Internationally we are seeing strong interest from Europe, which we believe will result in the materialization of significant numbers of private shares desks globally. We will have several European organizations discussing liquidity solutions and other issues at our upcoming events. We also predict the global expansion of crowdfunding platforms. Representatives of Grow VC, a global, transparent, community-based platform dedicated to meeting the needs of entrepreneurs, will discuss the international growth of crowdfunding at our preeminent event, The SoHo Loft Capital Creation and Crowdfunding Conference, in New York City on January 23.

Crowdfunding has already added hundreds of millions of US dollars in capital to early-stage start-up companies. European banks and institutions are turning to US accelerators and angel networks to run boot camps for their venture divisions. We foresee this becoming a new growth sector for US investor networks, with much of West Central Europe’s legislation and infrastracture having tremendous upside to support entrepreneurship.

- David Drake, Partner, LDJ Capital, New York, NY, USA

MicroCapital readers are invited to use the code “TheSohoLoftMC” to receive a discount of 10 percent on selected events by The SoHo Loft, including the The SoHo Loft Capital Creation and Crowdfunding Conference to be held in New York on January 23.

About the Multilateral Investment Fund (MIF):
The Multilateral Investment Fund (MIF) is an autonomous fund that was founded in 1993 by the Inter-American Development Bank (IDB). Now a member of the IDB Group, MIF has 38 donating member countries from Latin America, the Caribbean, North America, Europe and Asia. As of 2010, MIF reported having approved approximately 1,000 projects in approximately 26 developing member countries. Together with its partners, it has provided financing of approximately USD 2.5 billion to various projects.

Sources and Additional Resources:

The Nassau Guardian: http://www.thenassauguardian.com/index.php?option=com_content&view=article&id=16605&Itemid=2

MicroCapital Universe: Multilateral Investment Fund Profile: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Multilateral+Investment+Fund+%28MIF%29

Browse the MicroCapital Universe and add your entry to the wiki at: http://www.microcapital.org/microfinanceuniverse/

I woke up that day in Addis Ababa. It was a morning that I’ve come to think of as typical there: it was sunny, the air was cool with the smell of wood smoke, and slow-moving donkeys shared the city streets with blue taxis. I had been on the job at Oxfam for about a month. A group of us – a number of my Ethiopian colleagues and I – were scheduled to meet with the CEO of Nyala Insurance to discuss a contract to provide weather insurance to farmers in northern Ethiopia.

Nyala is one of the leading and most innovative insurers in the country. Its website features a photograph of a powerful mountain nyala stag with massive sculptural horns and the words “Care and Protection” artfully transcribed over the photograph. It was in this meeting, 7,000 miles from home, that I had one of those ah-ha moments. Over strong Ethiopian coffee, Nyala’s CEO told us that his entire balance sheet was USD 30 million. Here we were, talking to largest major insurer in Ethiopia, and they were operating on a balance sheet smaller than a mid-sized nonprofit in Kansas. How could they reach even a fraction of the people in Ethiopia who could benefit from having something to fall back on in hard times and that could foster confidence in good ones? 

It made me think hard about the work ahead of me. What would it take to build a rural insurance market to serve the 70 percent of Ethiopian population that, as farmers, depend on rain to feed their families? Working together in public-private partnership, we needed to establish all the elements required for a market: supply, demand, data, channels, regulations and so forth. There was tremendous need for insurance and insurers would love to meet that need, but we certainly weren’t in Kansas.

****

I was hired in 2010 as a technical advisor to Oxfam’s micro-insurance project in Ethiopia. Millions of Ethiopians rely on grain and other provisions from the United Nations World Food Program to survive. Feeding hungry people is a vital service but the current system does not allow farmers who are scraping by to get ahead. As journalist Tina Rosenberg wrote in The New York Times earlier this year, “The very precariousness of the harvest makes the yield more precarious still: out of fear, farmers do not try new methods that can bring them higher yields. They cannot take out loans to buy the drought-resistant seeds and tools to bring a bigger harvest, because they cannot be sure of repaying the loans. They need to know they will have money left over to feed their families and plant again should the harvest fail, so they invest less in farming. Insecurity is a vicious circle that is starting to spin faster and faster.”

