In April Walmart announced the launch of a new money transfer service. I did a double take on the service's low price: $9.50 to send up to $900 from one Walmart store to another – that’s as much as $66.50 cheaper than the price of competing services at Western Union and Money Gram.
This is just the latest example of Walmart's foray into the financial services industry. In 2012 the retailer launched the Bluebird prepaid card with American Express. The product has no monthly fees or minimum balance requirements, making it more affordable than the norm. The cost of cashing a check at Walmart's Money Center is a transparent flat rate, often cheaper than independent financial services centers that take a large percentage of a check's total. The big box store also offers car insurance “one stop shops” at a growing number of locations, and it houses bank branches with “convenient hours, free financial education and unusually forgiving account features”. All in all, Walmart seems to consistently deliver more budget-friendly financial tools than its competitors. And not only do its financial products come at a lower price for consumers; they are all offered in the same place, easing the burden on people who are squeezed for time and transportation . . . Read More
In January, the Wall Street Journal reported that banks are to closing brick-and-mortar branches “at a record rate,” as new technologies and financial pressures drive them to transition many of their services to digital equivalents or ATMs. But against this broader backdrop of bank closings, the market is both fragmenting and polarizing, as a handful of banks redesign their branches for specific demographic groups.
For the tech-savvy, middle-to-high income millennial who doesn’t carry cash and wants banking to be quick and convenient, Capital One advertises its new network of “360 Cafés” as places where customers can discuss account options with staff while drinking an espresso. Umqua Bank in San Francisco has a concierge at its downtown location, described in the local press as “a cross between an Apple Store, a Starbucks and a W Hotel lobby.” And Wells Fargo is piloting “mini-branches” in up-and-coming urban neighborhoods like DC’s U Street where customers, attended by trouble-shooting tablet-carrying bank employees, use sophisticated versions of self-service machines that dispense cash and take deposits, but also issue debit cards and loan applications . . . Read More
Lately I've been noticing a lot of writing about innovation inanely citing Steve Jobs (“People don't know what they want until you show it to them”) and/or Henry Ford (“If I had asked people what they wanted, they would have said faster horses.”) quotations about customers not knowing what they want. An example last week, in an otherwise reasonable piece about how to measure economic progress, caused my frustration to boil over.
I think this perspective on innovation rears its head a lot when it comes to financial services for poor households which is concerning because it is 90% (at least) dead wrong.
Let’s start with the Ford quotation. First, it’s apocryphal . . . Read More
My last two posts on the potential repayment crisis in Chiapas described the high risk of a crisis in Chiapas, Mexico, and its potentially devastating consequences to the microfinance sector around the world. But here is the good news: thus far there is no crisis, and one could still be avoided.
I have argued before that development finance institutions and other funders could leverage Smart Certification to enforce client protection practices and thus reduce the risk of the kind of over-lending that's happening in Chiapas. However, that prescription alone would not work in Mexico, mainly because a large number of Mexican MFIs are independent of foreign funding, and there are many other lenders active in the same space, including consumer finance companies and large retailers that provide credit.
The answer to avoiding a repayment crisis in Mexico will thus require government action . . . Read More
In the past few weeks, the local government of West Bengal has been embroiled in a financial and political crisis that has potentially large impacts on the state’s poor and its MFIs. After discovering that the commercial entity the Saradha Group had duped thousands of investors through a real estate Ponzi scheme, the state minister launched a full investigation of over 70 other deposit-taking entities which are grouped under the category of “chit funds.”
A chit fund is a ROSCA-meets-the-auction block style of Indian savings scheme in which subscribers pool money every month and then try to outbid each other to get the entire pot. The difference between the lowest bid and what is left in the pool is distributed among members. In West Bengal, chit funds are particularly important due to the high demand for products that accommodate small savings. According to Abhijit Banerjee and Maitreesh Ghatak, West Bengal’s share of population was approximately 7.5% in 2011, its state domestic product was 6.7% of India’s GDP, but its share of bank deposits was 22%. Many of the state’s poor cannot afford to open a bank account and those who can face plummeting interest rates. Chit funds can offer an alternative to traditional savings and credit lines for the unbanked . . . Read More
The long-awaited impact study of Compartamos, led by Manuela Angelucci of the University of Michigan and Dean Karlan and Johnathan Zinman of IPA, has finally been published. The research team used a randomized trial to test the impact of loans offered at 110% APR by Compartamos, the largest microlender in Mexico. After three years of data collection on a variety of factors, the results were generally positive with no evidence that the loans caused harm or significant negative effects. Researchers found that loan recipients grew their business revenues and expenses, were happier, more trusting, had greater household decision power, and were better able to manage liquidity and risk. However, there was little evidence that loans had an impact on building wealth like household income, business profits, or consumption.
