There is a great post over on the Kiva Fellows blog by Joel Carlman — it’s called On Buoyancy and it’s about Joel’s experience as a Kiva Fellow in Kenya. Here’s an excerpt:

Their lives have been built one step from the ledge of despair and crippling poverty, and forces beyond their control threaten always to push them over.  And yet, they sing and dance and are thankful.  The difficulties of life are found only in their eyes, never on their lips.  Unsolicited shouts of “I am fine!” from across the street are so common!  And the question follows: “How are you?”

Now, go on and read the whole thing.

DECSI (Dedebit Credit And Savings Institution S. C), located in the Tigray Region of Ethiopia, is an MFI that has over 423,000 active borrowers and has a gross portfolio of over 116 millions USD.

The mission of DECSI is to improve the well being of those individuals, who are not getting services from the formal sector banks, by increasing their income and wealth through the provision of quality and sustainable financial services.

Objectives
- To help small producers to become financially independent and start their economic activity
- To provide credit to enhance the productive capacity of small producer
- To provide savings facilities and thus foster thriftiness
- To increase employment and raise the standard of living of clients and their families.
- To increase institutional efficiency and effectiveness

Although DECSI doesn’t have an official website (at least that I can find), here is a great video that gives you a brief description of some of the things they are doing over in Ethiopia.

It seems just about every week, a journalist somewhere in the world will write a piece on microfinance and the effects the worldwide credit crisis will have on the sector. Most journalists and experts alike are optimistic that microfinance will weather the storm and could even be “the answer” to the international investment predicament we are slipping further and further into (find the article here: Raksin, Huffington Post). An article by Allianz’s James Tulloch, “Can Microfinance Beat the Credit Crunch?” presents one of the more realistic outlooks for microfinance in 2009. Though it strays from the common “nowhere but up!” optimism, it offers a silver lining to the crisis’ impact on microfinance worldwide;

The downturn could [force] MFIs to grow less aggressively and focus on consumer protection, transparency, and governance. “Are we building a ‘bubble’ of over-indebtedness? If so, then a slowdown in growth will provide the opportunity to reconsider the basics of underwriting,” said Cecelia Beirne of MicroVest at the CGAP event.

There is no doubt that microfinance is a pretty resilient investment alternative, and the growth of MFIs (microfinance institutions) through the Asian and Latin American economic crises of the 1990′s and early 2000′s is an encouraging sign that microfinance may reside just below the economic current that can affect the regions of operation.  Today, the sector has not been greatly affected by 2008′s volatility and economic decline. Though past performance is encouraging, it is a different sector today than it was three years ago, not to mention 10-15 years ago. In that period, microfinance investment, exposure, and commercialization has increased exponentially (with projections that at one time had predicted private investment in microfinance to increase from $2B USD to $20B USD by 2015; IAMFI).  Let it be known that I, like the many that are optimistic that microfinance may even benefit from the credit crunch, are cut from the same cloth… we all want to microfinance to succeed in its efforts to alleviate poverty worldwide. I also know there are many out there, like myself, that think microfinance is so close to the tipping point of becoming a mainstream issue and investment avenue. This feeling can lead to a concern that the progress microfinance has made (and deserved) in recent years may take a serious hit because of the current crisis. I personally do not find this concern to be a very valid one. The concerns over the impact of the financial crisis can essentially be split into two camps; the financial concerns and the ideological concerns.

Financially speaking, I do believe funding will become more expensive and harder to find in 2009 (even though investment funds have heralded microfinance and healthcare as the two sectors with the most opportunity… seeing an opportunity and access to the capital to pursue that opportunity are two very different things). Realistically speaking, I think individual microfinance institutions will have considerable woes in 2009.  However, ideologically speaking, I do not believe microfinance will be hurt by the crisis, and in that regard, the progress and attention gained over the past few years will hardly dissipate (just seeing investment funds spotlighting microfinance on par with a sector like healthcare is something quite incredible). Financially speaking, investment in microfinance will likely focus more on the larger, less speculative, and less aggressive MFIs. This will pose serious problems for the majority of MFIs that are still in their nascent stages of operation. Ideologically speaking, the crisis hasn’t hurt people’s interest and advocacy for microfinance. October 2008 was quite possibly the most volatile and economically disruptive month in the US over the past 50 years. However, it is interesting to note that October 2008 was also the month that Kiva raised the most in a single month in the history of its operation to that point (which was then surpassed by November and December of 2008).

