I am a big fan of Kiva and I am a personal lender on the platform having made more than 200 loans — see my Kiva lender page.

But their micro-lending product for India is very different than what they offer for other countries.

Unfortunately, it is a very poor consumer lending experience. Here are a few of the issues:

• all loans are for 3 years (minimum) — even though loan term is only typically for 6-12 months
• loan capital is auto re-loaned to whomever the MFI wants to lend to during remainder of the period
• no details provided on loan repayments until the end of 3 years
• lender takes currency downside risk (but not upside!)

And there’s a warning that India regulations are really unpredictable, so you might not get your money back even if it’s repaid.

I don’t think most lenders are going to be excited about these terms! If there’s a high likelihood that a loan is never going to be repaid — implied in Kiva warnings — then most funders would want to structure their loan as a donation and take the tax write-off upfront … not in 3 years.

I’m very surprised that Kiva would launch such a poor quality micro-lending product. They have historically been a leader in delivering quality micro-lending products. I don’t think this is going to work well for them.

I am very familiar with some of the challenging regulatory issues in India, but platforms like Milaap.org* are providing a much better consumer micro-lending experience without all of these limitations. I do hope that Kiva quickly fixes their product as there is huge demand for micro-lending in India.

*Full disclosure: Unitus Seed Fund is an investor in Milaap

Interesting personal experience article by Jitin Mitra on the status and impact of microfinance in India.

As a result of the microfinance crisis in India, there has been a significant decline in the availability of microloans for poor Indian workers. While certain politicians gloat that they are protecting poor borrowers, Jitin notes that “the reality is that millions of poor families have been forced back to traditional money lenders who have been far less beneficial, often charging over 50% interest and claiming collateral following defaults.” And, when poor families pay higher interest rates to moneylenders, this reduces their (already meager) disposable income. While mothers often take the brunt of the impact by reducing their own consumption (e.g. fewer/smaller meals per day), inevitably their children are also impacted.

Also what’s so often overlooked in an evaluation of microcredit is the empowerment benefits provided to most women borrowers. Jitin notes that “[Microcredit borrowers’] confidence had soared as they were now able to provide for their families and in turn, gained respect within their communities.” If we care about social justice and equal opportunity, well-managed microcredit is one of the most powerful tools that has demonstrated empowerment benefit at scale.

Jitin also reminds us of a recent study commissioned by the Small Industries Development Bank of India (SIDBI), an independent financial institution aimed to aid the growth and development of micro, small and medium-scale enterprises in India. It showed that borrowers benefitted significantly from microfinance. Amongst the findings were that:

• 76% were able to increase their income through MFI assistance
• 66% improved their food consumption
• 56% could improve their housing conditions
• 77% could provide better educational facilities

Ruma is creating a supplemental income opportunity for agents in rural districts of Indonesia using the mobile phone that they already own. The first product Ruma agents offer is a convenient and price competitive mobile phone pre-paid “top up” (credit) service. Since it typically costs about $0.20 in travel costs (plus time) to visit the nearest town to purchase an additional typical $0.50 of top-up credit, this service is very popular with rural customers. Ruma buys the mobile credits in bulk from all of the major mobile operators, so their agents can provide top-ups for any mobile service and they share the profit margin with the agent. This is truly a win-win.

In addition to providing mobile top-up services, Ruma is reportedly testing some additional services such as a job posting/matching service which can also be distributed by their micro-franchise agents generating more supplemental income.

Ruma’s focus on providing an opportunity for supplemental income vs. primary income is smart. This makes it easier for them to find agents who can try out their system with less risk. As Ruma expands the income generating opportunities they provide to their agents, the agents can self-select whether they want to grow this livelihood opportunity as part of their income mix or keep it as a smaller, supplemental source. As the story of the shop owner demonstrates, having a high-interest service like this can also grow their footfall (foot traffic) and revenue (turnover) for their main livelihood.

