“Secure Lives First” by tapping into larger markets

Thanks to Dr. Gavarasana, my 2-page essay got picked up in the May issue of Catalyst magazine alongside several and other articles, a few of them listed below…

See page 25 for my article

Secure Lives First
DEVABHAKTUNI SRIKRISHNA
Tapping into larger markets is the need of the hour if rural poverty in India is to be tackled and human security achieved as agriculture market is limited to $100 billion or $200 billion annually and crop yields are at the mercy of the fluctuating weather.

page 20,

Microcredit, NGOs and Poverty Alleviation
MRITIUNJOY MOHANTY
While access to microcredit serves as a useful complement to the survival strategies of poor households, it is not a strategy of poverty alleviation and growth.

page 31,

Is India’s Prosperity Trickling Down?
ABRAHAM M. GEORGE
Despite increase in employment by 60 million in all sectors in India during the five years sending 2004-05, most of the new jobs have gone urban and incomes have also not risen much for rural workers.

page 38,

Akshaya Patra
The Torch Bearer
At a cost of $28 per child annually, Akshaya Patra is providing underprivileged children in India with a free nutritious meal, often the only meal they receive for the entire day.

quote from Manmohan Singh

“Once poverty-stricken, India has been transformed by the past decade’s economic boom into a burgeoning world power whose wealth can be seen everywhere: New cars cruise the streets, high-end apartment blocks are rising on the edges of cities, luxury shops fill the seemingly endless supply of new shopping malls, he said and added: “But the inequality in this country of 1.1 billion people is as often as conspicuous as the consumption – Indian children are more likely to be malnourished than African ones and the country is home to about a third of the people in the world living on less than $ 1 a day”.

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What do people do in rural economies?

By listing the loans handed out per market segment, the 2006 annual report of Grameen Bank gives a snapshot of economic activities in rural markets (this is for Bangladesh). I’d be interested in finding more data long these lines…

Here are the top 25 items for which members took loans (like personal loans),

 

and here are the top 25 items for which members took micro-enterprise loans (small business)

Book Review of “The White Man’s Burden”

On a long plane plane ride to India, I read the “The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good ” by William Easterly – the guy that Bill Gates had a strong reaction to recently on a panel discussion in Davos earlier this year. Thanks to Mora for suggesting and lending the book to me.

From “Bill Gates Issues Call For Kinder Capitalism,” January 24, 2008, Wall Street Journal…

“If we can spend the early decades of the 21st century finding approaches that meet the needs of the poor in ways that generate profits for business, we will have found a sustainable way to reduce poverty in the world,” Mr. Gates plans to say….

To a degree, Mr. Gates’s speech is an answer to critics of rich-country efforts to help the poor. One perennial critic is Mr. Easterly, the New York University professor, whose 2006 book, “The White Man’s Burden,” found little evidence of benefit from the $2.3 trillion given in foreign aid over the past five decades.

Mr. Gates said he hated the book. His feelings surfaced in January 2007 during a Davos panel discussion with Mr. Easterly, Liberian President Ellen Johnson Sirleaf and then-World Bank chief Paul Wolfowitz. To a packed room of Davos attendees, Mr. Easterly noted that all the aid given to Africa over the years has failed to stimulate economic growth on the continent. Mr. Gates, his voice rising, snapped back that there are measures of success other than economic growth — such as rising literacy rates or lives saved through smallpox vaccines. “I don’t promise that when a kid lives it will cause a GNP increase,” he quipped. “I think life has value.”

Brushing off Mr. Gates’s comments, Mr. Easterly responds, “The vested interests in aid are so powerful they resist change and they ignore criticism. It is so good to try to help the poor but there is this feeling that [philanthropists] should be immune from criticism.”

also see Easterly’s rebuttal.

Easterly is former research economist at the World Bank now at NYU. in his book he looks at the successes/ failures of international aid interventions (financial + military) by “The West” and makes the case that they have done more harm than good during the past 50+ years.

