SVMN Panel: “Microfinance: Poverty, Profits & Promises”

Featuring: Ananya Roy, Chris Dunford, Premal Shah,

Ayesha Wagle & Eric Weaver

October 24th, 2011

Panel Recap written by SVMN Volunteer Monica Oyarzun

As microfinance continues to gain popularity, the news headlines on the topic have gone from a positive view to one that is much more questionable.  On October 24, five of the industry’s most prominent figures gathered at the Berkeley Blum Center for Developing Economies to discuss the validity of these headlines and the trends in microfinance today.  “Microfinance: Poverty, Profits and Promises” was co-hosted by the Blum Center and the Silicon Valley Microfinance Network, and moderated by Ananya Roy, Education Director for the Blum Center, Professor in the Department of City and Regional Planning, and co-Director of Global Metropolitan Studies.  The panelists included Ayesha Wagle, Senior Vice President of MicroCredit Enterprises, Eric Weaver, Founder and CEO of Opportunity Fund, Premal Shah, President of Kiva, and Chris Dunford, former President and Senior Research Fellow of Freedom from Hunger.  The room was filled with professionals and students alike, eager to hear what these industry leaders had to say.

After the panelists introduced themselves and their prospective organizations, Ananya requested each panelist to start by commenting on the news headlines that have surfaced recently, which call out microfinance as a predatory lending practice and refer to the “super-profits” that may overpower social mission.  Many of these headlines were in reference to the crisis in India, which Chris called “a perfect storm.”

Chris Dunford (Freedom From Hunger) referenced the strong commercial influence that microfinance has in India, speaking of influential investors that demanded a return.  Previous supporters of self-help groups began to switch over to microfinance as the industry grew and offered greater profits.  Investors accrued great wealth from the industry, further facilitating the belief that commercial funders didn’t care about the poor.  A group of indebted farmers in Andhra Pradesh committed suicide, and when SKS, India’s largest and most lucrative lender to the poor, underwent an IPO, reporting millions of dollars in profits, the story became a journalist’s dream.  “This is the disconnect,” stated Chris, “that such profit would stem from lending to the poor just doesn’t seem right”.

Chris concluded by saying that despite the turmoil over the last year, microfinance institutions in India are now doing well, to which Eric Weaver (Opportunity Fund) responded, “But how are the poor people doing?”  Eric highlighted the importance of measuring impacts, and spoke to the fact that when Opportunity Fund’s loan officers are out in the field meeting with clients, they convince 90% of their customer base into taking a smaller loan.  In some developing countries this is the opposite, with loan officers pushing larger loans without regard to the customer’s income or ability to pay.

Ayesha Wagle (MicroCredit Enterprises) and Premal Shah (Kiva) both took this opportunity to speak to the incentive structure by which a loan officer is compensated. If the sole evaluation criteria for a loan officer’s job performance is loan size, and MFIs are serving clients who are tempted to take on larger loans in an effort to support their families, one could understand how easily MFIs may (unknowingly) provide larger loans without regard to clients’ well-being.

When asked about the difference between microfinance and commercial banking, Ayesha, who previously worked at an investment bank on Wall Street, stated that microfinance is at an inflection point now.  “For a long time it had a halo around it – microfinance could do no ill.  And suddenly, it did.  Now the industry is leveling out and we’re looking at a more normal distribution curve.”  Ayesha stated that the most important aspect is to ensure that social mission remains the focal point in microfinance. She went on to explain that  “any organization that is motivated by growth will see their employees pushing volume.  This is characteristic of commercial banking, but one that shouldn’t necessarily be applied to a sector with a social mission.”

“For a long time it had a halo around it – microfinance could do no ill, then it did.  Now the industry is leveling and we’re looking at a more normal distribution curve of the impacts generated by microfinance.”  – Ayesha Wagle

Ananya then turned the conversation towards the  session, “Balancing Act: Mission, Profit, and Impact in Microfinance” which took place at Microfinance USA this past May. Premal stated that he believes the need for regulation is more dire than ever, as some microfinance institutions are able to charge monopoly rates due to the fact that there is little to no competition in the regions in which they operate.  Premal went on to site the SMART campaign (http://www.smartcampaign.org/), which focuses on achieving global standards for client protection through endorsement and implementation.