A few highlights on Paul’s comments from the below video interview:

• We will not make a meaningful impact on poverty without selling useful products to the BOP and making a profit from them
• There is a big difference between selling something to BOP customer which gives them more value than what they paid than ripping them off (which is mostly what they have experienced)
• In order to be sustainable, businesses targeting BOP populations generally need to target reaching 100 million customers because of the low profit margins (his previous advice was at least 1 million customers)
• Businesses need to seek out “radical affordability” and highly distributed last mile distribution strategies in order to be successful in BOP markets
• To make your product/service attractive to BOP populations, it must double their income in a relatively short period of time in order for them to take the risk
• He believes that most of the successful BOP businesses will come from new startups rather than multi-nationals who just don’t have the DNA to think about and build these new type of businesses
• There will be huge failures of BOP-focused businesses — this doesn’t mean there isn’t an opportunity (he noted that the Indian Andra Pradesh microfinance crisis is hardly a wimper compared with the disruption that accompanied the changes in the Soviet Union/Russia starting in 1989)

Thanks to NextBillion.net for alerting me to this.

This is actually a very timely topic. Why? Because as rich countries cut back their spending to get fiscally responsible, aid budgets are going to get cut and so there’s a great opportunity (remember Rahm’s “let’s not let a good crisis go to waste”) to evaluate whether there’s a better approach.

Read: Bill Easterly’s review of Dambisa Moyo’s book, Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa

Moyo is a Zambian economist and this book has caused quite a stir as she comments very knowledgeably on what’s happening in Africa challenging the status quo of “more aid is the solution to Africa’s problems.” And she’s NOT a white middle-aged male.

Bill Easterly recently shared this review of Moyo’s Dead Aid book which he wrote back in 2009 on commission from London Review of Books. LRB chose not to published it (reason not disclosed), so he has has released it on his own.

I have previously reviewed Bill Easterly’s book, The White Man’s Burden: Why the West’s efforts to aid the rest have done so much ill and so little good. Easterly is one of the most vocal critics of the lack of results (and often negative results) delivered through government-to-government aid, so his book review is, as expected, generally positive although not wholly so.

I also recently reviewed Poor Economics: A radical rethinking of the way to fight global poverty by Abhijit Banerjee and Esther Duflo which supports some of Easterly’s conclusions on the (lack of) existence of Jeff Sachs’ (The End of Poverty) “poverty trap” concept, but also refutes some of them.

I also reviewed another book on Africa and aid called The Trouble With Africa: Why Foreign Aid Isn’t Working by Robert Calderisi which share additional facts and perspectives.

Please post to comments for other perspectives on this topic and/or other books worth reading.

By: Abhijit Banerjee and Esther Duflo

This is a continuation of my book review. See Part I of book review >

Here are a few highlights I took away for the book:

• Most poor aren’t hungry. Despite what the experts say. Generally, the poor don’t eat more even if you give them food. There is though an age-old issue of micronutrient deficiencies in poor people’s diet. So, it’s a “quality” issue, not a quantity issue with lots of complicated behaviorial challenges to overcome.
• Demand is low for many beneficial things. Many poor could afford water purification products and bed nets but don’t make them a budget priority. Much of this is based on focusing resources on the short-term.
• Paying people to take vaccines can be cheaper. One of the biggest issues for global health is how few children complete a full series of vaccines leaving them unprotected and increasing drug-resistance for diseases. They have found in a trial that it is actually cheaper to provide gifts to mothers who get their children vaccinated and they get more compliance. Read for the details.
• Making public good things free and the default. The authors argue that governments should make things like preventative care free, required and of consistent quality. Sounds paternalistic? Yep. They argue that those in the rich world are constant beneficiaries of paternalism that we hardly notice it!
• Unconditional cash transfers to poor families work. We’ve heard about popular (and statistically effective to help people out of poverty) programs in South/Latin America like Mexico’s Oportuniadades which provide grants to poor families on the condition that they do things like ensure their kids are in school. Two studies have found that without these conditions that the poor still send their kids to school, etc.
• Most poor people want a job, not a micro business loan. Despite what many microfinance advocates say, most self-employed do so out of necessity, not out of choice. Jobs bring more security which enables poor families to plan and invest for a brighter future.
• Microcredit has high marginal ROI, but low overall ROI. Since most poor who take microcredit loans are underemployed, any capital can often quickly improve their income (think: having inventory on their store shelves). But most micro-businesses stay micro as they have insufficient capital to get to the next level. And micro businesses equal micro incomes. Better than no income, but not the jackpot.
• Many poor parents don’t treat their children equally. They look for early signs of who might be “smarter” and often focus their resources on a single child’s education. They do this because they undervalue a smaller amount of education and overvalue a larger amount of education. Lots of parental expectations need reseting.
• Micro insurance for the poor is a hard sell. Despite all the interest by promoters in the space. The poor don’t value insurance services enough to be willing to pay premiums, which results in the insurance pool being skewed to the higher risk people raising premiums further … a downward cycle. And then there’s fraud. Their conclusion: micro insurance will only work with government subsidy. Sounds like farm insurance in USA and EU?
• Most poor need structure to save. If money sits around, it gets spent on other things, so the best savers amongst the poor are those who immediately invest their profits. Lots of good examples in book of structured savings. We know in USA that having opt-out approaches to things like auto-deduct-from-paycheck 401(k) savings programs result in much more saving than opt-in programs. We’re all human and subject to temptation.
• Building small businesses into bigger businesses is very rare. There are always publicized examples of a poor entrepreneur who defied all odds to build a big business from scratch. But these are extremely rare — especially in developing markets. Most poor don’t even have the ambition for this.
• Most small/micro business owners don’t benefit from training. Yep, that’s right. Mostly because they don’t care that much about growing their business because growing a business is very hard and not likely to succeed. This is unwelcome news to the many NGOs who believe that this is an important intervention.
• Non-agriculture growth is more beneficial than agriculture growth. When a factory locates near a village, it most often results in faster wage growth than agricultural productivity growth resulting from innovations like the famed Green Revolution. Why? Because higher-paid employment becomes available even to those with low skills.