The financial concerns, though significant, and the continued ideological progress could turn out to be a microfinance idealist’s dream. 2009 could be a year in which the commercialization and over-aggressive growth of microfinance wane, but attention and interest grow… which would certainly make 2009 an interesting year for microfinance– 2009 could be the year that 2008 catches up to microfinance, but the “gathering clouds” may certainly have a “silver-lining.”

Eduardo Jimenez has been a Senior Microfinance Consultant to the Central Bank of Philippines since 2000, and was the Team Leader in crafting the Philippines Microfinance Literacy Program (PMLP).  He presented his paper, “Building Financial Literacy in Microfinance Clients,” at the 3^rd Annual Microfinance Conference in Nigeria, and agreed to talk with myKRO.org about financial literacy and microfinance.

Kirsten Weiss: Why should the microfinance industry concern itself with financial literacy?

Eduardo Jimenez:  The industry should be concerned about empowering the three major stakeholders in the industry: clients, microfinance providers and regulators.  Microfinance clients need to be clearly informed so they can make intelligent decisions.  Next, in terms of the providers, informed clients make informed decisions which result in good portfolios.  Good portfolios mean good assets and more income, both for the suppliers and for the clients themselves.  Finally, the oversight or regulatory agencies – the external stakeholders – might have less heartache if those they regulate have good portfolios.  As an example, look at what’s happening within the banking and regulatory system in the US now.

Kirsten: Tell us about the Philippine experience with its financial literacy program, the PMLP?

Eduardo: The PMLP started over two years ago as a commitment by the Philippine government to see a strengthened microfinance sector.  The National Credit Council, which is comprised of several agencies, including regulators, felt that they need to work on financial literacy to reinforce the gains made so far in terms of policies and regulations.  The Asian Development Bank supported us in terms of technical assistance, and I became involved as team leader.

As I looked at the literature and documents on financial literacy programs from other countries, I could see what needed to be done.  But as I interacted with the sector, including regulators, providers, and community based institutions, I discovered they had their own needs and perspectives.  As a result, we integrated some of these issues into the PMLP.

There are five modules which look at how to increase savings and investment, the roles and responsibilities of clients, the right use of credit, consumer protection, and microinsurance.  Sector stakeholders requested we add two more modules: on microfinance in general – e.g. what it is, the legal regulatory framework, and the national strategy – and information on available business development services (BDS).  The latter focused on an overview of what BDS is, what’s happening in the context of BDS in the Philippines, and how business owners can link to existing BDS providers.

Kirsten: What are the challenges to delivering financial literacy programs?

Eduardo:  One is cost.  All the providers see the need for financial literacy, but at some point these programs are conducted separately from credit operations and that is a bit costly.  Financial literacy is an investment on the providers’ side.  To reduce these costs, they typically empower the account officer or field trainer within the particular institution to walk alongside the client and conduct the training over time, perhaps over a month or so.

Another challenge is popularizing financial literacy programs among other sectors.  For example, I think the habit of savings as a discipline is critical.  The Central Bank worked with the Department of Education, crafting modules to integrate a savings training program into the regular educational programs of its elementary schools.  It took more than six months to design a module that finally was integrated into three existing topics and pilot tested in schools.  After pilot testing, it became part of the national education.  You need to integrate financial literacy into the educational system at an early stage.

Kirsten: What are the lessons learned?

Eduardo:  You have to approach financial literacy training from where the clients are coming from – i.e. don’t use the typical lecture or the teaching methodology for adult microfinance clients.  When you’re dealing with adults, with an average age over 45, you have to be creative when introducing the concepts of savings, investments, and insurance in order to stimulate these concepts and the principles.  Because the target market is “mature,” trainers need to be adaptable, using adult training techniques.

