Warning: Creating default object from empty value in /afs/ir.stanford.edu/group/womenscourage/cgi-bin/blogs/wpmu-settings.php on line 45
microloans » Women's Courage

Posts Tagged ‘microloans’

The “Women-Only” Approach Versus the “Family Empowerment Approach”: Egypt as a Case-Study

March 7th, 2011

The access to basic financial services that Islamic Microfinance offers empowers Muslim women in giving them a new dimension in life and feeling of self-worth. However, while this ability of Microfinance to provide rural women with micro-loans in gender-segregated societies is laudable, working with Muslim women in particular raises the issue of interfering with social, cultural and religious codes. The Qur’an encourages men and women to play their respective roles in society, by ensuring the economic and social wellbeing of the family: “Men shall have a share of that which they have earned, and women a share of which they have earned” (Qur’an, VI, 32).

Hence, the “women-only” approach typical of conventional microfinance is not always followed by Islamic Microfinance Institutions (IMFIs) that try to adhere to Islamic principles and values while providing customers with loans. IMFIs overcome this problem by shifting their focus from “women empowerment” to “family empowerment”, which is also promoted by the Qur’an. While this kind of an approach might be met by criticism, it must be understood that it is a very culture-specific approach that mostly caters to male-dominated societies.

The “women-only” approach does weaken the institution of the family by sending both the male and the female out to work, giving them both the feeling of being the breadwinner for their family. But besides this, this approach is also prone to many risks posed by traditional male-dominated societies. In these societies, the funds provided to women for investment in their enterprises are often usurped by the male members of the family, while the women consequently end up carrying the burden of repayment and of their business independently.

In a Muslim country like Egypt, which was the first MENA country to sign the UN Convention on the Elimination of All Forms of Discrimination against Women (CEDAW), Microfinance has had a great impact on women’s empowerment in the country. In 2008, a national survey carried out by Planet Finance (NGO) evaluated the impact of microcredit as well as the perception of this impact: “During the focus group discussions, women unanimously stated that the loan had had a positive effect in terms of their image in their communities; they are also more self-confident and their children appreciate what they do. Their projects have allowed them to have a better life in general (“National Impact Survey” 86)”. Despite being a male-dominated Muslim society, Islamic Microfinance accentuates women empowerment.

47 percent of Egypt’s microentrepreneurs are women; 88 percent of these women operate home-based businesses and only 28 percent operate non home-based businesses. Despite these circumstances wherein women are allowed to realize their entrepreneurial skills and abilities out of their home, 45 percent of women have noticed a positive change in their life, in terms of education and economic possibilities, whereas 86 percent of women have experienced a positive impact in terms of personal autonomy (V. COSTA – H. MAKHLOUF – P. MAZAUD).

Sources:

Costa, Valentina. Makhlouf, Hala. Mazaud, Perrine. “Women’s Empowerment through Islamic Microfinance in Egypt”. MESCI 2009-2010.

The Role of the Rural Development Scheme (RDS) in the Development of Women Entrepreneurship Under Islamic Microfinance

March 7th, 2011

Looking at the RDS as a case study in the development of women entrepreneurship in Bangladesh by means of Islamic Microfinance, we can analyze the role of the burgeoning industry in poverty alleviation, and women empowerment in particular. The RDS is a provider of Microfinance services in Bangladesh, following the rules set by the Islamic Shari’ah. The RDS caters to the investment needs of the agriculture and rural sector; its target market segment include destitute women and distressed people. The RDS is an investment project that conforms to social responsibility fort he downtrodden in the rural areas as its prime priority. It uses depositors’ funds in interest-free ways in rural areas where downtrodden people are susceptible to interest-based groups.

90 per cent of the RDS’ customers are women; the project is currently being operated in about 2200 villages in 45 districts through 21 branches, with a recovery rate of approximately 99.7 per cent.

The cardinal principle of the Scheme is the ‘Group Approach’, Allah loves those ‘who conduct their affairs by mutual consultation’ (Al-Quran 42:38). For all decision-making activities, this mutual consultation is given high priority. The scheme works with each member of the group guaranteeing other members’ investments, and once the investment is approved, the investment (along with a percentage of the profit earned by the business) needs to be paid back by the client in 45 equal weekly installments.

This model has worked really well in terms of the scheme serving as a great source of empowerment for its women customers (who are also the majority of its borrowers). Since the establishment of the RDS, there has been a positive impact on women’s income, decision-making skills, and in reducing overall gender disparity in Bangladesh. Moreover, the group approach adopted by the RDS works really well with women because women in general find it easier to identify with organizations that essentially reflect feminine qualities such as relationships, interdependence and cooperation. An article written by Mahmood Ahmed on the RDS also points out that that scheme has seen a really high repayment rate because women are more likely to repay loans than men, owing to their “mother-hood” skills that they have developed while looking after their husbands, children, and families at home. This hypothesis particularly applies to the women and culture of Bangladesh.

