This paper examines behavioral effects of time discounting and risk aversion as they relate to the acquisition of microcredit. Specifically, the authors seek to determine whether people with a “present-bias time inconsistency” exhibit different financial behavior related to borrowing and saving. These are people that show some level of preference for less money sooner as opposed to more money later, particularly when the reward is more immediate. The authors go on to demonstrate how microcredit can help these borrowers overcome the assumed lack of financial “self-discipline” associated with present bias and how microcredit can, in this sense, become a replacement for contractual savings.

The study involves a random sample of 573 villagers in Karnataka, a coastal state in southern India. To determine whether they exhibit “present-bias” and if they are “time-consistent,” participants were first asked if they preferred to receive INR 250, the equivalent of USD 5.34, tomorrow or INR 265, the equivalent of USD 5.66, in three months. Four more similar questions were posed, with the amount to be received in three months increasing up to INR 375, the equivalent of USD 8.02, and the amount to be received tomorrow remaining constant. Individuals that switched their answers more than once were removed from the sample, reducing the total number of participants to 544. Participants were then asked about their preference to receive less money in 12 months, or more money in 15 months time. Individuals were identified to exhibit “time inconsistency” if they chose the earlier but lesser reward any number of times in either survey. And, if an individual preferred the earlier reward more times in the first survey than they preferred the earlier reward in the second survey, this individual is not only time inconsistent but more specifically “present-bias time inconsistent.” These people demonstrated that the immediacy of the reward, even if the reward is less, is especially important to them.

As stated, the main results are focused on these individuals. About one third of the total sample was determined to exhibit this bias. Variables such as level of education, wealth, or seasonality of income were not found to be strong predictors of the likelihood of exhibiting this bias. However, individuals in this “present-bias” group are more likely than all others in the sample to borrow. This is particularly true of women that exhibited a strong present bias. These women are especially likely to borrow from a microcredit institution or self-help group (SHG), as opposed to, say, a bank or moneylender. Additionally, these women were found to hold a comparatively smaller percentage of their savings at home. Furthermore, present bias was not found to be a predictor of repayment discipline, despite the fact that present-bias individuals are often assumed to have less patience with consumption.

These results are consistent with the idea that the structured repayment schedule, peer pressure, and contractual obligations typically associated with microcredit are important to people who may lack financial “self-discipline.” Therefore, the authors believe that, for these people, the goal of microcredit is comparable to the goal of contractual savings, which is “to exchange a steady series of small fixed payments for a substantial amount of income obtainable at a future date.” Additionally, women who have less decision-making power in the household were found to be more likely to have loans from SHGs, indicating that microcredit may be used to protect finances from husbands. With all this considered, the authors believe that microcredit can be viewed as a substitute for contractual savings for present-biased people.

By Christopher Maggio, Research Assistant

*It should be noted that the findings of the research project proposed in this paper are not included, but will be published in a forthcoming paper from the Czech Science Foundation.

The authors begin with a general introduction of the microfinance industry. As the authors explain, the majority of microfinance institutions (MFIs) have not been profitable enterprises. As such, external forms of funding play an important role in the industry. MFIs’ external funding may take different forms – from donations, grants and non-commercial loans to deposits and private capital.

The authors then introduce microfinance in the context of investor portfolios and risk management. They survey several research papers that have explored the potential of MFIs for portfolio enhancement and diversification:

1. Kraus and Walter (2008) examine the correlation of MFIs’ performance to international as well as to local markets. In terms of absolute market risk interconnection, they found that MFIs are not correlated with global capital markets, while there was some correlation with domestic markets. Kraus and Walter conclude that “MFIs may have useful diversification value for international portfolio investors able to diversify away from country risk exposures.” (Kraus and Walter, 2008).

2. Galema, Lensink and Spierdijk (2008) investigate whether adding microfinance funds to a portfolio of risky international assets (equity and bond investments) is beneficial in terms of diversification. They suggest that microfinance may indeed be attractive for investors seeking a better risk-return profile.

