Mainstreaming Microfinance: Malegam Report and Artoo

Lately, the micro-finance industry reports have been squarely in two opposing camps: unconscionable profiteers or saviours for stimulating the economy for the poorest of poor. If nothing else, the Malegam report, as an official, publicly available document from India, shifts the conversation from sensationalist news items to promote informed debate. Additionally, having regulations (such as the 24% cap on interest rates, 25K rupee limit on loan size, max 2 lenders for 1 client etc) outlined in the report, mainstreams a  capital procurement instrument for the poor - a population not served by traditional capital markets.The debate is no longer whether micro-finance works or not- the debate is how to make it work better for the client as well as the lender. While many practitioners view the report favourably, some may argue otherwise; that the Malegam restrictions favor the bigger MFIs or that the industry will no longer be self-sustaining or that the restrictions are unenforceable. I think the report is a fantastic development irrespective of the specifics of the debate because it brings micro-finance into the mainstream.

In addition to all the analyses you can read for yourself (google or follow link above) I have another point to make- The report, with its concrete guidelines will spur technology innovation in bringing down the cost of transactions. IT hardware as well as software exits to bring transparency which reduces corruption and automation to reduce cost/transaction (of the large number of small loans MFI must deal with that raise their costs) but so far the MFI industry has been somewhat tech-averse - it increases risk to take a technology and market risk at the same time after all. With industry benchmarks to follow I believe entrepreneurs as well as established MFIs will be motivated to enlist technology to develop applications specif to the MFI industry.
For a specific example of "technology to the rescue" check out the initial results of start-up Artoo. Sameer Segal, founder of Artoo writes "we truly believe we can help MFIs bring their OER down to meet the new requirements".
Mainstreaming micro-finance will also allow the industry to open up new product offerings (e.g. savings accounts) that further benefit both client and lender.

The Microfinance Debate: What would you do?

Minimum information and maximum media coverage has created the monster microfinance debate: greedy bloodsucking bankers or saviours of the world?.
I am particularly troubled by the fervor and timing of this debate because Diwali/Christmas/New Year is when, motivated by a spirit of thankfulness and/or spirit of saving on taxes, we do our annual bit of charitable giving. How will you give this year? The Financial Times (thank you FT) article Microfinance: small loan, big snag is a nuanced view with data from many countries. Microfinance is still about lending to people with no collateral; where traditional banking did not lend. That has not changed. What has changed is the desire to scale- more capital to benefit more poor people; while the majority of microfinance institutions, still led by dedicated entrepreneurs, stay true to the mission, different elements (in India, e.g. it is corrupt politicians worried about losing votes if the poor benefit from entrepreneurship who have garnered much media attention) have taken advantage of the situation. This does not mean that sustainability (double bottom line- do good and do well) is inherently impossible. Another FT article Perhaps microfinance isn’t such a big deal after all presents the strategy on how to deal with the pangs of going mainstream. fly under the radar- Just lets tone it down- lets not call microfinance the way to solve every problem - its just banking after all.
How will you donate this year? Whether it is Kiva or Microplace some other form of lending - I urge you to do your own homework - it is complicated and I personally do not know a single greedy bloodsucking banker in the microfinance realm.

Mission Drift: The Bogeyman of Social Entrepreneurship

The initial public offer (IPO) by SKS Microfinance is a landmark event: likely to set the stage for other IPOs in this area. I find much to cheer about in this development as financial inclusion goes mainstream and scales so a dream turns to reality for many many more people who live under $4/day. Not unexpectedly, the recent hoop-la about the IPO has come from activists and NGOs who worry that this move spells a mission drift - a profit from poverty mentality versus helping the poor, that has always been the bogeyman of social entrepreneurship.

The issue is that pure philanthropy does not scale. Charity funding is critical in providing a start to change-makers driven by passion for helping the poor. However, once a business model becomes sustainable, its capital need is far greater than what can be met by traditional philanthropic sources.

But change is hard for many to swallow and hence appears the bogeyman of mission drift - all the things that are wrong with the business world. But the bottom line is that there are also many things right with the business world. Besides- just as many albeit different, things are wrong with the charity model. Of course things can always go wrong, with greed overtaking social mission as MFIs go mainstream, but that risk is far lower than the risk of stagnation and besides financial instruments exist to manage it.