RDS is therefore one out of the many Islamic Microfinance models that has proven successful in alleviating poverty and empowering women by means of granting them interest-free loans.

Legitimacy of Islamic Microfinance as a Viable and Feasible Alternative to Conventional Microfinance

March 7th, 2011

Why is there a need for Islamic Microfinance?

We know that the prime motive of every government and every country’s Finance Minister is to account for a sound and stable financial system in the economy, and try to alleviate poverty. However, factually speaking, there is no evidence of a system that has succeeded in the above-mentioned attempts. With the emergence, instant success, and exponential growth of the Microfinance industry, Microfinance has been claimed to be the mechanism that has the potential to eradicate global poverty. This claim obviously comes with its share of criticism and debate; how does Microfinance aim to defeat poverty, if it charges its high-risk, poor customers, excessive rates of interest that in some cases soar as high as 60%? The industry is getting carried away by its potential to generate profits; there is an increasing number of MFIs that have started operating under the business objectives of the commercial world, with profits and expansion being their main aim. MFIs have started to go public, when the only beneficiaries of this industry, as stated by Mohamed Yunus, should be the poor population it was initially created for. Of course, other social benefits such as justice and equality, and a proper distribution of income and wealth, remain just as unattainable and untouched with the industry moving farther away from its actual goals.

Looking at Different Countries as Case-Studies of a Global Need for Islamic Microfinance

In such a global situation, Islamic Microfinance could be the savior that the Microfinance industry needs to remind it of its original motivations. Like Muhammad Yunus pointed out, the Microfinance industry was created to protect the poor from loan sharks, not create more loan sharks. Looking at the global Microfinance industry, and the cost of borrowing money, the countries that are most shocking are Nigeria and Mexico (NYTimes). The demand in these countries for micro loans is very expansive. In this classic case of an excess demand being met by a high price, these countries charge their poor excessive rates of interest.

In Mexico, the average rate of interest for a micro loan is 70 percent, compared to a global average of about 37 percent (NYTimes). Uzbekistan also boasts a whopping 80 percent average in interest rates per annum, with Uganda, Kenya and Ghana following at approximately 55 percent, 55 percent and 50 percent (respectively) (CGAP).

In such a situation, where the global average itself is at 35 percent, would it help to have an industry serving the same purpose of providing the poor with basic financial access, WITHOUT charging interest? Islamic Microfinance is definitely an alternative to the problem of high rates of interest; although Islamic Microfinance does not mean that money is lent absolutely free cost (since the industry needs to make its profits in accordance with the Islamic Shar’iah), its compliance with Islamic rules and the Islamic goal of an Economic System with values such as justice and equality, the industry is obviously bounded by moral values that hinder it from getting carried away or trying to make profits at the expense of the poor.

Sources:

Rosenberg, Richard. Kneiding, Christoph. 2008. “Variations in Microcredit Interest Rates” Brief Note. Washington, D.C.: CGAP, June.

<http://www.responsability.com/domains/responsability_ch/data/free_docs/1_0807_CGAP_Variations_in_Microcredit_Interest_Rates_2.pdf>

MacFarquhar, Neil. “Banks Making Big Profits From Tiny Loans”. NYTimes. April 13 2010.

<http://www.nytimes.com/2010/04/14/world/14microfinance.html?_r=1

What Does It Mean For Women To Be “Empowered” And Does Empowerment Compromise The Viability of Microfinance Institutions Worldwide?

March 3rd, 2011

Microfinance has had a positive impact on the status of women globally. What does it mean for women to be “empowered”?

According to the State of the Microcredit Summit Campaign 2001 Report, 14.2 million of the world’s poorest women how have access to financial services through bank, Microfinance Institutions (MFIs), NGOs, and other such institutions. These women belong to the 74 percent of the approximately 20 million of the world’s poorest people that are now being catered to by MFIs. This means that most of these women have access to the ‘loan’ they need to start or invest in their own enterprise; also, most of these women have great repayment records despite the financial problems they run into on a regular basis. So then, is it a good idea to lend money to the poor, and more specifically to poor women? What does this money do for them in terms of their ‘empowerment’?

