Archive for: microfinance

This is the final post in the short series on microfinance in Russia. You can find the previous two posts here and here.

In the two previous blog posts on this topic, we wrote on the situation with exorbitant interest rates charged by a few Russian commercial lending companies calling themselves “microlenders” (though we prefer to label them “payday lenders”).  We also shared suggestions from the Russian MFI community to the Russian regulatory authorities, which have been favorably received.

Certainly, Russia is not alone facing this issue; there are many other countries struggling with the question whether it is possible to draw a meaningful line between “justifiable” and “exploitative” interest rates – in other words, trying to answer the question “how much is too much?” The question has enormous political as well as operational relevance.  In this final post of the series, we would like to explore the issue by going back to the basics of what can – and should – go into setting the price of a loan. Read the rest of this page »

Mobile banking is just one of the reasons India is a place to watch for innovations in financial inclusion. This short film profiles one such innovation, Eko, to see how businesses chasing the fortune at the base of the pyramid are serving the needs of poor customers in India.

Five years’ ago, Abhishek and Abhinav Sinha created a software program that allows migrant workers in cities across India to send money to their families using a cellphone. Now their company, Eko Financial Services Ltd., is working with two major banks, the State Bank of India and ICICI, India’s second largest bank, to offer financial services to poor and low income customers using local corner stores, pharmacies, and airtime resellers as agents. By harnessing the huge potential of domestic remittances as an anchor product, Eko hopes to tap a huge potential market in India, where three quarters of the 1.25 billion people live on less than $2 a day.

The challenge to make Eko a success isn’t the technology—it’s the business model. When you see the long queues at the banks it’s clear that the demand exists to make a profitable business based on tiny margins if the right business model and regulatory environment can be created. “It’s a volume game,” says Eko marketing executive Purva Gupta. “But at the same time we need a particular ecosystem for the Eko business to sustain and to grow.”

Agent networks are the main issue that mobile operators and banks need to get right if they are to turn branchless banking into a sustainable business. The Reserve Bank of India recently removed restrictions on agent exclusivity, so customers can now transact at customer service points of one bank even if their accounts are held at another bank. Such interoperability should mean greater efficiency and lower costs across the system.

In February, the Government of India released a task force report on a unified payments infrastructure linked to the biometric Aadhaar number that proposes electronic payments for government-to-people payments as a means to cut costs for the government and bring added convenience to welfare recipients.

These two important moves by the government suggest that new momentum around branchless banking will shape the financial inclusion agenda in India. Domestic remittances and government payments are driving the electronic money market. If these payments can be translated into banking that goes beyond basic bank accounts—offering savings, insurance, and loans—they will make a major impact on financial inclusion in India.

——– Jeanette Thomas is the Director of Communications at CGAP.

The exorbitant interest rates offered by so-called  “microlending” companies (who look much more like payday lenders or garden variety loan sharks) to clients of the Russian Post  recently gave rise to a wave of indignation on the part of the public, government, mass media and the responsible microfinance industry. 

Microlending has existed in Russia for 15 years but it was not until 2011 that special legislation came into force, providing for a clearer legal status of microlending MFIs. These institutions play an important role in the country, serving people who do not have access to bank loans.  Thus, last year about 70 percent of microloans were disbursed in small towns and rural areas; 60 percent of microborrowers were women and 10 percent – youth; and about 50 percent of all microloans were used to fund micro and small businesses.   The average annual interest rates charged by MFIs are about 28 percent per annum. Read the rest of this page »

With around 20 million borrower accounts estimated for March 2012, India still has one of the largest microfinance industries in the world – even though the number is much lower than 32 million in October 2010 when the microfinance crisis began.  However, in March 2012 it also had the dubious distinction of having perhaps the worst portfolio quality in the world (at the national level).  Since October 2010 commercial bank lending to MFIs, which made up over 70% of their funding, has been consistently drying up mainly because of perceived political risk. Read the rest of this page »

This post kicks-off a three-part series on Russia’s financial inclusion space. This short series will feature prominent voices from Russia’s microfinance industry and discuss new developments and implications for the global industry as a whole.

Just as the dust settled after a controversial entrance of new players in the Russian microfinance sector about a year ago – those claiming themselves to be ”microfinance organizations”  and yet charging 730% interest per annum, another “innovative microfinance” product has totally shocked visitors of the Russian Post, as reflected in a multitude of blogs and in numerous media articles published in recent weeks.  Promotional booklets found in post offices in several major Russian cities were advertising microloans in the amounts starting from $100 that, if taken for one week, would cost 2772% p. a. (and a “special offer for low-income pensioners” – at 2598%).  The largest amount of 5000 rubles (about $167), for a one-month term, is offered at a “mere” 720%. Read the rest of this page »

Some time ago, I was on a microfinance panel organized by USAID together with two respected industry leaders:  Shari Berenbach, Director of USAID’s Microenterprise Development Office, and Sam Daley-Harris, the out-going Director of the Microcredit Summit Campaign.  Somebody from the audience told me afterwards: “It was fascinating to hear three such different views” – and I suspect she was just polite enough not to say “totally disconnected.”

