You are currently browsing the monthly archive for August 2010.
> Posted by Jon Pattee
Daryl Collins, Jonathan Morduch, and Stuart Rutherford, the authors of Portfolios of the Poor, will headline the annual conference of the Small Enterprise Education and Promotion (SEEP) Network this November 1-5th in Arlington, Virginia.
This year’s gathering of microenterprise development leaders from around the globe will honor SEEP’s 25th anniversary and tackle solutions to major industry challenges such as managing risk and monitoring social performance.
Center for Financial Inclusion staff will lead several trainings and roundtables on topics such as transformation and governance, client protection, and financial inclusion for the disabled. You can sign up for these events when registering for the conference.
- Training: The Forgotten Side of Transformation: Governance & Aligning Stakeholder Interests—Deborah Drake, Vice President and Program Manager, Investing in Inclusive Finance and Alex Silva, Principal Partner, President and Founder of Omtrix, Inc.
- Workshop: Tools for Consumer Protection—Charlotte Connors, Manager, Operations and Communications, The Smart Campaign
- A Breakfast Roundtable on Inclusion for People with Disabilities—Josh Goldstein, Principal Director and Disability Inclusion Project Manager
Participants will also celebrate achievements, address today’s challenges and opportunities, and explore opportunities for expanding financial inclusion by using new products and targeting new demographics.
For more information or to register, please visit www.seepnetwork.org. For details regarding sponsorship opportunities, please contact Lindsey Longendyke at .
> Posted by Stephanie Dolan
"All my successes have been built on my failures." ~ Benjamin Disraeli
“There have been no failures in microfinance.” I was struck by this statement when I heard it two years ago at an industry conference. Having recently moved from an investment bank (where part of my job entailed looking at distressed companies) to microfinance, I had a hard time believing this. How could a rapidly-growing, relatively young industry have avoided these pitfalls?
Later, when I talked with Deborah Drake, coordinator of the Council of Microfinance Equity Funds, she could barely believe it. Over her twenty years in the industry she has witnessed multiple examples of failed (or severely challenged) MFIs: “Of course there have been failures in microfinance—it’s just that no one talks about them.”
But finally, the microfinance sector is talking about them. Calmeadow just published a paper resulting from a project to generate lessons from failures in Latin American microfinance. The report, “Lo Bueno de lo Malo en Microfinanzas: Lecciones Aprendidas de Experiencias Fallidas en America Latina”, was written with support from the CFI, Deutsche Bank, the Inter-American Development Bank (IDB), and the International Association of Microfinance Investors (IAMFI). The paper draws on case studies from 10 institutions in Latin America. It searches for the root cause of the failure, which it categorizes into eight “buckets.” Was it fraud? Uncontrolled growth? Public intervention? The paper ultimately reiterates the importance of strong governance and management at institutions.
While this paper only examines Latin American experience, the Center for Financial Inclusion is taking it global. During the coming several months we are expanding the scope of the project beyond Latin America, to include cases in Africa, South Asia, Eastern Europe, Central Asia, and Southeast Asia. We will investigate whether the drivers of failure around the world are the same or different from those found in Latin America, with the goal of identifying ways to avoid and/or address these challenges.
Research is now getting underway, with a preliminary list of cases to study. We’d love to hear from you if you have ideas about cases that deserve to be included. Email your suggestions to me, sdolan@accion.org.
To learn more, read the report in Spanish. An English version will be forthcoming in mid-September.
Image from Wikimedia Commons
> Posted by Anita Gardeva
Word of the Week – Avoidance of Over-indebtedness:
A Client Protection Principle that states that providers will take reasonable steps to ensure that credit will be extended only if borrowers have an adequate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness.
Responsibility for avoiding over-indebtedness rests with both clients and institutions. For clients, this means making prudent decisions and judging their repayment capacity. For institutions, this means carefully assessing a client’s ability to repay. Over-indebtedness is not the same as multiple-borrowing—when borrowers take simultaneous loans from several sources—because borrowers might be capable of handling several loans without becoming over-indebted. Nonetheless, lack of credit bureaus and information-sharing between providers poses risks because it prevents institutions from being able to verify the existing indebtedness of prospective clients.
