is value in placing a fair trade label on these t-shirts, which makes good business sense. Most of the women being trained at the factory used to be tailors. “But like Eliza Jones, they left the freedom of their shops for the shackles of 9 to 5 employment,” Mr. Margolis reports. “Now she gets paid every month, $100. That’s $30 dollars more than an average civil servant makes in Liberia. The women also get medical insurance and a monthly bag of rice.”
In order for Mr. Liberty’s factory to have the “fair trade” designation, it must comply with 90 standards prescribed by TransFair USA, a 501(c)(3) nonprofit organization based in Oakland, California. TransFair USA’s standards address child labor, forced labor, health and safety, working hours, and wages. According to its website, TransFair USA is one of twenty members of Fairtrade Labelling Organizations International (FLO), and the only third-party certifier of Fair Trade products in the United States. They audit transactions between US companies offering Fair Trade Certified™ products and the international suppliers from whom they source, in order to guarantee that the farmers and farm workers behind Fair Trade Certified goods were paid a fair, above-market price. In addition, annual inspections conducted by FLO ensure that strict socioeconomic development criteria are being met using increased Fair Trade revenues. Regarding Mr. Liberty’s factory, a full West African supply chain is utilized where the cotton is grown in Mali and Burkina Faso, it is shipped to Morocco where it is spun into yarn and fabric, and then sewn in Liberia.
The challenge in manufacturing or growing fair trade products is that meeting the standards often translates to higher costs in producing the product. These costs are almost always passed along to consumers and while many consumers would pay more for a fair trade product, their purchasing habits may not represent their standards during tough economic times. TransFair USA’s founder and president Paul Rice says that people were skeptical when he began his organization a decade ago selling fair trade bananas and coffee. Mr. Rice notes that grocery stores like Whole Foods has created a niche providing fair trade products to their consumers who are willing to pay a higher price and this concept has expanded to other retailers not typically known for selling fair trade products. “But who thought that fair trade would work in Dunkin Donuts and Walmart? Well lo and behold, Dunkin Donuts, Walmart and bunch of others have put fair trade products out there. And they’re selling very, very well.”
I would like to hear from you: Are you willing to pay a high price for a fair trade product? Has the economic recession changed your purchasing habits for fair trade products?
“There’s an ugly secret of global poverty, one rarely acknowledged by aid groups or U.N. reports. It’s a blunt truth that is politically incorrect, heartbreaking, frustrating and ubiquitous: It’s that if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed. Much suffering is caused not only by low incomes, but also by shortsighted private spending decisions by heads of households.” This comes from Nicholas D. Kristof’s op-ed in The New York Times on May 22, 2010.
Mr. Kristof cites examples of parents unable to pay their housing rent, mosquito nets that help combat malaria or school fees for their children, but they are spending scarce financial resources on alcohol, cigarettes, and prostitutes. His also op-ed refers to a study by two Massachusetts Institute of Technology economists, which claim that “the world’s poor typically spend about 2 percent of their income educating their children, and often larger percentages on alcohol and tobacco: 4 percent in rural Papua New Guinea, 6 percent in Indonesia, 8 percent in Mexico. The indigent also spend significant sums on soft drinks, prostitution and extravagant festivals.”
I know this issue extends beyond the developing world to industrialized nations. The global solution lies within financial education. Furthermore, social services must be offered for people to overcome their addictions to drugs and alcohol. With respect to financial education, there is evidence that women tend to be more responsible when it comes to money management and initiatives implemented by nongovernmental organizations, government agencies, and the private sector should be tailored to further support this trend.
Another solution lies within microsavings, which are small deposit accounts. Microsavings accounts operate similar to a conventional savings account, but the former are designed for smaller amounts of money. Pairing microsavings accounts with financial education programs will promote wiser spending decisions by parents, which will result in long-term sustainable development.
Through the efforts of the Florida Association for Volunteer Action in the Caribbean and the Americas, Inc. (FAVACA), a Florida-based nonprofit organization serving the needs of the people in Haïti and throughout the Caribbean for over 25 years, I had the pleasure of attending the Social Venture Capital/Social Enterprise Conference Miami (SVC/SE, Miami 2010), which was held in Miami Beach, Florida from March 17-19, 2010. Part of the SVC/SE, Miami 2010 conference was the Sustainable Haïti conference, referred as a “conference within a conference,” which brought together social entrepreneurs and social investors, U.S. government officials, nongovernmental organizations (NGOs), Haïtian Diaspora, Haïtian government officials, faith-based groups, and corporations with a presence in Haïti. The purpose of SVC/SE, Miami 2010 was to promote economic development within Latin America and the Caribbean by utilizing social venture capital and social enterprise. Over 700 people attended from 30 plus countries and approximately 240 speakers participated on 110 panels and workshops during the three day event. I participated on two panels: Social Entrepreneurship in Post-Earthquake Haïti and Social Venture Capital as a Tool for Growth.
