Well not quite, but we are getting there. Two weeks ago, leading commercial microfinance investors gathered for two days at the Asia Microfinance Investment conference in Singapore.  Two trends emerged from the two-day discussions.  First, commercial cross-border investment in Asia is still low, but there are signs of growth. Second, commercial investors increasingly care about promoting the double bottom line in their investments.

Using CGAP’s recent market intelligence on cross-border funding for microfinance and MixMarket data, participants discussed the investment gap that we see throughout Asia.  Cross border investments from Microfinance Investment vehicles in East Asia represent only 6% of global MIV portfolio, whereas the region hosts 10% of the global microfinance portfolio volume, 15% of the world’s micro-borrowers, and 22% of the global population and 23% of the world’s poor population.  This investment gap in East Asia has multiple causes such as the relatively limited number of MFIs that investors consider “investable” can attract investors, relatively high supply of domestic local funding sources such as savings, but also government market intervention. For example in Vietnam, Laos, China, and Thailand state banks still play a dominant role in finance for low income people.  Cambodian microfinance, an exception in the region, has attracted international investors thanks to the emergence of solid institutions and government policies designed to attract foreign investment to the sector. 

Despite the funding gap, there are signs that commercial investment is stepping up in the region. At about US $ 300 million of outstanding microfinance portfolio in 2008, commercial investment  increased by 57% between 2007 and 2008. Blue Orchard expects Asian high wealth individuals’ to invest money into microfinance. Bellwether (India’s first microfinance investment fund) is preparing a fund for East Asia, and there are plans for a Singapore based “Stock Exchange for Social Business”.

Globally, cross-border investment in microfinance increased by 31% between 2007 and 2008. The vast majority of this cross-border investment has come from socially responsible investors and East Asia is no exception. In 2009, some overheated markets and reported cases of clients abuse, such as India or Bosnia, raised important ethical questions and investors have increasingly focused on ensuring that their investments are “responsible”.  At the Singapore event, many CEOs of investment funds, foundations and banks emphasized the need to maintain a double bottom line that combines financial and social returns. However, there is still some confusion about how to implement this objective.  Some investors think that investing in socially-focused organizations is enough, while others require their partner MFIs to manage their social performance and report on it, for instance to the MixMarket.  Several participants have endorsed the CGAP/Accion Consumer Protection Principles (CPPs), but most are now looking to go beyond just adopting the principles and believe that investors need to ensure implementation of the through their investments.  CGAP has just issued technical guides for investors to implement the CPPs. Several investors are also talking about how to ensure that their investees have positive impact on the life of their clients. Hopefully these initiatives will mitigate some of the risks of commercialization and ensure that more poor people have access to reliable financial services in the future.

What if we considered retail payment networks as a utility such as access to water, a clinic, or electricity? This thought experiment was conceived by my former colleague Ignacio Mas in a CGAP Focus Note. It gave me the idea to compare access to formal finance against the reach of other utilities and basic services. In fact, the stories from the recent book Portfolios of the Poor clearly show that financial transactions are a critical part of the daily lives of the poor. Just as poor people resort to substandard water sources and latrines, they often resort to “informal” financial alternatives as well.

So how is financial access (bank accounts) doing in terms of outreach compared to public services such as water, sanitation, basic medical care, electricity and phones?

According to the CGAP’s report Financial Access 2009, 40% of the world bankable population has access to savings or credit accounts.

This is much lower than:
-    basic sanitation: 60%
-    mobile phones: 68 %
-    electricity: 78%
-    safe water: 83%
-    basic medical care: 84%

There is a variety of possible factors that might explain why finance falls behind in terms of outreach.

