After twelve years in the field, I found myself a bit behind the tech curve when I returned to my home in the Silicon Valley.  So after attending Stephen Goodman’s (from Sun Microsystems) presentation on Emerging Market Models to the SVMN, I decided to circle back and get some questions answered from a Luddite’s view.

Stephen Goodman

Me (Kirsten): Thanks for taking the time to chat with me Stephen.

Stephen: Of course!

Kirsten: I have to admit, when you said that back-end technological support was one of the key needs in microfinance, I felt like cheering.  Why is this so hard?

S: In my presentation, I’d brought this issue up in the context of the mobile platform.   Mobility is so powerful because it’s handheld, it’s simple for communities that haven’t grown up in the PC environment, and there are sophisticated and sleek applications being developed.  But a lot of the pressure to develop is focused on the front end – what’s on the screen.  What MFI professionals must not forget is that there’s a back end needed, many times a substantial and robust back end.  Let’s say you do have a smashing success and your client base grows – what are you going to do for, say, storage and security? Many times this aspect of technology deployment isn’t as well thought out as the user interface.  Mobility is happening, they’re reaping the successes, but they’re having growing pains.

K: Maybe I’m projecting, but it seems that one of the biggest barriers to technology in microfinance is intimidation.  Implementing new technologies like M-banking, or even a decent management information system, seem overwhelming.  What steps can microfinance managers take to move forward?

S: I have two answers.  One is that technology is getting simpler and more powerful at the same time. Simpler in that it’s amazing how you can engage in technology and not be a technologist.   Around the world there are legions of younger folks and smart entrepreneurs who have technology ingrained into their personal and professional skill set, and I think you’ll find there are a lot of people who are less intimidated with technology.  The technology wave, adoption, is getting more powerful so there are communities, like open source, that one can be a part of. And on the other side, solutions, like cloud computing, for those that would never think to set up a system themselves.

I also think that people in the microfinance space shouldn’t feel obligated to become technologists.  They have a business model to execute on and a need to focus on their enterprise, their customers and I think technology will be that enabler if applicable.  They won’t have to spend 40% of their time being a tech manager. Back to the concept of computing becoming more powerful while simpler: cloud computing, a perfect example. Instead of having to buy a bank of servers and hiring IT management, one could use utility computing.

K: Cloud computing sounds like an interesting option for small to mid-size MFIs.

S: It is!

K: Can you tell me a bit about it?

S: Cloud computing isn’t new. You have centralized computing power, a data center, and it’s shared.  But instead of the computing power being at your desk, it’s in a more centralized place, remote and in the “cloud.” Some of the characteristics of cloud are its service model – you’re not buying a product; you’re buying a service.  You don’t have to buy software.  It’s scalable and elastic – you can add more or reduce.  If all of the sudden your data or client needs expand, you can scale your cloud capacity.  There are different models of how cloud services are  paid for but many are metered according to usage – again, helpful in a scaleable SME environment. In the past, you’ll often find a small organization buying computers with huge computing capacity they don’t really use or need – using cloud computing you only pay for what you use.  It also uses the web and the technology tends to be fairly straight forward and developed. Finally, we can’t forget that the main interface is a web browser, mobile or not, thus increasing accessibility.  We’re finding that small and medium sized organizations can really take advantage of it.

K: Do you know of any examples in the microfinance realm of cloud computing?

S: We are just starting to hear about MFI teams using cloud computing. Just like open source, it wouldn’t surprise me that we’ll learn of more cases in the near future. Mifos, an open-source based MFI-centric information management system has received a lot of attention recently. We have yet to hear of the equivalent in the cloud space.  But with that said, I bet people are using cloud computing and don’t even realize it.  For example, I know international NGOs using Google docs for their organization as a new and better way of collaborating.

K: I worked with a microfinance bank in Pakistan that used open source software, and they raved about the flexibility and low cost.  But I was left feeling that it takes a large institution – such as a bank – to manage open source software.  Am I wrong?