Ayesha added that the recent increase in savings accounts being offered by microfinance institutions introduces a new need for regulation.  In the past, the vast majority of microfinance products were credit related, but an increasing number of MFIs are offering savings products in addition to credit. Just as the FDIC offers protection to customers of commercial banks, regulation must exist to protect microfinance clients, requiring that the institutions maintain enough liquid assets so clients can gain access to their funds if so desired.

Ananya took advantage of this moment, and asked Eric to speak about Opportunity Fund’s Individual Development Account (IDA) savings program, California’s leading microsavings program. He indicated that while debt can be a useful tool for entrepreneurial individuals, it is not the ideal instrument for everyone.  Eric went on to explain that “Here in the US, most people aren’t entrepreneurs, and thus may not benefit from the credit approach.  Strong savings practices, on the other hand, can benefit anyone.”  Eric also made the astute observation that America’s government system does not incentivize low-income or underserved individuals to save money in the way those in higher tax brackets are encouraged to save. Income tax breaks and capital gains adjustments are not available to low-income individuals.  “Through tax breaks, we subsidize savings for middle and upper classes, but there are no such subsidies for the poor.”

Chris added that organizations and politicians often tell poor people how they have to use their money, creating accounts for them that can be used strictly for their children, or for housing, food, and other basic needs.  Nobody, however, tells the wealthy how to spend their money.

Ananya’s final question before opening the session up to the audience was whether or not the global financial crisis will alter the future of microfinance, with specific emphasis on the ‘Occupy Movement’ that has materialized recently.  Ayesha answered this on both the macro and micro level.  Even if we don’t realize a correlation, microfinance is in fact linked to commercial finance on the macro level.  She used the example of a fruit vendor at Angkor Wat in Cambodia, who relies on tourists to come visit and purchase her goods.  “If suddenly tourism to the area decreases, our fruit vendor is affected just as the tourist who could no longer vacation in the first place.  At the micro level, on the other hand, there will always be a need for microfinance so long as there is a population somewhere lacking access to financial services.”

Our first audience question was in respect to scale and organizational growth versus impact, and the panelists agreed that the best work combines advice and educational support with the financial services provided.  Premal used recent debtor revolts in Bolivia as an example, and informed us that those institutions providing credit coupled with education didn’t experience any revolts.  This goes to show that the impact is a result not just of the value of the loan, but also the client-lender relationship.

The role of gender in the industry came up, and Ayesha confirmed that the bulk of the MFIs they work with at MicroCredit Enterprises have portfolios predominantly comprised of women borrowers.  Research has shown that women are more likely to put profits they make back into their families and communities as opposed to some luxury item.  Eric stated that in the US, they haven’t found evidence that women pay any better than men, and thus doesn’t take gender into consideration when funding loans.  He said he would base any gender consideration on the impact he hopes to make:  to benefit children he would reach out women, to lower crime rates he would focus on men instead, and for job creation would not show preferential treatment to either.

Next, mobile banking was discussed; as a member in the audience asked what impact mobile banking will have on a predominantly “high-touch” industry.  Both Chris and Premal agreed that “multiplex problems require multi-faceted solutions,” and that such innovations should be implemented, not only to deliver financial services, but also to address a wide range of social missions. Underserved populations are not just in need of financial access, but also health care, insurance and many other basic services we take for granted in developed countries.  Premal also mentioned that an MFI in Kenya (that works strictly with mobile payments) conducts 60% of its business with borrowers after closing hours. This displays the need for 24/7 services so borrowers can bank online when they have time. Again, with any innovation, it is most important to understand client needs to best develop new products and services.

Finally, the panelists were asked to provide last words on what the future of microfinance entails, focusing this time on potential methods in which we can measure social impact.  Premal explained that MFIs could better incentivize their loan officers to offer credit only to appropriate clients.  Premal described a new innovation, a “poverty scorecard”, containing a list of simple ‘yes’ or ‘no’ questions, that is being used to help loan officers determine whether or not a particular client is living below the poverty level.  By creating an incentive plan based on getting loans to the right people, and maintaining a high repayment rate, they are hopeful to avoid the problem of loan officers pushing loans based on quantity as opposed to quality.  They hope to use this scorecard to track progress as well – using it on an ongoing basis can show differences in their clients’ level of poverty, and ultimately create a method to monitor and evaluate company performance.  The panelists agreed that the measurement and management of social performance is in a much more preliminary phase than that of financial performance.  It’s very difficult to manage what you can’t measure, but through the development of evaluation metrics and other social impact indices, we can ensure microfinance continues to fulfill its primary purpose.