The authors proceed with the proposed research topic of the paper, which is to analyze the risk characteristics and performance of microfinance investment funds against certain equity and fixed income indices over a defined study period. As the authors explain, the advantage of evaluating these vehicles is that they publish their net asset values (NAV) monthly. As such, the authors can evaluate their performance during the recent, global financial turmoil.

The authors’ hypothesis that the underlying assets of MIVs are not correlated to global markets is backed by two special features of MFIs. First, MFIs manage risk in ways that are uncommon in developed markets. These include group-lending and short-term, small-size loans with a high frequency of installments and flexible payment schedules. Second, microfinance customers are usually small entrepreneurs who operate within a close community. Their exposure to the formal domestic economy and international markets is therefore limited.

The total risk of an asset is measured by the standard deviation of monthly returns. To measure the risk of an asset within a broader portfolio, the authors use historical portfolio beta and the portfolio R-squared measures that are both derived from the Capital Asset Pricing Model (CAPM), a model often used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio.

The coefficient beta measures the correlation of that asset to the performance of a benchmark index or market portfolio. A beta equal to zero signifies that a given asset is not correlated to the benchmark portfolio and therefore may help to reduce the overall risk of a portfolio.

To measure the return of an asset, the authors propose using Jensen’s alpha, which measures the added return of a portfolio against its theoretical expected return implied by the CAPM. Positive alpha is therefore attractive from the point of view of investors. The authors also propose using the Sharpe ratio, which measures how much the excess return compensates the investor for a riskier asset. Finally, the authors propose using the Treynor ratio, a measure of a portfolio’s performance with respect to the portfolio’s systematic risk exposure. The higher the Treynor ratio, the better the investment returns, adjusted for systematic risk.

As the author explains, the actual research of the proposed project outlined in this paper is currently being conducted in the Czech Science Foundation.

By Jay Kumar, Research Assistant

Additional Sources:
1.) Source Article: http://www.microfinancegateway.org/gm/document-1.9.41395/The%20Problems%…
2.) Kraus and Walter (2008): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1300771
3.) Galema, Lensink and Spierdijk (2008): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1286769

SoftXpand’s ability to convert 1 computer into 8 fully independent virtual desktops without additional proprietary hardware will help SKS’s efforts to increase computer accessibility throughout its branches, according to a SKS spokesperson.

“The SoftXpand solution has delivered seamless virtualized computing experiences across multiple terminals, ensuring ‘near zero’ performance loss while reducing infrastructure and energy costs. With our aggressive growth underway, this cutting-edge technology perfectly matches our low cost – high value rural network model, improving productivity and efficiency of the field staff while reducing transaction costs, thus adding value to how we deliver financial solutions to our members,” said Pradeep Kalra, Chief Information Officer at SKS Microfinance.

By Jay Kumar, Research Assistant

About SKS Microfinance:
SKS Microfinance was founded in India in 1998. In 2005, it transformed into a for-profit non-banking financial company (NBFC). As of September 2009, SKS had 3.5 million active borrowers and 1,676 branches, compared with 771 in March of 2008. According to the MIX Market, the microfinance information clearinghouse, its total assets as of 2008 were USD 596.2 million, with a return on assets of 3.68 percent and return on equity of 18.72 percent. SKS products include: income generating loans, mid-term loans, individual loans, loan cover insurance and health insurance.

Additional Sources:

1. http://www.free-press-release.com/news-miniframe-provides-thousands-of-softxpand-virtual-desktops-to-the-india-s-largest-microfinance-company-1265209837.html

2. http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=SKS+Microfinance

By Christopher Maggio, Research Assistant

About: Grameen Foundation

The Grameen Foundation, founded in 1997, is a non-profit organization based in Washington, D.C. Though the Grameen Foundation is independent of the Grameen Bank, Muhammad Yunus, the founder of the Grameen Bank, serves on the foundation’s Board of Directors. The foundation aims to help microfinance institutions throughout the world replicate the microfinance model of the Grameen Bank. It provides financial, technological, and managerial support for local organizations and intends to provide new business opportunities and telecommunication services to the rural poor. The Grameen Foundation works with microfinance institutions (MFIs) in about 37 countries worldwide.