Next is the challenge of getting other educational and training institutions, including academic agencies and other NGOs, to embrace the principle of financial literacy.  Again, financial literacy training is a cost to their programs, but I think when they understand the value they will embrace it.  We don’t want to see a repetition of what’s happening in the current global economic and financial meltdown.  What we’re seeing in the West is a grim reminder that people need to become financially literate.

Kirsten: What else would you like to add?

Eduardo:  The goal of microfinance is the double bottom line – sustainability of the institution, and empowerment of the clients and transformation of the communities.  Financial literacy is an effective tool to empower clients.

I just returned from Nigeria’s 3^rd Annual Microfinance Conference, where Mrs. Mariama Ashcroft of Women’s World Banking presented a paper on commercialization.  When I told her about Mykro.org, she was kind enough to give me an interview for the site. My questions and her responses below:

Kirsten Weiss: How do you define microfinance commercialization?

Mariama Ashcroft:  It’s a strategy to create a means of reaching large scale numbers of low income borrowers, with a focus on sustainability.  This means an approach that relies on strong systems, governance, professional staff, and high performance standards, and which is moving toward profitable and efficient operations and towards getting fully integrated into the financial system.  The latter in turn translates into financial intermediation – being able to mobilize deposits and access commercial funds.  Financial integration/intermediation is what draws the line between NGOs and commercial MFIs.

Kirsten: Why should MFIs commercialize?

Mariama:  The primary reason is the need to expand access.  Though the estimates vary, the numbers indicate that demand for financial services far outstrips supply.  One statistic suggests that there are two billion productive people without access to finance.  Other numbers refer to 500 million microentrepreneurs without access to credit.

Because NGOs can neither fully intermediate nor provide a broad range of financial services, it makes sense for NGOs to transform to commercial institutions.  The assumption is that when the institution can mobilize financial resources, it can expand more broadly and deeply, placing it in a better position to provide more products that low income people need.

The other part of the rationale is in terms of governance.  When MFIs commercialize, they’re held to higher performance and reporting standards.  For instance, they’re typically regulated with stricter oversight.  As one example, there are frequently minimum conditions at the board and senior management level such as the fit and proper test, which requires regulators to approve all board and senior management positions.

Kirsten:  What are the challenges to transformation?

Mariama:  The first challenge is the regulation – particularly the minimum capital requirements.  In many cases, NGOs have been able to accumulate retained earnings over time sufficient to meet the minimum capital requirements stipulated by law to become a microfinance bank.  But in many countries these MFIs aren’t allowed to be sole owners, so they must find other investors for equity participation.

Another important hurdle for transforming NGOs lies in product design and development.  Here I’m talking mainly about savings – most NGOs only take savings as a guarantee for loans.  As a microfinance bank (MFB), however, they must develop savings products that appeal to clients based on trust.  When providing credit, the MFI must trust the customers.  With savings the reverse is true and crossing that line has been a challenge for many MFIs.

The third hurdle is in terms of systems.  Under regulation, MFBs are held to higher reporting and compliance standards.  Many NGOs tend not to have these systems fully developed and in many cases must start from scratch to create them as they transform.  This can be both costly and stressful.

A fourth hurdle I’d like to mention in terms of meeting the rationale for commercialization is to be able to reach scale in terms of outlets.  An NGO can set up branches wherever it wants because it doesn’t need a sophisticated infrastructure to provide credit.  An NGO can set up a meeting under a tree if it likes.  But once you become regulated that changes, because the law says branches must look a certain way – they must have secure premises, a strong room, 24 hour security, etc.  In many cases, MFI branches can’t meet these specifications.  I know of one case of an NGO which transformed to a MFB and its operations shrank as much as 50%.  It took them over five years to return to their original size.  In another case, an NGO started with 21 branches but after transformation was only able to upgrade ten branches to reach the minimum requirements.  The remaining branches remained unlicensed and offered credit only.

