"As for microfinance, I have a question. As microfinance becomes more recognized as a profitable tool, are larger international banks becoming attracted to the field? I know the IMF and World Bank have become more involved in it. As these larger, establishment type entities move into the field, are they putting the squeeze on the smaller NGOs, charging lower interest for larger loans and such? My biggest worry is that the bigger banks will take over the field and the philanthropic part of microfinance will be lost. I just don't see Bank of America giving a crap about empowering people but they have big money muscle."
Thanks, Joe, for giving me a perfect segue into a fascinating topic! This is the one of the main issues these NGOs are dealing with right now and as microfinance continues to prove its sustainability and profitability this issue is at the forefront of everyone's minds! This topic has come up at every NGO we have visited and here's what I've gathered and understand.
First, I want to give a bit of background. Indian Banks have a quota they need to fill to lend to those who may not be considered traditionally "credit worthy." At the end of the fiscal year when they realize the need to meet this quota they send a few representatives out onto the streets, identify a few people, give them loans, and then write it off as bad debts to close the fiscal year. In this way they 'meet' their quotas and unfortunately propogate the notion that the poor are not credit worthy. This story was related by the founder of one of the NGOs we visited, Annapurna. The founder, Medha Samant, worked in the banking sector for three years before starting Annapurna.
So far we've spent time at three NGOs and all three cite the huge gap between the supply and demand for finacial services. As I said before, moneylenders were occupying the space in the market for poor people to get loans. Then, the NGOs came in and began promoting microfinance alongside a series of social programs. Now, microfinance is gaining international attention from investors and corporate banks alike as a way to make a profit.
The problem is that the demand for financial services is so high, that the NGOs who have the right intentions are not able to serve everyone. This leaves the door open for other microfinance insitutions (MFIs) to come in and compete for the business. For-profit MFIs are able to give loans with a one-day turn around with lower interest rates. They are able to give lower interest rates because the loan periods are longer - the maximum loan repayment period we have seen at these NGOs is 2 years. Many Indian NGO microfianance models are based on a Self Help Group model (SHG) that require savings for the first 6 months. When members want to apply for a loan they apply to the group and the entire process may take a couple of weeks, depending on how often the groups meet. (I will write an entry describing the SHG model in detail...). The point is, if people really need money and they can get it the next day, why not use the for-profit MFI?
Members of mature SHGs that have been around for 5-10 years understand the value of the SHG and the benefits they receive from being a part of the group. However, there is nothing to stop members of even mature SHG groups to take a loan from a for-profit MFI during times when they need quick cash, or don't want to go through the group model. The for-profit MFIs are threatening the effectivness and structures of the SHGs and may hinder the ability of NGOs to spread their socially empowering model of microfinance.
Many people I've talked to point out that the for-profit model just doesn't make sense from a business standpoint. The for-profit model focused only on lending neglects the other 'needs' of their customers and does not encourage growth in their customer base and is not a sustainable business model. In fact, there is a shift in NGOs towards evaluating microfinance from social performance perspective in addition to a financial perspective.
The main concern NGOs have about for-profit MFIs is that they are in the market to gain profits, which sets up exploitative models for their clients. The NGO models must be efficient, effective and even self-sustaining, but they are operating with a completely different mission: to better the lives of their clients. I have not visited a for-profit MFI and to be sure, they most likely do not begin under the pretense of exploiting people. But I would argue that regardless of your intentions, if your goal is profit and you are accountable to shareholders who are expecting returns on their investment then this will be reflected in the way business is conducted. The NGOs do recognize these MFIs are providing a service that they are not able to provide, and that indeed they are expanding the scope and reach of credit, but at what cost?
Which brings us to the next part of Joe's question...
"And how are the NGOs funded? Are they more or less sustained by the interest paid on the loans?"
This differs between all of the NGOs we've visited. There are two basic philosophies I've encountered:
1) Sustainable microfinance programs after 3 years.
NGOs are now requiring the Federations (groups of SHGs) to be completely self-sustaining by the end of three years. They recognize that costs of the initial set up, support and development of these groups cannot be burdened on the people. The NGO use funds raised through grants and other international programs to support those groups while they are forming and becoming self sustaining.
DST recently realized the need for groups to be sustainable and now have the SHGs calculate repayment rates of their groups, the individuals and the federations. The women are very cognicent of these financial ratios and concepts and strive to achieve 100% repayment through peer pressure and mutual trust. (Two reasons why the SHG model is so brilliant...will explain in another post).