First, the other utilities are different in terms of the immediate need they satisfy: people will die or get very sick without clean water but not without cell phones or financial services. Also, it seems likely that the reason mobile phones are more wide spread than bank accounts is due to market forces: it might be harder to get profits from poor savers than from poor mobile phone users. Services such as electricity or mobile phones also benefit from existing infrastructures: once a network is built, it is relatively cheap to add new users and market forces (often combined with government subsidies) will drive outreach as cost per user drops. Then, although governments have been involved in facilitating access to formal finance to the poor through credit and savings programs, policy makers were considering it as a political tool or a secondary issue.

Since the poor need financial services and market forces have failed so far in providing basic financial services to over than half of the world, should developing countries start considering finance as a utility similar to water, sanitation or electricity? Should financial inclusion be a priority for public policy? Or will the market bring financial inclusion when the power of branchless banking is unleashed?

Haiti receives between $1.5-1.8 billion in remittances each year. In the immediate term, it’s vital to ensure that remittance flows to Haiti are not disrupted for people’s very survival.

It’s not often that an account of financial systems and money transfers reads like a tale of derring-do. But Anne Hastings’ account of a middle-of-the-night airlift of cash co-ordinated by the US Department of State to Haitian MFI Fonkoze is a true Hollywood-style action-adventure. Anne details the hour-by-hour progress of ten boxes of cash ($2 million originating from Fonkoze’s accounts in City Bank of New Jersey) as they are transported from JPMorgan Chase in Miami in armoured trucks to a C17 diverted from Langley, Virginia to Homestead Air Force Base, and from there flown to the newly-functioning airport in Port-au-Prince.

Anne met and signed for the cash on the runway at 03:30 on Sunday morning, and it was transferred immediately by helicopter to Fonkoze’s 34 branches across the country not shut down by the earthquake.

The dénouement nearly 24 hours later: “our branches worked throughout the day to pay the money transfers our clients so desperately needed to begin to put their lives back together… it’s time to announce to the Diaspora that Fonkoze will be able to pay out their transfers throughout the country without problems!”

World Bank economist Dilip Ratha estimates an additional $360 million in remittance flows to Haiti in 2010--and they could become a critical part of Haiti’s recovery, fuelling local and national development.

For MFIs working to get money to poor people in Haiti, the biggest constraint right now is liquidity. Until last week, banks in Port-au-Prince weren’t operating. Families living in the diaspora – including half a million in the United States – have been unable to get vital money transfers to their relatives and friends right at the time it’s most needed.

Haiti receives between $1.5-1.8 billion in remittances each year. In the immediate term, it’s vital to ensure that remittance flows to Haiti are not disrupted for people’s very survival. In the longer term, these remittances are likely to increase dramatically–World Bank economist Dilip Ratha estimates an additional $360 million in remittance flows to Haiti in 2010–and they could become a critical part of Haiti’s recovery, fuelling local and national development.

Time was of the essence in this mission to ensure that Haitians have access to their own resources to begin rebuilding their country. Anne titled her email: “mission accomplished”. But the incredible story of the partnership between civilian government, military, and civil society is less one of courage (though that’s certainly needed to move $2 million in cash around a country that’s been devastated), than commitment and co-operation. And that’s what Haiti needs right now.

In a recent mission to Peru to review ways that MFIs measure client poverty, a manager told us “I think we have overestimated the percentage of poor clients we were serving”.

MFIs with a social mission or interested in capturing socially-responsible investment have been using a range of tools: poverty mapping, focus groups, wealth ranking, scorecards, and household surveys. These tools, when applied by qualified, rigorous monitoring and research teams, can be an excellent source of information to reorient operational targets and innovate with products that respond to clients’ needs.

Read the rest of this page »

Participants of the Global Meeting

In late November 2009, the nine partners in the CGAP-Ford Foundation Graduation Program met in Bangladesh, during a workshop hosted by BRAC Development Institute. The first part of the meeting was kept to pilot implementers only—it proved to be an incredible forum for candid discussions about the challenges of implementing such a demanding model.