Recognizing this, several years ago Oxfam launched a program to try to break this cycle, including weather insurance as part of an effort to build rural resilience among farmers in Adi Ha, a village in northern Ethiopia. The idea behind agricultural index insurance is that if insufficient rain fails to fall during a critical period of the growing cycle, farmers get a payout to help cover their losses. This safety net gives growers the confidence to take judicious chances like investing more in their crops so they can reap a bigger harvest. In Adi Ha, the insurance was designed to cover Ethiopia’s staple grain, teff.

This insurance product is designed to be commercially viable (i.e., risk-based pricing) and to avoid subsidizing premiums as has been done in the past. It hinges on the innovation that the most vulnerable households, through the national safety net work program, can purchase insurance using their own labor. Those not in the work program can pay cash using the same delivery channel. This accessible and commercially viable offering is our strategy to build insurance markets, but it requires systemic change: many partners are required – the government, national insurers, global re-insurers, scientific research institutions, community organizations, to name a few – to build supply, demand, data, channels, volume, and, of course, trust.

In 2009, 200 households in Adi Ha enrolled. Last year, 1,300 households in five villages opted to buy insurance, and this year over 13,000 families in 45 villages have enrolled. This 1,000-percent growth within the same annual project cost structure delivers the desired “demonstration effect.” From the outset, the project was sponsored by Oxfam, Columbia University, global re-insurer Swiss Re, and the Rockefeller Foundation. Earlier this year, Swiss Re, announced that it would join Oxfam America and the World Food Programme as a Founding Sponsor of the Rural Resilience Initiative (R4) to expand and evaluate this approach over the next five years.

Much of East Africa is in crisis and the current famine is not its first. This season the rains failed throughout much of the region, in places triggering the worst drought in 60 years. The result is that 13 million people are now at risk – with 1.8 million Somalis alone displaced. Aid groups and governments are scrambling to help, but these recurrent crises beg the question: What would it take to make this Africa’s last famine?

We can’t accurately estimate how much it would cost to prevent a disaster, but our Rural Resilience Initiative is based on the idea that it costs less to avoid a crisis than it does to save lives after famine hits. Although an imperfect science, experts estimate that emergency relief in famines costs seven times as much as preventing the disaster to begin with. So, on the eve of World Food Day, with more than 750,000 East Africans facing starvation, it’s time to look at how strategic investments could help break this cycle.

You can watch “Africa’s Last Famine” below and on Link TV at 11 pm eastern US time on Tuesday, October 18:

This story has been reposted with permission from Next Billion.

1. How did you become involved in microinsurance and what is your current role?

I became involved in microinsurance through my active role in the International Actuarial Association (IAA), which represents the actuarial profession in matters of interest to the worldwide profession. Following the lead of some influential leaders of actuarial associations in developing countries such as Mexico, IAA leaders formed a microinsurance task force in 2006 to study what was to us a new area of insurance and to make recommendations to them about if and how actuaries might become involved. I joined this task force at its inception out of personal interest in expanding my own professional horizon. IAA task force activities involved exposure to microinsurance organisations, such as the Microinsurance Network and the ILO’s Microinsurance Innovation Facility, and also to functioning microinsurance organisations during field-trips organised around our meetings and invited speakers. What we learned was that microinsurance, indeed, would benefit from the interest and support of the international actuarial community.

In April 2009, the IAA formed a Micro-Insurance Working Group and I was asked to lead it, in large part due to my familiarity with IAA’s leaders and knowledge of how the organisation functions. The IAA’s worldwide membership network allowed the new Working Group to quickly build its membership by identifying and recruiting the small number of members with microinsurance experience and to make contact with key international organisations and people involved in the worldwide growth of microinsurance. The IAA Micro-Insurance Working Group in a relatively short time has become deeply involved in the international microinsurance community. My role continues to be to provide leadership to the IAA Micro-Insurance Working Group, help to develop its agenda, and to build relationships with leaders of the international microinsurance community.

