NextBillion.net - Blog: Microfinance

BRAC’s TUP Program: When Base of the Pyramid Approaches Might Not Work

Mon, 02 Nov 2009 13:59:54 +0000

Authored by: Rob Whiting

Photograph above: A northern Bangladeshi (Netrokona) tea stall owner who started his business with a $260 loan from ASA, another prominent Bangladesh MFI.

BRAC, a Bangladesh-based NGO, is just giving stuff away to the poor. One of the world's largest and most innovative poverty alleviation organizations has decided that aid, and not profit, is the way forward to help the very poorest.

As an intern this past summer at BRAC, I was told this in our orientation right before the program coordinator happily proclaimed BRAC to be a social business (think sustainable). The coordinator said that 80% of BRAC's funds are self-generated and that its goal is to become fully sustainable.

BRAC is no foreigner to market-based approaches to poverty. It was one of the pioneers in microfinance (banking for the bottom of the economic pyramid); it has established BRAC Dairy to sell milk to the poor; and its successful chain of handicraft stores sells the cultural products of villagers to wealthy urbanites. It seemed odd that with all its experience in business applications, BRAC was turning to a handout. Not only that, but this program was funded entirely by donations. What led them to the conclusion that BoP methods just wouldn't cut it? And could this be sustainable?

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Utilities as Decentralized Energy Delivery Platforms

Mon, 19 Oct 2009 11:06:24 +0000

Authored by: Phil LaRocco

(Apologies for the silence, which some may prefer anyway: I have been in a medical fog these past weeks. I owe another installment on Francisco's and Manuel's entries on platforms -- one on micro-finance -- and some comments and questions from previous posts. Fortunately, NextBillion has been really rich as I slept, so I also need to catch up on fifty or so entries).

In a prior post I commented on the potential of traditional utilities to serve as a platform for expansion into a non-traditional area: decentralized energy. It was suggested (by Paul Rigterink) that it would be helpful to provide more cost information and he kindly suggested some resources. While such resources may be helpful for "back-of-envelope" calculations, it is more relevant and frankly more important that you reverse-engineer the product search a bit by looking at what is currently available within a region you may wish to serve or study.

Product Pricing presumes Product Access, which is not always the case. It makes little sense to determine that a particular solar lantern might be available for $25 in market X if your interest is in market Y half a continent away. If there is a logical way to move the product between points (Uganda to Tanzania for example), then costs in one market may serve as a useful placeholder for another until you get a firm price quote. Such regional prices will result in better business planning than catalog estimates. There is a second caveat: most imported goods (solar panels, for example) are very volume sensitive, so general or catalog unit prices may only serve as the roughest of approximations.

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Ayllu: Scaling Social Enterprise through Microfranchise

Tue, 13 Oct 2009 15:22:00 +0000

Authored by: Tayo Akinyemi

It's all about scale. Inevitably, any dialogue about operationalizing 'development through enterprise' strategies will confront this issue. Why? Because a fundamental axiom of 'economics for the greater good' is that one should strive to maximize social benefit whenever possible---help more people more efficiently and effectively at a lower cost. Unfortunately, that nut has yet to be cracked in a meaningful way. Fortunately for us, there are a few intrepid souls who are confronting this challenge.

Enter Melissa Richer, founder of a new social enterprise called Ayllu (pronounced eye-yoo). Melissa's journey began with two simple questions. First, what would happen if several social enterprises were located in the same community? Secondly, how can they be brought to scale? As you'll soon discover, Ayllu is tackling this problem head on. With no further ado, Ayllu!

Tayo Akinyemi, NextBillion.net: What inspired you to launch Ayllu and how did it get started?

Melissa Richer, Ayllu: It came from traveling in high school and college. Through my travels to places like Ecuador and Costa Rica I noticed that my peers were unable to find jobs and that they had a strong passion for solving problems in their communities. This made me think: what if they could get jobs that solved some of these problems? At the time I didn't know what social enterprise was, but I thought that two issues could be resolved at once---unemployment and making a difference.