One of the more interesting conclusions from the paper is as follows . . . Read More
In the last week, two significant deals in the world of microfinance investment have been announced. First, Bamboo Finance announced that it was acquiring "a controlling interest" in Accion Investments, a $105 million for-profit investment fund started by Accion. In context, Bamboo Finance had $195 million of assets under management. Yesterday, Microvest GMG Asset Management announced they had taken on MinLam Microfinance Fund, a $47 million debt fund making loans in local currencies. Microvest GMG currently has $245 million of assets under management.
While these transactions likely have a variety of motivations, it's impossible not to wonder if we are seeing the beginning of a wave of consolidation driven by the souring of public sentiment on microfinance . . . Read More
If there’s one issue that’s most difficult for microfinance practitioners to explain to the lay public, it’s high interest rates. As Elisabeth Rhyne describes it, at some point the numbers get so high that people become outraged and stop listening altogether. Most recently, the issue was put back in the public eye through Hugh Sinclair’s Confessions of a Microfinance Heretic and the media coverage it has spurred.
With few exceptions, his critique that microfinance investors are investing in MFIs charging exhorbitant interest rates has gone largely unanswered. That’s not a tenable position for the long-term. For a socially responsible fund, the case ought to be simple – if you have investments that you’d rather not have to publicly support and explain, then either those investments don't belong in your portfolio or you should learn how to explain those investments . . . Read More
A few weeks ago M-CRIL, an Indian microfinance ratings firm, published a white paper on India's evolving microfinance regulations. The overall message is that while the proposed regulatory framework is improving, it still needs work. One particular point caught my eye:
"The prevailing pricing regime – average cost of funds plus a margin cap – penalizes those MFIs that incur a high cost due to their commitment to responsible finance as well as those who are innovative in raising funds at low cost. Those that do both suffer a double 'whammy'."
While there is widespread agreement around the world that people should be protected from usurious interest rates on loans, there is little consensus on how to determine, and enforce, a cap on interest rates charged to the poor. The debate is as hot in the US (where it's fought over credit card and payday lending rates) as it is in India, Nicaragua and Bangladesh . . . Read More
What does a microlending operation look like? Well, it may be a bank or an NGO (and many others in between), it probably has some branches, branch managers, loan officers. The funding of the MFI may come from deposits or from debt, whether from a local or foreign institution, including from online platforms such as Kiva. There may be variations on these themes, but that pretty much describes microlending as we know it.
What if you took all that away – the branches, the loan officers, the institutional funders? Could the lending still work? Well, one model is that of Zidisha, an online lending platform that connects lenders in (mostly) developed countries with borrowers in developing ones. And, unlike Kiva, the connections are real – borrowers create their own online profiles, post their own loan applications, and make their own repayments. They also post their own comments, as do the lenders. There is no local MFI intermediary – it is literally the first true person-to-person (P2P) microfinance lending platform in the world (Disclosure: I am lender on Zidisha, and have been informally advising the organization for several years).
Naturally, getting there has required a lot of innovation and experimentation . . . Read More
The last decade saw an incredible expansion of the microfinance industry, reaching 190.3 million borrowers in 2009. In 2007, in the heat of this expansion, Forbes Magazine named Bangladesh’s ASA as the top microfinance institution worldwide. In his book The Pledge, Stuart Rutherford describes ASA’s moves to maintain successful development outreach and profitability simultaneously. At the time, ASA was one of the few institutions with a clear claim to truly achieving the “win-win” promise of microfinance.
We just received ASA’s 2010 Annual Report. The report marks two interesting trends since 2007. First, the number of loans and members served are declining. But, second, the total loan disbursement and average loan size are increasing . . . Read More
Ten years ago, “The Microfinance Schism” was published in World Development(vol. 28, no. 4, 2000). I had become frustrated sitting in meeting after meeting, especially in Washington, with people talking past each other. Some took the view that microfinance should be first and foremost a social intervention. Others argued that it should be profit-driven. Many argued that you could achieve both goals without making trade-offs. No one had good evidence, and few had a strong conceptual frame.
It’s a debate that hasn’t gone away. In fact, the debate has become more rancorous, especially given the current tensions in South India following the SKS IPO. Muhammad Yunus and Vikram Akula are the current combatants. Read More
“The Microfinance Schism” parsed the arguments and aimed to show the true nature of divides. Here’s the abstract
Recently there has been a lot of talk within the industry about the commercialization of microfinance institutions. In 2008 the wildly successful IPO of Mexico’s Banco Compartamos demonstrated that the microfinance industry can yield massive profits and is worthy of private investment. But it also raised questions about whether such financial success is reason for concern, whether microfinance is in danger of mission drift, and if operating on a for-profit basis is in the best interest of the poor households microfinance claims to help.