2) Profits not only sustain the microfinance program, but also fund the growth and development of new projects.
At Annapurna, where the founder comes from a private-sector banking background, they use the profits from the microfinance programs not only to sustain their operations, but also to expand other social programs. I sensed that other NGOs founders do not support this type of expansion funded by profits - they would rather the profits go to the women, or go towards lower interest rates for their loans.
At this point in time, NGOs are being approached by investors and they are having some real internal debates on how to handle this. Of course in an NGO capacity, funding is always an issue, but many are wary of compromising their mission. The only one currently exploring the issue of outside private investors is Annapurna.
Whew! Congratluations if you made it through this very lengthy explanation! This is a very real and complex issue and something the microfinance community is going through. All of my opinions are based on what I've learned here...I'm sure there are more scholarly articles about this topic if you're interested.
Also, there probably won't be any more pictures added to this blog, I'm having some issues with the technology. So sorry!
Monday, August 10, 2009
Saturday, August 08, 2009
Avida's Story
Access to credit is not a new concept in the urban slums in India. Women borrow money from 'money lenders' who usually charge a rate of 10-15% per month or 120% annually. These exorbitant rates not only make repayment next to impossible but creates an environment where families become more and more entrenched in debt as they borrow money to pay back old loans. Money-lenders exploit women unable to make timely payments through the use of sexual and physical violence that sometimes even extends to the family.
From an economic point of view, NGOs are creating a more efficient money-lending market. Critics of microfinance point out the high interest rates - averaging about 24% per year. However, comparing 24% to the 120% the money lenders charge, the rate is much more reasonable. And that's where the comparisons should end. True, the 24% rate would never fly in the States, and in the same vein, no one would take out a loan for just $50. What seems like an insignificant amount of money to us can really make a difference in the ability of poor people around the globe to create and sustain livelihoods.
For example, listen to the story of Avida. Married at 9 years old she had her first child at 14. Only educated through the second grade, when her husband died of a heart attack she was left along to care for her four children. Through a friend, Avida learned of microfinance and joined a Self Help Group (SHG) to gain access to savings and credit. Ten years later, Avida has taken out three separate loans to expand her business of selling bangles and tailoring saris. So far she has borrowed and repaid 50,000 Rupees (about $1,100). She is currently repaying her third loan and then plans to take another to build a second floor on her house to rent. This will provide her with a stable source of income in addition to her other businesses.
Avida attributes her success as a business woman to the network she's built through the SHG group and her perseverance and patience. She takes great pride in the quality of her work and most of her business referrals come through word of mouth. At 34 Avida already has grandsons, but she hopes to educate her two children still living at home. One day she dreams of having a shop of her very own.
After spending an afternoon in Avida's 1-room home in the Pune slums listening to her story, I was struck by her confidence and the great strength she gains from the other members of her SHG. Joining the group has given her access to credit and savings, but along the way she and the other women have created a support structure for each other. Together they have taken on sanitation issues with the municipal government, successfully reported a man of domestic violence, and organized a day of clean up to impact the overall health of the community. Women came together for a tangible thing: money, and through the process became leaders and in their community.
As I continue to write this blog and delve into the specifics of how microfinance works please keep one thing in your mind:
Microfinance is a tool used for the end goal of empowering women.
Yes, microfinance is profitable.
Yes, microfinance institutions can be self-sustaining.
...but microfinance practiced for the sake of making profits is a misguided approach.
In the next few entries I will describe a few methods of microfinance I have witnessed and how it contributes to women's empowerment.
Sorry, no pictures today! Having some technology issues... Hope all is well!
From an economic point of view, NGOs are creating a more efficient money-lending market. Critics of microfinance point out the high interest rates - averaging about 24% per year. However, comparing 24% to the 120% the money lenders charge, the rate is much more reasonable. And that's where the comparisons should end. True, the 24% rate would never fly in the States, and in the same vein, no one would take out a loan for just $50. What seems like an insignificant amount of money to us can really make a difference in the ability of poor people around the globe to create and sustain livelihoods.