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Anecdotes and Analysis: The Microfinance “Bubble”

Mon, 21 Sep 2009 11:20:00 +0000

Authored by: Saurabh Lall

An article in the Economist, 'Froth at the bottom of the pyramid' brought to my attention an interesting ongoing debate about the possibility of an emerging 'bubble' in microfinance. While news of a bubble is in itself extremely interesting, the argument also highlights a fundamental weakness we currenty face in analyzing the BoP space. The lack of large scale quantitative data and analysis to back our arguments.

The debate is as follows: Based on the findings of a research study in the silk making town of Ramanagaram, in the south of India, a reporter from the Wall Street Journal wrote about a groundswell of discontent among microfinance borrowers in the town and warned of an emerging 'bubble', as lenders chased potential borrowers who would not have the ability to repay their loans. Based on interviews with residents of the town, academics and investment funds, she finds evidence of a 'credit crisis' brewing, as over-indebted borrowers find it difficult to pay back their loans. She talks about poor neighborhoods in India being 'carpet-bombed' with loans, which are mostly being used to pay for weddings, purchase goods and pay off other lenders, rather than for any income enhancing purposes.

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Social Capital Markets 09: Beyond MFI

Thu, 10 Sep 2009 10:00:00 +0000

Authored by: Miriam Stone

For the SoCap community, the success of microfinance is a well known story: over the course of nearly 40 years, what started as a bright idea by a Bangladeshi economist has become a global industry that improves millions of lives per year and provides a range of profitable investment opportunities for socially minded investors.

The question on the collective SoCap mind is "What's next?" Might there be other opportunities at the Base of the Pyramid for providing non-financial goods and services that could also offer returns for investors? Can the vast platform built by microfinance be leveraged to provide these services to marginalized communities? If so, which services should be prioritized, and how long will it take for them to reach scale?

With the afternoon sun brightening the room and a light ocean breeze passing through the open windows, the participants in last Wednesday afternoon's "Beyond MFI" panel turned their attention to these burning questions. April Rinne of Water.org moderated the lively discussion between Steve Hardgrave of Gray Matters Capital, Gil Crawford of Microvest, Gary White of Water.org, and Patricia Safo of JCS.

Steve kicked off the panel by explaining how Gray Ghost began to invest in independent private schools scattered throughout the slums of Mexico. Many poor families already pay fees to send their children to these schools, which they consider better than government-run schools. With additional investment, school proprietors can invest in improving classrooms, supplies, and teaching staff, thus attracting more students and improving the quality of education for the poor.

Patricia advocated for MFIs themselves to play an increased role in development; in Ghana, she believes that MFIs can identify promising sectors of the economy, pressure the government to regulate those sectors, provide loans for SMEs to operate within them, and target companies that can produce goods locally to create vertical supply chains within the country.

Water is another area in which the microfinance model can be leveraged; by providing loans to build toilets and connect to water utilities, MFIs can improve the health and productivity of communities while making a healthy return. Despite this compelling opportunity, Gary said that most MFIs have been slow to embrace this new line of business for fear that it might fail. However, with $1M in grant capital as the catalyst, Water.org was able to raise an additional $4M from the capital markets for MFI partners to make loans for access to water.

Rather than focus on one issue, Microvest has bifurcated their portfolio, continuing with classic MFI investing on one side and investing in other new BoP initiatives on the other. Along with Stu Hart, Gil conducted research on potential investments, but found that many promising BoP initiatives were still 7-15 years behind microfinance in terms of scale and returns.

In my opinion, new BoP initiatives will require significant investment if they are ever to catch up to microfinance. We cannot forget that the microfinance sector was built on the back of millions of dollars in donated capital.

I agree with Gary that philanthropic capital is necessary to allow for the incubation of new initiatives beyond microfinance, and that this capital must have the flexibility to allow for the trial and error that is inherent in launching new businesses in difficult markets (which Gary argues that much donated capital still does not allow for). These donations can catalyze what may later become investment opportunities at the Base of the Pyramid, but will donors be willing to invest philanthropic dollars that will provide impact investors a return later down the line? With all the rush towards impact investing, are there still donors out there willing to provide seed capital that expects no return?