S: Yes and no.  It’s not black or white; you don’t use all open source or not. And you’ll find open source in all sizes of organizations. For example, one of our executives had a meeting with a banker, who’s very regulated, and the banker said they don’t and couldn’t use open source because of perceived security concerns.  The sales representative in the meeting modestly raised his hand and said, “Actually, we know your team is using open source.  We’ve have multiple records of official downloads.”  So you’ll see banks use it in some areas and not in other areas. The same goes for MFIs or smaller enterprises. Open source should be part of a smart technology portfolio. Another misconception about open source is that you’d need a very advanced tech team.

K: That’s my concern!

S: If you’re creating and building on it, yes, you need good tech people.  But there are open source options out there you don’t have to build on, so it really depends.

K: You mentioned in your presentation to the SVMN that Africa is the technology “hotbed” these days.  Why do you think that is?

S: Because necessity drives innovation. There are some genuine problems.  I don’t say that cynically, but it does create a certain level of motivation.

Our research uncovered something that wouldn’t be a surprise to practitioners working on this geographically and demographically huge continent – there is a lot of new and innovative economic activity going on, now. Investment and commitment is growing. Along with that is growing technology uses and adoption.  There’s a wealth of opportunity – of smart, emerging and established universities, of thriving SME sectors, and so what we find is that there are a lot of really dynamic things going on there.

Though it’s not a completely blank canvas, Africa has an environment where you can leapfrog technology.  There are many cases where there is no legacy system of old infrastructure you have to overcome.  As a result, the newest technology, for example, mobility, is so successful.

You often hear about the hesitation regarding the economic payoff of Africa.  It may not fit with the US model of quarterly returns, but we’re starting to see long term investments from the past pay off.  You have to be part of that – to get in the game – to reap the benefits.  If you don’t invest, you won’t be able to contribute and share the rewards.

K: What question should I have asked you that I haven’t?

S: Around new engagement models. What are the new and savvy engagement models that corporations are employing?

We’ve learned that in the ICT (Information and Communication Technology) space we’re in enables change, and contributes to positive economic and social utility. It might not be selling product at the base of the pyramid but it will be in helping to build and sustain the ecosystem of these emerging communities.

If you want to be part of this growth of these emerging communities then it’s not always about working with the end consumer of the project, but maybe it’s about supporting the the vendors, policy leaders, MFIs, or municipalities, for example.  It’s not enough to focus on the top, bottom, or middle of the pyramid, but the innovators, incubators and influencers which support, which make up the economic growth.

Microenterprise, social enterprise, and, what I call, tech enterprise are the really interesting new business/marketing models.  If, as a corporate leader, you do not align your sales, marketing, thought leadership, product development, sales channels and other aspects of your business model to intersect at some level with these organizations and, leaders, than you will not evolve as they do. Microenterprise is a different scale, sometimes hard to connect with, but we see SMEs dominate so much of the economic growth in emerging markets it would be foolish not to consider some strategy of engagement.

I’m excited about the hybrid model of social enterprises because they’re about building both social and economic opportunities.  Finally tech enterprise – there are a lot of technologists out there building to solve problems, but who might not realize they’re also building a business.  Many are associated with universities and labs.  Better partnership or collaboration could lead to even more wonderful applications of their work.  A lot of people are talking about building the business, but there are pockets of people who just like building the technology and solving problems.

The point is that there are new and evolving business and marketing models that parallel technology and enterprise innovation, all happening outside western markets. Tap into these transformation and you’ll grow your opportunities, significantly.

Check out Stephen’s presentation to the Silicon Valley Microfinance Network on the SVMN website.

Here’s a good interview on NPR with Anthony Pace, the executive director of The Plan Fund.  Here’s a little background on The Plun Fund:

Starting in 1999 The PLAN Fund has been committed to making a positive difference in the lives of working class entrepreneurs. The PLAN Fund is a non-profit organization whose mission is to assist entrepreneurs to achieve success in starting and or expanding their small businesses. Our program’s underlying goal is to increase our member’s economic self sufficiency through entrepreneurship by developing sustainable businesses. Through 2008 we have distributed 490 business loans worth almost $725,000 our average loan size is $1,475.