Most of Easterly’s book makes sense to me and I agree with Easterly that philanthropic/aid agencies are not “above” criticism – their hyped up expectations do not necessarily make things better and sometimes they make things worse by standing in the way of more realistic, lasting solutions… but,

1. I agree with Gates on one thing, that you can get into trouble measuring national economic development using aggregate GDP (growth) instead of measuring the purchasing power of the bottom pyramid (half or quarter) of earners in the economy. Easterly cites India as a success story of development showing a chart of exponential GDP growth over 20-40 years using the Indian IT industry as an example. Despite this progress, the failure is that 50 years after Indian independence close to half of all Indians (400-500 million people) still live on less than $1 of $2 per day.
2. Easterly says new (niche) market creation is limited by social and legal barriers to trust and property rights and therefore must take place indigenously – there is not much we can do about it living in “The West.” I think we have not yet explored the potential of the Internet to overcome these constraints and help diversify agricultural economies (long tail). See my essay “Opening Niche Markets in Rural India using the Internet”
3. Style. Though his analysis is very compelling and data-driven with graphs, stories of people, case studies of developing nations, and world history, to me the title seems a bit polarizing or stuck in the past and the tone of the writing is funny bit also feels a bit sarcastic. Perhaps it is discouraging to visionaries and optimists who want to break from the past. In his book he takes aim at Bono and Jeffery Sachs’ “The End of Poverty.”

I tried to capture the main ideas of the book… sure I missed something but I think it’s mostly here.

— Top-down “planners” at large institutions like the World Bank will mobilize resources on the basis of utopian agendas and large-scale “big pushes” that attract donor governments and private institutions (in US, UK, and The West). These visions are never achieved because they lack feedback from the people (Africa, Asia, and “The Rest”) whom they are intended to benefit, i.e. the poor. On the other hand, he notes that the World Bank produces very high quality economic research.

— Unlike market-driven firms or (legitimately) elected officials the planners are accountable to donors, not the poor. planners’ jobs are not dependent on serving the poor but rather to indulge donors’ unrealistic expectations which may never materialize. The “planners” efforts do more harm than good (large part of what the book is about). The failures of these big pushes become self-fulfilling as donors redouble their efforts, bureaucracy becomes bloated, and they begin to measure progress based on volume of aid disbursed not impact on the poor. incentives of planners and poor people are not sufficiently aligned – this is called the principal-agent problem

— Bottom-up “searchers” (NGOs, entrepreneurs, profit-seeking companies) who are on “the ground” in developing countries can get direct feedback from the poor people they serve and make real impact on the their lives. they set realistic, achievable goals unlike the planners. Too little money is going to support the searchers. several case studies.

— On microfinance and microcredit,

Microcredit is not a panacea for poverty reduction that some have made it out to be after Yunis’ discovery. Some disillusionment with microcredit has already come in response to these blown-up expectations. Microcredit didn’t solve everything; it just solved one particular problem under on particular set of circumstances-the poor’s lack of access to credit except at usurious rates from moneylenders.

— Markets are a spontaneous outgrowth of social trust (for transactions) and property rights (for investment), and can’t be planned by aid agencies, foreign governments, or “out of the blue” after an invasion or removal of a dictator.

— Foreign aid has been most effective and made a large-scale impact in people’s lives for things like vaccination, health care delivery, and programs to keep kids/girls in school when compared to other areas in which results can’t be directly measured. dollar for dollar, the recent momentum to offer AIDS treatment ($1000 per person) like Bush’s $15 billion commitment of US taxpayer funds for Africa (30 million infected) is many times less cost-effective compared to preventing the spread of AIDS through condoms (600 million not infected) or even prevention of other life-threatening diseases like malaria, diarrhea, and infant mortality. the spread of AIDS could have been avoided had prevention been a bigger priority since experts have been predicting this epidemic for over a few decades. In AIDS, saving a life gets more “emotional” attention from the public than prevention of AIDS transmission which could save many more lives.

— There have been some success stories, but economic growth in developing countries has not been correlated to aid/intervention by the West. Colonialism and imperialism has resulted in long-term economic stagnation, which he offers as a case study to consider other neo-imperialistic plans to take over weak-states. His claim is that countries develop much faster and better when they are left to their own.