If the social capital markets are serious about "social" returns, the market will need to provide significant philanthropic capital to provide new ventures the runway capital (hence the takeoff photo at the head of this post) they need to get to scale. While there may be certain sectors and projects that can be funded through investment capital from the start, and the lessons learned from microfinance may indeed speed up the trajectory to scale for BoP ventures, there are many ventures with potential for major social impact and profit, such as VisionSpring, that will never get off the ground without significant donated capital to play the critical R&D role.

The Base of the Pyramid has been largely ignored by the private sector because it not conducive to large scale and profitability within a reasonable time frame for most investors. If, as a sector, we can view nonprofit BoP ventures as seeding markets for the private sector - and provide sufficient donated capital to allow them to grow to scale - the social capital markets have the potential to revolutionize the quality of life for billions of people.

Who's Going to SOCAP 09? Gil Crawford from Microvest Capital Management

Tue, 11 Aug 2009 14:35:00 +0000

Authored by: Francisco Noguera

Like Alvaro Rodriguez, Gil Crawford will be at the Social Capital Markets Conference this coming September. Mr. Crawford is the Chief Executive Officer of MicroVest Capital Management and is responsible for leading the company's investment, business development, operations and strategy. He led the launch of MicroVest I, LP, the first commercial private equity vehicle focused on microfinance in North America. He has over 20 years experience with microfinance institutions and capital markets, and has worked extensively in Latin America and Africa, as well as in Asia.

Previously, Mr. Crawford worked for the Latin American Financial Markets Division at the International Finance Corporation (IFC), created and ran Seed Capital Development Fund, and was the Assistant Project Director for Africa Venture Capital Project. Mr. Crawford received his bank training at Chase Manhattan Bank in the mid-80's after working in Africa for the Red Cross and State Department. He graduated from SAIS at Johns Hopkins University in 1983 and Bates College in 1980. Mr. Crawford is currently on the Board of Directors for DC Central Kitchens.

Gil kindly agreed to answer NextBillion.net's questions about his participation in the upcoming SOCAP Conference in San Francisco, for which NextBillion readers have a special 30% discount in registration.

NextBillion.net: Where do you think the social capital space is now, in 2009? Where do you see it going in the next 12-18 months?

Gil Crawford: The framework that describes the 4 phases of industry evolution (by Jessica Freireich and Elizabeth Fulton at the Monitor Institute) is very helpful to understand where the different social investing sectors are today and where they are headed. These 4 stages are (i.) uncoordinated innovation, (ii.) marketplace building, (iii.) capturing the value of the marketplace, and (iv.) maturity. (Editor's note: The framework is described in Monitor Institute's report "Investing for Social and Environmental Impact")

On one hand, microfinance has entered the third stage. Many microfinance institutions (MFIs) have developed effective and efficient models while maintaining healthy growth. This has helped them to become profitable and begin to attract commercial funding. I expect the sector to continue attracting commercial funding over the next year or so.

On the other hand, many other social sectors, such as education, affordable housing, energy provision, etc., are in the first and second phases of uncoordinated innovation and marketplace building. Individual businesses and organizations are still in the learning process to find effective and efficient models in order to attract the commercial funding that microfinance has achieved. Over the next 12-18 months, I expect to see the market building process continue in these sectors. Development finance institutions and other mission driven organizations have a great opportunity to play the role of accelerating this process by funding these sectors, just as they did in microfinance 10-15 years ago.

NextBillion.net: What is different about SOCAP versus other conferences?

Gil Crawford: SOCAP has a very strong online presence that is carried through all year long.

NextBillion.net: What useful lessons / connections came out of SOCAP08 for you?

Gil Crawford: Katherine Fulton's keynote address highlighting the 4 phases of industry evolution was very inspiring and useful.

NextBillion.net: What are you hoping to get out of the conference this year?

Gil Crawford: I'm hoping to increase awareness of the challenges facing the Bottom of the Pyramid (BoP) and ways to overcome these challenges using the lessons we learned through building the microfinance sector.

5. Which plenary, panel or speaker are you most looking forward to?

Sonal Shah's keynote address and the panel I'm speaking on, "Beyond MFI".