MicroCapital’s Microfinance Universe profile: Grameen Foundation

About: Bankers Without Borders

Bankers Without Borders is a volunteer program started by the Grameen Foundation that supports microfinance and technology initiatives related to finance in poor countries. It was founded in 2008 and, as of February 5, 2010, has over 50 projects and operates in nine countries. It has received funding from J.P. Morgan Chase and the Bill and Melinda Gates Foundation.

MicroCapital’s Microfinance Universe profile: Bankers Without Borders

Additional Resources:

J.P. Morgan Chase press release entitled ‘J.P. Morgan supports Grameen Foundation’s expansion of Bankers without Borders microfinance program’: http://www.jpmorgan.com/cm/cs?pagename=JPM_redesign/JPM_Content_C/Generic_Detail_Page_Template&cid=1264634763046&c=JPM_Content_C

J.P. Morgan Chase Community Partnership: http://www.jpmorgan.com/pages/jpmc/community

Bankers Without Borders: http://www.grameenfoundation.org/take-action/volunteer

Grameen Foundation: http://www.grameenfoundation.org/

By Christopher Maggio, Research Assistant

About:
Spandana Sphoorty Innovative Financial Services Limited

Description:
Spandana Sphoorty Innovative Financial Services Limited is a microfinance institution (MFI) based in India. It was founded in 1997 as a non-governmental organization (NGO) and is now a non-bank financial company. It offers loans, insurance, and fund transfer services.

Microfinance Information Exchange (MIX) Profile:
http://www.mixmarket.org/mfi/spandana

Organization’s Website:
http://www.spandanaindia.com/

Just the Facts:
- Country of Incorporation: India
- Year Founded: 1997
- Legal Status: Non-Bank Financial Company
- Total Assets: USD 359.5 million (as of 31/March/09)
- Gross Loan Portfolio: USD 245.2 million (as of 31/March/09)
- Number of Active Borrowers: 2.4 million (as of 31/March/09)
- Return on Assets: 6.89%
- Return on Equity: 51.16%
- Area of Operation: India
- Participant(s)/Backer(s)/Investor(s): Lok Capital
- Products: Loans, Insurance, Fund Transfer Services
- Main Funding: Loans, Shareholder Capital
- Managing Director: Padmaja Reddy

Contact Information:
Spandana Sphoorty Financial Limited
Plot No. 79. Vinayak Nagar, Care Crystal, Near Spencer Super Market, Gachibowli, Hyderabad-500032

Ph : +91 40 44386648

E-mail: contact@spandanaindia.com

MicroCapital’s Microfinance Universe profile: Spandana

Additional Resources:
VC Circle article entitled ‘Spandana Places Rs 25Cr Commercial Paper’: http://www.vccircle.com/500/news/spandana-places-rs-25cr-commercial-paper

Rabo India Financial Limited: http://www.rabobank.com/content/global/office_pages/Asia/India/

MICROCAPITAL STORY: Spandana Sphoorty Financial Ltd. Issues INR 800 million (USD 17 million) One-year 10 Percent Bonds in Deal Arranged by Standard Chartered Bank

MICROCAPITAL STORY: Hyderbad-based Spandana Microfinance Seeks to Raise Rs 300 Crore (USD 63.7 million) by June

Initial blog posts have addressed microfinance in Haiti and the correlation between loan size and portfolio yield in Russia, Mexico and India.

By: Stefanie Rubin, Research Assistant

About MFTransparency (MicroFinance Transparency):

MFTransparency is a company that aims to provide “information on credit products and their prices in a clear and consistent fashion” for the microfinance industry. It was launched in July of 2008. According to its website, as of December 6, 2009, it was endorsed by 264 “industry leaders” that served 80 million clients globally.