With access to more capital, I actually think things will improve for the clients of MFI because there will be pressure to bring interest rates into alignment with traditional banks. In recognition of this Businessworld article says "Earlier this year, India's finance minister said non-banking financial corporations (NBFCs), including some like SKS, can be granted banking licences, signalling a greater role for MFIs. But India's central bank has pulled up MFIs for their high interest rates -- about 25-27 percent. That is about double the rate at which they borrow from banks, but still lower than moneylenders."

Actually this business of mission drift has become a particular peeve of mine because of my past 4 years of experience directly working with social entrepreneurs. The SKS IPO provides an example against which I can generalise. Budding social entrepreneurs face an uphill task as it is. They initially get ignored by traditional capital and foundation money is so scarce that the competition in the field of social entrepreneurship is unhealthy (results in inability to merge or collaborate later on). Two factors come into play: First, self doubt in the mind of the entrepreneur in entertaining a realistic revenue generation (Am I being social enough?) plan for sustainability. Second, many opt for an incorrect business model which later becomes difficult to change, especially given the negative feedback from their initial supporters. The way I see it, the issue of mission drift is an operational issue - to be managed like any other risk whereas having a built-in plan to get to sustainability and scale is a strategic choice which guides impact in the long run.

Microfinance 2.0: People + Technology investment

The fact that microfinance has been a successful business model for poverty alleviation is undisputed (operational quibbles notwithstanding). The reason is that Grameen bank turned conventional wisdom on its head and made the unbankable (people with no collateral) into safe banking bets. Once they proved that the model was financially sustainable - the world followed suit. Now we are even looking at IPO's for microfinance institutions like SKS and others. So what is next? If microfinance 1.0 was about betting on the innate entrepreneurship of people microfinance 2.0 will be about betting on technology (providing scale by lowering cost) for changing the world. A partnership with social entrepreneurs can pave the way because they typically look for sustainability and are technology savvy. Unfortunately, social capital is still hard to come by especially for social entrepreneurs involved in changing the rural economy through innovations in renewable energy (like solar for lighting) or education (e-content for education) or healthcare. Government institutions involved with rural development should especially take note as they can provide the scale and sustainability. The Jaipur foot is a good example of medical technology that got a boost from a government partnership. Right now when India is so visible in the climate change debate, by investing in companies bringing solar to rural - off grid areas - would strategic. Companies like SELCO, D.Light, Duron energy are good investments for microfinance or NABARD (Govt. banks). It has long been held that research is expensive and emerging economies need only be markets. This is no longer the case when technologies of the developed world do not scale to meet the needs of the emerging economies.

Microfinance and Education: A win-win partnership

There is a Chinese proverb that goes something like this: if you want to plan for a year, plant a rice field, if you want to plan for ten years, plant a tree and if you want to plan for the future, educate your child. Microfinance is addressing the 1-10 year scenario which is pretty great. But last year, at the Tech Awards (http://www.techawards.org/) I heard of a business model innovation - a partnership - that addresses the future. It is a combination microfinance plus education model. In this model, women who receive loans are encouraged to send their children to a partner education NGO for "free" or at a subsidised rate. The partner institutions decide how the finances are shared (the interest payments) for optimal sustainability of both organisations. This is a win-win model where the women are encouraged to make a go of the business, (education is a social benefit - unquantifiable through standard metrics), microfinace institutions have to do less policing about the use of their funds and education NGO gets students who's parents care.
Countries with severe poverty are also plagued with prejudice against women, poor health among children and a growing opportunity gap between the rich and the poor. UNESCO proclaimed September 8 as International Literacy Day in 1965 to highlight the role of education in addressing these issues but while its importance is universally acknowledged, the deployment of quality education in developing economies has proved unsuccessful. This is also true for India where, in spite of a great rise in economic stature of the nation in recent years, the literacy divide is as great as it was prior to the IT boom. The success stories of opportunity inclusion come from the microfinance sector. So wouldn't it be nice if we could leverage the success of the microfinance model to do more? Like maybe provide quality education to those left behind bythe current system?

Microfinance Awards - Application Deadline Sept. 30, 2009

Awards and recognition are a great way of supporting change makers- providing emotional and (sometimes) financial support - while engendering healthy competition. So I am pleased to hear that HSBC is sponsoring Microfinance India Awards. The winners will be awarded with a cash value of Rs. 100,000 each, a silver plaque and a citation. The deadline for receiving completed nomination forms is September 30, 2009. Nominations are solicited for two categories:
1- Microfinance Institution of the year 2009 - self nominate
2- Lifetime achievement -individual - long-term, significant contribution to Microfinance sector
The awards will be presented at the Microfinance Summit October 26-28, 2009 in Delhi. Even better the awards will become an annual feature - so if not ready this year - stay tuned.