Source: SeaMo, good stuff Ryan.

April Rinne, Director of Water Credit

The “classic” model for microfinance entails lending for income generation. But the microfinance community is starting to experiment with ways to bring the power of microfinance for other purposes related to the needs of the poor and under served in the developing world. I interviewed April Rinne, Director of WaterCredit, about the role of microfinance in delivering improved access to water and sanitation.

Q: Tell me about WaterCredit.

WaterCredit is an initiative of Water.org, which operates in approximately ten countries in Asia, Africa, and Latin America. Water.org was officially launched earlier this month with the combination of WaterPartners International and H2O Africa. This gives us a much broader platform to engage in a variety of water-related work, including WaterCredit, and it also blends the strengths of the two co-founders of Water.org – Gary White, who co-founded WaterPartners, and actor Matt Damon, who co-founded H2O Africa.

With WaterCredit, we put microfinance tools to use in the watsan sector. It connects the microfinance and watsan communities to scale up access to credit and capital for individual- and household-based watsan needs. It is the first program of its kind, linking microfinance with watsan through multiple models and across multiple countries. WaterCredit currently operates in India, Kenya and Bangladesh. We work with eleven partners – a variety of commercially-oriented MFIs and NGOs.

Q: How does WaterCredit work?

This depends on the needs of the local community as well as the robustness of the indigenous microfinance and watsan sectors. We partner with watsan NGOs and MFIs, linking them together to share expertise and information and facilitating relationships to provide access to finance for MFI clients with unmet watsan needs.

WaterCredit loans may be used for sinks, latrines, water pumps, rainwater harvesting equipment and other basic watsan products. The rural communities we serve are those in which women (and often girls) may spend up to six hours a day walking to fetch water from a remote source. Frequently the water is dirty, which adds problems of water-borne disease. In urban areas women may spend the same amount of time queuing for water, which is often also of poor quality. By making loans for things that benefit access to water and hygiene, we’re able to free up that time to use for other productive purposes, while lowering the incidence of water-borne disease and providing financial empowerment.

Q: Why credit instead of grants?

For water projects to succeed, you need local ownership, management, and accountability. One way to cultivate that interest is through sweat equity provided by the local community (and we may provide a grant to match that), but another simple yet more powerful instrument to use is debt. If end-users of WaterCredit know they have to repay the capital provided, they’re more likely to take accountability seriously. In addition, by providing appropriate debt capital that is then repaid, we are able to release and leverage the grant capital for much more effective purposes. To this end, we provide “smart subsidy” grant capital to MFIs and watsan NGOs for the “software” costs associated with the development of a WaterCredit loan portfolio, such as product development and market assessment costs. We expect the “hardware” costs of launching a new watsan loan product to be the responsibility of the MFI, and in turn that any WaterCredit loan portfolio is financially sustainable.

Scalability is critical to the WaterCredit model, because there are more than 900 million people in the world without reliable access to clean, safe water. Microfinance has shown its ability to scale successfully over time, by adapting financial tools that are appropriate to the needs of the poor and underserved and requiring an ability to repay. The watsan needs of the poor simply won’t be met if we look at the situation only through a grant-based funding filter.

Q: Can you tell us a bit about the microfinance mechanism that WaterCredit uses?

We’ve provided catalytic grant capital (smart subsidies), debt capital, and a variety of credit enhancements (e.g. first loss loan guarantees and standby letters of credit) to attract additional commercial capital to the table for MFIs. The loans made by WaterCredit partner MFIs may be to individuals, households or groups of households via SHGs.

Q: What are the loan terms like?