Summary of authors’ learnings

1. The poor often lack critical pieces of information and believe things that are not true.
2. The poor bear responsibility for too many aspects of their lives.
3. There are good reasons that some markets are missing for the poor, or that the poor face unfavorable prices in them.
4. Poor countries are not doomed to failure because they are poor, or because they have had an unfortunate history.
5. Expectations about what people are able or unable to do all too often end up turning into self-fulfilling prophecies.

I’ve only covered a small portion of the book’s content. I recommend that you read it for full benefit.

By: Abhijit Banerjee and Esther Duflo

This is one of the best books I’ve read on addressing global poverty. And I’ve read a LOT of books on this topic. It summarizes a massive amount of primary in-the-field research and has lots of interesting finds which will surely challenge some of your assumptions on effective poverty programs. The authors founded Abdul Latif Jameel Poverty Action Lab in 2003. Also, there is a book website.

What works; not what you think should work

I was impressed with the authors’ focus on “what actually works” based on empirically validated experiments and data. This is very refreshing in a world where so many people approach poverty with pre-determined viewpoints. I particularly like how they compare, contrast and critique the two primary international development perspectives of “supply wallahs” (Jeff Sachs & co) and the “demand wallahs” (Bill Easterly & co). The authors (both economists) seek to test whether there are specific poverty traps (Sachs’ concept which Easterly contests) in specific situations. Their conclusion — sometimes there are and other times there aren’t. It just depends on the specific situation.

Similarly they critique the pessimism of both the political left and the right who (for different reasons — colonialism or unfortunate culture) think that political institutions in these countries must change first and they won’t. They look for pragmatic steps forward in both good and bad political regimes.

Progress generally comes incrementally and at the margins

They are not idealists. The authors are realists who believe that improvement comes incrementally at the margins. It is all about the small stuff which adds up. Much of what works isn’t “sexy” and therefore isn’t easy to raise donor money for. Some of the successful approaches they’ve discovered are counter-intuitive at first and many are far from perfect. But they are committed to taking a scientific approach and to judge things by their results and to learn as they go.

There are far too many excellent facts in this book to cover in a short review. So, I will call out a few as illustrative and recommend that you read the book for the full benefit.

Focus on testing specific interventions (with randomized controlled trials)

“This book will not tell you whether aid is good or bad, but it will say whether particular instances of aid did some good or not.” One of the big issues with aid is, how do we know what interventions are effective? or more effective than others?

Read Part II of book review >

Interesting article posted by Forbes challenging the widespread use of the general term “entrepreneur” to describe both Bill Gates and a poor street fruit seller in a developing country.