— National financial health has less direct impact on earnings of the poorest people, except indirectly via inflation and government subsidies to the poor.

The IMF’s approach is simple. A poor country runs out of money when its central bank runs out of dollars. The central bank needs an adequate supply of dollars for two reasons. First, so that residents of the poor country who want to buy foreign goods can change their domestic money (let’s call it pesos) into dollars. Second, so those poor-country residents, firms, or governments who owe money to foreigners can change their pesos into dollars with which to make debt repayments to their foreign creditors. What makes the central bank run out of dollars? The central bank not only holds the nation’s official supply of dollars (foreign exchange reserves), it also makes loans to the government [aside from foreign borrowing with bonds] and supplies the domestic currency for the nation’s economy. The government spends the currency [it borrows], and the pesos pass into the hands of people throughout the economy. But are people willing to hold the currency? The printing of more currency [excessive government borrowing from the Central Bank] drives down the value of currency if people spend it on the existing amount of goods – too much currency chasing too few goods… so they take the pesos back and exchange them for dollars. The effect of printing more currency that people don’t want is to run down the central bank’s dollar holdings. Too few dollars for the outstanding stock of pesos is kind of like the Titanic with too few lifeboats. The country then calls on the IMF. So the standard IMF prescription is to force contraction of central bank credit the government, which requires a reduction in the government’s budget deficit [government spending]… forces the government to do unpopular things [like cut subsidies] – disturbance of domestic politics.

— Bad governments (corruption and violent dictators) have been responsible for much of the slow growth in these countries, which are in turn caused by either a colonial past or by historical poverty itself. Foreign aid tends to prop these governments up, and in some cases private organizations working around these governments can lead to much better results.

— Loans are not necessary to balance a national budget, and the IMF’s prescriptions for foreign exchange lending to developing countries and reducing government spending can be way off. This is due to severe accounting irregularities in the books of these countries, uncertainty of how or when markets react to falling currency prices, and how they react to information in the economy (people’s behavior). Lending based on shaky foundations can lead to the self-reinforcing “debt trap” through repeated refinancing of poor countries and propping up of bad governments. the IMF does better in emerging markets, but he says it may be better off to leave the poorest countries alone.

Morgan Stanley Microfinance Conference

Reporting from the Morgan Stanley offices in Westchester, NY… at the first day of the Women’s World Banking conference on microfinance.   

In the morning Aisha De Sequeira gave a cool talk summarizing the worldwide microfinance industry. Microfinance institutions (MFIs) are banks that require capital (equity/debt financing) like any other business, which they use in turn lend to their “clients” in small amounts of $1000 or so. Based on projected growth plans of these MFIs in the next 5-10 years, Morgan Stanley estimates that their total capital needs will be $280B, but in actuality may remain as low as $20B – what to do about the gap in order to service the needs of end users? (that’s 500 million people according to Premal Shah at Kiva). 

Aisha says MFIs can be categorized into Tier 1 (10%) which are profitable, and Tier 2 (90%) which are not profitable but most (or all) have business plans to become profitable. In afternoon sessions they were even talking about some MFIs going IPO. Profitability for 1^st gen MFIs tooks 13 years, 2^nd gen took 9 years, and 3^rd generation are becoming profitable in as short as 4 years. The less mature MFIs usually get funded by organizations out of social responsibility, and the more mature MFIs can access commercial capital markets – they represent a diversified asset compared to other classes of investments. In funding MFIs, there is a tradeoff between absolute returns versus social responsibility – transparency allows people to make that evaluation. 

Had a few hallway/lunch conversations. Professor James Austin (HBS) helped me understand that there may be a difference between urban and rural microfinance, but information on types of the types of businesses that are funded is probably not readily available yet – the major source of information/feedback is simply whether the loans get repaid (or not). Talking afterwards to Abid Safaffe, CEO of the Kashf Foundation (an MFI based on Lahore, Pakistan) whose operations are growing at 60-80% year on year, she says they see a “higher cost of operations” in rural areas due to distance and organizational hurdles and that most of their rural clients are farm-related (animals and agriculture). The urban clients (70%) are easier to serve and they are mostly “selling small stuff.” Also spoke to Asphina Skihauli — a loan officer from a South African MFI called Women’s Development Bank (WDB) that is purely rural focused. They pointed out that most of the clients are illiterate, start off in farm opportunities (like animals or selling vegetables), then after seeing success they move onto more profitable things like sewing, artifacts, manufacturing pottery or wooden chairs, all based on ideas they come up with which the bank then supports. WDB provides education for free. 