WaterCredit loan sizes and terms vary by country. The global range is between $100-300 and the average size is $150. The loan tenor is usually between 18-24 months, and the interest rate is set by MFIs in relation to the rates of their other income- and non-income generating loan products. In India it’s generally been between 18-22%. We’re very careful to work with our partners on setting appropriate terms, and undertake market assessments when needed to ensure we’re striking a range between ability to repay.

Q: Who takes out the microloans?

About 90% of our clients are women, which isn’t surprising since they’re more connected to the home and are often the ones who fetch the water.

Q: What else would you like to say about WaterCredit?

Until now, watsan organizations and MFIs have talked to each other occasionally at best. Watsan organizations generally don’t have in-house financing expertise, and vice-versa, MFIs don’t have in-house watsan expertise. I believe we’re at the beginning of seeing that situation change. It will take time, but given the growing water strains and watsan needs of the global community, it won’t be possible for watsan and microfinance communities to remain in separate silos.

To quote a couple oft-used puns (the water world is full of them!) – though WaterCredit may seem like just a drop in the bucket today, I think we’re very early on to something that’s going to turn out to meet overflowing demand – and a flood of success – in the years and decades to come.

April Newman, SVMN

What’s the connection between Northern California and microfinance? I interviewed April Newman, Interim Executive Director of the Silicon Valley Microfinance Network, to find out.

Q: What does Silicon Valley have to do with microfinance?

The Bay Area and Silicon Valley have the technology, expertise, and venture capital of few other places in the world. Social entrepreneurship is quite vibrant in the Bay Area as well. If you think about MicroPlace or Kiva, they were both born here and that doesn’t seem to be a coincidence because they bring together elements of investing, technology, social entrepreneurship and microfinance.

Q: How did Silicon Valley Microfinance Network (SVMN) get started?

The idea was to connect the Bay Area’s human resources, investment interests and technology with the growing interest in microfinance, which was particularly high three and a half years ago when we formed. Tracey Turner was one of the co-founders of SVMN, and she also founded MicroPlace around the same time. Dave McClure was another co-founder and he came from the technology side. The microfinance community here needed a place to get together, connect, and share what’s going on.

Q: What are the objectives of SVMN?

Our goal is to mobilize resources into the field of microfinance to increase its impact in reducing poverty. Resources include people – volunteer staff, permanent staff, consultants, and innovation; funds, to increase the amount of investment in microfinance; and technology. Technology is one of the key components of how microfinance will achieve scale in the future. To link those resources, that supply, with the demand within the microfinance field, we have three pillars, or what we call the three “N’s”: kNowledge, Networking and eNgagement.

Q: What SVMN activities do you feel have had the most impact so far?

The major program is our monthly Speaker Series. It’s a set of talks where we bring in world class leaders in microfinance and they speak on some current issue, trend, or challenge in microfinance. These events serve a threefold purpose: 1) to educate people on a current topic; 2) to get them in the same room and same space to discuss and collaborate and think what can they do in their positions to address the topic; and 3) to serve as networking events.

Q: What does the future hold for SVMN?

Our next speaker event will be on August 19th and it features Stephen Goodman. The topic will be the intersection of emerging technologies and emerging economies. These two areas are an exciting breeding ground to watch and direct consciously. You can link to our home page for more information on the event.

Q: Is there anything else you’d like to say?

We have over 1,000 members with a broad range of backgrounds and experience. Some have been in microfinance for 20 years and some have just gotten into it. We even have members outside the Bay Area – including internationally – because we have created a microfinance community where people can stay connected; there’s a need for communities like SVMN.

SVMN really is for anyone who’s interested to learn more about the field and hopefully get involved in other ways – for example to volunteer. A lot of people in our membership are transitioning from a different sector into microfinance or looking for a way to use their skill sets in this area. I encourage people to check out our website, http://SVMN.net, and attend our Speaker Series. By coming to our Speaker Events you can start to get to know us and meet some of the community members and see what we’re about.

Evelyn Huang leads the Small Business Loan Program at Opportunity Fund, an organization which also provides matched savings accounts, finances affordable housing in Silicon Valley, and lends to real estate projects bringing investment in to low-income communities. Opportunity Fund is also one of the hosts of the Microfinance California 2009 conference, on May 28, 2009.