For example, listen to the story of Avida. Married at 9 years old she had her first child at 14. Only educated through the second grade, when her husband died of a heart attack she was left along to care for her four children. Through a friend, Avida learned of microfinance and joined a Self Help Group (SHG) to gain access to savings and credit. Ten years later, Avida has taken out three separate loans to expand her business of selling bangles and tailoring saris. So far she has borrowed and repaid 50,000 Rupees (about $1,100). She is currently repaying her third loan and then plans to take another to build a second floor on her house to rent. This will provide her with a stable source of income in addition to her other businesses.
Avida attributes her success as a business woman to the network she's built through the SHG group and her perseverance and patience. She takes great pride in the quality of her work and most of her business referrals come through word of mouth. At 34 Avida already has grandsons, but she hopes to educate her two children still living at home. One day she dreams of having a shop of her very own.
After spending an afternoon in Avida's 1-room home in the Pune slums listening to her story, I was struck by her confidence and the great strength she gains from the other members of her SHG. Joining the group has given her access to credit and savings, but along the way she and the other women have created a support structure for each other. Together they have taken on sanitation issues with the municipal government, successfully reported a man of domestic violence, and organized a day of clean up to impact the overall health of the community. Women came together for a tangible thing: money, and through the process became leaders and in their community.
As I continue to write this blog and delve into the specifics of how microfinance works please keep one thing in your mind:
Microfinance is a tool used for the end goal of empowering women.
Yes, microfinance is profitable.
Yes, microfinance institutions can be self-sustaining.
...but microfinance practiced for the sake of making profits is a misguided approach.
In the next few entries I will describe a few methods of microfinance I have witnessed and how it contributes to women's empowerment.
Sorry, no pictures today! Having some technology issues... Hope all is well!
Thursday, August 06, 2009
Communicating in India
English and Hindi are the national languages in India, but that doesn't mean that everyone speaks one or both of those! And even if people do speak English, the cadence, vocabulary and inflection is so difficult to understand to my American-English ears that they may as well be speaking a different language!
India is huge, and every state speaks a different language.
For example, when major corporations are running a national marketing campaign in India there is always the question of what languages to run it in and where...and it can lead to really costly marketing in multiple languages. When Indians travel between states, they aren't always able to communicate with each other.
We are able to get by with English, most people speak basics in the cities for shopping and other things. However, in the slums and rural areas we are working through translators.
Another really interesting thing is the head waggle. The best I can describe it is as a bobble head doll, when you ask a yes or no question the head moves from side to side in sort of a figure eight motion...I'll demonstrate it for you when I get back! It can mean yes or no or anything in between. It's hilarious.
Thanks, Stacy for the questions! Yes, in the first group meeting we went to they had us sit in chairs while they sit on the floor. In most meetings people sit on the floor...but since we were guests at the meeting they had set up their chairs for us. It was awkward sitting there, but if we were to refuse it might be even more awkward.
I've learned that in India there is a saying, "athithi devo bhava" which means something like "treat the guest as God." Perhaps some of you who are more familiar with Indian culture can shed more light on this...but the bottom line is guests are treated very well. Everywhere we go we have been served tea and biscuits (another tradition likely inherited from the English colonization) and we have been treated very well. Even in the slums, we were served hot chai!
And, since I'm a firm believer that every blog entry should have pictures, I'll leave you with a few.
India is huge, and every state speaks a different language.
For example, when major corporations are running a national marketing campaign in India there is always the question of what languages to run it in and where...and it can lead to really costly marketing in multiple languages. When Indians travel between states, they aren't always able to communicate with each other.
We are able to get by with English, most people speak basics in the cities for shopping and other things. However, in the slums and rural areas we are working through translators.
Another really interesting thing is the head waggle. The best I can describe it is as a bobble head doll, when you ask a yes or no question the head moves from side to side in sort of a figure eight motion...I'll demonstrate it for you when I get back! It can mean yes or no or anything in between. It's hilarious.
Thanks, Stacy for the questions! Yes, in the first group meeting we went to they had us sit in chairs while they sit on the floor. In most meetings people sit on the floor...but since we were guests at the meeting they had set up their chairs for us. It was awkward sitting there, but if we were to refuse it might be even more awkward.
I've learned that in India there is a saying, "athithi devo bhava" which means something like "treat the guest as God." Perhaps some of you who are more familiar with Indian culture can shed more light on this...but the bottom line is guests are treated very well. Everywhere we go we have been served tea and biscuits (another tradition likely inherited from the English colonization) and we have been treated very well. Even in the slums, we were served hot chai!
And, since I'm a firm believer that every blog entry should have pictures, I'll leave you with a few.
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