In Nigeria, Central Bank policy allows MFBs to work around this hurdle by having “meeting points.”  Meeting points can be a small room somewhere with a table and a few desks – enough room for field agents to work and to meet with clients.  These are supplements to full-service MFB branches; for example, one branch might service seven meeting points.  Another good thing about Nigerian regulation is that MFB field agents can make collections in the field, then at the end of the day return to their meeting points, prepare reports, check cash, and take the cash to the branch.  This system reduces pressure on MFBs to have many branches, while increasing access to customers.

A final challenge is the risk of serving less poor clients because of the pressure for profitability.  Commercial investors want commercial returns.  This has led to a tendency to disburse larger sized loans to higher income clients.  The concept of mission drift comes into play here.

Kirsten:  What trends do you see in microfinance commercialization?

Mariama:  I see more commercial banks doing microfinance but there’s still a long way to go here.  There are also more private investors interested in microfinance, increasing the flow of funds into the sector.  Microfinance is attracting new players that aren’t even financial institutions, for example cell phone companies and other technology providers, grocery stores and gas stations serving the role of point of sales outlets.  Rating agencies are playing an increasingly important role in terms of increased demand for transparency.  Even mainstream companies are becoming interested in rating MFIs.

As a side note, I represented ShoreBank International at the same conference, and presented on Commercial Product Development.  You can view a copy of my presentation on my blog: http://mfimarketing.blogspot.com/2009/01/presentation-commercial-product-design.html.

Before I tell you of two hopeful entrepreneurs I live with, let me tell you a little about where I am and what I’m doing.  I have been living in Mombasa, Kenya for a little over a month now, doing an internship at an organization that works on community empowerment.  The wrapper organization that brought me to Kenya, the Foundation for Sustainable Development, deals with many NGOs around the area, including numerous micro-finance institutions.  I live with a family in a low-income area a little ways outside of Mombasa.  So far, the experience has been incredible.  The world of international development is inspirational, but you cannot understand the frustrations it entails, nor can you understand the massive amount of need that exists until you have had a firsthand experience.

Two of my host-brothers, Abdalla and Socy, are perfect micro-loan candidates.

Socy is currently unemployed, and every time I ask him why he doesn’t look for a job he always tells me the same thing, “I don’t want to work for someone else.  I want to have my own business and make my own money.”  His fear comes from a wide disregard for labor rights and the widespread exploitation of unemployment.  As job demand increases, the poorly regulated labor market has allowed employers to lower wages and have poor working conditions.  The most wasteful aspect of a developing economy is idleness.  Idleness is widespread.  Being idle is perpetuated through strong family support structures where members of a family with jobs are expected to support the rest of the family.

Socy, like most, doesn’t like being unemployed.  He wants to work, but can survive doing odd jobs, hosting interns like me, and getting help from his family.  Finding a job often means standing somewhere for hours until you get chosen to work that day.  Socy started a small fruit and vegetable stand outside the front of the house I am living at when he was younger.  After a while he grew tired of the long, slow business hours, and gave Abdalla the shop.

Abdalla is a teacher.  He works all day while his wife runs the shop.  After work and on weekends, he runs the shop. I was nervous to ask how much he would make a day, but ended up caving into curiosity.  He said, “On a good day, maybe 900 Ksh ($12).  On a bad day, sometimes you might just sit here sleeping, making nothing.”  From the earning, he gives his son 40 Ksh daily for transport to school, and uses his teacher salary to pay school fees and take care of the family. In the end, the store does little, but it is a start.

Abdalla’s dream – expand his shop.  His stand is recognized for having quality products, but he does not have enough variety to attract a large client base.  He wants to build an extension onto his shop and offer a larger variety of fruits and vegetables, maybe even getting into selling other products.

Socy’s wife has a clothes selling business.

Socy’s dream – open up a store where he can sell the clothes his wife sews.  He wants to be able to both sell the products at his shop and walk around the neighborhood selling door to door.  To do that, though, he needs a loan.  He needs materials to build his shop, fabric to create a product base, and money to live on until his business starts to provide for him and his family.

