To access this article visit: “Great Expectations: Microfinance and Poverty Reduction in Asia and Latin America”

Authors: John Weiss and Heather Montgomery

Qualitative Information: Introduced as evolving for different purposes, microfinance within Latin America åö initially having a greater focus on commercial profitability åö is contrasted against Asia and the ideals of the Grameen Bank, a famous Bangladeshi microfinance institution (MFI). The authors propose that although NGOs are still important players within Latin America, there is a significant trend toward the commercialization of microfinance and thus MFIs’ focus on profitability. The article suggests that rural, impoverished regions particularly within larger countries such as Brazil, Mexico, and Argentina are under-addressed, but neither provides examples to support these statements nor distinguishes the types of MFIs and their target markets. While the authors agree that there are indications that MFIs have an impact on borrowers within Latin America, MFIs remain unsuccessful at reaching the poorest åö although they offer little propositions for MFIs to both achieve profitability and successfully touch the pooråÐest. They do, however, suggest more studies are needed on the impact and cost effectiveness of microfinance programs.

Accion and Unitus, two US non-profit microfinance "networks" announced a partnership to work together in India. While good to see even a hint of industry consolidation on the non-profit "buy" or "supply" side of microfinance, it would be great to see actual mergers and acquisitions in these networks. "Networks" are loosely defined as rich country non-profits that support microfinance institution (MFI) partners or members transnationally. Almost all the 14 major network players have small budgets, as is typical of the non-profit sector. In fact, approximately 99% of all registered US non-profits have budgets less than $100 million and about 98% have budgets less than $10 million. This absence of large-scale solutions to social problems shames all of us in the face of global poverty.

1) ACCION Press Release: “Microfinance Leaders ACCION and Unitus Establish Strategic Alliance for India.”
2) MicroCapital Blog: “Microfinance Networks (transnational second-tier): Defined and Listed.”
3) “Registered Non-Profit Organizations by Level of Total Income.”

To access this article visit: “Microfinance and Socially Responsible Investment in Latin America”

Authors: J. Cheng and M. De Sousa-Shields

Qualitative Information: The article argues that main reason for low investment in microfinance is that investors do not understand the industry, and therefore do not have the expertise to decide where to invest in microfinance. One solution is to invest in intermediary funds, which have the expertise to evaluate MFIs and make good investments. Rather than educate investors about MFIs, the article argues that MFIs should adapt to investors. MFIs lack of credibility with investors because many are from non-profit backgrounds. The article recommends that MFIs use financial tools that investors understand, such as portfolio securitization and bond offerings. Lastly, MFIs need better measurements of their social impact for investors.

There are about 300 commercially viable microfinance institutions (MFIs) worldwide. The total investment portfolio for these institutions is estimated to be $3.5 billion and is growing at a rate of 20-30% per year. Those MFIs, however, are rarities among the 10,000 MFIs operating today. So what separates the few commercially viable MFIs from the huge host of laggards?

1) “Commercial Microfinance: The Right Choice for Everyone?”
2) "The Impact of Interest Rate Ceilings on Microfinance." CGAP. May 2004
3) “Expanding Commercial Microfinance in Rural Areas: Constraints and Opportunities.”
4) “Microcredit Interest Rates.”
5) Subscription only: "Strategies That Fit Emerging Markets." Harvard Business Review: June 20056) “The Influence of Donors on Microcredit Sustainability: A Case Study of the Three Microcredit Programs in Vietnam.”

The Ugandan market for microfinance services has over 1,300 microfinance institutions (MFIs) in operation. While one would hope that such a glut of MFIs would necessarily ensure the market was being served, this is unfortunately not the case.

According to the Bank of Uganda (BoU), the industry suffers from an urgent shortage of licensed deposit-taking institutions. However, this does not mean that deposit services are not being offered illegally. Among Uganda’s many MFIs, just 3 are licensed to take deposits, while many more offer such services, even though unlicensed.

The scarcity of formal ways to save comes at an enormous cost to poor people, who have limited access to formal, regulated financial services (p. 3). They are generally left with no alternative to the non-regulated MFIs that accept deposits illegally. In Uganda, 99% of clients saving in the informal sector report having lost some of their savings (p.3), with losses averaging 22% of the amount saved in the past year.

If non-regulated microlenders follow the letter of the law, that is, they do not accept savings deposits, they forego valuable capital for their loan portfolios. Prospects are dim for small operations that may serve as few as 10 people (which make up the majority of MFIs in Uganda). The government’s effort to weed out unlicensed deposit-taking institutions includes setting minimum asset holding requirements in order to be eligible to legally take deposits.

In an ostensibly inclusive move, the Bank of Uganda is encouraging all microfinance institutions to apply for licenses to take deposits. This is far harder than it sounds. Smaller microlenders will not be able to meet this regulatory burden for many reasons, including taxes, onerous paperwork, and of course, reserve and capital requirements.

We have yet to see a government launch a wholesale attack on microlenders who illegally accept deposits. Will Uganda be the first? Probably not, as Ugandan government officials would be hesitant to take any action that might upset the misguided donors who have created this problem by subsidizing microlenders outside the law.