There was a particularly lively discussion on targeting. The graduation model is intended for the poorest—food insecure households, those at the bottom of the economic ladder, and often excluded from regular microfinance. Targeting, to ensure both that the poorest are reached and that better off households are excluded, is therefore an extremely important element of the program. And because the program is based on household-level economic activities, only people who are physically or mentally able to manage enterprises can join.

Read the rest of this page »

I appreciate the vigorous discussion on microcredit impact. A few responses:

–(for Michael) When people think about “getting out of poverty,” they are usually thinking in terms of income and/or consumption. Most impact studies focus on these variables rather than wealth, so I’m not aware of evidence bearing one way or the other on your interesting suggestion that housing microfinance may be more helpful.

–(for Elie Hassenfeld) The statements about loan demand and desertion rates were based on my and my colleagues’ anecdotal experience. I know of no source for broad data on these topics. Many individual MFIs keep such data, but I have no idea which ones might be willing to share it.

–(for V. Rengarajan) The question of how far down the poverty scale microfinance reaches is an important but difficult one. The Microcredit Summit publishes data about millions of “poorest” clients–that is, people in the bottom half of the group below the poverty line, or living on less than $1 a day. I have been told (I can’t vouch for it myself) that with the exception of Fonkoze in Haiti, most of the MFIs that are studied using the Grameen/CGAP or IRIS/USAID poverty scoring tools turn out to have far fewer extremely poor clients than their management has thought. Let’s not assume that reaching such clients is always and necessarily beneficial. It’s far from obvious that indebting people who aren’t likely to have the regular cashflow to make payments on the loan is a good thing for them.

–(for Sophie Chitedze) Randomized controlled trials aren’t the only way to know about microfinance helping poor people. The private knowledge of experienced people like you is also an important source of knowledge. The problem is in the public forum: it’s a lot easier for a third party (like me, for instance) to assess the reliability of an RCT than it is to assess the reliability of often-conflicting reports of personal experience.

–(For FCRWizard)So far I’ve heard of only one RCT study of microfinance plus, and my recollection is that the people who got the “plus” did better than the people who just got the loan. I hope that there are many more studies of this question using rigorous methodology.

–(for Anita Sharma) I certainly agree with you that we need to look more broadly than just income changes. On another point, I think that your overall feel about the findings of the Banerjee study may be a bit more optimistic in tone that the authors’overall conclusions were.

For those who are interested, the topic of this blog is treated in more detail in CGAP’s Focus Note No. 59: ‘Does Microcredit Really Help Poor People?’

After the devastating earthquake that struck Haiti three days ago, here is what we know from Fonkoze, our Graduation Program partner, implementing Chemen Lavi Miyo in Haiti.

Anne Hastings, director of Fonkoze, wrote to our colleagues at BRAC on Tuesday saying “Am ok but bodies everywhere. Destruction massive. Very little communication gets through even in-country. Headquarters demolished. Need to figure out how to get operational again.” You can read more excerpts from her distressed email on BRAC’s blog.

Gauthier Dieudonné, the program manager for Chemen Lavi Miyo, sent a text message to his colleagues saying he is safe. Fonkoze is also reporting that both Fonkoze and Sèvis Finansye Fonkoze staff in the HQ in Port au Prince are secure. However, the building cannot be used, the wall surrounding the property is demolished, and apparently securing the property is a concern. Fonkoze doesn’t yet know the status of the Port au Prince Branch, the status of other branches, the safety of their staff, families, and borrowers. They also don’t know when they will be able to get more information. You can read their frequent updates on their earthquake news page.

Fonkoze staff in Haiti is establishing an emergency operations center—their “Earthquake Relief and Rehabilitation Fund” is soliciting donations. In addition Fonkoze suggests that anyone interested in going to Haiti as a volunteer or that has assets that “would be usable in Haiti,” describe their skills or assets here. Fonkoze’s Haiti staff will determine what is needed and match the needs with the offer.

There’s lots of talk about the delinquency crisis in Nicaragua, Bosnia, and Morocco these days. But what is really happening in these countries? What is the origin of these crises and what are the lessons learned for the industry? I’ve been looking at the situation in Morocco.