Several excellent discussions that took place as a result of well-planned presentations or side conversations during session breaks. I made several points during my two presentations, but the one that garnered the most responses is the failure of NGOs’ ability to achieve long-term solutions. (I recognize that not all NGOs are ineffective, but those operating with clearly defined deliverables and benchmarks for success are too few in the world.) While many NGOs attending the conference agree that the aid model is largely ineffective, I find their reluctance to reform their respective operating model very disturbing. To become effective in eradicating poverty in the developing world, NGOs should partner with the private sector in implementing a long-term sustainable solution. For small and medium-sized enterprises (SMEs) with operations in a developing country, I recommend that NGOs collaborate with these businesses by providing job training, education, health and essential life skills that will ensure that workers remain healthy and properly trained to participate in a formal economy. These skills will pass from generation to generation, thus breaking the cycle of poverty.
While I have addressed my criticisms of the microfinance model implemented by most microfinance institutions (MFIs) in this blog, I focused my presentations in Miami on the need for job creation in addition to supporting entrepreneurship through microfinance. I recognize there are several benefits of microfinance in some of the world’s most undeveloped regions, but there are not enough measured results to justify the amount of money invested into MFIs. Microloans provide short-term debt financing, but does not necessarily create long-term enterprises. In addition to providing working capital to entrepreneurs, investments in developing nations should focus on job-creation through equity financing (microcapital). Moreover, I recommend that MFIs work with businesses in industrialized markets by creating a partnership strategy to open an office or plant with local populations in developing nations, thereby establishing a partnership that many underserved entrepreneurs. (Photo of Marc Roger (left) and Aaron Rose (right): Benjamin Wilkinson/HAITI ONWARD)
SMEs in industrialized markets should receive microcapital from MFIs to help stimulate business expansion into developing nations. Three conditions must be stipulated with these investments: SMEs must use local populations and provide fair compensation, implement microsavings mechanisms for the employees, and establish a health insurance program with NGOs or for-profit insurance providers. The number of employment opportunities in developing nations will grow exponentially with strategic partners located in industrialized markets.
I also discussed my experience of being presented with an investment opportunity to revitalize a factory located outside of Les Cayes, Haïti that produces vetiver oil. My visit to the factory was a side trip during my time serving as a consultant to evaluate Haïti's strategy to utilize tourism for social and economic development (see "Haïti: Pearl of the Caribbean" and "Haïti: Using Tourism as a Means for Sustainable Social and Economic Development").
Distilled from the roots of vetiver grass, the aromatic oil is widely used to scent household products to everything from detergents, soaps, and cleaners, to window coverings, baskets, and matts. It may be used to treat skin problems. And as a natural anti-inflammatory it is recommended to remedy arthritis, muscular aches and pains, rheumatism, sprains, swelling, muscle or joint stiffness, and similar problems.
During my visit to the dilapidated factory, I was provided details on how my investment would be used to modernize the distillery. The pitch, however, failed to address a key questions such as: How will the oil be transported to the port in Haïti's capital of Port-au-Prince, which is located several hours away (assuming that gangs do not steal the barrels off the trucks)? Is the sea port in a condition that allows for rapid loading of products on cargo ships? (I should note that while we were not stopped by gangs or corrupt police during the drive between Port-au-Prince and Les Cayes, a bridge over a major river was out and there was a wait of several hours to drive through the river.)
In addition, while France was once a leader in the production of products that uses vetiver oil, most of these products are now manufactured in Asia. Do the factory owners have the resources to connect with Asian buyers? Answers to these questions can be done through better collaboration between NGOs, governments, and the private sector. After some consideration, I passed on the opportunity to invest in the vetiver oil distillery.
Other speakers at the Miami conference talked about the need to establish a bond market in countries like Haïti to finance infrastructure development, credit ratings for investment instruments to help developing countries modernize their financial systems to compete in a rapidly global economy, and establish full currency convertibility measures.
A fellow panelist, Marc Roger, a consultant based in Port-au-Prince, noted that every developing country has a blue-chip company. More collaboration among the governments of developing nations, NGOs, and the local population should take place to attract additional blue-chip enterprises. Furthermore, according to Mr. Roger, there should be a better focus on establishing business incubators to create small and medium-sized enterprises, and NGOs and the private sector must work together in establishing a legal framework that includes a judicial process for business disputes, fair employment laws, and regulations to protect natural resources.