Additional Resources:

Source Article: MFTransparency Blog: http://www.mftransparency.org/pages/

MicroCapital Universe: MFTransparency: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=MFTransparency

“We are excited to be working with our investors in providing market-leading microfinance institutions with steady and patient capital support, especially in these turbulent economic times,” noted Gil Crawford, CEO of MicroVest. “Capital from the fund will allow these institutions to increase their outreach and product offerings to the working poor, ensuring that entrepreneurial individuals are afforded a stake in their own economies.”

By Jay Kumar, Research Assistant

About MicroVest Capital Management:
Launched in 2004 with USD 15 million, MicroVest is a family of funds that invest in microfinance institutions in emerging markets. It manages approximately USD 100 million in assets currently. MicroVest is headquartered in Bethesda, MD and was founded by CARE, MEDA and the Seed Capital Development Fund, three non-profit organizations.

About International Finance Corporation (IFC):
IFC is a member of the World Bank Group, created to support financial private sector development, mobilize private capital, and provide advisory and risk mitigation services to businesses and services. The group uses loan and debt securities, equity investments and guarantees as instruments of poverty alleviation. It “invests in companies and financial institutions in emerging markets” as well as providing technical assistance. The IFC has 182 member countries that “collectively determine its policies, and approves investments.”In 2009, IFC made new investments in developing countries that reached a total of USD 14.5 billion.

About Kinnevick New Ventures AB:
Established in 1936, Kinnevick New Ventures AB manages a portfolio of investments focused around three business areas. These include: “Major Listed Holdings”, which includes Millicom International Cellular, Tele2, Modern Times Group MTG, Metro International, Transcom WorldWide; “Major Unlisted Holdings”, which includes the cartonboard and paper company Korsnäs; and “New Ventures”, which is active in finding new investments in small and mid sized companies which has a significant growth potential.

Additional Sources:

1.) http://www.microvestfund.com/news/MVIIClose-PressRelease.pdf

2.) http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Kin…

3.) http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=International+Finance+Corporation+(IFC)

4.) http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Mic…

Additional resources:

Rural Shores: http://ruralshores.com/

Lok Capital on the MicroCapital Universe: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Lok+Capital+LLC

Source press release (not available online):

LOK CAPITAL INVESTS IN RURALSHORES BUSINESS SERVICES PVT LTD.

February 05th, 2010, NEW DELHI — Lok Capital LLC, a venture fund focused on the microfinance sector in India, announces an equity investment in RuralShores Business Services Pvt Ltd.

Lok Capital LLC has invested in RuralShores Business Services Pvt Ltd. Lok’s investment will allow the company to continue to expand its reach by opening additional operating centers in rural areas of India.

Rural Shores was founded in 2008 by a dynamic group of promoters including Mr. V.V. Ranganathan, formerly a senior Partner of Ernst & Young and co-founder & Chairman of Pinnacle Opportunities; Mr. C.N. Ram, previously CIO of HDFC Bank; Ms. R. Sujatha, who has founded a BPO business, MMC Infotech; Mr. Sudhakar Ram, Chairman and Managing Director of Mastek; Mr. G. Srinivasan a 25 year finance veteran with companies including Dawn Consulting and Wipro Finance; and Mr. Murali Vullaganti, formerly Mangaging Director of Xansa and earlier a Senior Executive with EDS in the US and Asia Pacific.

RuralShores’ business model has been designed to ensure scalability and sustainability of its operations by creating real value, not only for the shareholders, but for all stakeholders and to have a positive contribution to the communities in which they function. The Business Model has been designed to achieve the vision of setting up of 500 centers in seven years across the length and breadth of India. It is spearheading the rollout and operations of these centers across the nation through local entrepreneurs. RuralShores and each center will be run on a commercial basis to ensure long term sustainability.