Spotlight Fact: One of the greatest challenges around over-indebtedness is how to measure it. We understand over-indebtedness in general terms but it is difficult to articulate with measurable precision. As Rich Rosenberg asks, is a client over-indebted when a loan equals a certain percentage of her disposable income? Or is it when she says that she finds it difficult to repay? If we could define and measure over-indebtedness more clearly it will help us to prevent it.
Suggested Resource:
- “Facing Over-indebtedness at Partner Microcredit Foundation” SmartNote – Read about one MFI’s strategy to avoid client over-indebtedness.
- “Avoiding Over-indebtedness” – A Smart Campaign webinar on how to identify, evaluate, and avoid over-indebtedness.
For more financial inclusion terms, visit the Center’s interactive Financial Inclusion Glossary.
For more information, sign up for updates from the Financial Inclusion 2020 campaign.
Flickr credit: sektordua
> Posted by Anita Gardeva and Sergio Guzmán
Interest rates in Latin American need not stay as high as they are today. This is the basic argument that Anita Campion, Rashmi Kiran Ekka and Mark Wenner present in their recent publication “Interest Rates and Implications for Microfinance in Latin America and the Caribbean.” Their study surveys the interest rates of 29 MFIs from seven Latin American countries between 2005 and 2008. It argues that anyone interested in lower interest rates should be searching for ways to improve operating efficiency. The authors find that “improved operational efficiency – a key driver of lower rates – comes primarily from five sources: competition, reinvestment of profits, learning by doing, pressure from donors and investors on MFIs to be socially responsible, and the absence of interest rate caps.”
The paper identifies competition as the most important of the five conditions in bringing interest rates down. It explains that, “In interviews, MFI managers said that competition was often the largest factor in determining the interest rates they charged…” Competition also creates pressure to expand and reach clients who previously were not served and increase the quality of services.
Increasing affordability through competition coupled with price disclosure standards, knowledgeable stakeholders, client education, and market research can create more robust and responsible pricing in microfinance markets as we discussed in our recent paper “Responsible Pricing: The State of the Practice.” Responsible pricing is defined by the Smart Campaign as pricing, terms, and conditions that are set in a way that is both affordable to clients and sustainable for financial institutions and along with transparency it constitutes one of the Client Protection Principles.
We have always believed that healthy competition in markets can generate lower prices; this paper provides evidence that increased operational efficiency as a result of competition can lower prices for microfinance clients in Latin America.
For more information, sign up for updates from the Financial Inclusion 2020 campaign.
Flickr credit: krossbow
> Posted by Julian Sosa and Sergio Guzmán
Incentives are among the most controversial of issues in finance. They raise provocative questions: Why they are necessary? Who receives them? How should they be given? Various stakeholders are active in the debate, from Wall Street to microfinance. There are numerous arguments for and against incentives that match an equally sizeable slew of theories about human behavior. In a recent publication, Ron Schmidt from the University of Rochester discusses “Are Incentives the Bricks or the Building?”
Incentives are able to promote positive results from their collaborators through well paired with individual motivations and with organizational goals and culture. Administering incentives is important because they promote work and personal motivation, however, as Professor Schmidt argues that, “incentives can be powerful enough to encourage employees to ignore trade-offs beneficial to firm performance when making [such decisions] leads to reduced incentive pay.” This is a story familiar to us in microfinance: sometimes loan officer incentives are designed to reward portfolio growth over quality which can motivate individual loan officers to make decisions based on self interest rather than sound credit decisions that might make loan sizes smaller and reduce incentive pay accordingly. This is why we have argued in the Smart Campaign that in order for institutions to prevent overindebtedness “[p]roductivity targets and incentive systems [must] value portfolio quality at least as highly as other factors, such as disbursement or client growth. Growth is rewarded only if portfolio quality is high.” Read the rest of this entry »
> Posted by Michelle Romeu
En su artículo más reciente en el blog Huffington Post, Elisabeth Rhyne explora los esfuerzos de Martin Burt, fundador y director de la Fundación Paraguaya, para lograr sacar a cada uno de sus clientes de la pobreza al utilizar las garantías grupales que se utilizan en los préstamos de microfinanzas. Al permitir a los clientes evaluar el progreso de cada cual, ha logrado darles herramientas para cambiar sus vidas de una manera innovadora.
