microfinance

Arvind Gopal is a Columbia Business School student working with the East Africa Agriculture Portfolio Team this summer. At Columbia, he has focused on international development. He is currently VP of Investments for Microlumbia, a student-run fund focused on making debt investments in microfinance organizations. Additionally, he provided consulting advice to Broad Cove Partners, a Boston-based social venture fund, on a potential investment opportunity in a Liberian mortgage finance business. Prior to business school, Arvind held various positions in the U.S. and Singapore. He worked in New York in investment banking at Bear Stearns, before moving to Lightyear Capital, a private equity firm focused on the financial services sector. In Singapore he worked at Argus Software, a real estate software provider, guiding their business development in Asia.

I have spent the past few weeks researching the agriculture market in Kenya with the objective of identifying sustainable business models that could help the country’s ~6 million smallholder farmers and their families (~30m people), most of whom live in extreme or near extreme poverty. One of the largest bottlenecks in the agriculture supply chain is access to credit. A survey conducted in 2007 by the Tegemeo Research Institute of Agriculture Policy and Development revealed that only 30% of the country’s smallholder farmers have access to any kind of credit. After several visits to farmers across the country, I began to understand this reality. Formal financial institutions are between 30 km and 50 km away from the farms and in many cases, will not lend to the farmers I interviewed. As a result, the majority of these farmers receive credit through either input providers (fertilizer and seed companies) or informal groups. The credit available through these channels is usually small and short term and limits farmers’ investments in the essential ingredients needed to increase their productivity. Based on this information, I decided to take a deeper look on why microfinance institutions have had such a limited impact in the agriculture sector. I found some interesting data points, both from a global and East Africa perspective.

Microfinance has received a lot of attention over the past few years and rightfully so. Since Muhammad Yunus started the Grameen Bank in 1976, microfinance has helped millions of people access credit across the developing world. In 2006 alone, over 100 million micro-borrowers accessed about US$25 billion in loans (Deutsche Bank Microfinance Report, December 2007). The industry has even shown surprising resilience to the global financial crisis, which has brought down some the world’s largest financial institutions.

While the success of microfinance is undisputable, a huge funding gap remains and the market is still substantially underserved (market demand is estimated at over 1 billion borrowers world wide). A part of this gap will be filled with the growth of the current microfinance model, but we will also need new innovative approaches in order to provide access to rest of the BoP. The dominant microfinance models of today depend on small, short-term and high interest rate loans to assure strong repayments and cover operating costs. Some key success factors for this model include higher population densities and portfolio diversification. In contrast, much of today’s poor lives in rural areas and relies mostly on agriculture to generate income. These borrowers typically need larger loans with longer durations that coincide with crop cycles. Additionally, the returns generated by farmers are lower than that of micro-enterprises, and high interest rates of 2% to 4% per month erode farmers’ incomes, causing them to become trapped in poverty. These loans are inherently riskier to microfinance institutions because they are longer in duration, sensitive to weather conditions and international food prices, and limit loan diversification. Considerable agriculture expertise is needed to due-diligence loan applicants, monitor existing loans and train farmers on best practices including negotiating input prices and finding markets for their products.

In Kenya, the microfinance model has been very successful in urban areas – enough so that commercial banks are now reentering the high-end of the microfinance market as they recognize the income-generating potential and stability of this group. However, only 0.8% of smallholder farmers have access to credit through microfinance institutions — surprisingly, more farmers access credit through commercial banks (about 1%) than microfinance institutions. Equity Bank, a Kenyan commercial bank focused on the lower-income population, has made some inroads in rural areas through innovative approaches like mobile banking that have reduced the costs of conducting business in sparsely populated areas and allowed it to disburse longer-term loans at 1% monthly interest rates. However, most of their loans target rural enterprises and not farmers. Almost all the farmers, research analysts and MFI consultants I spoke with agreed that a better system has to be developed in order to reach the majority of small farmers.

Microfinance organizations, commercial banks, government organizations and NGOs in Kenya have all spent considerable time trying to develop a model that effectively targets the agriculture sector. As a result, a few innovative approaches that have focused on asset leasing and microfinance linkages with other parts of the agriculture value chain such as input providers and distributors of agriculture products have emerged in recent years. While these strategies are still in their early stages, the models are likely to address the limitations of today’s microfinance institutions and could provide future investment opportunities for Acumen Fund and others in this space.