I want to thank FAVACA for their generous sponsorship of the SVC/SE, Miami 2010 and I wish to express my gratitude and appreciation to John Rosser of DVK L3C for organizing this important event, which was very timely considering Haïti’s devastating earthquake that occurred this past January. I am pleased to be a participant and honored to share the podium with a distinguished group of speakers with a wide array of knowledge and experiences.
And I conclude this post by sharing a video produced at the Sustainable Haïti conference where I and others provide our insights for a new model to promote sustainable development in Haïti.
Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.
While I am a supporter of the microfinance concept, namely, the access of basic financial services such as loans, savings, money transfer services and microinsurance by underserved populations, I am critical of the application strategies employed by microfinance institutions (MFIs). I am pleased, however, to discuss the workings of an organization that is effectively administering small loans to help students in the developing world achieve a college education or vocational training.
Vittana recognizes that the students benefiting from microloans ordinarily could not receive loans to finance their education from local banks. The Seattle, Washington-based nonprofit organization partners with local microfinance organizations to establish student loan programs—often providing the only access to college loans. Through Vittana’s website, individuals are able to lend $25 and $50 at a time to individual students. Currently, Vittana, which is an Indian word for “seed,” has active partnerships in five countries: Mongolia, Nicaragua, Paraguay, Peru and Vietnam.
I had the opportunity to attend an event organized by SeaMo in November 2009 that featured Vittana’s co-founder and chief executive officer, Kushal Chakrabarti. One issue Mr. Chakrabarti discussed was the focus to provide student loans rather than scholarships. He said, “Students do not want a hand-out, they want a hand up. A loan enables them to go to school without feeling beholden.” He explained that small monthly payments provide an easy way for students (borrowers) to repay the money. In fact, many students actually begin repaying ahead of schedule, which represents their personal drive for financial responsibility.
Recognizing the impact of education, Mr. Chakrabarti said, “Education is income generating; more than microfinance (small loans for entrepreneurs).” In the developing world, a college graduate can earn 200-300 percent more than they would have otherwise. However, there are less quantifiable measurements that have an equal impact to the college graduate, their family and surrounding community. Single mothers gain self-confidence by receiving a college education or vocational training. Not only is she acquiring the skills to obtain a skilled job with a higher income, but she is becoming a role model to her children and perhaps other single mothers in the community. Moreover, communities become stronger by having some of its residents possess an education in high-valued professions such as teaching, medicine, engineering or law.
During his presentation, Mr. Chakrabarti noted that the typical borrowers are 18-25 years old, loan amounts range from $500-$1,500 and repayment periods last from 6-24 months with a successful repayment rate of 97-98 percent. While the interest rates vary from region to region, Vittana’s partners usually charge a 10-15 percent annual rate. And to mitigate the loss of the loan, most partners require that a close relative co-sign on the loan. It is rare that a student is unable to repay the loan him or herself, but in the case that the student has difficulty making a payment, a parent, grandparent, or spouse will ensure that the student repays on schedule.
It is important to note that donors providing funds (loans) to students through Vittana are not making a charitable donation; the loan will be returned to the donor upon repayment by the student. Upon repayment, the donor will have the option keep their money or make a loan to another student. How does Vittana generate revenue? Although not required, many people make a donation beyond the loan amount help Vittana cover their costs. Vittana also received direct financial support from individuals and foundations such as the Peery Foundation, the Mitchell Kapor Foundation, and the Crystal Springs Foundation.
Here is a video that highlights Vittana’s operations through testimonials of students receiving loans through this innovative application of microlending:
In my blog post, Microfinance 101, I explain the different components of microfinance, which include loans, savings, money transfer services and microinsurance. From my experiences working in the developing world, microloans to help economically impoverished people climb out of poverty are the most common microfinance vehicle. While it exists in a few markets, I rarely see savings mechanisms in place to help underserved populations. Therefore, I was pleased to read that the Bill & Melinda Gates Foundation is helping “microfinance institutions (MFIs) provide the poor with safe, affordable places to save their money” by allocating $38 million in new grants, according to a press release dated January 13, 2010.
The Gates Foundation’s announcement explains that “six grants will help 18 MFIs, which currently focus on microcredit, expand their portfolios and make savings accounts available to an initial 11 million poor people across 12 countries in Africa, Asia, and Latin America over five years. The grants will create new ways for the poor to make deposits and withdrawals, expand the availability of existing savings products, and fund savings-focused marketing campaigns.”
Why is the promotion of financial savings among the world’s poor important? Citing a National Bureau of Economic Research report, the Gates Foundation announcement says “that poor households with access to savings accounts are more likely to invest in education, increase productivity and income, and reduce vulnerability to illness and other unexpected events.” The challenge remains that very few MFIs offer “savings accounts, and more than 90 percent of the world’s poor still lack access to financial services and resort to risky, expensive, and inefficient ways to save.”