Meeting Recap: “Financing Good: How Partnerships Between Microfinance & Social Enterprises

Benefit the Bottom of the Pyramid”

- Thursday, April 28th -

Written by SVMN Volunteer, Helen Liang

The last Silicon Valley Microfinance Network (SVMN) meeting took place on Thursday, April 28^th, 2011 and featured Jocelyn Wyatt, Co-Lead & Executive Director of IDEO, and Chuck Slaughter, Founder & President of Living Goods. The overarching topic discussed was how partnerships between microfinance and social enterprises benefit the bottom of the pyramid (BoP).

Where does social enterprise intersect microfinance?

In recent years, thriving social enterprises have joined forces with established microfinance organizations to leverage one another’s financial services and distribution channels in order to more effectively provide innovative products, tools and equipment to the rural poor.  During this panel, these industry leaders will address how the combination of microfinance financial tools and distribution channels with consumer products sales can provide financial sustainability for families in developing countries, and the pros and cons of this innovative business trend.

“If microfinance organizations want to expand, they should personalize and diversify their financial products according to the financial needs of the poor locally.” -Chuck Slaughter

Moderator Question: What are IDEO and Living Goods doing to service people at the bottom of the socio-economic pyramid (BoP)? What are the limitations and opportunities in reaching the poor?

Jocelyn Wyatt: IDEO is always working through partners who have the ability to implement projects and impact masses. The program helps organizations to better understand their consumer base and fine-tune offerings by designing innovative distribution models. One example would be to develop creative approaches made to bundle services for consumers rather than confining to one-off focused offerings. This approach would both benefit the company and more optimally serve consumers’ needs.

Chuck Slaughter: There are three distinct challenges in reaching the poor. First, many companies have innovated one idea or one product and have thus built distributions models for the one product, which lacks efficiency and increases the cost of the one individual product. Second, many companies tend to be technologically led rather than marketing and consumer led. Thus, a lot of products are costly (up to ten dollars), which target consumers cannot afford. Third, educating consumers about the new innovative products. Many products are new and need to be explained thoroughly to target consumers. Consumers need to know how and why products can exponentially benefit their lives. This may be an extra operational cost for a well-educated service.

Moderator Question: For Jocelyn— How do you determine which products are needed by those living at the BoP? Further, how do you determine effective branding and appropriate pricing? Can you talk about the process of innovation and implementation?

Jocelyn Wyatt: Generally, products and services are developed under one of the three lenses. The first lens is a technology approach where generally students from universities design devices without truly understanding the needs and current situations abroad. The second lens is where solutions are developed through a business-led intention to make profit; this could also have been a business plan drafted by business schools or drafted for business plan competitions. The third lens is a human-centered view, which reflects marketing and more consumer-oriented industries. This third lens starts with identifying what people want and need based on ground research driven by anthropology, ethnography, and sociology. Then the research is synthesized through many rounds upon which prototypes of different ideas are developed and refined until a small pilot launch program can be launched. The key to a successful program is constantly testing, learning, and revising a program in the beginning stages to then scale up a successful prototype.

Chuck Slaughter: A great way to determine whether a product is needed by those living at the BoP is to start with identifying your consumer’s current purchasing habits from basic medicines, basic foods, soap, and so on. This would help narrow in on distinct products that have a strong value to communities and highlight opportunities for products that are easy to sell, such as clean cook stoves. It is much easier to sell a product consumers already understand. On the other hand, water filters are harder to sell because consumers lack education, understanding, and are not used to the idea. Therefore, it may be best to tell a manufacturer to send a sample of their product; then to test the product in the local communities to see if it will and to identify any recurring problems.

Moderator Question: For Chuck— What have been the challenges and successes in targeting the demographic at the BoP? What’s worked? What hasn’t worked? Can you touch upon the BRAC case study?