Moderated by Caitlin Weaver, Chair of the Microfinance Club of New York

Panelists Include:
Camilla Nestor, Vice President of Microfinance, Grameen Foundation
Bill Abrams, President, Trickle Up
Beth Ellen Dunphe, Director of Development, Project Enterprise

While Mohammad Yunus was awarded the Nobel Peace Prize for his pioneering microfinance work in Bangladesh just three years ago, the popularity of providing the poor with collateral-free loans and other financial services to support their businesses is at an all-time high.  New microfinance models seek to make lending even more direct. Yet as the practice of microfinance has begun to mature and expand, so too have concerns over how to implement it most effectively. What are the implications when a nonprofit organization offers microfinance to an impoverished community but does not provide basic health or social services? Can a single microfinance model work on different continents? How might nonprofits, lenders and governments ensure that micro-loans lead to lasting change not just for the borrowers, but for their entire families and communities?

These are among the questions to be addressed at this panel discussion hosted by Mercy Corps’ Action Center to End World Hunger in Battery Park City.

Wednesday, August 5, 7:00PM
Mercy Corps’ Action Center to End World Hunger
6 River Terrace
Battery Park City, New York
(212) 537-0511
Contact: Embry Owen, eowen@nyc.mercycorps.org

With Pakistan often among the top headlines on The New York Times front page (and usually not in a flattering way) – we are heartened to see the most recent issue [Dec – Jan 2009] of Blue Chip Magazine, a leading business magazine in Pakistan, carry a cover story on our very own Jacqueline Novogratz and the investments Acumen Fund has made in Pakistan.

Our most recent intra-office debates revolve around the question of how to support and encourage social entrepreneurship - let alone find the solid business ideas that are providing services at the BoP - so we at Acumen Fund are excited to see positive news of on-the-ground initiatives and social businesses that often operate in the most challenging environments and landscapes. The story really is around social entrepreneurs like Roshaneh Zafar, Tasneem Siddiqui, and Dr. Sono Khangharani who “have seen possibilities where other people see hopelessness.”

Also featured in the same issue of Blue Chip is Roshaneh Zafar , President of Kashf Foundation, who recently launched Kashf Microfinance Bank Limited (KMBL) in October 2008. KMBL is an investment of Kashf Holdings Private Limited, the parent holding company in which Acumen Fund has also invested.

In the five months since operations were launched, Kashf Microfinance Bank has set up 18 branches and is serving 20,000 microfinance clients. But with the microfinance industry facing a challenging period in Pakistan due to the macroeconomic environment and political instability, the innovation of the original group lending methodology is now facing a setback. There is a need to innovate in microfinance services beyond the group lending methodology commonly used by microfinance institutions in Pakistan.

With the launch of the new Kashf Microfinance Bank, Kashf has begun individual lending and savings mobilization and now provides savings products to women from low-income communities. Roshaneh discusses the pioneering work Kashf has been doing at the BoP and Acumen is proud to support Kashf and the microfinance sector in Pakistan.

Editor’s note: New contributor Priya Pingali joined Acumen Fund in October 2008 as a Portfolio Intern. She earned her B.A. from Brown University, where she studied Economics and International Relations. Prior to joining Acumen Fund, Priya spent time working with child victims of sexual exploitation in Bogota, Colombia.

By Priya Pingali

Last Tuesday night, Rob Katz and I had the privilege of attending a talk by Nobel Peace Prize winner, Muhammad Yunus, hosted by NYU’s Stern School of Business and its Berkeley Center for Entrepreneurial Studies. Not surprisingly, the hall was packed with students, faculty and professionals, but very luckily, we were offered a couple of reserved seats right up front! One of the original pioneers of social entrepreneurship, Yunus and the Grameen Bank are shining examples of how businesses designed to serve the poor can have a profound impact on the lives of millions.

The stories of Grameen Bank (and the other businesses founded by Yunus) are clearly well known, but I would be surprised if anyone had walked away that night without a revitalizing sense of optimism, if not pure awe and admiration. Yunus’ journey began in one village in Bangladesh, with no plan except for the idea of lending $27 to a group of 42 people. Today, the Bank has about 7.5 million borrowers, 97% of whom are women. It manages over $1 billion in small loans, lending $100 million per month, and is currently making it possible for 34,000 students to enter higher education with loans and scholarships. Among his other ventures is Grameen Phone, the nation’s largest phone company and employer of 300,000 telephone ladies, and a solar energy company that currently sells about 8,000 solar systems a month. Yunus has also dedicated his efforts to the eradication of night blindness in Bangladesh by selling fortified vegetable seeds.

In a soft spoken yet powerful manner, Yunus challenged the audience to remove our “profit-maximizing glasses” and to regard making money not as the means and the end, but as the means to a social end. Admittedly, he seemed almost to be preaching at times, but judging by the standing ovation and roaring applause received, he had inspired the room of future leaders and entrepreneurs to reject the traditional (and outdated) trade-off between creating successful businesses and serving the poor.

I was personally moved by his emphasis on how insignificant the differences between all humans are. Hearing this at a time when the entire world, it seems, is yearning to believe once again in the possibility of collaboration, I was reminded of the importance of working to eradicate poverty, not just for the sake of reducing inequality, but in service to the idea that everyone in our world deserves the same chances in life.