At dinner one of the people I met expressed skepticism in the claims about microfinance. He thought that while there were lots of success stories and cases,

1. there is not a lot of data to support microfinance as being diversified asset class yet.
2. repayment rates are really so high as being reported due to refinancing by the MFI (instead of allowing client to default)
3. most of the profitable MFIs are in urban microfinance, leaving the unprofitable rural operations to NGOs and non-profits

In her presentation, Roshaneh Zafar the President/founder of Kashf (means “miracle”) cited Yunis’ call to action to get started several years ago – “if you fail blame me.” 

In another talk I heard that Mexico has 106 mllion people of which 45% live on less than $2/day – in aggregate does not appear a whole lot different than India. Microfinance penetration in Mexico has been only 7%. Similarly Pakistan is 160 million people, 80% of them live on less than $2 per day, and microfinance penetration is 6-8%.

Some useful links

• The Microfinance Information Exchange (Mix Market)
• Consultancy Group for Advocacy for the Poor (CGAP)
• Small Enterprise Education and Promotion Network (SEEP)

Kiva: The Ebay for Microfinance

Yesterday I went to the talk by Premal Shah about www.kiva.org which he calls the “Ebay for microfinance.” It was at Zerox PARC. Thanks to Chari for giving me a heads up about this. They get lots of press and also see a recent NY Times article about them.

 

Kiva is a nonprofit website and clearing house that enables Internet users (lenders) to give 0% (interest-free) loans to specific individual or small-group “entrepreneurs” (borrowers) in developing countries in Africa, South America, Eastern Europe, and Asia. They work with 85 field partners from 40 countries, called microfinance institutions (MFI), who post/vet entrepreneur profiles which are in turn selected by Internet users for personal loans. One of the biggest advantages of Kiva is end-to-end transparency — each lender can “see” who which borrower they are lending to, track their progress through journal updates, and see when the loan is being repayed. See a blog post by Guy Kawasaki that explains their fee per transaction business model — $2.50 voluntary fee that lenders pay when checking out their “shopping cart.”  

Yunis was first 30 years ago, and today there are 10,000 MFIs worldwide. He estimates there are 500M people needing loans like this, and only 100M have been reached through traditional microfinance to-date. Access to capital is still a bottleneck he says. Note: Kiva is prevented from operating in India due to their bank regulations.

Kiva Statistics. Kiva is 3 years old, so far $20M loaned by Q1 08 in 3 years since inception,. Observing parabolic quarter on quarter growth in loans and expect to have loaned $250M to $1B in five years surpassing efforts of microfinance initiatives major banks like Citibank ($100M).  

The Kiva model:  

Internet user (a lender, social investor) 

–> Kiva (online marketplace)  

–> Local Field Partner (Microfinance Institution)  

–> Developing World Entrepreneur (the borrower) 

Each Kiva lender has given on average 2.2 loans — $25 max limited by Kiva. Over the 20-30,000 people visit the site daily, and 3% end up giving loans. Each borrower is usually funded by 15-20 lenders on average — typically in the range of $1000 total loan size. The lenders usually sign up within a day of a loan request being posted for an entrepreneur. In some war torn or crisis areas like Iraq of Afghanistan, the lenders sign up in just a few hours. 

The lenders (social investor) rationale is that Kiva is transparent (know where it goes), sustainable (if repaid, money can be lent to someone else), affordable ($25 to change someone’s life), and unique (“I love microfinance, I want to participate”). For the microfinance institution, Kiva offers a low interest US dollar capital, no liability, flexible repayment terms, and financial assistance + incentives for transparency. 100% of loan funds go directly to the borrowers.