Additional Resources

1) Subscription only: "Central Bank to Crack Down on Unlicensed MFIs."

2) "Central Bank Warns MFIs On Deposit-Taking."

3) Consultative Group to Assist the Poor (CGAP): "Regulation and Supervision of Microfinance."

4) The Monitor: "Register or Close Down, MFIs Told."

"El Financiero," a Mexican Finance newspaper, tells a story where, at first, all is bright for our hero microfinance: the Mexican government representatives talk of poverty reduction and the displacement of loan sharks. These loans are really working! The story then crescendos: the situation is so good for these micro-businesses that the Mexican government now plans to establish "The Fast Opening Business System," a new government program to help all the poor micro-entrepreneurs register their businesses formally. Does this mean greater regulatory burden for all those struggling to make ends meet?

A point of explanation is needed: people from the developed world often assume that micro-enterprises are new ‘start-ups,’ but such is not the case. Due to the dearth of formal jobs in the developing world, most people are self-employed, and have always been self-employed. So, the Mexican government is not making it easier for common folks to ‘open’ a business as the catchy name of their new bureau implies. Instead, the government seeks the registration of businesses that micro-entrepreneurs have been running for years to feed their families.

Is there something in this for the micro-business owners other than new taxes, paperwork, and bureaucrats winking for a greased palm?

Of course the formal registration of micro-enterprises should be supported, and of course one of the great benefits of successful microfinance is that it creates wealth, which in turn enlarges the tax base, hopefully helping to stabilize and clean up dreadful governments. However, this should be a natural evolution. Once a micro-enterprise starts to grow, the proprietor has ever-more reasons to formalize her business: i.e. renting commercial space, offering the business as a micro-loan guarantee, or offering benefits to her employees. In this way, the best thing governments can do for new recipients of micro-loans is stay out of the way, not think up new bureaus over U.N. luncheons.

Moreover, plenty of reform of existing legislation is essential if microfinance is to reach its potential, such as streamlining red tape for all businesses. The article ends on yet another gloomy note. Amidst the excitement of the U.N. meeting, an attending government official generously offers the important participation of his particular bureau, adding that more government programs should get involved!

1) Don’t place ceilings on interest rates
2) Promote the concept of microfinance as a crucial means to resolve poverty
3) Adapt existing legislation rather than promulgate new laws
4) Eliminate unfair competition from public institutions, which often loan at below market-level interest rates
5) Actively work to improve and stabilize the business environment and general macroeconomic situation (benefits include reducing interest rates to make more capital available, stabilizing interest and exchange rates, improving infrastructure)
6) Scale-up microfinance by integrating it with the formal financial sector (benefits include economies of scale, risk management expertise, physical infrastructure and branch networks, and information, administrative and accounting systems)
7) Encourage commercial entry into the financial sector by reducing high reserve requirements to increase available capital
8) Non-prudential regulation
9)Encourage a diversified environment of regulated and unregulated institutions that meet performance standards
10) Develop transparency and performance standards

1) Main article discussed in entry, El Financiero: "Viables."
2) Consultative Group to Assist the Poor (CGAP): "The Impact of Interest Rate Ceilings on Microfinance"
3) Women’s World Banking (WWB): "Policies, Regulations and Systems that Promote Sustainable Financial Services to the Poor and Poorest"
4) "Impact of Government Regulation on Microfinance"
5) CGAP: "Guiding Principles on Regulation and Supervision of Microfinance"
6) "Regulatory Requirements for Microfinance: a Comparison of Legal Frameworks in 11 Countries Worldwide"

You may have heard the hype about the eBay fortune being on its way to revolutionizing philanthropy through for-profit investing, but the numbers tell a different story.

Why so much attention to Pierre Omidyar? High stakes: he is estimated to be worth $10 billion, only 1% of which he plans to retain. The rest will be given away or invested with a social purpose. In June, he demonstrated his commitment to microfinance with a $4 million grant to the nonprofit Grameen Foundation USA (GFUSA).

(Omidyar.net extends the commitment to microfinance with an online discussion board with a microfinance focus.)

The Omidyar Foundation undertook a facelift when it was transformed into the newly christened Omidyar Network in 2003, now housing both a foundation and an arm that makes investments.

The news that the Network would revolutionize philanthropy by no longer purely donating to nonprofits "shocked the philanthropic community," as reported in Business Week and Newsweek. However, despite his belief that "for-profit companies can have a big impact on society," most of Mr. Omidyar’s activity is grant-making. In the second half of 2004, less than $5 million was invested in social-mission for-profits, while a prorated $91 million was granted to nonprofits. From these numbers, we have to wonder what’s stopping Mr. Omidyar from giving this revolutionary idea a chance to get off the ground.

That said, the Network reporting on its site is not clear. So, we are using some guess work here.Omidyar Network uses the terminology “non-profit investment” and “pro-profit investment” as its two super-categories when reporting on its website. What does this mean? For instance, the donation to the Grameen Foundation was a “non-profit investment.” How is this different than a grant? After our inquiries to Omidyar Network, we have guessed that there is no difference.