Financial Inclusion: Microfinance to Mainstream

Every year I try to do one hike in the Himalayas. It takes me back to my roots in Dehra Dun, inspires, energises and engenders hope. So in September 2008, when we did the gruelling 14km uphill trek to an elevation of 3584m (Gaurikund to Kedarnath), as usual, the mountains were unimaginably majestic but this year I saw something unexpected- man-made but equally mesmerising for me. Beyond the hike trail, on the dirt path to the last village on the India border, there flew a banner that read something like "Proud to reach 100% financial inclusion - State Bank of India". I wish I had had the presence of mind to take a picture (too tired is my excuse). Sure it is an ad. But look at the lofty goal. In a country largely supported by a rural population, where less than 50% bank and even fewer have access to credit, to reach the remotest corner of India with a goal of 100% financial inclusion is nothing short of ambitious. And indeed, all the huts I saw looked clean, had roofs and there were tiny, immaculate gardens with cabbage, cauliflower growing; chickens running around and nobody looked cold or hungry. For developing economies, microfinance (and micro-franchising) must become mainstream. So I am pleased to be invited to the Microfinance India Summit to be held October 26-28, 2009 at Taj Palace Hotel, New Delhi. The theme this year is "Doing Good and Doing Well: The need for balance". The summit will look at both the trade-offs and points of convergence as the sector grapples to balance between building the social as well as the financial capital; scale and soul; social performance measurement; client protection; products and services that the poor need; and issues linked to last-mile connectivity, among others. I also look forward to interviewing ordinary and extraordinary folks I meet at the conference - so send me your questions and I'll report back on what I hear - right here.

Muhammad Yunus Honored by Obama

Last week, the White House announced that Professor Muhammad Yunus will be one of the recipients of this year's Presidential Medal of Freedom. The Medal of Freedom is bestowed by the President and is the highest civilian award in the United States. President Obama said: "These outstanding men and women represent an incredible diversity of backgrounds. Their tremendous accomplishments span fields from science to sports, from fine arts to foreign affairs. Yet they share one overarching trait: Each has been an agent of change. Each saw an imperfect world and set about improving it, often overcoming great obstacles along the way. Their relentless devotion to breaking down barriers and lifting up their fellow citizens sets a standard to which we all should strive. It is my great honor to award them the Medal of Freedom."
When Dr. Yunus receives his award, he will be joining a distinguished group of individuals that includes Nelson Mandela, Mother Theresa and Martin Luther King, Jr. Adds Warner P. Woodworth, Social Entrepreneur & Professor, Organizational Leadership & Strategy, Marriott School, BYU: "I have had the privilege of working with Professor Yunus for over a decade as he has advised a number of the NGOs my partners and I have established around the globe. From those little efforts, mostly launched with BYU students using my courses as incubators for global change, over 50 projects have been launched, and 22 have become NGOs. Last year alone, we collectively raised more than $46 million, trained approximately 340,000 microentrepreneurs, and grew our client base to about 6.1 million impoverished individuals who received a loan during 2008."..."While critics say the poor are lazy and that they are irresponsible, our microcredit experience, not only in the Third World, but also now in America, is that they simply need an opportunity. Our NYC outstanding loan portfolio has grown to over $950,000, and these borrowers have also cumulatively saved over $150,000, which demonstrates the impact of our savings program (http://www.blogger.com/www.grameenamerica.com/ <http://www.grameenamerica.com/>)."

Microfinance to Mainstream?

Micro finance methods have captured our imagination, hearts, social conscience and even our technology innovation dollar, but, sadly, never the institutional support that ideas need to go from boutique to mainstream. Till now. Eric Bellman, Wall Street Journal July 6, 2009 headlines "Rural Demand Helps Indian Banks". Bless his WSJ heart, the byline says "once considered a burden, remote branches prosper on aid for farmers". Note: aid, not loans. Other than that quibble (though technically aid is correct, because there are some subsidies involved but given all the baggage associated with the word "aid" I would rather use "stimulus" or something else), the rest of the article is worth every bit of ink. India has been resilient to the global meltdown because of growth in rural India; technology to reach remote areas and as market is growing, traditional for-profit banks are moving in too- completing a virtuous cycle. Key points:

- rural banking growth - from 12% to 20% has offset decline in urban - from 28% to 19% which is more tied to the global economy

- technology helps - remote branches have a finger-print scanner and mobile phone for identification and processing (State Bank of India) - loans and deposits are small amounts

- the benefit is felt by the state owned banks, which were forced to maintain rural branches (at a loss), but as the "market" is growing, multinationals (e.g. HSBC) are entering the market -thus taking it mainstream

-because of low default rates etc. - interest rates are competitive (10%)

- customer profile- "No one in my family has ever had an account"

I generally highlight media coverage of business+technology+social impact - and coming from WSJ - I thought it was especially noteworthy. In fact it made me track down other noteworthy articles (one especially on cell phone growth in India) by the same author.

For emerging markets -if there is a killer app - it is banking - whether it is delivered through cell phones, kiosks or moving vans; think of the potential customer base! I hope this story is an indication that "microfinace" is moving to "finance" - its the kind of change the world needs.

A different kind of story - win big, think small

Have you noticed how the stock market never goes up or down? It soars or plummets. Somehow hyperbole hustles us to the same stories over and over. So whenever I see mainstream news with a story truly different I feel the need to applaud. Such is the case with CBS news story on micro-lending. Bigger is not always better. Think micro-loans. And how they are giving good returns when banks are loaded with "toxic assets" of large loans. The CBS story, on location in Peru, is one of the best explanations of micro-loans (features MicroPlace, Ashwini Narayanan) and truly inspiring. Another big player in this space is Kiva and there is a nice blog with details about the two. But here's the main point: Micro-finance isn't so much about the fact that the loan amount is small - its about the fact that loans are being made to people who the banks have declared "not creditworthy". It means loans are made to people normal banks don't give loans to. Banks, using metrics based on collateral (i.e. how much they already own), decided that these people could not pay back their loans. In other words, you have to be rich already to get a loan. Now isn't that backwards? This is the Big Idea; The Big Win of micro-lending phenomenon. Micro-loans and the fact that they get almost 99 percent payback prove that establishment thinking is wrong; can be wrong. So it is really unfortunate that micro-finance still remains in the "boutique" category (yes- just calculate the percentage of money in micro-loans versus total lending) and seems a long way from becoming mainstream. There are entrepreneurial efforts (e.g. UnitedProsperity) to make lending to the poor more viable by raising money for guarantees and this is change in the making.

Change doesn't just happen - It needs faith and cheerleaders - and -yes mainstream media can do a lot by uncovering stories like this one. Cheers for CBS.

Microfinance for Beggars?

Yesterday at SCU's event "Transformative Changes Through Science and Technology: The Role for Social Benefit Entrepreneurs" honoring the 2008 Tech Laureates I heard something new. It has made me change my mind. (In the interest of full disclosure, I hereby state that not much changes my mind these days).
Here is the story: I am just back in the US after six weeks in India. A common sight in India is women and children at stop lights- begging. There used to be a time when I would give some change but I have stopped doing it now; doesn't giving them money encourage them? Not much has changed over the years except now they often carry tissue boxes, balloons, magazines, hats, toys etc. to sell. Where did they get the money to buy the stuff? Some tiny children offer entertainment in the from of headstands or juggling or something. "The goods must be stolen; they are just an excuse for begging - whatever" I think. I look away. I can do nothing about this. I feel rotten for a while till I get over it.
Yesterday, I heard Mohammed Yunus talk about Grameen's new program in Dhaka, Bangladesh - "loans to beggars". He thought - why not do something for the beggar? and that's how the program started. They find a beggar and ask one question - at what time in your life did you become a beggar? And then they gave him/her an idea - continue begging, but why not carry some small article to sell- give their "customer" a choice - so as to speak - buy or give charity. If the beggar agreed, they gave an interest free loan with no time set for repayment. Whenever they are read to repay, they can come back to repay. That he said was key. Enablement- a person who tries cannot fail. In fact, they said - take your time to repay. To keep their own costs low, Grameen provides no other service, just trusting the person to come back. Loan amount is $15 flat. So far there is $100K in the program and 11,000 people are not begging anymore. Most others are only part-time beggars and some are successful entrepreneurs.
So next time I am stopped at a light in New Delhi - I will roll down my car window. I may not be in a position to start a loan program but I can buy a box of tissues. Who knows? It might make a difference. Why had I never thought about this before? Why did I assume the goods were stolen? The kids wanted to trick me?
Why? Becuse I still have a lot to learn.