The word empowerment is difficult to define precisely; yet, it is easy to pin-point an example of empowerment when we see one:

Snapshots of Empowerment:

  • Nury, an illiterate Trust Bank client at AGAPE in Colombia, formerly too shy to speak to strangers, became the treasurer for her Trust Bank.
  • A group of widows in Bali received loans from WKP to start simple projects raising pigs. Over time, they grew in confidence and solidarity and expanded to form a pig-feed cooperative that became the major supplier for their village.
  • Hanufa, a member of CODEC in Bangladesh, defends her rights against an illegal divorce but ultimately decides that she is better off on her own. “I can walk on my own shoes now.”

A lot of different terms have been associated with empowerment: self-reliance, self-respect, self-enabling to reach potential, development of self-worth, and so forth. Empowerment is definitely the goal of many MFIs worldwide; these institutions help women that have previously experienced little or no power, make choices that impact their lives forever. By providing these women with basic financial services, and a loan to become an entrepreneur, they have a tremendous impact on this empowerment process.

Even though MFIs with a strong focus on empowerment have been criticized to have lose their operational viability and sustainability in the process, this has been proved wrong by many MFIs with the same women-empowerment focus. Working Women’s Forum (WWF) in India, for example, is fully financially sustainable and offers a range of nonfinancial services, including organizing women in the informal sector to achieve better wages and working conditions. WWF also empowers poor women through its institutional structure by training them to act as health promoters and credit officers in their neighborhoods. Therefore, MFIs with a strong focus on empowerment maintain very high levels of operational and financial sustainability, suggesting that a great deal can be done to enhance women’s empowerment even within the constraints of financial sustainability.

Despite its name, IFAD is no fad

February 24th, 2011

Before I begin this week’s post, I’d like to provide an update on my microfinance project—this past week, I got my first repayment on my microfinance investment through Kiva.org. Of my $25 invested, I so far have recouped $3.12 from the Let’s Unite Group, which aims to increase the production capacity of a rural bakery in Sierra Leone. I’m excited to re-invest it, but I think I’ll wait til I’ve recouped more of the investment before helping someone else. I wish Kiva would provide status updates—I think it’d be more rewarding and satisfying to know if the borrowers are faring better off now. As for MicroPlace, the for-profit alternative, it seems as though I will not see any return until September, so further updates are unlikely.

For this week’s topic, I want to address how microfinance could potentially help to support small farmers in Africa. This past week, former UN leader Kofi Annan claimed that with aid, Africa could feed the world’s farmers. With the help of the UN’s International Fund for Agricultural Development (IFAD), small African farmers have already been helped—“partnerships involving IFAD and AGRA have leveraged US$160 million in affordable loans to agriculture from commercial banks in Ghana, Kenya, Mozambique, Uganda and the United Republic of Tanzania.” (http://www.reliefweb.int/rw/rwb.nsf/db900sid/KHII-8EA5VF?OpenDocument)

More relevant for the subject of this blog, of IFAD’s microfinance portfolio (as agriculture is investment-intensive, holding an exclusively microfinance portfolio would in many places be an ineffective strategy) 80% has been loaned to women. In African nations, these small, low-interest loans seem particularly poised for success, as small agriculture has long been the pattern in many nations, and women have long played a crucial role in raising plants. Through IFAD’s loans, it is conceivable that more countries could start to shake some of their dependence on foreign crops, that they could help to curb issues of hunger, all while simultaneously giving rural citizens the ability to empower themselves. And by charging a small interest rate, the impact of IFAD stands to grow with time. And although countries continue to have issues with loan defaults (take a look at http://allafrica.com/stories/201102240919.html for a discussion of Rwanda’s incredibly low rate of repayment), I still remain optimistic that ethically minded organizations like IFAD can effect some valuable change.

Interview with Matt Bannick, Managing Partner at the Omidyar Network (Part Two)

February 10th, 2011

Last week, I posted the first half of my conversation with Matt Bannick, Managing Partner for the Omidyar Network, which so far has invested over $330 million in both for-profit and non-profit organizations designed to help elicit positive social change. In the first part, I focused particularly on what he called “flexible capital,” wherein the Omidyar Network can invest in nonprofit or for-profit organizations, primarily on the basis of which strategy is likely to have the most successful outcome.

This week, I want to focus on some of the organizations Mr. Bannick and the ON have been excited to give grants to, namely D.Light, a project out of Stanford, and the Bridge Academy International schools set up in Nairobi. Said Mr. Bannick:

D.Light is a solar lantern company. The problem they’re trying to address is that in many parts of Africa and India, people in the rural areas have no light in the evenings. And what they use typically is kerosene. And the problem with kerosense is that it creates noxious fumes, so it’s a health hazard. It’s also expensive and it obviously has a pretty high carbon footprint. D.Light has developed a solar lantern that’s down to eight dollars. And the solar lantern, you charge it for six hours and it gives you six hours of light. So all of a sudden, you don’t have to buy kerosene, you’re healthier, and you can read and get a better education, and it can transform the life of a household. So that’s one company that we’ve invested in, and I think they’ve now sold more than a million units worldwide.