2. With the current lack of actuarial microinsurance experts in the world, what needs to be done to address this problem?

The principals that underlie microinsurance organisations’ risk bearing activities are familiar to actuaries around the world who practice in various lines of insurance in the developed world – though, the context varies significantly from our experiences at home. To be successful, microinsurance practitioners need to understand the risk bearing principals upon which their success depends. To be helpful, actuaries need to understand the very different cultural and economic circumstances faced by microinsurance organisations. Our challenge is to expand the existing core group of actuaries who understand the contextual issues and can effectively translate their knowledge of risk bearing principals to the organisers, operators, and technical people working in microinsurance organisations. Our new role as the Actuarial Discussion Group within the Microinsurance Network will help us to better understand the needs of the microinsurance community and allow us to effectively engage with the community.

3. How important is pricing in microinsurance? And what can happen if one gets it wrong?

The obvious explains the importance of pricing correctly – if premiums are too low, risk bearing is unprofitable, and, if premiums are too high, customers who can be effectively served by insurance will decide not to buy insurance causing a failure to thrive among microinsurance organisations. Government and donor developmental-stage subsidies allow some leeway for pricing errors, but over time microinsurance organisations will need to stand on their own, which requires proper pricing. Thus, proper pricing is every bit as important to microinsurance organisations as to insurance companies in the developed world.

4. What are the main challenges and obstacles when pricing a microinsurance product?

The largest single obstacle is a lack of relevant data to price risks. This is a huge challenge, and one without easy short-term solutions. A second major challenge is to transfer to the actuaries and technicians actually doing pricing on behalf of microinsurance organisations the skills and tools they need to do a proper and professional job.

5. What is the role of data? And how can one cope when there is a lack of significant data?

There are many sound approaches to dealing with a lack of needed data. The international actuarial community is already working on independent projects and projects in cooperation with other organisations, such as the ILO’s Microinsurance Innovation Facility, to develop education and tools needed to allow these techniques to be used by microinsurance practitioners. We look forward to expanding the scope of this important work as we continue to build relationships with members of the international microinsurance community.

6. Will pricing becoming easier over the next 5 years?

Yes, definitely – as long as we work cooperatively with the microinsurance community to make reasonable provision for the collection of relevant data from microinsurance organisations. Absent relevant data, the problems we face today will not go away.

Ghanaian farmers depend on their ability to harvest food to feed themselves and their families. When they have a surplus, they can also feed their communities and make a better living. But when the harvest is disappointing, as it often can be due to problems like drought or lack of fertilizer, the farmers suffer disruptive financial problems. Once again, life becomes challenging.

How do farmers negotiate these financial disruptions – called “shocks” by economists – and what technological or financial service advances might help them manage these shocks even better?

These questions are at the heart of Chris Udry’s research project, “Examining Underinvestment in Agriculture.” Udry, who is one of the foremost American economists specializing in African development and a Professor of Economics at Yale University, talks below about how he thinks his research might help rural farmers in developing countries manage the everyday risks they face.

Q. How do you describe your research project and the questions you?re seeking to answer to non-economists?

Udry: What we’re trying to understand are the fundamental features of the economic environment that farmers in Ghana are faced with. We are concerned with poor farmers in poor areas with very poor capital markets. It’s difficult for them to save; it’s difficult for them to borrow. We know there are investments that could be profitable for the farmers, but they can’t achieve them without liquid assets, which few of them have, so they can’t invest. Parallel to that, farmers face an enormous amount of risk. Very small, regular shocks could have disastrous consequences for them, and they, overall, are risk averse. Also, without access to insurance, they cannot take on investments that, on average, we know to be profitable but risky.

We are trying to understand these dimensions of the environment that farmers face by investigating whether there is a change in behavior if we provide grants of money and/or insurance against the risks they face. This is fundamentally a science project not a policy project. We are trying to investigate the nature of the environment rather than directly testing a specific set of policy interventions that can be rapidly scaled up.