Por: Elisabeth Rhyne
Mientras académicos de prestigiosas universidades de la Costa Este de los Estados Unidos están desarrollando metodologías para medir el impacto de las microfinanzas en la pobreza – y llegando a resultados modestos, Martín Burt fundador y director de la Fundación Paraguaya, está dando un importante salto en este sentido. No contento con medir o siquiera aliviar la pobreza, Burt cree que puede lograr que todos los clientes salgan de la pobreza. ¿Cuál es su secreto? Buscar movilizar la energía de los clientes.
Martín Burt es un pionero de las microfinanzas. En 1985 fundó la Fundación Paraguaya como una organización que otorga préstamos a microempresarios afiliada a ACCION International, y logró que esta fuera reconocida como una de las mejores organizaciones de microfinanzas (incluyendo un premio a la mejor institución de microfinanzas del Banco Interamericano de Desarrollo en el 2004). Luego de un corto lapsus en la política – un periodo como Alcalde de Asunción – Burt regresó a la Fundación Paraguaya con un amplio enfoque social en un momento en donde las microfinanzas estaban centrándose exclusivamente en servicios financieros.
Burt afirma que la contribución más importante de las microfinanzas al desarrollo, no es tanto lo que puede ofrecer, sino como operan. Las microfinanzas han demostrado que las instituciones que atienden a los pobres deben ser financieramente auto-sostenibles para poder lograr tener permanencia y escala, dos calidades necesarias para lograr tener un impacto significativo en la pobreza global. Igual de importante es la manera como las instituciones de microfinanzas tratan a sus clientes – las personas de bajos ingresos. Son tratados como personas capaces, que pueden ser sus propios agentes de cambio. Son apoyados en sus propios esfuerzos por lograr una mejor vida – la auto-ayuda y no la caridad. Burt ha aplicado esta filosofía al desarrollar una escuela (secundaria) agrícola auto sostenible, brindando educación a jóvenes de familias de escasos recursos en una zona rural de Paraguay. La escuela opera sin subsidios externos, financiada únicamente a través de la venta de productos cultivados y procesados en la escuela por los estudiantes. Read the rest of this entry »
> Posted by Michelle Romeu
Is mobile banking the next step on the way to 21st century financial inclusion? As someone new to the industry, I have spent much of this summer learning about microfinance; and for me, one of the most interesting developments in the industry is the use of mobile money to further financial inclusion. Earlier this month I made my way to the U.S. State Department to attend Tech@State: Mobile Money. The half-day event brought together U.S. government representatives with technology and microfinance experts to discuss mobile banking in the context of U.S. foreign policy.
Recognizing that mobile phones are altering the course of international development, the State Department is exploring new tools for 21st century statecraft and economic growth. The event represented the State Department’s first foray into the mobile-banking space and as Under Secretary Maria Otero said, there is a hope that, “with the help of industry experts, we can help generate local political will in order to make financial inclusion a reality.”
Mobile banking is an attractive,scalable alternative channel for financial services; as Carol Realini, CEO of Obopay, stated, 5 billion people in the world possess a mobile phone. Shainoor Khojam, Director of Corporate Affairs at Roshan, spoke about financial services in Afghanistan and noted that the entire country has only 17 banks and 34 ATMs. Promoting mobile banking in Afghanistan has been noted to help decrease official corruption in addition to the broad benefits of cheaper delivery and greater convenience and safety for clients.