I met Roshaneh Zafar; Roshaneh met Khairoon Apa. By the power of deductive reasoning, I have therefore met Khairoon. Right?

Of course, that’s not how the world works - the truth is that I’ve never been to Pakistan, and I’ve never met the “Ted Turner of a small village near the Bay of Bengal” as Roshaneh describes Khairoon. I did have the pleasure of meeting Roshaneh, however, and she left a lasting impression. Her passion for microfinance is contagious; she believes deeply in the power of credit to bring dignity and choice to a formerly disempowered underclass - to people like Khairoon Apa.

So, how do I know Khairoon? After all, I’ve still not been to Pakistan…but I feel like I have after reading a recent article authored by Roshaneh, the founder and CEO of Kashf Foundation. In the article, entitled Female Empowerment and the Promise of Microfinance, we learn Khairoon’s story, about “a woman who started her life owning only one sari that she would wash from one side wrapping the wet end around herself since she did not have the resources to buy another.”

I urge all members of the Acumen Fund community to take a few minutes on this Saturday to read Roshaneh’s words. You may even meet someone new in the process.

I went the FINCA International networking lunch last Friday afternoon to learn about their village banking model and hear about the types of opportunities available to recent graduates.  With 20 years of experience in microfinance, FINCA targets the poorest of the working poor, and has served over 700,000 clients in 21 locations across the globe.  Like Grameen, FINCA uses a group lending model, taking advantage of the human capital that exists in villages in lieu of collaterol needed to secure capital.

FINCA has a great career track called the Senior Banking Leadership Program, which grooms mid-career professionals to become the chief operating officers of their regional offices.  FINCA also has a fellowship program, which apparently opens on Monday. Forty-five positions are listed on FINCA’s website.

The FINCA representative highlighted the need for strong financial and language skills and international experience.  We have “lots of Wall Street talent now,” she explained, alluding to the new pool of financial expertise that the current economic situation has provided.

Random tidbit: you don’t have to have international experience specifically in the financial access or microfinance industries to get a job at FINCA.  Our speaker landed her position because of her travels as a Dutch Olympic high-diver.

It’s 9 a.m., day two of Net Impact.  I grab my compostable coffee cup and head into the session on social intrapreneurship.  The panel focuses on corporate changemakers working inside businesses to deliver innovative market solutions for the world’s toughest social and environmental challenges.  Among the panelists is Acumen Fund Fellow alumna Jocelyn Wyatt who currently serves as the Head of Social Impact and Business Factors at IDEO, a global design consultancy.

Jocelyn came to know about IDEO during her Acumen Fellowship while visiting VisionSpring in India.  IDEO was interested in bringing in someone to build out the firm’s social impact work, so she wrote her own job description – knowing nothing about design and having never visited the firm itself – was made an offer, and then started the job.

One of her biggest surprises was that she had to figure out her job once she got there.  She was also surprised to discover a thriving group of social entrepreneurs who were already on board at IDEO.  Jocelyn realizes that the biggest asset in being able to make changes in a company is having a team of like-minded people who share the values of bringing services to the poor.  She started an e-mail list called “social impact at IDEO.” After that, she launched a social impact wiki page where people post resources and social impact projects.  The group then started meeting over Monday lunch hours for strategy meetings and social labs with entrepreneurs in the field.  “Everything is really transparent and open,” said Jocelyn.

During a two-week trip in June to various IDEO offices, Jocelyn put out a call out for people to start social impact initiatives at the local level.  Some have started this, some haven’t.  But, according to Jocelyn, IDEO’s social impact work has been able to withstand the current financial crisis because it is fully integrated into its normal business operations and because social impact services are priced at market rate.

Unlike Jocelyn, Henry Gonzalez of Morgan Stanley only gets to spend 25 percent of his time on social impact work, but his work as a patient advocate enabled him to found and integrate a Microfinance Institutions Group into the firm’s work.

“Your interests could evolve in the firm – whether you are the cheerleader, taking on your issue as an extracurricular project outside of the 9 to 5 p.m., or whether the firm eventually fully integrates a base of the pyramid strategy into everyday efforts,” said Henry.  “The more you can embed your initiative into the current business practice, the more the social impact work is unstoppable.”

The two intrapreneurs agreed on the importance of name affiliation in their ability to create a social impact movement.  If you’re a new social entrepreneur, but don’t have the name backing of Morgan Stanley, SustainAbility or IDEO, you’re not going to get asked to speak at conferences like Net Impact, they said.

I like to cook, and I was recently browsing through the 101cookbooks.com site, looking for something do make with some extra zucchini, when I came across this unexpected post: an invitation to join the 101cookbooks.com Kiva lending team.