Chuck Slaughter: Microfinance has built a tremendous platform for anyone who wants to sell products to BoP. In fact, microfinance organizations should be in the business of developing great financial products and distributing them. However many microfinance institutions are struggling financially themselves. Microfinance firms should improve current financial initiatives before delving into other initiatives such as livestock, education, and healthcare. Initially Chuck envisioned their partnership with BRAC would mean his operations can be cheaper, he would build a foundation faster, and reap other benefits from being involved with a large organization. Whereas in reality, BRAC operated on such a grand scale and were so efficient that they did not have much slack for Living Goods. The operation did not help Living Goods spend any less compared to any other start-up company. Chuck was also hoping to network and gain support of fellow lending group members but this wasn’t the case because BRAC was notorious for lending to the poorest individuals. In contrast, Chuck had found that as a start-up company, it was ultimately more optimal working with women who were more educated and had some savings rather than working with the poorest within a community. Now, three and a half years after Living Goods had first worked with BRAC, a more successful partnership seems plausible.

Moderator Question: For Jocelyn— Can you speak more about the partnership with Kenya Women Financial Trust (MFI)?

Jocelyn Wyatt: It was an interesting project. Women’s World Banking received a grant from The Bill & Melinda Gates Foundation to move consumers from just loan services to take advantage of savings and other financial services. Women were saving money but by purchasing durable goods, purchasing livestock, or hiding money under mattresses. Upon speaking to women, we’ve learned that they wanted to visually and physically see their savings. When their savings are in a bank, they don’t get to see it. Therefore, the overall goal for this initiative was to make savings accounts transparent in a way that was relevant to the clients. With this information, IDEO designed the livestock savings account, which highlighted the monetary equivalent in cows and livestock versus showing the numerical value. Moving forth, some consumers even chose to have their savings reflect in the value of school fees. Ultimately, this was an interesting way to design financial services product. Now the challenge is how to enhance communication and develop more mobile options for consumers. This was one prime example in showing how design can play an important role due to the specific visual mandatories.

Certain companies are currently failing because they are taking their effective markets in the US and transferring them abroad. Whereas, companies who undertake a design process and specifically design products for new markets are more successful. IDEO focuses on helping companies collaborate and understand worthwhile global initiatives are generally long-term ventures.

Chuck Slaughter: If microfinance organizations want to expand, they should personalize and diversify their financial products according to the financial needs of the poor locally. Franchising is a strong business model that boasts fast growth and large profits. Microfinance institutions can leverage this model to expand their reach and reach lower down the ladder to BoP target consumers.

Audience Question: For Chuck— Thanks for sharing your Living Goods business and supply chain model. What is next for Living Goods?

Chuck Slaughter: Chuck’s goal is to expand the basic model to include different skill levels of agents and reflect more of a direct-selling model that is lower cost per agent. Currently, we have 40 agents per distribution point and the goal is to have 100-200 agents in a multi-level tiered system. Secondly, we want to increase the availability and usage of mobile phones. Mobile phones will and have dramatically changed the lives of the poor. This initiative will be difficult as rural communities lack marketing, education, mobile payments, and data availability. We are currently still learning how we can expand the phone market within these communities. Mobile phones will allow consumers to call agents and increase efficiency. It will also open up the possibility of collecting mobile numbers of all clients to do out-bound education and product promotions. These are long-term goals for some regions versus others as mobile payment has not penetrated Uganda as it has in Kenya.

Audience Question: For Jocelyn— How is feedback gathered from consumers and when are they retrieved after a launch?

Jocelyn Wyatt: We generally retrieve feedback and stay connected to consumers through mobile phones and leverage warranty offers to attain contact information. Then, we would track consumers through feedback to improve ventures and modify models. Feedback can ultimately help drive businesses.

Audience Question: For Chuck— What are key characteristics that make a business model successful when a company replicates existing models in other countries?

Chuck Slaughter: A company should geographically target countries that are poor but not failing and countries that have higher than average population density with a minimum overall size of 10-12million people because a program needs scale for sustainability. Kenya is an exemplary example of these descriptors.

Audience Question: What initiatives have you undertaken to help the domestic poor families in the United States?

Jocelyn Wyatt: Although IDEO is more globally focused, we take part in domestic initiatives. For example, we took part in a Chicago-based project, specifically working with community centers and programs for public housing. After conducting local outreach efforts, IDEO found that families didn’t necessarily need enhanced community center activities. Rather, families primarily needed financial services and financial literacy to help build personal equities to transition out of public housing.

Chuck Slaughter: The majority of Avon’s business is overseas and domestically, the most successful agents have been immigrants who have close ties with communities and are able to break through language barriers. This would be an important angle for organizations to help poor families in the United States.