CGAP’s Microfinance Photography Contest Now Open

Fri, 31 Jul 2009 18:00:00 +0000

Authored by: Manuel Bueno

Some months ago, I commented in one of my posts on the winning photos of CGAP’s Microfinance Photography Contest 2008. In my opinion, this contest was useful because it served as a reminder of who the final microfinance customers are: a woman drying corn, a camel owner, a farmer tending her strawberries or a young girl preparing radishes to take to market.

CGAP is now accepting entries to their 2009 contest. For those with an artistic flair their deadline is on August 14th. Good luck!

Microfinance: An Open-Book Blog

Tue, 30 Jun 2009 15:45:00 +0000

Authored by: Tayo Akinyemi

Occasionally one encounters a novel application of a familiar technology. In this case, it's blogging. David Roodman, fellow at the Center for Global Development and architect of the Commitment to Development Index, is writing an open-book blog about microfinance. He drafts a chapter, then posts it for comment and critique. Mr. Roodman shared the introduction to his book on February 17th and has since authored nine additional sections. Although the work looks substantially complete, there is still a tremendous opportunity to contribute to its evolution. (Talk about opportunities for co-creation!)

What I appreciate most about Mr. Roodman's approach (apart from his willingness to share the manuscript-in-progress), is his clear and thoughtful use of a framework to couch the discussion. The purpose of the book is to explore the impact of microfinance from three primary perspectives : development as freedom, development as institution-building, and development as measurable impact.

Development as freedom, a concept introduced by Amartya Sen, refers to the ability to exercise one's sense of agency and maintain control over one's life. With respect to microfinance, the question is whether (and under what circumstances), microfinance increases or limits the freedom of those who use it. Creative destruction, described by Joseph Schumpeter as the dissolution of the status quo caused by disruptive innovation, is the underpinning of development as institution building. From this perspective, the relevant query is whether the evolution of financing for MFIs has improved the state of the field. Finally, development as measurable impact explores the debate over whether social impact can be meaningfully measured. In other words, how do we know if microfinance is really helping the poor?

Editor's note: A blog post written by Manuel Bueno, published yesterday on NextBillion.net, addresses this exact question.

Given the extreme contrast between microfinance success stories and those of disaster and indebtedness, a balanced interpretation of these accounts and a rigorous exploration of the truth is quite welcome. Check out David Roodman's Microfinance Blog here.

Happy Reading!

Yes, Microfinance has Positive Effects on the Poor

Mon, 29 Jun 2009 11:15:00 +0000

Authored by: Manuel Bueno

Microfinance in its simplest form involves extending loans to a group of borrowers (usually called self help groups) who agree to help each other by means of group savings and informal support. The typical self help group consists of 10 to 20 people who meet regularly to discuss social issues and activities and deposit their savings in a joint bank account. Once enough savings have been accumulated, group members can apply to internal loans within the group or apply for loans through a commercial bank.

Even though microfinance is estimated to have directly reached 100 million customers in 2008 (for more details see my previous post) there is still plenty of debate about whether it has a significant impact on the lives of the poor or not. There are many good reasons why it may benefit or harm the people it tries to help. In theory, microfinance self help groups are better at allocating resources because it takes advantage of more comprehensive local information regarding local needs and lower monitoring costs, thus mitigating challenges like moral hazard and adverse selection. Therefore transferring resources to self help groups should result in local empowerment and efficiency. On the other hand, those resources devoted to the self help group may be appropriated by local elites. Additionally, if these resources are channeled through institutions parallel to local governments they may undermine rather than strengthen local capacity.

Continue reading this story...

Financial Inclusion in India: Interview with Anurag Gupta from A Little World

Wed, 24 Jun 2009 20:00:00 +0000

Authored by: Pankaj Agarwal

Financial inclusion has long been a challenge in India, where bank transactions are mainly urban based and people living in rural areas rarely even have a bank account. Financial inclusion is the delivery of banking services at affordable costs to vast sections of disadvantaged and low-income groups. The Reserve Bank of India’s initiative to reach rural India by extending banking services through Non-Governmental Organizations (NGOs), Micro Finance Institutions (MFIs) and other Civil Society Organizations (CSOs) has been a welcome step forward.