There’s another example in Nairobi in a chain of schools called Bridge Academy International, and what they’ve been able to do is to get the cost of creating a fabulous education (and by the way, as background, in Kenya, everyone is entitled to schooling, but in reality the teachers don’t show up. And to show up frequently they expect bribes, and so the system fundamentally doesn’t function. And so Bridge Academy has come in, they’ve developed a very low-cost model where they can provide a fabulous education to children in the slums of Nairobi for $4 a month. It’s truly exceptional. They’re now bringing even on their first schools and their hope and their desire is to build out thousands of schools across Africa that could deliver very high-quality education at very low cost to the poor.

I do wonder a bit about the discrepancy between the eight dollar cost to manufacture the solar lamps and the thirty dollar pricetag mentioned on the D.Light website for an American to buy a light and give it to an impoverished person in East Timor, but profit or not, it’s clear that solar-powered lights can be incredibly helpful. And maybe, as Mr. Bannick explained in Part One, using for-profit organizations can effect quicker change, as having a margin of profit can add more fuel to growth and allow for the quicker spread of disruptive technology. In impoverished nations, there does continue to be the spectre of abuse that can occur when labor is cheap and desperate, but when money is given to people concerned with doing good first, then making profit (more as a means of sustaining growth than an end in itself) second, it can still have massive positive impact.

Read the full interview below for more on what kinds of entrepreneurs the Omidyar Network tends to invest in, for the breakdown of international vs. local and male vs. female entrepreneurs, and for his analysis of the nonpayment movement. And immediately below are some of the organizations he mentions.

  • D.Light: low-cost, Stanford-based solar-powered light manufacturer.
  • Bridge International Academies: Low-cost, high-quality education for underprivileged African children.
  • Endeavor Global: An organization fostering high-impact entrepreneurship.
  • Omidyar Network: A philanthropic organization that gives to both nonprofit and socially conscious for-profit organizations.

================================================================================

KW: What’s an organization that you’ve invested in that has been for-profit that you’ve been most excited about?

MB: Well, since you’re at Stanford now, I’ll use a Stanford example. Have you heard of the “Design for Extreme Affordability” program at Stanford?

KW: I actually have, yeah.

MB: Have you heard of D. Light?

KW: The name sounds familiar.

MB: So D.Light is a solar lantern company. The problem they’re trying to address is that in many parts of Africa and India, people in the rural areas have no light in the evenings. And what they use typically is kerosene. And the problem with kerosense is that it creates noxious fumes, so it’s a health hazard. It’s also expensive and it obviously has a pretty high carbon footprint. D.Light has developed a solar lantern that’s down to eight dollars. And the solar lantern, you charge it for six hours and it gives you six hours of light. So all of a sudden, you don’t have to buy kerosene, you’re healthier, and you can read and get a better education, and it can transform the life of a household. So that’s one company that we’ve invested in, and I think they’ve now sold more than a million units worldwide.

There’s another example in Nairobi in a chain of schools called Bridge Academy International, and what they’ve been able to do is to get the cost of creating a fabulous education (and by the way, as background, in Kenya, everyone is entitled to schooling, but in reality the teachers don’t show up. And to show up frequently they expect bribes, and so the system fundamentally doesn’t function. And so Bridge Academy has come in, they’ve developed a very low-cost model where they can provide a fabulous education to children in the slums of Nairobi for $4 a month. It’s truly exceptional. They’re now bringing even on their first schools and their hope and their desire is to build out thousands of schools across Africa that could deliver very high-quality education at very low cost to the poor.

KW: OK. Now, this class is for International Women’s Health, so I have to ask this question, which is, what’s the breakdown been of entrepreneurs who have been male versus female?

MB: Oh gosh. I think it varies. I’d have to go through. I mean, there have been terrific entrepreneurs, both male and female. Many of our organizations we support do have a gender focus on women. So for example there’s an organization in Seattle called Landessa that works on rural property rights, and they have a whole area that focuses on women and land, women and property rights. The schools in Nairobi, one of the exciting things about them is that about fifty percent of the kids attending those schools are girls, and that may not sound remarkable until you realize that in most places, when school becomes expensive, the families send boys first, and then if they have money left over they send girls. So one of the positive impacts here is that you’re able to actually to get the cost down to a point to where the girls can go to school. And there are implications of educating girls—they tend to marry later, and they tend ot have fewer children. And their children tend to be healthier and better educated. So there’s huge returns, and you probably studied this in the women’s health class, there are huge returns on educating girls. So we have a bit of a bias toward those organizations, those companies that disproportionately benefit women and girls.