“Providing access to safe, affordable savings accounts has been a challenge because of the high costs for both banks and customers,” says the Seattle, Washington-based philanthropic organization. “For banks, the costs of physical buildings, with dedicated bank tellers, are expensive, especially in remote areas or where there is a limited number of clients with small deposits. Poor clients often live far from banks so the cost to reach a branch may exceed the amount of their deposits.”
Allocating to a diverse group of international MFIs, “the grants will use a variety of approaches to offer savings accounts to poor people. ShoreBank International, for example, will broaden its reach by sending staff on motorbikes with handheld devices to rural clients in India. Women’s World Banking will revamp its savings products to make them better fit the needs of the poor and fund marketing campaigns in the Dominican Republic. The Grameen Foundation will work with its partner MFIs to ensure they have the business systems and staff to manage emerging client savings programs.”
The blog entry dated December 7, 2009 provided a summary of microfinance and the entry posted on December 20, 2009 outlined microfinance's benefits and provided a few success stories. The focus of this post is to discuss microfinance's shortcomings and begin a discussion on how the service that offers poor people access to basic financial services may be improved. (Photo of an outdoor market was taken during my visit to Pisac, Peru in June 2009)
I appreciate the way microfinance provides an opportunity to individuals whom seek to improve their lives and become better providers for their family through entrepreneurship; however, I am concerned that microfinance fails to achieve its primary objective of eradicating poverty for millions, perhaps billions, of people worldwide. Additional problems I have observed of microfinance operations in the developing world include little or no access for goods or services produced by entrepreneurs to reach global markets, debt rather than equity financing, exorbitant interest rates for loans, and lack of scalability and sustainability.
Microfinance institutions (MFIs) should take a more proactive role in assisting borrowers (entrepreneurs) gain access to lucrative markets for their services or products. During my extensive travels to developing nations, I observed recipients of microloans manufacturing small crafts or clothing items. The consumer market for these entrepreneurs is limited to nearby villages or passing tourists and MFIs should help rural entrepreneurs gain access to large population centers. Furthermore, I recommend that MFIs take a more proactive role in assisting borrowers to gain access for their goods in lucrative industrialized markets in North America or Europe. To facilitate liberal access to the United States market, the U.S. government enacted legislation such as the African Growth and Opportunity Act (AGOA), Haiti Hemispheric Opportunity through Partnership Encouragement (HOPE) Act or the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR).
Microloans create a revolving door of debt by requiring entrepreneurs to take subsequent loans in order to grow their business operations. In the preceding blog entry, I use Bayamma Neerudi's experience to highlight the benefits of microfinance. Not to diminish the impact microcredit has made on Ms. Neerudi or individuals like her worldwide, but Ms. Neerudi has obtained three loans in order to grow her business. Where is the savings or reinvestment mechanism? While I recognize this information may be missing from Ms. Neerudi’s story, too many MFIs are not working with borrowers in implementing savings strategies. Technically, microfinance includes microsavings, but the latter is often missing when it comes to the operations of MFIs. I encourage MFIs to make a stronger effort to incorporate savings as a means to promote business scalability.
I propose a different type of microfinance model. As stated above, traditional microfinance models support debt rather than equity financing. I recommend that MFIs reevaluate their lending model by providing private equity financing to entrepreneurs. An equity "fund" should operate similarly to a traditional microlending operation with one of the objectives to provide initial or early development funding to a variety of private enterprises to stimulate social and economic development. The differences between my recommendation and traditional microcredit vehicles are: (1) Rather than immediately repay the principal and interest, entrepreneurs are required to save a portion or reinvest initial revenue to maximize sustainable growth opportunities, (2) entrepreneurs are required to implement a revenue-sharing plan for all employees, (3) entrepreneurs are required to operate with complete transparency including providing every employee a copy of the business plan and the opportunity to provide input regarding the business strategy and operations, (4) all recipients of the fund will receive support and technical expertise from MFIs and their contributors, and (5) the size of the loans should range from $5,000 to $500,000. $100 loans will not eradicate poverty.
When I taught my first seminar on entrepreneurship at the CFDE University in Port-au-Prince, Haiti in 2007, my students’ greatest need to become successful entrepreneurs was access to capital. I was astonished to learn that lending rates from the black market, MFIs, and government-owned banks were 15, 18, and 20 percent respectively. I have met with MFIs in Africa that charge borrowers up to 30 percent interest for loans. I understand that MFIs incur vast costs in administering small loans to several borrowers, but charging high interest rates is wrong. While I am not an expert in finance, I know from my experience as an entrepreneur in developing markets that through a different lending model, borrowers will no longer need to be punished with excessive interest rates.