Suffice to say, I was not expecting to find microfinance shout-outs on a cooking blog. But when I saw this post, I was really struck (again) by the power and reach of Kiva’s model. Kiva just makes it so easy for people to participate in the micro-lending “movement” – anyone can become a lender and forge personal connections to individual loan recipients in the developing world. Not only is it easy to participate, but now it’s apparently getting easier to enlist others, too. The virality is really impressive.

Acumen Fund’s model is obviously different from that of Kiva (small & medium enterprise finance vs. micro-lending to individuals), but we have similar ambitions around engaging large numbers of individuals in our work. How do we give any interested, eager individual a way to participate? How do we create personal connections between the customers of our portfolio companies in India, Pakistan, East Africa and people who live thousands of miles away? How do we build a “movement” around the development-through-enterprise sector in the way that the microfinance movement has sprung up in recent years? How do we translate that “movement” into changes in the way people approach philanthropy and development?

We don’t yet have answers to these questions, but Kiva has at least shown us that there are plenty of people out there who want to try to help solve poverty if you can just give them a way to get involved. Our challenge in creating a “movement” will be to supply easy ways for people to participate so that maybe one day someone else’s search for a simple recipe will change the way she looks at the world.

P.S. If you ever find yourself with an “extra zucchini” problem, I recommend this recipe.

Acumen Fund investee Kashf Foundation is the featured 5 Diamond profile of this month on the MIX Market, a global microfinance information platform on the web. The MIX Market rates Microfinance Institutions (MFIs) on their transparency in reporting, by scoring them on a scale of one to five “diamonds”, with 5 being the highest possible level of accuracy and clarity in financial and operational program reporting. The MIX is seen as a global leader in championing financial transparency, accountability and disclosure standards in microfinance.

Kashf Foundation is one of Pakistan’s fastest growing microfinance institutions, with a mission of financial inclusion and providing women in Pakistan with access to microfinance products and services. Acumen Fund has been investing in Kashf since 2002 and has seen the organization grow to over 300,000 clients, with plans to reach 1 million by 2010. We have been working with Kashf to expand beyond simple microfinance to second generation products like the Home Improvement Loan (HIL). Kashf is a professionally-run organization, with clear financial reporting systems and processes and we are delighted to see them highlighted on MIX Market for transparency. MIX has also rated Kashf as one of the top 25 MFIs in the world for 2007. Kashf President Roshaneh Zafar has also recently been nominated to the World Economic Forum’s Global Agenda Councils on Financial Empowerment and the Gender Gap.

Visit the Kashf Foundation page on the Acumen Fund website to read more about our investment, view stories and a presentation at our office by Kashf Foundation CEO Sadaffe Abid.

Am on my way to one of the clients centre meetings to discuss health insurance. The streets of Lahore are very busy and all the cars are hooting; everybody is in a hurry and some cars have occupied the footpath and there is no space even for pedestrians to walk as the shop corridors are also lined up with food stalls and donkey carts displaying their wares.

As we approach the branch; it’s nothing close to what I had in mind; the dusty wall displays the signboard and we make our way through a narrow lane to get to the office. The offices and staff are very simple and also simple dressing is encouraged due to the nature of the clients they work with.I am introduced to Imran, a loan officer who will take us to his centre meeting; not far from the office. Each of the loan officers will normally attend 3 meetings in a day which translates to reaching 75 clients every day per loan officer. A typical branch will have serviced 375 clients for the day.

We arrive at the client’s house; a one roomed house; most of the clients live in one or two roomed house with an average family size of seven due to the kinship system. The furniture has been moved to the side and the women are seated on the mat on the floor and we join them. A typical centre comprises 25 women who are further broken down into groups of five which are led by group leaders and the lager group by a centre manager.

The loan officer will start by recording attendance and if quorum is achieved will have a discussion on a general topic and then will manually record their payments and wind up.
The clients are excited as there is a foreigner who has come to visit them and after a long fight which started because we have turned down a glass of juice which did not go down well with them and we ask about how the loans have empowered them.

This particular centre is from the second largest muslim sect and women are not allowed to work. One woman even emphasized that their men have sworn that the families would rather die of hunger than have their women working and fending for the family. So all the women here have accessed the loans and given the money to their husbands for business. Most of them would want to run a business but they would be viewed as almost next to prostitutes if they will go out of their homes and interact with men.

Back in my room in the evening and am wondering how do you help such women with such drive and zeal to move forward but are held back by their culture? The women are happy that even though they still have cultural restrictions and are still fighting for women’s rights; they have a social identity; they belong to a certain group. They are happy that they can now afford to by nice clothes and attend weddings and other social gatherings. They can finally become normal members of society; and it finally dawns on me that the social exclusion aspect plays major role in the definition of poverty.