KW: Backing up and talking a little bit more about the entrepreneurs that you tend to invest in, what do you use to identifiy which entrepreneurs are going to succeed? Do you have any sort of bias toward people who are working in their own countries, or people who are going to other countries?

MB: Yeah, you really want people with local knowledge, and sometimes, like in the case of Bridge Academy, they’re Americans but they’ve been in Nairobi for some time, and they have been successful entrepreneurs. [We look at] the caliber of the entrepreneur, their reputation, their track record, their knowledge of the market, they’re looking to serve, then you look at the quality of the idea, the market size, the competitive environment. You know, many of the same things that you would tick through when you’re looking at an investment for [a company] would be the exact same criteria that we’d be looking at as well.

Now the added dimension for us is that we’re looking for investments that will create opportunity for hundreds of thousands. Whereas the objective at [an investment firm] would be, OK, well what is the return on investment?, we absolutely would look at return on investment, but we also look at social impact and we’d be willing to have a little lower return on investment in exchange for a higher social impact.

KW: That’s awesome. I did want to ask whether the non-payment movement that’s been affecting a few different countries has been affecting you guys at all.

MB: So we’re not directly invested in MFI’s [Micro-Finance Institutions] in [any of the affected regions], but we are invested in funds that are invested in MFI’s in India, so yeah, I think the whole sector has been affected by the challenges in [that region], and unfortunately I think that microfinance institutions should have done a better job in the areas of consumer protection and in the area of establishing effective credit bureaus to guard against over indebtedness. I also hope that people recognize that microfinance is delivering tremendous value to the poor, and we need to figure out how to strengthen the industry, rather than do things that inhibit people who don’t have the means from receiving credit.

KW: The final question that I have is how do you think you can foster a more entrepreneurial spirit in the third world, and as a follow-up, do you think that it should be encouraged.

MB: Well absolutely. I think that entrepreneurship is key to ideas, to job creation, to economic development, and I think people inherently want to make a better life for themselves and their families. Entrepreneurship, in addition to helping societies progress economically, also gives people hope, and also taps their creative spirit, and I think it’s absolutely essential that societies support entrepreneurship. One of the organizations that you might take a look at is a group called Endeavor Global, and I’m on the board there. Endeavor is very much focused on fostering entrepreneurship in the developing world, and they have a lot of good facts and figures on their website that you can check out. But I think that it’s absolutely critical.

KW: Thank you so much, I really appreciate the time that you took for this, and I hope that you’re getting as much satisfaction out of the work that you’re doing as you should be.

MB: It’s fabulous, and who I am, and the work I do, and the values I want to pass onto the kids are all the same thing, which makes it very gratifying.

Interview with Matt Bannick, Managing Partner at the Omidyar Network (Part One)

February 3rd, 2011

Matt BannickThis afternoon I had the distinct pleasure of interviewing Matt Bannick, current Managing Partner at the Omidyar Network and former President of PayPal and eBay International, as well as formerly serving as a diplomat to Germany. The conversation ran long (there’s plenty to talk about in microfinance!), so I’ll post some highlights here at the top, and the full transcript of the first half of our conversation below for anyone interested.

The Omidyar Network, for those who are new to this thread, is a philanthropic organization begun by eBay founder Pierre Omidyar that uses a combination of grants and investments to try to effect the most positive change globally that it can. Said Mr. Bannick:

One of the things that distinguishes us is an approach that we call “flexible capital.” Most philanthropic organizations are set up just to do grants, and we do grants and we do investments. And by flexible capital we look at what the problem is first, and who’s addressing that problem, we focus on the entrepreneur that’s trying to address that problem, and then and only then do we determine what’s the most effective type of capital to deploy…

We’ve actually done 14 not-for-profit deals and 12 for-profit deals. And in total we’ve probably invested more than $100 million. So we see the two kinds of investments as complementary—you may do a not-for-profit investment to help develop infrastructure for a sector, and then you’d do a for-profit investment in a company in that sector that can really drive scale. One of the problems with not-for-profits is that they find it really difficult to scale. For example, in the US in the last 40 years, there have only been 150 not-for-profits that have scaled to $50 million in revenue or more. In that same period, there have been thousands and thousands of for-profit companies that have scaled to $50 million in revenue or more.