Kirsten Weiss: Tell me a bit about Opportunity Fund’s microloan program in California.

Evelyn Huang: Microfinance in the Bay Area is targeted towards working people – hard work isn’t always enough to build a solid economic foundation. For example, a single parent with two kids in the bay area needs around $65,000 per year to get by, but a minimum wage earner won’t earn that. Opportunity Fund focuses on individual families, businesses, and communities with the goal of building a financial system. We see microfinance as a comprehensive approach to financial education, savings, business loans, and investment in communities and homes. At Opportunity Fund, we provide Individual Development Accounts (IDAs) targeted toward working families, combined with financial education and matching funds they can save and use for education, retirement, citizenship, etc. We also provide small business loans – lending to support entrepreneurs who don’t qualify for commercial business loans but need and can use capital. Finally we provide community real estate lending, financing non-profit developers to build affordable rental and for-sale housing complexes and also things like community facilities, like child care centers, etc.

Kirsten Weiss: What are the loan sizes within your microfinance program?

Evelyn Huang: The loans range from $1,000 to $200,000. However, 90% of our loans fall within the $1,000-10,000 range.

Kirsten Weiss: How does microfinance in the US differ from microfinance in developing countries?

Evelyn Huang: There are two general microfinance issues that are really different: the environment and the business model. On the environmental side, the cost of living is very different in California than in many international arenas. Starting a business in California takes a lot more up-front capital, there are frequently more rules and regulations, and the dollar amount required for loans is higher. For example, $200 won’t do much for someone running a business in California. There’s also more critical competition for the microlender. People can come to this country with no credit history or financial education and they will receive credit card offers in the mail. With that type of credit availability, makes the US a much more competitive environment for microlenders. The last environmental issue has to do with the concentration of borrowers. In a lot of microfinance, potential borrowers are highly concentrated, lending microfinance to the village-based model. However, in the US, borrowers are more widely distributed across geography, industry, and loan size needed, which means that our business model as an organization has to be different. As to our business model, here in the US we not only provide capital but also training resources. We meet with clients one-on-one and provide business and credit advice. Given the lack of concentration of borrowers, we have higher marketing and advertising costs. In general, the interest rates we charge will also be a lot lower than those in the microfinance industry internationally. I don’t think domestic microfinance can be a profitable business; it has to be subsidized.

Kirsten Weiss: How is the current economic downturn affecting microfinance in the US?

Evelyn Huang: We’re seeing more demand for microfinance throughout the spectrum of clients. On the higher end, we’ve had applicants with good credit scores and who potentially could have been served by a bank in the past, but can’t get a commercial loan today. Since 2008, we’ve found the percentage of clients with credit scores over 700 – which is quite good – has doubled. On the bottom half we’re seeing applicants in worse financial shape in general. Examining all the applicants that came to our program, we’ve seen increases in clients with tax liens and judgments against them. The mortgage market has also affected clients like ours. The percentage of clients who actually owned a home increased from 17 to 24% – small numbers, but this is an expensive place to live. If you’re a low-income person in our program you’re probably over-indebted if you own a home. The average mortgage outstanding has increased from $260,000 two years ago to $445,000. Homeownership can be an asset but a lot of low income clients are severely over-leveraged. These are the people who hold subprime loans that convert to higher interest rates and unmanageable payments. We see a lot more of these instances in this crisis. In part we’re responding to that by pushing a lot more education. A lot of the clients that call us, if they’re in poor financial circumstances, we’ll try to talk them through as much as we can as well as refer them to other agencies which might have more in-depth knowledge, e.g. to legal counseling on mortgage issues. As to how the environment’s changing and how it’s affecting us as a microfinance institution, it’s harder to make new loans. I think part of that is the amount of risk that we can take. Our delinquency rate is going up because people are having a tougher time. The clients to whom we’ve made loans are losing their jobs; these are typically wage earners and the first to be let go, and they’re highly dependent on their income to cover their expenses. I think the total number of loans we’ll do in this fiscal year will probably drop 15% because clients are in more difficult financial situations and in order to protect our financial health as an organization. On the positive side, the clients that we have worked with – our existing clients that have gone through our business consulting – are in general well prepared. We did a survey of our existing borrowers, asking how their businesses are doing and how the crisis is impacting their personal financial situation. Forty percent of the respondents reported their businesses were experiencing some kind of difficulty. But the vast majority of the clients also said that they did not expect to experience any change in their personal financial situation. They felt they had the tools and knowledge to weather the storm. Our clients are making intelligent decisions. One client told me, “it’s a difficult time but I understand when this happens that I need to cancel my cable and lower the number of minutes on my cell phone.” So they know what they need to do to manage their personal finances during this downturn.