With the current model, entrepreneurs find it difficult to scale or sustain their business operations. I see an immediate need to change to microfinance model. In principle, I support microfinance and the positive benefits realized by people striving to break the bonds of poverty. However, how does a MFI define success? Increased gross domestic product? Increased per capita income? Increased personal spending? Can we say that the results of microfinance are reflective of the hundreds of millions of dollars invested? Microfinance is mostly a good thing as it often helps keep borrowers from even greater catastrophes. However, microfinance fails if judged by the number of borrowers whom overcome the barriers of poverty.
The preceding post, "Microfinance 101," provided a brief overview of microfinance. In addition to discussing the componenets of microfinance during my presentation to the Japanese Students Business Association (JSBA) at Bellevue College in Bellevue, Washington on December 2, 2009, I outlined the benefits of the scheme that offers poor people access to basic financial services. The benefits include increasing access to capital for individuals, increasing personal income and reducing poverty, enabling people to build assets, reducing vulnerability to economic stress, and development of basic life skills (e.g., literacy, personal health care, and financial education).
Unitus, a Seattle, Washington-based international nonprofit organization dedicated to advancing innovative, market-based solutions to global poverty, highlights several individuals whom have benefited from microfinance. Susan Wangui, 30, is a single woman living in Nairobi, Kenya with her son and daughter who are 13 and 9 years old, respectively. Susan, who is HIV-positive, was working as a prostitute when her husband left her when he learned about his wife's medical condition. (Photo of Susan Wangui courtesy of Unitus)
Susan "learned about Jamii Bora, a Nairobi-based microfinance institution, from neighbors in her slum. She completed their business training, which improved her business skills and gave her the confidence to begin her clothes mending and sales business. Jamii Bora's microfinance services enabled her to quit prostitution and move her family from a shack in their crime-and disease-ridden slum into a safer house."
With each increasing loan, Susan, "buys more raw materials in bulk at lower costs, thus increasing her business's profitability. She is convinced she would not be alive without Jamii Bora’s medical insurance and access to HIV medication, and can't imagine what would become of her children, as there is no one else to care for them. Susan has savings for the first time and is striving to earn enough to ensure her children's educations so they can break free from the chains of poverty."
Another example Unitus provides is Bayamma Neerudi, 49, of Medak, India, a married woman with seven children. Bayamma worked "as a seasonal agricultural laborer, earning 32 cents per day for only 150 days each year. Her husband was a mechanic in the nearby town of Jogipet, earning only 50 cents per day. One of her sons also worked as an agricultural laborer, while her other son was sold into bonded labor, often working 13 hours or more each day. For much of the year, Bayamma’s family survived on starch as their only food source." (Photo of Bayamma Neerudi courtesy of Unitus)
Bayamma's first loan of $150 was used to purchase a buffalo. "By selling milk and other dairy products from the buffalo, she was able to save an average of $2.75 each week after paying her loan installment and buying feed for the buffalo. She used subsequent loans of $64 and $128 to pay for a buffalo and to have cart made, which she rented out to transport sugarcane and other produce from the fields to the factories. With this income, Bayamma was finally able to release her son from bonded labor, whose wages are now added to the family's income. She recently received her third loan of $150, with which she has leased six acres of land for growing rice."
Unitus' website explains that "Bayamma is happy now that she and her family have stable sources of income. Her family eats more nutritious food that includes milk, rice, vegetables and, occasionally, meat. With her future loans, Bayamma hopes to begin repairing houses and also plans to purchase irrigation equipment to increase her crop yield."
Seattle, Washington-based Global Partnerships, a nonprofit organization that expands opportunities for people living in poverty by supporting microfinance and other sustainable solutions in Latin America, provides another success story. Gregorio Francisco Perez of Ocotal, Nicaragua, a married man with two sons, is a street vendor selling enchiladas, taquitos and fresh fruit juice from his pushcart. "Gregorio's business is funded by microloans provided by Global Partnerships microfinance partner” Fundación para el Desarrollo de Nueva Segovia (FUNDENUSE), "and the income from it supports his entire family. The business itself is a family affair. Gregorio staffs the cart selling the product, his wife of 14 years cooks the food and prepares the juice at home, and their older son brings fresh supplies to restock Gregorio when he runs out. Together they prepare and sell more than 350 enchiladas every day." With the earnings from his business, Gregorio and his wife are able to pay for their boys' school uniforms and books. (Photo of Gregorio Francisco Perez is courtesy of Global Partnerships)
The three examples above illustrate the benefits of microfinance and while I do not want to diminish the impact microfinance has made on the lives of Susan, Bayamma or Gregorio, there are significant problems within the microfinance mechanism that prevents maximizing the benefits for a greater number of people living in poverty worldwide. I will discuss these challenges in a December 22, 2009 blog entry.