Kiva checks out (verify) the MFIs and the MFIs in turn check out the borrowers. The MFI charges 20% interest rate to cover distribution costs, and they bear currency ris as well when converting from US dollars to local currency and back during repayment period. In the future Premal hopes they can establish credit histories for individuals and bypass this intermediate layer completely. Kiva uses random sampling to audit and check on the MFIs for fraud.  

Unlike traditional microfinance where borrowers are organized into groups who are accountable to each other, social accountability is created via the Internet. Borrowers’ profiles are made visible on the Internet, and is therefore visible online to locals who watch each other at Internet kiosks/cafes. 

Capital. Internet users are willing to bear greater risk than banks probably due to the “personal connection.” People don’t want (need) to lend with interest, whereas banks have to when they are working with MFIs.  

Operating Principles. “Unreliable credit is OK, but unreliable data is not OK.” Each lender gets a “portfolio” of people who they lend to, much like a stock portfolio on Etrade. Loans in this model create a “persistent tie” between the people across the world with journal updates. The accountability is simple. If you are getting repaid, something is working. If you don’t get repayed, something is not working. MFIs report repayment rates of 99.7% but Premal believes that’s skewed to report better than actual results because the MFIs don’t want to discourage Kiva. He believes the actual repayment rate is over 90%. There is a “Risk & Due Diligence Center” on the website. 

Diversification. I asked what types of different activities and market opportunities are being funded, epecially outside agriculture. He said he doesn’t know for sure, but says that agricultural opportunities are the dominant activity being funded. In addition, there appears to be a slight lender bias. For example, the most popular kind of loan that gets funded by lenders is African female farmer, and the least popular is an Eastern European male taxi driver. He questions whether or not that is economically rational, but says that’s what it is right now. In 3Q 2008 they plan to open up APIs so researchers can download and analyze the loan data from their website to gain further insights. 

Organization. Kiva.org is 25 people and operates on very low overhead thanks to cooperation and donations from several silicon valley companies. For example PayPal gives free payment processing. Google offers free AdWords traffic.  

Trust-based lending by the inventor of microcredit

This week we got to see the founder of Grameen Bank, Mohammed Yunnis speak in person at the Fairmont Hotel in downtown SF (Commonwealth Club). He pioneered a new form of banking that can be called “trust-based” or “community-based” lending, which is contrast to the worldwide banking system based on “collateral” and “credit-histories.” For this he won the Nobel Peace Prize in 2006. See this FAQ http://www.grameen-info.org/bank/GBGlance.htm

In 1976, he was a economics professor an Dhaka university where he found the theories he was teaching had little practical applicability to the poverty he was seeing outside the university. So he decided to do what he could. He lent small amounts of money (~$500) to poor people and they became very happy. Then he asked, why doesn’t the bank do this?

For months he struggled to get banks to lend to the poor, but found them to be uncooperative. Since poor people didn’t have credit histories + collateral the banks were unwilling to lend money. His insight was to turn those assumptions on their head by lending to people with no money and history of taking loans. He sought out poor women who were afraid of taking money, and tells his employees that those are the people they should loan to.

No lawyers. By challenging all the “assumptions” he came up with something completely new. He said that the current banking system has lots of money and is setup to loan large amounts of money to people who already have money. That architecture doesn’t scale down to vast majority of people who need it. Using the analogy of ships, he said the modern banking system is like a large supertanker. For poor people you need a system more like a dinghy boat, and if you scale down a supertanker architecture to that size it would sink.

Grameen Bank does not require any collateral against its micro-loans. Since the bank does not wish to take any borrower to the court of law in case of non-repayment, it does not require the borrowers to sign any legal instrument.

Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. Repayment responsibility solely rests on the individual borrower, while the group and the centre oversee that everyone behaves in a responsible way and none gets into repayment problem. There is no form of joint liability, i.e. group members are not responsible to pay on behalf of a defaulting member.

Social business. Yunis described the concept of “social business” intended simply to help people, which can exist alongside profit-maximizing businesses and often work in synergy.  Related, see January 24 front page article on Gates speech at Davos, “Bill Gates Issues Call For Kinder Capitalism”

“If we can spend the early decades of the 21st century finding approaches that meet the needs of the poor in ways that generate profits for business, we will have found a sustainable way to reduce poverty in the world,” Mr. Gates plans to say.