In the Omidyar Network’s defense, the language has indeed gotten quite muddy around the new field of ‘social enterprise,’ where organizations with a social mission can either be non-profit or for-profit.May we suggest a clear distinction: is a return on capital expected? If yes, then it is an investment. If no, it is a grant.

In other words, our critique may be misplaced if Mr. Omidyar’s group is making ‘program-related investments’ (PRIs) to non-profits instead of grants. A PRI is the legal term describing when a foundation expects a return on its grant-making capital from a nonprofit.

So, let’s hope we are wrong about Mr. Omidyar’s group. Let’s hope he really is expecting a return on his philanthropic dollars to in turn create more philanthropic dollars. But current giving patterns and opaque reporting make us doubt they are actually pursuing the sophisticated philanthropic strategy their press proclaims. Too bad. We could use some visionary leadership in microfinance to model market discipline for all the other players on the investment side.

More on PRIs in the next entry  

Additional Resources

1) Omidyar Network: "On Microfinance" discussion forum
2) Omidyar Investments
3) "Grameen Foundation Receives $9 Million to Finance Micro-Loans."
4) Press Release: "eBay Founder to Create Organization to Fund Social Change."
5) Omidyar Network record of news coverage

Is ‘philanthropic investment’ just a contradictory term to make charity sound business-like? In the US, Program-Related Investments (PRIs) have served as a way for foundations to earn a return on their grant-making dollars since 1969. Such investments made by foundations to support charitable activities offer the potential return of capital within an established time frame, and are well codified in US law. PRIs are the perfect way for foundations to capitalistically and responsibly support microfinance.Of the 66,000+ grant-making foundations in the United States, only a few hundred make PRIs. Giving by the nation’s grant-making foundations increased by 7% in 2004, to $32 billion (pg. 1), but PRI financing makes up a negligible proportion. Why such dismal numbers?

The answer turns out to be the cultural inertia within foundations and non-profits. A return on capital requires a different sort of rigor than social work. And this is just the tip of the iceberg. In 2004, US foundations granted $32 billion, but they held $476 billion in assets. Imagine 1% of this principle corpus invested in microfinance, this would open the door for commercial capital investment. Whereas most huge chunks of capital (pension funds, insurance companies, mutual funds, hedge funds) fall under the ‘prudent man’ US law that obliges the prioritization of profits, foundations (and universities) enjoy leeway under the prudent man rule to invest per their missions.

The irony of course is that microfinance may well out-perform the market, so ‘prudent man’ would be irrelevant. But, we are not an asset class yet, so to get there, we look for leadership not just in your grant-making, Mr. Omidyar, but in your asset management. PRIs are an opening for you to introduce Wall Street to our emerging asset class.

Again, to give Mr. Omidyar and his group the benefit of the doubt, maybe his asset managers and his grant-makers do eat lunch together regularly, maybe they are just “ramping up,” and will fulfill his righteous vision one day soon.

Additional Resources

1) The Foundation Center: Foundation Growth and Giving Estimates: 2004 Preview
2) Although dated, the best document discussing PRI trends is still the Foundation Center’s PRI Financing: Trends and Statistics 2000-2001
3) MicroCapital Blog: Mr. Omidyar’s Philanthropic Vision: a Work in Progress, Part 1

Why is profitability so out of reach for many microlenders? By definition, microlenders operate in emerging markets, which places them squarely in the middle of notoriously challenging business environments. Harvard Business Review (subscription only) provides us a useful analysis of the challenges, but actually gives scant "strategies that fit emerging markets’ as the acticle title states.

Even though developing countries are the fastest-growing market in the world, the article gives us very little real strategic advice. In the end, they say nothing more than to go with one of the following: – adapt your strategies – change the contexts – stay away
Thanks, Harvard.

1) Subscription only: "Strategies That Fit Emerging Markets." Harvard Business Review: June 20052) World Bank (WB): "Developing Country Growth Is Fastest In Three Decades, But Global Imbalances Pose Risks."
3) "Emerging Giants: Building World Class Companies From Emerging Markets."

"….it may be better to direct money [rich country aid] to charities or to schemes such as microcredit, which loan people money to help themselves, than to governments."

Rich countries re-directing their ‘aid’ from African governments to microfinance organizations is not a solution, but rather, part of the problem. Indeed, most of the money already in microfinance originates from government funding. What would be the point in diverting money from inefficiently-run governments to inefficiently-run microfinance institutions (African Business). A more effective use of this ‘aid’ would be to invest it into private sector intermediaries such as the funds MicroCapital lists, in which investors hold fund managers accountable. Indeed, it is the sad performance of government bureaucrats picking and choosing which microbanks to fund over the past 20 years which has created the current situation: 10,000 micro-banks around the world, but less than 300 that are financially viable. When will it end?

1) Games, Dianna. "Mobilising Africa‘s untapped potential." African Business. London: May 2004. Issue 298. pg. 18
2) "Micro Loans, Solid Returns; Microfinance Funds Lift Poor Entrepreneurs — and Benefit Investors." Business Week. May 2005. Vol. 3932, pg.100. Uhlfelder, Eric and Ilma Ajanovic
3) Article referenced above: African Business. Issue 298. Pg. 18