But the world may not be ready to take advantage of mobile banking opportunities. Jan Chipchase of frog design addressed bottlenecks to scaling mobile banking, including the importance of user literacy—both in terms of language and technological illiteracy—as a key challenge.
While mobile banking is sure to break some important ground on the way to financial inclusion, we must also be wary of putting all our eggs in one proverbial basket. Mobile banking can help bring us closer to full financial inclusion, as part of a bigger toolkit of solutions to financial exclusion.
For more information, sign up for updates from the Financial Inclusion 2020 campaign.
Flickr credit: whiteafrican
> Posted by Anita Gardeva
Graph from: Adrian Gonzalez, "Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Mohammed Yunus" MIX Data Brief, No. 4
Word of the Week – APR:
An acronym for Annual Percentage Rate; a form of stating an interest rate in which the interest rate is annualized and all fees are incorporated.
Quotation of rates in APR terms facilitates price comparison. It is important that clients are able to compare prices and select the loan with the greatest value for their money; however, diverse manners of portraying the price of a loan make it difficult for microfinance clients to compare interest rates. APRs are always declining balance rates. Additionally, an APR does not include compounding interest unlike the effective interest rate (EIR). See also nominal APR.
Spotlight Fact: Despite the recent debate on whether microfinance institutions are making unfair profits from the poor by charging exuberant interest rates, a recent MIX publication that analyzed over 1,000 MFIs, shows evidence that operating expenses are far more influential on microfinance interest rates than profits, and that removing profits altogether would not change interest rates for clients substantially.
“The most important result from this analysis is that operating expense is the largest factor contributing to the level of both [interest rate] premiums and interest rate (yields) levels of microfinance institutions…For both yield and premium, the relative contribution of profits is less than one-eighth of the relative contribution of operating expenses.”
Suggested Resources:
- “Responsible Pricing: The State of the Practice” (July, 2010) –A recent paper by the Smart Campaign examines the full range of approaches to responsible pricing of loans, including interest rate caps, promoting competition, comparative transparency, and return on equity limitations.
- “Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Muhammad Yunus,” MIX Data Brief, No. 4—A publication by Microfinance Information Exchange (MIX) that analyzes the interest rates of global MFIs in order to better understand the factors affecting the prices of microfinance loans.
Graph from: Adrian Gonzalez, “Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Mohammed Yunus” MIX Data Brief, No. 4
> Posted by Michelle Romeu
Senior Fellow and Chief Consultant to the Energy Links project Paul Rippey is leading a course on “Modern Energy Business Opportunities for the Base of the Pyramid” from Wednesday, October 13 through Friday, October 15, 2010 (Registration deadline is September 27). Paul writes:
I’m going to be co-leading along with my good friend and colleague Harry Andrews, who is one of the founders of Barefoot Power. Energy Links has worked a lot with Harry and Barefoot, and they are a great folks: we like their values, we like their products, and they are creative and fun to work with. At the May 2010 Lighting Africa conference in Nairobi, their products won first or second place in every category and after years of hard work and no income, they seem to have become the leader in affordable lighting products in Africa.
The course that Harry and I are leading is part of the Sustainable Microenterprise and Development program offered by the Carsey Institute at the University of New Hampshire. The course will be held at the Ocean View Resort on Zanzibar (somebody has to do it).
We will share what we have learned about building partnerships along the supply and distribution chains between microfinance institutions and savings groups, small-scale entrepreneurs, suppliers, and manufacturers. The second day of the course will take participants out to the field to interview people in villages, and find out how they use energy, what improvements they want and would be willing to pay for, and how they could finance them.
This is going to be great fun and I believe very useful – it will be hands on, and a great chance to network and learn. I enthusiastically invite you to participate.
You can find out more, and register in the program, at the course website here.
I’ll also be leading a presentation on climate change and development, inspired by An Inconvenient Truth, but also going down a few roads that Al Gore has never taken.
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