On December 2, 2009, I had the pleasure of making a presentation about microfinance to the Japanese Students Business Association (JSBA) at Bellevue College in Bellevue, Washington. My presentation focused on providing an overview, and outlining the benefits and challenges of microfinance. Upon sharing the highlights of the presentation with friends and colleagues, I learned that while many of us have heard the term "microfinance," very few understand its components. This post will provide a summary of microfinance and the people it serves. In a subsequent posts, I will discuss microfinance's benefits and challenges. (Photo of me with members of the JSBA is courtesy of Mr. Takahara Tsuyoshi)
I find the Washington, DC-based Consultative Group to Assist the Poor, CGAP, an independent policy and research center dedicated to advancing financial access for the world's poor, a great resource by explaining microfinance as a mechanism that "offers poor people access to basic financial services such as loans, savings, money transfer services and microinsurance." Having traveled around the world, whether in industrialized or developing countries, I agree with CGAP's assertion that people living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks."
Microfinance facilitates the accessibility of financial services to economically underserved populations. CGAP explains, "Poor people usually address their need for financial services through a variety of financial relationships, mostly informal. Credit is available from informal moneylenders, but usually at a very high cost to borrowers. Savings services are available through a variety of informal relationships like savings clubs, rotating savings and credit associations, and other mutual savings societies. But these tend to be erratic and somewhat insecure. Traditionally, banks have not considered poor people to be a viable market."
Many microfinance schemes are administered through a microfinance institution (MFI), an organization that provides financial services to the poor. MFIs include small nonprofit organizations that provide small loans, to commercial banks that, according to CGAP, "have large existing branch networks, vast distribution outlets like automatic teller machines, and the ability to make significant investments in technology that could bring financial services closer to poor clients." CGAP adds, "While this is a very broad definition that includes a wide range of providers that vary in their legal structure, mission, and methodology...all share the common characteristic of providing financial services to clients who are poorer and more vulnerable than traditional bank clients."
Ownership structures of MFIs vary from government-owned entities to member-owned credit unions or socially minded shareholders to profit-maximizing shareholders. In its summary about MFIs, CGAP says the types of services offered by MFIs "are limited by what is allowed by the legal structure of the provider: non-regulated institutions are not generally allowed to provide savings or insurance."
Who are the clients of microfinance? Most surveys report two-thirds of microfinance clients are women, which is very important considering women often have difficulty in accessing basic services. Microfinance clients, men and women alike, seek loans across for a variety of reasons including working capital for small provide businesses, larger loans for durable goods, student loans, and to cover emergencies. Microfinance clients work on farms or work for themselves in fishing, carpentry, vegetable selling, small shops, transportation, etc.
Microfinance offers a great opportunity for people to overcome the challenges of living in poverty. There are some benefits that are worth exploring, which include increasing personal income, enabling individuals to build assets, and reducing the vulnerability to economic stress. There are significant problems, however, with the application of microfinance such as little or no access for goods or services produced by borrowers to reach global (and more profitable) markets, extraordinarily high interest rates, and creating a cycle of debt as the entrepreneur attempts to manage (micro)enterprise growth. I will provide details and examples of the benefits of microfinance in a blog post on December 20, 2009 and I will discuss the challenges of microfinance on a posting dated December 22, 2009.
The following is a guest post by Samantha Rayner, Executive Director of Lumana Credit
In a rush of excitement, a friend approached me the other day stating that the IMF had announced that they would provide a loan in the amount of US$600 million to the Ghanaian government in an effort "to reduce its budget deficit and support its currency" (http://news.bbc.co.uk/2/hi/business/8155374.stm). While I could see the need for funding, I didn't jump to share my friend's optimism. Whenever the IMF announces the provision of more aid to Africa, I have to ask, how is it going to help and what accountability system is in place to ensure results?
True, Ghana is experiencing a serious budget deficit mostly due to a decrease in rainfall over the past few years which caused an increase in food prices. There is clearly a need for aid but how are these funds going to get to the rural farmers who need the monetary assistance most? Driving through the neighborhoods of Accra, Ghana's capital, in August of 2008, I was amazed to see immaculate government mansions only minutes away from poor slum dwellers and beggars. It instantly became clear that funds such as those from the IMF were not going to the poorest of the poor.
Seeing the income disparity first hand and wondering where all the aid money was really going, I took action upon my return to the US and started my own organization, Lumana Credit. We are a microfinance operation that provides small loans, entrepreneurship training, and simple technology solutions to small businesses in rural Ghana. Lumana focuses on serving clients in rural areas of Africa as opposed to urban settings where the majority of microfinance institutions (MFIs) are located.