A recent déjà-vu moment reminded me of that conversation and the conclusion that I had come around to:  we weren’t that disconnected and probably had the same starting point, but we stressed three different directions of evolution from the original microcredit idea. These three directions are not mutually exclusive.  In fact, from a development perspective they are all required.  We just each stressed one dimension that seemed more plausible or comfortable – perhaps for a combination of reasons such as institutional mandates, philosophical beliefs, and pragmatic biases. Read the rest of this page »

The most rapidly obsolescing part of my book, Due Diligence, is chapter 6, which reviews the statistical evidence of the impact of microfinance on poverty. Since I put the text to bed, working papers have appeared that test microcredit in Mongolia and Bosnia & Herzegovina and microsavings in Malawi and Chile (though the latter is marked “do not cite or circulate”). There’s also the Morocco microcredit study, which I didn’t catch wind of until too late in the book production. Add all these to the trials of microcredit in India and the Philippines and of microsavings in Kenya—the one that initiated this wave of research in 2009—and we have five credit studies and three savings ones. Read the rest of this page »

A micro-borrower in the Philippines struggles to figure out which one of several loans is the least expensive—one comes with a flat charge, another a weekly interest rate, and still another a monthly rate with an upfront deduction. In Senegal, a recent survey of low-income consumers revealed that more than 99% of respondents were unaware of their right to standardized price information on the loan and deposit services they used. In Mexico, poorer consumers looking for a cheaper way to save, reported to CGAP losing 25%, 50%, or even their whole savings due to hidden fees on “low-balance” accounts they were not aware of until it was too late.

Consumer research supported by CGAP and others around the world is painting a similar picture – customers face many challenges in understanding the prices, terms and conditions of the financial services they use, and this lack of understanding carries very real economic consequences. Even if consumers are fortunate enough to have multiple options for loans, savings or payments services, many find it very difficult to “shop around” and identify the option that offers the best value-for-money.  Sometimes the problem is the opposite, when excessive fine print floods consumers with too much information and distracts them from the factors that are most important for their decisions—factors such as total finance charges. Read the rest of this page »

David Freedman in the November issue of The Atlantic  profiles John Ioannidis, one of the world’s most respected and sought-after experts on the credibility of medical research.

Ioannidis argues that much of what biomedical researchers conclude in published studies is misleading, exaggerated, and often flat-out wrong. “Gold-standard” randomized controlled trials (RCTs) are not immune: 25 percent of published RCT results are subsequently convincingly refuted. When Ioannidis narrowed the focus to the very pinnacle of the research pyramid—49 of the most highly regarded medical research findings of the past 13 years—he found the same problems.

The causes are varied and complex, including researcher bias (and sometimes even outright fraud), publication bias that highlights certain types of findings and buries others, inadequate statistical procedures, and of course financial conflicts of interest when pharmaceuticals are tested.

“Medical research is not especially plagued with wrongness,” says Freeman. “Other meta-research experts have confirmed that similar issues distort research in all fields of science, from physics to economics (where the highly regarded economists J. Bradford DeLong and Kevin Lang once showed how a remarkably consistent paucity of strong evidence in published economics studies made it unlikely that any of them were right).”

Does any of this bear on the credibility of microfinance RCTs? I could speculate about some differences.  For instance, I wouldn’t expect financial conflicts of interest to very much of a problem in current microfinance RCTs. And publication bias may be lesser; after all, a major reason that Dean Karlan and his buddies started IPA was to carry out research that academics would have a hard time getting published.

But I’m a statistical illiterate with no business opining on these issues.  Watch this space tomorrow for Jonathan Morduch’s much more informed reflections on the matter.

With the SKS IPO slated to hit the street by the end of July, we will have an opportunity to learn more about where the microfinance industry is headed.  There will be some details which the IPO transaction itself will shed light on, but the most important questions about the microfinance industry will take some time.  We should not rush to judgement.

The IPO will finally tell us where the price and valuation settled.  A price at the low end might dampen investor enthusiasm.  On the other hand, a valuation perceived to be a the high end might bring accusations of supernatural profiteering.  Expectations about the price and valuation may drive the initial reaction.  It will be very interesting to read carefully the reaction from the general public, opinion makers or policymakers to gauge broader perceptions of a changing microfinance industry within India.  Microfinance may finally move in the public’s view from a development sector to a fully commercial enterprise.  Another key issue is how smoothly the transaction is executed.  If it moves through seamlessly with strong subscription this should be a sign that future IPOs for microfinance are possible.

But the most important and contentious issues about the IPO will take more time for us all to weigh carefully.  It will be particularly important to see how the proceeds of several Mutual Benefit Trusts are used given the philanthropic purpose for which these MBTs were first created. This is something we may not know for several months or possibly even longer.  Another feature that may take time to learn more about is how new transparency and governance standards applied to public companies affects SKS’s performance.  And we will have to wait and see how the IPO affects the growth trajectory, expectations, and valuations of the broader microfinance industry. 

Will the health of the microfinance industry be advanced?  This is something we will have to look beyond the transaction itself into the months and years ahead. 

Keep your eyes on the CGAP blog in August for a forthcoming breakdown of the IPO transaction.

Gregory Chen