Everyone is an entrepreneur. Yunis explained that all people are entrepreneurial by nature, and it is the system that either brings it out in them or not. Grameen Bank has been able to convert tens of thousands of beggars into door-to-door salespeople who earn a living – since they visit those house anyways, why don’t they take along something to sell and make money? It turns out beggars have unique knowledge of when particular people are home, and and household demographics that is useful in selling.

Begging is the last resort for survival for a poor person, unless he/she turns into crime or other forms of illegal activities. Among the beggars there are disabled, blind, and retarded people, as well as old people with ill health. Grameen Bank has taken up a special programme, called Struggling Members Programme, to reach out to the beggars. About 98,500 beggars have already joined the programme. Total amount disbursed stands at Tk. 102.27 million. Of that amount of Tk. 69.74 million has already been paid off

There are many other programs (scholarships, cell phones, loan insurance, etc) described on the website. Some facts,

• Total amount of loan disbursed by Grameen Bank is US $ 6.55 billion
• Loan recovery rate is 98.35 per cent
• Total number of borrowers is 7.34 million, 97 per cent of them are women
• Grameen Bank finances 100 per cent of its outstanding loan from its deposits. Over 58 per cent of its deposits come from bank’s own borrowers. Deposits amount to 139 per cent of the outstanding loans
• Ever since Grameen Bank came into being, it has made profit every year except in 1983, 1991, and 1992.
• Grameen Bank has 2,468 branches. It works in 80,257 villages. Total staff is 24,703.

I expect the Commonwealth Club audio transcript should be available in a few weeks. Here are some funny short clips from where is interviewed on the Daily Show (2006) right after recieving his nobel prize where he uses the phrase “trust-based lending.” He was also interviewed a few weeks ago by Steve Colbert (2008). Speaking to Colbert, Yunis remarks that the current home loan default crisis in the US was caused not by the people who took the money but rather by the banks who didn’t understand how to lend money.

Micro-enterprise

the US State Dept (USAID) defines a micro-enterprise as “a firm of 10 or fewer employees, including unpaid family workers, that is owned and operated by someone who is poor.” apart from the grameen bank type efforts, Congress supplies a good amount of money every year for small sized loans (~$500) and business development activities (BDA) to poor individuals worldwide – majority women – in the form of microcredit.

in 2002 it was $170 million = $110M microfinance + $47M business development services (BDS) +… see review papers prepared by the US state dept (in 2004). this has been shown to bring families out of poverty — consistent with what we would expect from Dr. Krishna’s surveys on the causes for families falling into and rising out of poverty.

the basis (or bias) of microcredit is a repayment rates of 95-97% ensured through social support groups who hold each other accountable, and which turn requires focus on businesses that the villagers know how to make money from and so many end up being agricultural based. examples cited here tend to indicate this (selling vegetables, food preparation, etc) while some are non-agricultural (sewing, kerosene lamps, handicrafts)

1. Members must run successful businesses. This is at the heart of what we do. Our members create businesses around existing livelihood skills and provide simple services and products for which there is already a demonstrated demand. Their business plans must pass the scrutiny of their own self-guarantee groups, which have the power to reject loan applications.

2. Perhaps counter-intuitively, even the poorest people (i.e., those earning less than $1 per day per capita) do not, in general, need formal training before launching a business supported by a microfinance institution (MFI). Their “survival skills,” honed in an environment where there is neither a safety net nor wage employment to fall back on, are well developed, though severely undercapitalized. Providing capital, in a structured format where peer accountability is emphasized, is the most efficient and respectful means of ensuring rapid progress. Costly business training and technical assistance programs can therefore often be dispensed with or used only in exceptional cases.

so the success of micro-enterprises hinges on information that the villager already knows about and has access to. from these papers and the IIT-Madras analysis for india, it seems little to nothing has been done so far to expand the information available to villagers about higher paying opportunities in their village or region by exposing demand and reducing distribution costs in the local/rural economies – how do we close the information deficit?