While much attention has been given to microfinance in Africa in recent years, surprisingly less that 10% of the industry financing is actually going there.India, for example, recieves around half of the capital, primarily due to the high density of clients which causes operational costs to be lower. In Africa, over 75% of those living below the poverty line are located in rural areas, a potential reason for the lack of microfinance funds going to the continent.
Referring back to the $600 million loan to Ghana this year, imagine if those funds were going into microfinance institutes? Poor people with access to savings, credit, insurance, and other financial services, are more resilient and better able to cope with the everyday crises they face. Even the most rigorous studies have proven that microfinance can smooth consumption levels and significantly reduce the need to sell assets to meet basic needs. With loans as little as $50 in some cases, people like Comfort, a Lumana client, would able to purchase clean water for the first time and improve the profits of her porridge selling business. Unfortunately, I have a hard time seeing the IMF funds going to people like Comfort.
Samantha Rayner is the Executive Director of Lumana Credit, a Seattle, Washington-based nonprofit micro-credit organization that focuses on serving rural and underserved populations in Ghana. To learn more about Lumana Credit, please visit http://www.lumana.org/.
I serve on the Advisory Council of the Trade Development Alliance of Greater Seattle, which is a collaboration of local governments and the private sector to promote the Seatte metropolitan area as one of North America's premier international gateways and commercial centers. During the Advisory Council's quarterly meeting held on May 13, 2009, Ryan Calkins, Executive Director of SeaMo, a Seattle-based nonprofit organization, gave a presentation on microfinance. Founded in 2007, SeaMo's mission is to connect the (Seattle) microfinance community through events, online services and opportunities for collaboration by hosting networking events and speakers series, and providing a website that serves as an events calendar, jobs board, community forum, and news source. (Photo courtesy of the Esperanza International Foundation)
According to Consultative Group to Assist the Poor (CGAP), a Washington, D.C.-based policy and research center dedicated to advancing financial access for the world's poor, "'Microfinance' is often defined as financial services for poor and low-income clients. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as 'microfinance institutions' (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly. More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services are not limited to credit, but include savings, insurance, and money transfers."
During his presentation, Mr. Calkins said, "Microfinance is a key breakthrough in economic development in emerging markets." He explained that without microfinance, consumers in poor countries have to pay with cash only and businesses have to hold large inventory supplies, which reduces profitability. With an increase in established MFIs, developing economic markets have experienced accelerated growth over the past several years. Mr. Calkins noted that Seattle is a hub for MFIs or supporters of MFIs by listing a few Seattle-based organizations:
Having traveled to some of the world's least developed regions, I have personally witnessed how individuals are utilizing microfinance strategies to build entrepreneurship opportunities in an attempt to breaking the cycle of poverty. There are many success stories worldwide of men and women (CGAP claims 66 percent of microfinance customers are women) taking small loans, some as little as US$50, and creating sustainable small businesses. However, critics of microfinance suggest that these loans assist a disproportionately small number of people compared to the overall demand. Comparing the financial amount invested, critics argue, microloans have made little impact on increasing gross domestic product rates. Furthermore, recognizing that microfinance may provide an avenue for individual or small groups to increase financial equity, microfinance falls short in helping borrowers rise above poverty. In essence, more must be done to create a thriving middle-class in developing nations. I will address these issues and formulate viable solutions in a future post on this blog.
On March 4, 2009, I had the pleasure of meeting Ehsan Zia, Afghanistan's Minister of Rural Rehabilitation and Development (MRRD) and Javaid Zeerak, Coordinator for the Afghanistan Rural Enterprise Development Program (AREDP). I very much enjoyed having a direct discussion with Minister Zia and Mr. Zeerak and the substance of our meeting was focused on building Afghanistan's economy through agriculture and agribusiness development.
The AREDP's development objective is to have higher market participation of targeted rural enterprises, which will result in increased income and sustainable employment opportunities. AREDP's "is an initiative designed to improve all levels of business development and entrepreneurship from sole proprietorship and micro-enterprises to Small and Medium Enterprises [SMEs], in order to improve rural livelihoods and expand employment opportunities across rural Afghanistan," according to a summary document. The initiative will be managed by an office with Afghanistan's Ministry of Rural Rehabilitation and Development. An governing board will consist of members from the private and public sectors. The AREDP "is intended to be national in scope and will build on other developmental initiatives of the Government of Afghanistan, donors, and MFIs [microfinance institutions]."
AREDP consists of three program components: Community Enterprise Development, SME Development, and Program Management. The Community Enterprise Development will provide support to strengthen and expand business and market skills of enterprise groups. In addition, the program will facilitate rural access to financial services and resources.