If we see changes in farming behavior, in response to the money we provide, or in response to the insurance that the farmers receive that will tell us there are problems in the financial environment. If farmers who receive a capital grant invest more in their farms, that is direct evidence of credit constraints and/or barriers to saving. Similarly, if farmers who receive insurance from us increase their investment on their farms, that is a direct evidence of incomplete insurance arrangements.

Q. What do you hope to contribute to the understanding of financial systems and poverty with your project?

Udry: For someone interested in microfinance and micro-investments, it’s an interesting project because no one’s going to give farmers money for a project that’s not related to policy. But, the farmers’ response tells us that they are facing really bad loan market situations. They can’t borrow. It also tells us how hard it is for them to save from one year to the next. When we are seeing farmers getting our cash grants, they are hiring a lot more labor. That’s telling us there are problems in the capital markets. It tells us there is a demand for microfinance interventions. But, this program does not say what kind of microfinance can help. This program tells us these groups have a demand for saving and borrowing.

On the insurance side, our work can be more directly tied to policy. Crop insurance has failed universally, but we offer rainfall index insurance. The reason this can work is because pricing is based on an important source of risk to the farmer. Rainfall is very variable. There’s no irrigation. If it rains too much or too little, profits will go down. We offer insurance tied to a nearby weather station. Our insurance won’t track profit variations perfectly (the difference between profits and what we give them is called basis risk), but we work hard to minimize the basis risk.

The benefits are that there is no moral hazard, no adverse selection, it depends on what is publicly observable (so farmers cannot influence it), and it’s cheap to do. We offer them a certificate that says if it rains so much, you’ll be paid so much. It’s easy to imagine how to commercially expand this. We find really high demand for rainfall insurance in our area.

Q. What interested you in this line of research?

Udry: I’ve been working on risk and poor farmers since my dissertation in the late 1980s. I’m interested in how people deal with risk and how it shapes their lives. I’ve lived in this area in northern Ghana, and I know how important farming is in these communities. Rainfall insurance isn’t new, but with the boom of microfinance, there is increased interest. There’s a lot of buzz around it, and it seemed like a feasible research objective to reach now.

Really, risk and imperfect financial markets have been at the core of my understanding of poor people and rural poverty. CFSP has given me the opportunity to go in and examine it in a much more serious way. In some respects, CFSP is now an insurance company. The challenge down the road is going to be to identify a larger, commercial insurance partner to help bring what we’re discovering to a wider part of the population.

This interview originally was published by the CFSP and has been re-posted with permission.

An estimated 11.5 percent of the demand for microfinance is being met by existing microfinance institutions, with restrictions on microlending by for-profit entities cited as a primary barrier to growth. Charitable organizations involved in microfinance cannot take deposits and cannot easily access loans from the domestic financial sector.

Microlending is not explicitly regulated by any branch of the Lebanese government, although the central bank has allowed banks to use 5 percent of required reserves for microfinance initiatives. To encourage such activity, ESCWA reportedly suggests that the government develop credit bureau and a legal structure based on enforceable credit laws and institutional regulations.

By Paul K. Kim, Research Associate, and MicroCapital Staff

About the United Nations Economic and Social Commission for Western Asia (ESCWA):

Headquartered in Beirut, Lebanon, the United Nations Economic and Social Commission for Western Asia (UN-ESCWA) is one of five regional commissions under the United Nations Economic and Social Council. ESCWA aims to promote economic and social development in the region, coordinating its activities with other groups such as other United Nations offices, the League of Arab States, the Gulf Cooperation Council and the Organization of the Islamic Conference. Member states include Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Sudan, Syria, United Arab Emirates and Yemen.