Kirsten Weiss: Is there anything else you’d like to add?

Evelyn Huang: I’d like to let people know about the Microfinance California 2009 conference, at Stanford University in Palo Alto on May 28^th. It’s the first state-wide conference on microfinance in California, where participants can learn more about microfinance, visit Bay Area microfinance borrowers, and meet with practitioners, leaders, and investors. You can learn more about it at: http://www.microfinancecalifornia.org/home/

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.

I have been off the radar for a few weeks now due to the holidays and having family visiting, so I do apologize for not posting anything for a while, and especially for holding on to this interview for so long.  Bhalchander Vishwanath, CEO of United Prosperity, who is a supporter of myKRO, was kind enough to donate an interview that he had with Jonathan Lewis, the CEO of MicroCredit Enterprises.

MicroCredit Enterprises to grow to a $100 million guarantee fund – Interview with Jonathan Lewis, CEO of MicroCredit Enterprises

Bhalchander: We have with us today Jonathan Lewis, who is the CEO of MicroCredit Enterprises. MicroCredit Enterprises is committed to reducing poverty by mobilizing private investment capital to finance micro-businesses throughout the world.  Jonathan – Congratulations on winning the Social Venture Innovation award and for being recognized as an honoree by the World Affairs Council of Northern California. And thank you for taking time from your busy schedule to be with us.

Jonathan Lewis:  Thank you for your own commitment to economic justice and for inviting MicroCredit Enterprises to this interview.
MicroCredit Enterprises is deeply honored to be recognized for our pioneering social venture model.  In three years, we have created a stable financing model which is sustaining 100,000 microloans reaching 500,000 poor individuals (89% of whom are women and children) via 28 MFIs partners in 15 nations on 4 continents without needing a single dime of donations, grants OR investment.  In the end, as proud as we are of these awards, our lasting pride comes from knowing that literally thousands of children will go to bed tonight without the pang of an empty tummy and their mothers will awake tomorrow to a more hopeful life.

Bhalchander : I read that Microcredit Enterprise utilizes ‘idle capital’ to help the poor. It is a very interesting concept to take something which is idle and use it for public good. Can you tell us more about your innovative model and Microcredit Enterprises?

Jonathan Lewis:  Because poor women do not have collateral or credit histories, MicroCredit Enterprises Guarantors – the key program benefactors — pledge collateral assets and personal guarantees (not a donation or grant) to back loans to MicroCredit Enterprises that are used to fund an overseas microfinance loan portfolio.  Our Guarantors realize returns in the open market, manage their own funds and simultaneously support about 5,000 small entrepreneurs.   In the event of an overseas financial loss, each Guarantor bears the tax-deductible loss on an equitable, pro rata basis with all other Guarantors.  Guarantors do not realize a return on the guarantee risk, but do maintain complete control of their assets, thus receiving all investment returns from their portfolios.

Bhalchander:  In how many countries does Microcredit Enterprises operate currently and how have you chosen the countries to operate in?