"The program will create and provide support to Enterprise Groups and Producer Associations, as well as establish a sustainable basis for rural financial services by forming Savings Groups. The program aims to link Savings Groups to existing MFIs wherever possible, and for this purpose will closely cooperate with MISFA [Microfinance Investment Support Facility for Afghanistan]. If there are no MFIs operating in a region, the program will try to attract MFIs to set up branches in the targeted region and will provide some assistance in start-up costs, in line with what is provided by MISFA. In the case that there are no suitable MFIs in an area, the program will provide assistance in the set-up of Village Savings & Loan Associations (VSLAs). After successful training, the VSLA will receive a seed capital of $2,000-$5,000 (depending on the size and membership of the VSLAs) and will manage loans to qualified borrowers."
The AREDP will offer business development and technical support, and credit advisory services to facilitate SME development. "In order to further stimulate lending to SMEs by banks and MFIs, the program will also consider capitalization of banks on agreed terms to lend to SMEs in select value chains. Furthermore, in an effort to promote innovation and encourage investment, the program will also sponsor an annual competition for an innovation prize of up to 100,000 USD in each province."
AREDP's program management will focus on the implementation oversight, project planning, governance and coordination, and capacity building and institutional development of the program. "In addition, this component will include an Office of Research and Technical Services (RTS) that will provide backstop support services to enterprises across rural Afghanistan. Where available, the clients will be connected to service providers from the non-governmental, MFI and private sectors; with the balance of services to be provided by the RTS itself."
Minister Zia and Mr. Zeerak are seeking funding approval from The World Bank for the Afghanistan Rural Enterprise Development Program. During our meeting, I recommended that the Minister take a more direct approach in engaging the private sector for financial, logistical, and technical support. For example, in Washington state, there are several agribusinesses that can serve as partners in implementing AREDP's strategic plan and I invited Minister Zia and Mr. Zeerak to visit Washington State to meet with industry leaders.
I know there are many challenges to Afghanistan's sustainable development such as security, lack of physical infrastructure, and a strong opium cultivation market, but the AREDP to empower Afghan's to own SMEs and participate in the global economy is a step in the right direction. Is it unrealistic to imagine finding "Grown in Afghanistan" produce in Costco or Whole Foods?
Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.
Many of us understand how entrepreneurs in developing nations use microloans to finance their businesses, but we may not be aware that small and medium-sized enterprises (SMEs) in industrialized nations such as the United States are using microloans as a similar tool to facilitate business growth. During the past few weeks, BusinessWeek has published two articles about how SMEs are securing microloans in order to start or expand their business operations from nonprofit organizations and the opportunities that exist for smaller community banks as larger financial institutions struggle to survive.
In Louise Lee's article dated February 13, 2009, "As Credit Dries Up, More Owners Seek Microloans," she writes about how a retailer in Brooklyn, New York, with a high credit score, opted to obtain a small loan in the amount of $20,000 from a local nonprofit lending organization. As larger lending institutions fight to remain solvent, nonprofit lending organizations are providing microloans in the average amount of $25,000 to SMEs. Although microlenders traditionally provide loans to borrowers who lack high credit scores or business experience, borrowers with stronger credit histories are tapping into the same microlenders as an alternative to working with larger banks.
Ms. Lee explains, "The Accion network, which has eight branches across the country, says it saw 905 applicants with credit scores of 700 or greater in the first nine months of 2008, a 43% jump over the same period in 2007. At Opportunity Fund, a San Jose (Calif.) microlender, 16% of applicants in the second half of 2008 had credit scores above 700, compared with 7% in the first half. And at Community First Fund in Lancaster, Pa., applicants in the second half of the year averaged a credit score 53 points higher than those in the first half. Another microlender, the Wisconsin Women's Business Initiative Corp., is receiving 'four to five' calls a week from banks referring clients, up from four to five a month, says President Wendy Baumann."
Several of my colleagues are clients of large financial institutions and complain that customer service has diminished as these institutions "try to stop the bleeding." Stacy Perman’s article published on January 27, 2009, "Community Banks Increase Small Business Loans," focuses on how community banks are taking a larger role in offering loans and lines of credit to small business owners as larger banks struggle. Ms. Perman writes, “As the credit freeze continues and the recession deepens, many community banks, generally defined as having less than $10 billion in assets, are reporting an uptick in loans and credit lines to small businesses.”
Community banks see an opportunity to develop lending relationships with SMEs. As Ms. Perman explains, "Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. 'Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks,' says Christine Barry, Aite's research director. ‘They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers.'"
Another advantage of working with smaller community banks is they generally provide personalized service to their customers compared to their larger counterparts that provide exceptional service to a more select group, namely, high net-worth clients. Smaller banks carry another advantage as their "loan officers often have an intimate knowledge of the local area and its businesses."