Sources and resources:

Byblos Bank, “Lebanon This Week”: http://www.byblosbank.com.lb/newscenter/economic_research/Publications/LTW/LTW-195.pdf

The Daily Star Lebanon News, “Lebanon’s microfinance sector suffers from lack of regulation”: http://www.dailystar.com.lb/article.asp?edition_id=1&categ_id=3&article_id=122871#axzz1DWE77US8

MicroCapital’s Microfinance Universe Profile: United Nations Economic and Social Commission for Western Asia: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=United+Nations+Economic+and+Social+Commission+for+Western+Asia

MicroCapital.org Story, November 16, 2010: “Microfinance Operations in Lebanon Begin to Grow”: http://www.microcapital.org/microcapital-brief-microfinance-operations-in-lebanon-begin-to-grow/

Browse the MicroCapital Universe and add your entry to the wiki at: http://www.microcapital.org/microfinanceuniverse/

The mechanism of this program is similar to that of the Kredit Usaha Rakyat (KUR) program, which was established in 2008 by the government to provide Indonesian farmers with credit. KUR reduces the risk for commercial banks to provide working capital and investment credit to microfinance institutions by guaranteeing the investments through the state credit program.

Under the migrant worker program, there are two different loan schemes: one with a maximum loan amount of IDR 20 million (approximately USD 2,220) and interest of 22 percent per year, and another for larger loans with interest of 14 percent per year. State-owned banks, including Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI) and Bank Mandiri, will disburse the loans at first with others expected to be added over time.

By Paul K. Kim, Research Associate

ABOUT Kredit Usaha Rakyat (KUR): Established in 2008, the Kredit Usaha Rakyat program aims to provide Indonesian farmers with accessible credit. The KUR program was legally established by Presidental Decree (Inpres) No. 6/2007 which focused on the development of the microfinance sector. The program was spearheaded by the Program of Agriculture but involves the cooperation of many government ministries. Through KUR, working capital and investment credit are provided to microfinance institutions by commercial banks whose investments are in turn guaranteed by the state credit program.

ABOUT Bank Rakyat Indonesia (BRI): BRI is a state-owned bank specializing in microfinance. Some its offerings include small and medium-sized enterprise (SME) loans, personal loans, car loans, housing loans, education loans and savings. As of the end of 2007, it had assets worth USD 6.45 billion, a gross loan portfolio of USD 3.47 billion and approximately 3 million active borrowers.

SOURCES:
[1] Jakarta Post. ?Govt launches micro credit for migrant workers? December 15, 2010 http://www.thejakartapost.com/news/2010/12/15/govt-launches-micro-credit-migrant-workers.html

MicroCapital?s Microfinance Universe Profile: Kredit Usaha Rakyat (KUR): http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Kredit+Usaha+Rakyat+(KUR)

MicroCapital?s Microfinance Universe Profile: Bank Rakyat Indonesia (BRI): http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Bank+Rakyat+Indonesia+(BRI)

MicroCapital.org Article, January 18, 2010: Indonesian Government Relaxes Rules of Its Microfinance Program, Kredit Usaha Rakyat (KUR): http://www.microcapital.org/microcapital-brief-indonesian-government-relaxes-rules-of-its-microfinance-program-kredit-usaha-rakyat-kur/

MicroCapital.org Article, February 24, 2010: Indonesian Government Adds 13 Banks to Association of Regional Development Banks (Asbanda) to Distribute Microcredit: http://www.microcapital.org/microcapital-brief-indonesian-government-adds-13-banks-to-association-of-regional-development-banks-asbanda-to-distribute-microcredit/

Browse the MicroCapital Universe and add your entry to the wiki at:
http://www.microcapital.org/microfinanceuniverse/

BlueOrchard loaned Prasac USD 2 million from the Microfinance Enhancement Facility (MEF), a microfinance investment vehicle that was established in 2009 by the World Bank Group’s International Finance Corporation and German deelopment bank KfW Entwicklungsbank to refinance loans to well-established MFIs to mitigate the effects of the global credit crunch. According to the Microfinance Information Exchange (MIX), the microfinance information clearinghouse, Prasac reported a gross loan portfolio of USD 64.4 million, total assets of USD 71.3 million and 87,945 active borrowers as of 2009.