Jonathan Lewis:  MicroCredit Enterprises is in 15 nations diversified across 4 continents.  The special focus is sustainable economic development for families living in extreme poverty ($1.00 per day or worse), so our lending criteria are, first and foremost, targeted to reach overseas microfinance partners in rural areas with high numbers of deeply impoverished women.  Secondarily, we apply strict geographic diversification to minimize risk.  Since MicroCredit Enterprises is entirely open source, your readers can visit our website  to study our specific criteria, loan process and evaluate what we have accomplished and – if they wish – build on it.

Bhalchander: What were the biggest challenges you faced in setting up and growing Microcredit Enterprises? How did you tackle them?

Jonathan Lewis:  The steepest hill to climb, which still exists today, is explaining our new model, a new funding paradigm.  Since MicroCredit Enterprises depends on neither donations nor social investments, we have an important educational job to explain how a foundation, high net worth individual or company can directly impact lives around the world without writing a check.
The solution?  Patience, and old-fashioned, low-tech guerilla marketing by word of mouth.

Bhalchander :  You were a very successful business executive before you started MicroCredit Enterprises. Can you tell us a little bit more about what you did before starting MicroCredit Enterprises?

Jonathan Lewis:  My last commercial venture was an international knowledge company in the healthcare field.  Among other services, we organized trade missions to other countries to investigate healthcare systems and business opportunities and hosted the International Summit on Public-Private Healthcare Partnerships.  The Summit was attended by delegations from about 80 nations.  One day I realized that I cared more about the people who get no healthcare at all.

Bhalchander: In your experience what is tougher and why – running your previous organization or setting up and growing Microcredit Enterprises?

Jonathan Lewis:  Both are tough, but in different ways.  All businesses, social or otherwise, and all nonprofits serve multiple stakeholders:  shareholders, customers, the larger community interest, etc.  A social venture adds mission clarity, but – as the adage goes – “no margin, no mission”.

Bhalchander: In the last few months, everyone’s attention has been on the economic crisis. Microfinance is also seeing a lot of changes – there is private equity and venture capital coming in. Are there any new kind of risks Microfinance faces and something we should all watch out for?

Jonathan Lewis:  Microfinance is not immune from the turmoil in the financial markets.  MFIs are indicating that the biggest challenge resulting from the global financial crisis will be securing new financing and rising interest rates which ultimately have to be passed on to impoverished borrowers.  Stories already abound about MFIs losing commitments for funding from so-called mainstream lenders and banks.   For some MFIs in select countries, foreign currency exposure is becoming a more serious risk.  In recent years, the weak dollar has largely muted this concern.  No longer will that risk factor be so easy to overlook or ignore. In general, microfinance will soon discover that private capital flight risk is real.  Indeed, I predict that the microfinance intelligentsia will mute the complaint about public capital “crowding out” private capital, an argument that actually has never made much sense either economically or in terms of social mission.  Hopefully, in the future microfinance thought leaders will be more respectful of the need for stable, socially committed capital, whatever its source. For a quick overview about microfinance, visit the MicroCredit Enterprises Study Center.

Bhalchander: What advice would you give to up and coming entrepreneurs and social entrepreneurs?

Jonathan Lewis:  To dream.  Listen to everyone, but trust your instincts.  Hang on to your core beliefs and live them intensely and everyday through your venture.  Keep moving.
Bhalchander: And my last question, what are your future plans for Microcredit Enterprises?

Jonathan Lewis:   One, MicroCredit Enterprises will grow to a $100 million guarantee fund (or one percent risk exposure per Guarantor unit of $1 million).  That will mean roughly 2.5 million people with food security.  Two, in 2009, MicroCredit Enterprises will become an offering on the new, very innovative MicroPlace.com website which allows individuals to earn interest from microloans.
Bhalchander: Thank you very much for being with us. We are all very happy that MicroCredit Enterprises is making the world a better place. We wish you greater and bigger successes.

You will also find this interview posted on http://unitedprosperity.org/blogs/team/

If anybody would like further information about MicroCredit Enterprises or United Prosperity, feel free to comment on this post or email me.