A Little World, a Mumbai based organization is one such organization working to connect rural India with mainstream financial institutions. In less than ten years, A Little World has expanded into more than 20 states in the country and developed partnerships to run the banking operations of over 25 banks. Recently, the company was awarded the The Sankalp 2009 High Impact Award for Highly Scalable Social Models at the Sankalp Social Enterprise and Investment Forum.

During my internship here in the company, I recently had a chance to speak to Anurag Gupta, Innovator, Founder and Chief Technology Officer of the company and also the Director of the company's Zero Mass Foundation.

NextBillion.net:Tell us a little bit about yourself - where do you come from, your educational/professional background.

Anurag Gupta: I come from the state of Uttar Pradesh in India and studied architecture from the School of Planning and Architecture, Delhi.

NextBillion.net: Can you provide us with some background on A Little World?

Anurag Gupta: A Little World is operating micro-banks in rural and remote areas of India, which have traditionally struggled with financial inclusion. We are spread in over 20 states working with local governments and 25 Banks, including State Bank of India, the largest in this regard, to carry out transactions and other financial activities in those areas. As a business correspondent for these banks, we enroll new customers and follow up on transactions by utilizing Bank-in-a-Box methodology. The enrollments and transactions are authenticated by using a finger print scanner, which also serves as a printer for the receipt of transaction details. The operators, 98% of which are women, also have a smart-card-enabled mobile phone with them to type in the details of the transaction. GPRS technology is used to communicate between the mobile phone and the finger print scanner. At present, we have 8,200 outlets in the country with 24,000 trained women operators running them.

NextBillion.net: What ideas led to it's inception? What was your inspiration to start this venture?

Anurag Gupta: There was a clear need for a domestic payment system that was affordable despite the amount involved in the transaction. Credit cards, for example, have this inherent challenge because it is infeasible for all the parties involved to approve transactions at very low amounts. In 2003 we started mCheck which is a mobile payment platform that could make and receive payments securely and instantly over any distance. After the adoption of this technology by the State Bank of India, Airtel, and others, we sold off this business model in 2006. On the 7th of November 2007, we created the first outlet for Zero Mass Foundation in Mizoram to work as an implementer of the Social Service Payment System.

NextBillion.net: What’s the biggest challenge you face as a Director?

Anurag Gupta: It has always been difficult to raise investments to scale a business model like ours. Dr, Sayed AR Zaidi,former head of the Philosophy department at University of Delhi and one of our investors, has been the soul of the company although he exited the company after we sold mCheck. Without his support all this time, the company would not have been in existence.

NextBillion.net: What’s the one thing you never would have imagined when you started the company, but is obvious to you today?

Anurag Gupta: When we started in 2000, the proliferation of the mobile phone as a tool we could utilize was definitely not at the levels that it is today. We never thought our company would be based around the cell phone to this extent and that now we would be creating a whole eco-system around it. At the inception, we were visioning a model based on stand-alone terminals rather than using mobile phones. Now, the thought only of the terminals seems so obsolete.

NextBillion.net: What was the most important thing you read in college relating to your work today?

Anurag Gupta: As an architectural graduate, I realized that we need to think openly in three dimensions. It is more flexible and gives you a much better understanding of a challenge. Also, the company and its operations are an architectural model in itself and so the principles are applied in an organization context as well.

NextBillion.net: What does Base of the Pyramid mean to you?

Anurag Gupta: For me, Base of Pyramid means the kind of people we are serving - the underprivileged and poorest in the income pyramid. A 95 year old widow with a mere pension of INR 200 month, a physically handicapped staying below the poverty line and millions others. Our business model is based on improving the quality of their lives and making it as sustainable as possible in the process.

NextBillion.net: Where do you see the company to be in next 18-24 months?

Anurag Gupta: We vision to make this company the largest microbanking organization in the world. We hope to reach a level of 100,000 outlets serving a base of over 50 million customers in the process.