This model feels unique and exciting, and I’m interested in where it goes. As any money they make is subsequently funneled into future philanthropy, the potential impact of the Omidyar Network is enormous. Next week, I’ll include the second half of the interview, where we talked about some of the specific organizations Mr. Bannick was particularly excited about.

===================================================================

FULL TRANSCRIPT BELOW:

KW: What drove you to switch to being interested in philanthropy versus the private sector?

MB: I’ve long had an interest in having a positive impact in society. I started out early in my career, I was actually an American diplomat. I was in Germany when the wall came down. I found that deeply rewarding work. And the issue of that age was the Cold War and the battle between a system that created opportunity for individuals and celebrated potential and freedom of the individual and a Communist system that oppressed the individual. And so I did feel at that stage that I was actually engaged in working on an issue of the greatest import.

I went to business because I loved the action orientation of business. In diplomacy there was a lot of talk on really important issues, but as a young diplomat you couldn’t have an immediate impact on issues of great import. I went into business and initially into business school and consulting because I liked what I perceived to be the action orientation of business, and I had been in banking before I’d gone into diplomatic service, and in my career I was really fortunate most particularly at eBay to both be working to build a fabulous business, but also a business that delivered positive social impact. For me it also had an international dimension. I ran eBay International and I ran PayPal, and PayPal is now building their international footprint as well. I was able to do the things I really liked to do in terms of running a successful business. I really liked the leadership component of that and I also was able to do the international piece and feel like we were creating opportunity for individuals at eBay, we were creating social impact.

All of that said, the thing that led me to philanthropy was really a desire that the bottom line for me, the objective of my work to be positive social impact, rather than at eBay where we were having positive social impact but the bottom line ultimately was about dollars and cents. So meeting with Pierre and learning about the Omidyar Network, the real draw for me was saying, “Look. I can use the skills I learned in business,” because Pierre had a very expansive view of having impact, which included business, I can use the skills I learned in business in an environment where the bottom line was social impact, and that was very, very compelling to me. I do think as I go back to my reflections of the Cold War and that being the issue of our age, I think the issue of our age in our contemporary global society is that you have billions of people around the world who lack opportunity, and who inherently capable.

One of our lessons at eBay was that people are inherently good, inherently capable, and we created a tech platform where they could use tap their skills and do fabulous things. And what’s lacking in the world today is opportunity for billions of people to realize that potential. And where ON is centered on supporting entrepreneurs who create opportunity for millions. So that’s how it’s come arund for me and in a sense it’s new, but in a sense it’s back to where I was grounded back when I was a diplomat in Germany.

KW: That’s very cool. How would you describe your role in the Omidyar Network?

MB: I am the managing partner here, so I am responsible for finding and executing against Pierre’s vision on how to have massive positive social impact. That would be my high-level job description. I’m responsible for the results of the entire organization.

KW: How many people are in the organization?

MB: We have probably now about 44, 45. We have one in London, 8 in India, and the rest here in Redwood City.

KW: One of the things that made the Omidyar Network stand out to me is that most microfinance organizations invest in people who will be employing one person, which is themselves. What led the Omidyar Network to start investing in bigger sized organizations? Because that’s really what differentiates it from a lot of the things I’ve seen, looking at microfinance.

MB: Microfinance is one of six investment areas. One of the things that distinguishes us is an approach that we call “flexible capital.” Most philanthropic organizations are set up just to do grants, and we do grants and we do investments. And by flexible capital we look at what the problem is first, and who’s addressing that problem, we focus on the entrepreneur that’s trying to address that problem, and then and only then do we determine what’s the most effective type of capital to deploy. So that’s really what defines us in many ways, is focus on the entrepreneur, focus on the ability of the entrepreneur to scale, and then figuring out what the right type of capital is to deploy.

Most philanthropists focus on grants of about $100,000 to $200,000; our average deal size is in the $2-4 million range, so in that sense we focus on bigger ticket deals, and so I think this for profit and not-for-profit model is more distinguishing.. Within the realm of microfinance, we see them—for-profit and not-for-profit—as very complementary, and in the realm of microfinance, we’ve actually done 14 not-for-profit deals and 12 for-profit deals. And in total we’ve probably invested more than $100 million. So we see the two kinds of investments as complementary—you may do a not-for-profit investment to help develop infrastructure for a sector, and then you’d do a for-profit investment in a company in that sector that can really drive scale. One of the problems with not-for-profits is that they find it really difficult to scale. For example, in the US in the last 40 years, there have only been 150 not-for-profits that have scaled to $50 million in revenue or more. In that same period, there have been thousands and thousands of for-profit companies that have scaled to $50 million in revenue or more.