Audience Question: For Chuck— What due diligence do you have set in place to make sure all your agents are on task?

Chuck Slaughter: Local branch offices and managers are required to travel out with agents for field visits. In addition, agents have to document prescription forms and order forms. Mobile phones have the ability to impact this process dramatically and increase efficiency across the board.

Audience Question: Why are organizations not able to work as well in failed geographical locations such as Somalia?

Chuck Slaughter: Somalia has significant security problems and an unstable government. It is challenging because many places that need services don’t have a foundation to sustain these initiatives. Foreign aid and philanthropy initiatives are most suitable for failing geographical regions.

Jocelyn Wyatt: There is a need for new organizations to focus on geographical areas with existing great partners and safe environments for staff. This would allow the opportunity for trial and error, margin for error, and will ultimately help identify what it takes to have presence in more high-risk regions.

Speaker Self-Introductions

Jocelyn Wyatt is the Co-Lead and Executive Director of IDEO.org, which started four years ago to lead social innovation work and design. The primary challenge of IDEO’s initiatives thus far are their expensive fees but this is why the program has made a point to expand efforts with nonprofits to create more impact. IDEO applies design efforts to nonprofits and social enterprises and have nicknamed their design efforts in the socially conscience realm as “design change”. IDEO believes in applying their talents and creating more impact in three distinct approaches: designing projects, fostering talent, and spreading methodologies. IDEO works directly with nonprofits, social enterprises, and foundations to get new solutions to markets faster. IDEO consistently seeks and utilize new networks for collaboration in developing solutions. The projects have spanned from agriculture, water sanitation, health, financial inclusion, financial education, gender equality, and community building.

IDEO functions both domestically and internationally, however their predominant focus is on global work as it reaches a mass of individuals who are in dire need of their services. One prime example of IDEO’s design projects is their work with Kenya Living Finance Trusts (KLFT) in designing new savings products for rural women in Kenya. Kenyan women invested in their savings by purchasing durable goods, purchasing livestock, or hiding money under their mattresses. IDEO worked with women and loan officers to find out how the women were saving. IDEO then extracted and composited what was most suitable for the Kenyan women and provided tangible savings solutions in surrounding institutions.

IDEO pride themselves in human-centered efforts through connecting with people and designing new opportunities. The program fosters talent and spreads methodology by sponsoring four IDEO fellows and four global fellows annually. Each fellow devotes one year of their time to learn more about human-centered design and bring their knowledge back out to the world.

Chuck Slaughter is the Founding President of Living Goods. The primarily goal was to create a sustainable system for defeating the diseases of poverty. He combined best practices in microfinance, franchising, and public health. He was taken by how more than a billion people around the world lack access to simple resources such as clean water and further, how about 20 million youths pass away due to water sanitation problems. Living Goods provides simple innovations such as clean cooking stoves, but sometimes innovations are not enough. What the world needs is truly sustainable, globally scalable options. Chuck used to work with Avon and harnessed Avon’s system. Chuck utilized network of Avon-like network of mobile health entrepreneurs and global NGOs to sell bed nets and clean cook stoves amongst other products. Living Goods had three distinct goals. First, to reduce mortality, morbidity, and fertility rates by 15-30% focusing on children under 5. Second, to provide living incomes for thousands of health workers and save poor families money on healthcare. Third, to keep wage earners productive and in doing so, become financially sufficient.

Living Goods also lowered costs for consumers by lowering their operational costs through streamlining their supply chain: manufacturer/importer (e.g. P&G) > Living Goods (offers toolkits and products that are available 100% of the time) > rural seller. Living Goods functions in three steps versus the traditional five steps in the typical supply chain: manufacturer/importer > national distributor > regional distributor > local distributor > rural seller. Everyone in the traditional supply chain has a profit margin and distribution cost. Thus, products end up costing three times more than Living Goods products and the prolonged process also lacks the ability to verify the legitimacy of products. Living Good’s diverse product mix also helps drive sales and enables cross-subsidization. The company leverages existing investments and continuously looks for partners in every possible setting, ranging from distributors, NGOs, government, and beyond. One example is Living Good’s initial high degree of involvement alignment with BRAC, a program with extensive microfinance experience and over 30 years of experience in health. Chuck’s experience with BRAC was monumental and has shed light on how he collaborated with microfinance institutions there forth.