Mr. Murali Vullaganti, CEO of Rural Shores, welcomed the investment by Lok Capital saying “We are very happy to partner with Lok Capital. This strategic investment by Lok Capital will help us to work with microfinance institutions, where we believe we can reduce the cost per transaction by delivering services out of our rural centers. We have already established 4 centers and will be commencing another 3 in the immediate term”

Mr. Venky Natarajan, Managing Director of Delhi-based Lok Advisory Services, expressed his enthusiasm saying “RuralShores presents a tremendously exciting opportunity. We are very happy to partner in this venture to create employment and value at the “Base of the Pyramid.” Through the first few centers of RuralShores, Murali and the RuralShores team have demonstrated that an outsourcing facility located in a rural area can create employment in the villages while delivering services at the highest quality in a sustained manner. We believe that this partnership will help microfinance institutions in outsourcing some of their non-core processes and thus cutting operating costs.”

ABOUT RURALSHORES BUSINESS SERVICES PVT LTD.

RuralShores Business Services Pvt. Ltd. is a rural-focused socio-commercial initiative dedicated to create employment in villages all over India through the establishment of Rural Business Processing Centers. The organization is geared to set up 500 centers across the country in 6 years with each center employing nearly 200 people from surrounding villages. This initiative is expected to create nearly 100,000 direct jobs and 300,000 more indirect livelihood opportunities across Rural India. HDFC Ltd. is a strategic investor holding 26% equity in RuralShores.

ABOUT LOK CAPITAL LLC

Lok Capital LLC is a $22 million Mauritius-based venture capital fund investing in commercially-oriented microfinance institutions in India. The Lok Capital fund is advised in India by Lok Advisory Services Pvt Ltd, a New Delhi-based firm composed of management and finance professionals.

“So here is Asia, [the] largest microfinance market in the world, funded mostly, in terms of private equity debt capital, by players from Europe and the US… Either there is no interest or no awareness or maybe it’s just a question of time before this opportunity is picked up by Asian investors too,” said Mr Prashant Thakker, global head of microfinance for Standard Chartered Bank.

By: Stefanie Rubin, Research Assistant

About Standard Chartered PLC:

Standard Chartered was formed in 1969 through a merger of two banks: The Standard Bank of British South Africa, founded in 1863, and the Chartered Bank of India, Australia and China, founded in 1853. The bank has over 1,600 branches in over 70 countries. Since the 1990’s, Standard Chartered has focused on developing its franchises in Asia, Africa and the Middle East.

As of 2008, Standard Chartered had extended USD 385 million in loans to 52 microfinance institutions, with an average loan size of USD 7 million.

Additional Resources:

Source Article: The Business Times: “Asia Investors Yet to Warm up to Microfinance,” http://www.syminvest.com/market/news/microfinance/asia-investors-yet-to-warm-up-to-microfinance/2010/2/1/2229

MicroCapital Universe: Standard Chartered PLC: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Standard+Chartered+PLC

“Most of MFIs’ members are in the rural areas where their main economic activity is farming which was hit hard by the drought,” said Ms Lydiah Koros, Chairperson of the Association of Microfinance Institutions (AMFI), an umbrella body for Kenyan MFIs. Due to the drought and post-election violence, many Kenyan MFIs have been faced with mass default and forced to write off significant portions of their loan portfolios.

Moreover, the global financial crisis has decreased the flow of donor funding, forcing MFIs to obtain loans from commercial banks at higher rates.

By: Stefanie Rubin, Research Assistant

About the Association of Microfinance Institutions (AMFI):

AMFI presently has 41 member institutions serving more than 4,000,000 poor and middle class families with financial services throughout Kenya. AMFI is an umbrella organization for Kenyan microfinance institutions (MFIs), which was established in 1999 in order to strengthen Kenyan MFIs’ lobbying efforts with respect to government policy formation and to aid local MFIs in networking with other local and international organizations.

Additional Resources:

Source Article: Business Daily Africa: “MFIs Still Reeling From the Effects of Post-Election Violence, Drought” http://www.businessdailyafrica.com/-/539552/853096/-/item/0/-/hiits0/-/index.html

MicroCapital Universe: AMFI: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Association+of+Microfinance+Institutions+of+Kenya+%28AMFIK%29