Living life as these two do isn’t easy and it isn’t flexible.  The concept of savings in Kenya is foreign. If you have money, you either spend it or give it to someone else who needs it.  Most microfinance institutions begin by forcing their lenders to save a certain percentage of their earnings either weekly or monthly, but some cannot afford that or are scared of those restrictions.  Microfinance institutions work with groups more often than with individuals, which leaves a lot of people feeling like getting a loan is out of reach for them.

Talking to both of my host-brothers, I encouraged them to seek out some of the local microfinance institutions to fund their dreams.  Both agreed it would be a great idea, but have not done much towards it.

Two final issues come to mind.  First, the market is saturated with small businesses here.  There are a million and one shops scattered all over cities, towns, and villages, and they often offer the same goods.  People with good business ideas are in competition with many others, which lowers their ability to have a truly successful business.  Second, microfinance is quite far from being accessible to all.  People in impoverished areas do not see it as an avenue available to them.  Work needs to be done to advertise microfinance to individuals, and to make systems of monitoring and accountability of microfinance work focus around individuals as well.

I praise the initiatives of microloan sites that do work on an individual basis.  They must continue to spread their word and show motivated people that they too could qualify for a loan.

There are people hungry for micro financing.  They need to be reassured that it is possible for anyone to have access to a loan so that they too can benefit from the funding of global philanthropists.

Micro Finance turned commercial banking on its head. Loans predominantly given to women?…to the poor?…with no collateral? What for decades seemed impossible has even the initial nay-saying pessimists jumping on board.

But what do you get when you turn Micro Finance on its head? You get Jamii Bora.

Established in 1999 by Ingrid Monroe at the initiative of 50 beggars in Nairobi, Jamii Bora has now become the largest Micro Finance Institution in Kenya. Of the belief that, “any family, however poor, miserable, and hopeless, is capable of getting themselves out of poverty”, Jamii Bora extends loans to not only the poor – but to the poorest of the poor. Loans are extended to anyone who is willing to learn how to help themselves: thieves, criminals and prostitutes alike.

At Jamii Bora, there are no ’clients’ or ‘customers’ – just members. Jamii Bora offers its members various types of loans for micro-businesses, school fees and housing, and has additionally implemented its own Health Care and Life Insurance System. For a mere 15 US$/year, a family of five persons can receive a year of health insurance (and this insurance does not just cover the basics…heart surgeries and hip-replacements have all been performed!)

It is a fact that the poor pay more in rent per square meter than the rich. Jamii Bora quickly reached the conclusion that if the poor could construct their own houses, than they could pay the same amount of money per month in loan repayment and soon own the house they live in. This would not only lead to increased savings in their household budget, but would open the doors to investment opportunities for both their businesses and the school of their children. To aid in this process, Jamii Bora purchased a large plot of land on which their members could build their houses. In a sense, they created a town. Now home to approximately 14,000 members, Jamii Boras’ town has a commercial center, a sewage treatment plant and allows for the reality of business growth.

I had the opportunity of listening to Ingrid Monroe speak at this months RESULTS conference call. To say she is inspiring would be a mere understatement – she is revolutionary. Now in the process of building its second town, we can only expect Jamii Bora to grow even larger and continue to eradicate poverty one dream at a time.

I could go on and on about the successes and innovative strategies of Jamii Bora – but there is simply not enough room on this page (and I’m sure I’d lose all my readers)…but check out JamiiBora.org for more information, updated statistics and Ingrid Monroe’s future plans.

Here’s a short video from Microloan Foundation. The foundation was founded in 2002 and now provides microfinance services in Malawi, Zambia and the Philippines.

In yet another sign of its growing success, politicians are evidently hitching their carriage to microfinance–and the African Union wants none of it. “Political leaders or those who declare their active participation in politics be it in government or opposition, are bad economists,” declared an AU commission formed to support the development of microfinance. (more)

This Day, an African website on global affairs, reports new comments from Muhammad Yunus about the role of international financing of MFIs. Yunus was speaking at a conference in Lagos, and reiterated his point from last month’s conference in Mexico City that microfinance should focus on the extremely poor. He also went a step further in calling for greater local funding for microfinance. Yunus’ remarks are bound to make some European and US funders a little nervous. For the complete article: thisdayonline.com