In reality, there are entrepreneurs by necessity (because you have to eat) and those by choice or opportunity.

Forbes argues that we do a disservice to not distinguish between these two types.  If you ask most necessity entrepreneurs what they aspire to, most would much prefer a salaried job rather than to run their own business.

On the other hand, opportunity entrepreneurs love not having a boss and thrive on creating a new, growing business.

This doesn’t mean we should stop providing micro-loans to the necessity entrepreneurs because without those loans most would indeed be worse off.  But we must also consider other investments which ultimately create more jobs in the local economies to employ many of these people over the longer-term.

Lending to the Small Enterprise

Loans of a few thousand dollars to small businesses (vs. a few hundred dollars to self-employed micro-entrepreneurs) is very rare in most developing countries.  The microfinance banks view this as a much riskier proposition then spreading their risk across 10 times as many individuals with a group guarantee methodology.  The traditional banks are looking for either hard collateral or proven cash flow to lend against, hence they are not interested.

In Asia, you are starting to see MFIs like Swadhaar in India starting to experiment with so-called “micro-enterprise” or individual loans as the regulators start heavily regulating microcredit.  And in Indonesia, you are starting to see banks like btpn creating new products for this segment as a growth strategy.  But, I think you are also going to start seeing more new specialized finance companies like Vistaar Finance which are focused exclusively on innovative financing for this segment.

I believe that this new sector of micro-enterprise lending is a new frontier opportunity to help generate millions of jobs for the poor over the coming decade.

See an interactive version of above.

Here’s another way of looking at countries in rank order of their poor populations by middle and low income countries:

Below is an interesting podcast discussion where Paul Collier (see my review on his book, The Bottom Billion) and Andy Sumner share their dramatically different interpretations of this new data.

Paul Collier key points:

• If you ask the wrong question, you’re bound to get the wrong answer — by focusing on measuring poverty simply by looking at people’s daily income today is a reductionist (and unhelpful) way of measuring poverty
• A better way to look at poverty and where the international community should consider intervention is where you’ve got both current poverty with lack of a credible opportunity for the future
• Countries like Nigeria shouldn’t be considered middle income just because they have oil while few of their populace participates in this wealth … it needs help in economic governance to change its course
• We should seriously reconsider whether to provide further aid to middle income countries who continue on a growth trajectory as in a generation they will likely have very few poor (assuming they deal with income redistribution which is largely a domestic issue)

Andy Sumner key point:  We should start looking at allocating aid based on where the poor live, not just to low-income countries.

• Vitamins for children
• Adding zinc and iodine to salt
• Breeding micronutrients into crops

Other recommendations included more girls’ schools and trade liberalization.

Of the 40 nutrients every person needs, four are in chronically short supply:  iron, zinc, iodine and Vitamin A.

Vitamin A is essential for the mucous membranes that protect the body’s organs, such as the eyes.  Lack of it causes half a million children to go blind every year; hal fo them die within a year as their other organs fail … Zinc deficiencies impairs brain and motor functions and causes roughly 400,000 deaths a year. Shortage of iron (anaemia) weakens the immune system and affects, in some poor countries, half of all women of child-bearing age.

Children with nutrient deficiencies do more poorly at school and have reduced earning potential.  Statistics also show that the malnourished also tend to marry each other continuing the cycle of under achievement and development.

The most common response is to attempt to hand out vitamin pills or fortify foods like salt with iodine. But the nutritional deficiencies persist, so there is a new exploration of whether getting the nutrients directly into the local food supply might be a better approach.

As the article points out, this approach is no panacea as it is difficult to influence the poor to buy (as most buy vs. grow their own food) the right kinds of foods especially if they cost more.  Some countries who have focused on increased agriculture value-added have decreased malnutrition (Malawi, Bangladesh and Vietnam) while others have the opposite result (Egypt, Guatemala and India).

What seems to matter is encouraging the right crops.  Common policies encouraging cheap grain have not helped.  These cereals provide calories, but are low on nutrients.  Policies which encourage consumption of vegetables, pulses and meats have much more nutrient benefits.

One key fact to keep in mind: Early intervention is critical as the first 1,000 days of malnutrition have the most damage.