BlueOrchard also loaned the local-currency equivalent of USD 515,000 from MEF to Hattha Kaksekar Limited (HKL), which reports total assets of USD 33.4 million, a gross loan portfolio of USD 31.2 million, 41,000 active borrowers, return on assets of 3.45 percent and return on equity of 16.57 percent as of 2009.

About BlueOrchard: BlueOrchard is a Switzerland-based, commercial microfinance intermediary that provides loans to microfinance institutions through its subsidiary BlueOrchard Finance SA and invests in the equity of microfinance institutions and microfinance network funds through its subsidiary BlueOrchard Investments SA. BlueOrchard had approximately USD 895 million assets under management and a microfinance portfolio of USD 715 million as of year-end 2009.

About Prasac: Prasac, formerly a credit component of the “Prasac Project,” funded by the European Union and implemented by the Royal Government of Cambodia, is a microfinance institution (MFI) in Cambodia. It was officially registered in 2004 with the Ministry of Commerce as a private limited liability company. According to the Microfinance Information Exchange (MIX), the microfinance information clearinghouse, Prasac reported a gross loan portfolio of USD 64.4 million, total assets of USD 71.3 million and 87,945 active borrowers as of 2009.

About Hattha Kaksekar Limited (HKL): Hattha Kaksekar Limited is a microfinance institution (MFI) based in Phnom Penh, Cambodia. It was founded in 1994 by two charitable organizations, the Organisation Canadienne pour la Solidarit? et le D?veloppement (OCSD) and Oxfam International. It was transformed into a non-governmental organization in 1996 and a private liability company in 2001. Its financial supporters have included Oikocredit, Norfund, Triple Jump, the French Development Agency (AFD), and Deutsche Gesellschaft f?r Technische Zusammenarbeit (GTZ). HKL reports total assets of USD 33.4 million, a gross loan portfolio of USD 31.2 million, 41,000 active borrowers, return on assets of 3.45 percent and return on equity of 16.57 percent as of 2009.

Source: Data submitted by BlueOrchard to MicroCapital November 2010

KNOW A FUND: Microfinance Enhancement Facility: http://www.microcapital.org/know-a-fund-microfinance-enhancement-facility-an-interview-with-mark-berryman-of-the-international-finance-corporation-ifc/

MicroCapital’s Microfinance Universe profile: BlueOrchard, http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=BlueOrchard

MicroCapital’s Microfinance Universe profile: Prasac, http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Prasac

MicroCapital’s Microfinance Universe profile: Hattha Kaksekar Limited (HKL), http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Hattha+Kaksekar+Limited

About Wall’s Street Advisor Services: Wall’s Street Advisor Services is a US-based consultancy specializing in innovations in financial information services for emerging markets and socially responsible investing. Founder and CEO Peter Wall has 20 years of experience developing and marketing financial information services with International Finance Corporation, a member of the World Bank Group; FTSE International, the creator of approximately 120,000 equity, bond and alternative asset class indices; and the nonprofit Microfinance Information Exchange (MIX).

Sources and Resources:

Listed Microfinance Institutions’ Shareholder Valuations and Their Stocks’ Results: http://wallsstreetadvisorservices.com/yahoo_site_admin/assets/docs/Listed_MFIs_Shareholder_Values_and_Their_Stocks_Results_-_Oct_2010.298111424.pdf

MICROCAPITAL BRIEF: Wall?s Street Advisor Services (WSAS) Releases Series of Benchmarks for Equity Investments in Microfinance Institutions (MFIs) ? WSAS MFI Shareholder Value Indexes (SVIX)

Browse the MicroCapital Universe and add your entry to the wiki at http://www.microcapital.org/microfinanceuniverse/tiki-index.php

Sources and Resources

Morningstar article: http://news.morningstar.com/newsnet/ViewNews.aspx?article=/DJ/201006011352DOWJONESDJONLINE000348_univ.xml

MIX Market Credi Fe profile: http://www.mixmarket.org/mfi/credi-f?

Browse the MicroCapital Universe and add your entry to the wiki at: http://www.microcapital.org/microfinanceuniverse/