Microcredit in Morocco has enjoyed one of the most extraordinary growths seen in the microfinance industry. In just four years, from 2003 to 2007, MFI loan portfolio multiplied 11 times and client outreach by four, according to MIX. This exuberant growth was driven by four leading MFIs. These institutions scored remarkably well on all microfinance performance metrics, including scale, depth of outreach, asset quality, and profitability. These impressive results did not go unnoticed, and Al-Amana and Zakoura were awarded several international prizes.

In 2007 some signs of stress—notably loan delinquency and a significant increase in the number of multiple loans clients took on—started to emerge.  A sharp rise in nonperforming loans took place in 2008 and affected all MFIs. PAR 30 increased significantly to 5 percent in December 2008 and reached an alarming level of 10 percent in June 2009. Write-offs also increased dramatically with a negative impact on MFI profitability and solvency. In May 2009, Zakoura, one of the Moroccan flagship institutions, reported a PAR 30 of over 30 percent and decided to merge with another MFI, Fondation des Banques Populaires

The causes of the delinquency crisis are well known and can be summarized in two words: unsustainable growth. The Morocco microfinance sector wasn’t a casualty of the global financial crisis: this was primarily a crisis of the MFIs themselves. Unprecedented growth had overstretched MFI capacity, translating into lenient credit policies, obsolete management information systems (MIS), lack of internal controls, and substandard governance. Multiple lending to the same clients was also an aggravating factor.

Moroccan MFIs are putting in place aggressive turn-around plans, and a recovery is expected for 2010. A new and more mature microfinance sector is emerging with a well functioning credit bureau and improved risk management systems.

But what’s at the root of these problems? Why are MFIs in Morocco and elsewhere being pushed to grow beyond their institutional capacity? Are the funders or the MFI managers to blame? Have we become obsessed with outreach, at the cost of quality and long term sustainability?

Congratulations to former CGAP Excom chair, Fazle Abed, founder and chairperson of BRAC, for his new year honour. Fazle Abed is to be appointed Knight Commander of the Most Distinguished Order of St. Michael and St. George (KCMG) by Her Majesty Queen Elizabeth II for his work in tackling poverty and empowering the poor in Bangladesh and in other parts of the world.

Despite the global crisis there is no shortage of capital for microfinance institutions.  The latest CGAP funder survey shows that donors and investors disbursed $3 billion in 2008, an increase of nearly 20% from 2007. Donors and investors participating in a recent European funders meeting reported maintaining or increasing their funding commitments for microfinance in 2009.  Political interest for microfinance remains high, especially following commitments made by the G20.

The question is if more funding is going to make things better.

Some people may argue that funders have contributed to a situation of uncontrolled growth in microfinance markets like in Nicaragua, Bosnia, and Morocco. A lack of coordination and concentration of funding with a limited number of institutions may have aggravated it in some cases. Are funders to blame for flooding MFIs with more money they can reasonably manage?

Today, one of the biggest needs for support appears to be for capacity building to strengthen the fundamentals of retail financial institutions. Strengthening risk management, governance, and management of microfinance providers is critical to help address the current challenges facing the industry and will be important for the healthy growth of the sector.

But what is the most effective way to build capacity on a massive scale and who can do it best?

Surprisingly, we don’t know much about the effectiveness of different models of technical assistance. One of the best models to build capacity and increase outreach of microfinance is through the creation of new institutions, like a Greenfield in Madagascar, or by focusing on the development of local MFIs using technical assistance providers like KFS in Kenya.  Context matters of course, but is there a way we can compare the sustainability and cost effectiveness of models? Can we come up with some indicators to measure the effectiveness of technical assistance, for instance based on the cost per client reached? This could help guide future capacity building investments. 

Another question to ask: is there a shortage of good technical assistance providers to build the capacity needed? And if so, what can we all do to address this issue and ensure a sustainable delivery of quality services?