So for for-profit, it’s not about making money, because whatever money we make on our for-profit investments goes back into our philanthropy, but the point is that for-profit businesses are all about getting big. And because they’re generating revenue, that provides them with the ability to have a bigger scale impact.

Microfinance at an Inflection Point

January 26th, 2011

First, some updates: last week I said I would discuss the Omidyar Network, which is working to provide loans for larger-scale operations in third-world countries, but I’ve secured an interview with a managing partner there, and so I will hold off on that discussion until I can hold and then post the conversation.

In the meantime, the past week has brought a few new interesting twists to the arena of microfinance, particularly regarding the Grameen Bank. Currently, founder Muhammad Yunus is charged with defamation for a remark made in 2007, a charge that could result in up to two years in prison—a lowly outcome for a Nobel laureate. It appears as though Yunus has become a public face for the concept of microfinance, and appropriately or not, he is receiving much of the flack for its shortcomings (http://www.guardian.co.uk/social-enterprise-network/2011/jan/26/microfinance-and-the-muhammad-yunus-case).

In a BBC article published on the 24th, author Madeleine Morris mentions many of the mounting criticisms of the expanding business practice. Specifically, an MIT report conducted between 7000 households in India “found access to microcredit had no impact on three poverty indicators – women’s empowerment and expenditure on child’s health and education – over the 18 month period it tested.” Although 18 months is a short timespan, it likely reflects the fact that microloans are generally used to help smooth over rough financial patches, rather than to expand into new ventures. (http://news.bbc.co.uk/2/hi/programmes/newsnight/9369880.stm).

Compounding the issue is that because some for-profit organizations have used international goodwill toward microfinance to create what are effectively loan-shark organizations taking advantage of the poor, demanding exorbitant interest rates for unpaid debts. This has in turn led politicians in places like India to discourage repayment, which is why currently the return on investment in the country has plummeted to only 20%. As microfinance’s model, both for-profit and non-profit, depends on being self-sufficient, such massive rates of default could spell an end for some organizations.

This is why Grameen’s announcement this week is so interesting—as of the 21st, the bank has opened up a branch in our own San Francisco Bay Area, where they hope to provide small loans to some of our most impoverished citizenry, particularly women, who would normally be denied more traditional loans. Although Grameen has been in the country since 2008, I suspect that a part of the motivation for the expansion may be due to the anti-microfinance political climate abroad (http://www.chevron.com/chevron/pressreleases/article/01212011_chevrontoprovide1milliontohelpbringgrameenamericatobayarea.news).

In any case, it’s clear microfinance is at the crossroads of change. More money continues to pour in at record levels (largely from philanthropists), its impact is increasingly unclear, and the likelihood of repayment seems to be decreasing. The model is expanding into newer, wealthier areas, and even though microfinance may be doing more good than harm, its impact is limited simply by its targeting of very small operations.

Microloans, Micro Impact?

January 20th, 2011

As I have continued my research into the topic of microloans, I came across an article in the New Yorker (http://www.newyorker.com/talk/financial/2008/03/17/080317ta_talk_surowiecki), which argues that despite much of the fanfare surrounding loaning small sums of money to struggling entrepreneurs, the net impact on their economies is negligible. Most microloan requests are not, in fact, for massive expansion of business or for the hiring of new employees; rather, the majority of them serve to carry a business over through a down period.  Phrased differently, most microloans go toward single entrepreneurs who are working toward goals of personal subsistence, versus toward the goal of creating thriving businesses that hire many of their countrymen.

Indeed, a quick survey of most requests on Kiva and Microplace confirms this. The first result I found, that of Rebecca Del Socorro Garcia Mendieta, is a woman seeking additional funds so that she can buy additional supplies to grow her personal business in retail. Understandably, she has an entire family to support and thus may not be inclined to hire additional workers she would have to pay, but it means that the impact of the loan could prevent more substantial change. (http://www.kiva.org/lend/266894). This is not to say that her work is invalid, simply that in countries with high unemployment especially, some more consideration should be given to entrepreneurs who want to create jobs.

Or, take as a counterexample Microplace, the for-profit microloan aggregator I mentioned in my previous post. Microplace deals largely with umbrella organizations, which make the individual loans. There, it is impossible to see what entrepreneurs specifically want to be doing with their money, nor what their plans for hiring additional employees are. (https://www.microplace.com/investments/details/FINCA+Microfinance+Notes+-+4yr+-+350bps?cmp=featured_listing)

As a part of this project, I have reached out to Kiva to ask whether they would be willing to begin featuring information about whether microloans will be used by entrepreneurs who hope to create businesses that employ more people than themselves alone. Whether they respond remains to be seen.

Next week, if I hear back, I’ll talk about the response and then focus on some of the organizations such as the Omidyar Foundation and Google.org that have begun to get into funding mid-level entrepreneurial ventures in the third world.

Microloans: Promise and Peril

January 13th, 2011

Introduction

“Can I borrow a feeling? Could you send me a jar of love? Hurtin’ hearts need some healin’. Take my hand with your glove of love.”–Kirk Van Houten

As with many authors before me have done with subject-driven blogs, I decided to start mine off with an italicized quote.  Over the course of the next two months, I will be exploring a subject much more substantial than this quote by Mr. Van Houten might portend, that of women, microloans, and the cultures they work within.

Microloans: a Primer

Much like their macroloan counterparts (generally just called “loans”), microloans are small sums of money banks or dedicated financial institutions make available to people, generally women, in impoverished nations.  With these loans, they theoretically can invest in themselves through learning a trade, developing a business, or improving one they already have.  Eventually, this grants them a degree of success that will allow them to repay their debts.

While microloans are anchored in philanthropic considerations, they are not intended as philanthropy.  Instead, loans given are expected to be repaid, with the central idea being that doing so fosters in entrepreneurs a sense that they are believed in and entrusted.  As stated on the Kiva.org website, they use microloans rather than donations because it imbues loan recipients with senses of:

  • Dignity: Kiva encourages partnership relationships as opposed to benefactor relationships. Partnership relationships are characterized by mutual dignity and respect.
  • Accountability: Loans encourage more accountability than donations where repayment is not expected.
  • Transparency: The Kiva website is an open platform where communication can flow freely around the world.

(http://www.kiva.org/about)

Origins

Although microloans have been used as far back as the 1700s and likely have parallels still earlier than that (see http://129.3.20.41/econ-wp/eh/papers/9704/9704003.pdf for a well-written discussion of the impact of micro-loans in helping the poor in Ireland, and how the semi-philanthropic efforts became less helpful with time), microloans as we understand them today emerged in the 70’s through economist Muhammed Yunus.  With his Grameen (Bangla for “rural”) Bank, he began loaning small amounts to impoverished women and men in a local village called Jobra.  Through its success and the eventual success of neighboring communities, the program expanded to encompass all of Bangladesh and, eventually, the poor nations worldwide.  Grameen Bank is currently 90% owned by the rural people that Grameen has helped, while the other 10 % remains in the hands of government.  (http://www.grameen-info.org/index.php?option=com_content&task=view&id=19&Itemid=114)

Other organizations have since followed in Grameen Bank’s footsteps, such as the aforementioned Kiva.org, the for-profit variant Microplace, and, more locally, the Valley Economic Development Center in the LA area.

Conflict and Controversy

Microloans are not without their dissidents.  The number of microloans issued per year appears to be growing at what some naysayers say is an unsustainable rate.  There’s an increasing rate of default, and some critics have alleged that microloan advocates have pressured rural workers into taking loans, only to harass them when they are unable to repay their mounting debt.  Additionally, it remains to be seen how open most societies are to the financial independence such grants give to women.  I hope to explore some of these darker sides to microloans through the course of this quarter.  (Check out http://www.nytimes.com/2011/01/06/business/global/06micro.html?_r=1&ref=vikasbajaj for a more in-depth look at some of the downsides of microloans.)

Firsthand Experience

As I wrap up this first post, I wanted to note that in order to better immerse myself in this subject, I signed up for Kiva and donated the last $25 needed for a woman named Ramatu Kamara in Sierra Leone to expand her baking business.  The time for repayment is anticipated to be ten months, and the organization has a relatively high delinquency rate (3.10%), so I am unlikely to see any meaningful contact or return this quarter, if at all.  That said, with any return on the money I will be able to re-invest in other entrepreneurs, or I can donate it all to Kiva.  (With Kiva, I can’t profit off of my loans).  That said, should any updates come in, I will be sure to share them.  By the same token, I will reach out to some of the other donors in the same project in order to get their impressions of the program. (Learn more about the recipient here: http://www.kiva.org/lend/264387#lenders_to_group).

For balance, I have also invested $25 through the for-profit MicroPlace, which I already feel a little bit uneasy about.  The money will be loaned to a South African organization named Kuyasa, which supports far more women entrepreneurs as they continue to recover from the impact of Apartheid.  The interest rate is low (1%), and I have justified my activity in the program to myself by promising to re-invest any proceeds I make in women.  I will be interested in seeing how my involvement here contrasts with what happens with Kiva, and I just hope that both actions result in far more good than harm.

Entrepreneurs Ramatu Kamara , Janet Kamara, Kadiatu Kamara, Liama Turay, and Marie Kamara.