To understand the implications and concerns regarding commercialization, it is essential to first appreciate the different types of microfinance providers: banks, for-profit NGOs, and non-profit, NGOs. From an economic standpoint the most significant difference among the various providers, is that commercialized entities (banks and for-profit MFIs) are able to distribute profits as they like after taxes. Non-commercialized MFIs (non-profit MFIs), must reinvest profits back into their organization. The MFIs also differ in regard to mission, clientele, services offered and regulation requirements they must meet. Banks are subject to stricter regulations and make loans that on average are about four times larger than loans from NGOs. Since poorer customers generally demand smaller loans, average loan size is a rough proxy for the poverty level of customers. On average, microfinance banks thus tend to serve a substantially better-off group of borrowers than do NGOs. Banks also serve fewer women as a share of their customers. For-profit NGOs have a very similar profile to banks, but are not subject to the same rigorous regulation and tend to be less profitable . . . Read More
This is the second of two guest posts by Barbara Magnoni, President of EA Consultants, on what we can learn from Banex and its demise. Banex had been one of the most prominent microfinance institutions in Nicaragua, but as it pushed forward with an aggressive growth strategy, its foundations proved weak. In early August 2010, Banex (formerly Findesa) entered liquidation. Magnoni gives starting points for understanding how the bubble burst.
While I do not claim to understand the dynamics of Banex’s drastic deterioration, I would propose we examine some possible causes to avoid repeating mistakes in other MFIs and other countries. Some of the issues to take into account (in no particular order) are:
1) Extremely fast growth and how this may have affected loan analysis (when entering new areas such as livestock, consumer lending and agriculture) as well as hiring practices, training of new staff, and conformity to loan policies and procedures.
2) Incentive schemes . . . Read More
The SKS IPO is a microfinance milestone: the first IPO of an Indian microlender – an event big enough to be covered by the international media. When the first IPO happened in Mexico in 2008, Banco Compartamos was attacked for its high interest rates and (arguably) excessive profit rates, with Muhammad Yunus leading the charge.
This time, there's controversy of a different sort: the focus is on the investors rather than the microlender, namely Unitus. This is Jonathan Lewis, founder of Opportunity Collaboration, pinning down the questions swirling around Unitus, a key SKSsupporter which has, at best, massively botched its PR strategy:
With its announcement, Unitus unleashed a series of web and media commentaries . . . Read More
Two very different events hit the microfinance world this summer. In India, the SKS IPO sparked debates about the lines between profit-making and social responsibility when investors profess a “double bottom line.” In Nicaragua, the failure of Banex is an event that may have even wider reverberations. This is the first of two guest posts by Barbara Magnoni, President of EA Consultants, on what we can learn from Banex and its demise.
I have been working with the microfinance sector in Nicaragua since the end of 2004, arguably the beginning of the “bubble.” At the time, Nicaragua was strangely popular among investment funds, due to its relatively mature microfinance market, which had received support from various donors over 15 years. This aid ensured a certain level of efficiency, transparency and best practice that helped convince investors to keep pouring money in, as more and more money was coming to investment funds from donors, socially responsible and commercial investors.
Since then, MFI performance has plunged . . . Read More
At the Bill & Melinda Gates Foundation, we have long been believers in the power of mobile financial services to piggyback off of the telecommunication networks that are rapidly being built in developing countries. Mobile penetration in Africa has increased from 3 percent in 2002 to 48 percent today, and is expected to reach 72 percent by 2014. That is a powerful wave we must ride.
In recent years, banks, payment system providers, and mobile operators have begun experimenting with “branchless banking” models which reduce costs by taking small-value transactions out of banking halls and into local retail shops, where “agents,” such as airtime vendors, gas stations, and shopkeepers, register new accounts, accept client deposits, process transfers, and issue withdrawals. One form of branchless banking, called “mobile banking,” uses a client’s mobile phone to communicate transaction information back to the telecommunication provider or bank. This enables clients to send and receive electronic money wherever they have cell coverage. They need to visit a retail agent only for transactions that involve depositing or withdrawing cash.
M-PESA, a successful mobile payments service in Kenya, is already demonstrating how m-payments can successfully expand the range of financial options available to poor households. Read More
In October, David Roodman hit a nerve when he drew attention to the fact that Kiva’s lenders were investing in loans already issued by microfinance institutions, instead of directly lending to specific borrowers, as many Kiva lenders believed. Kiva’s not alone; MicroPlace also has an indirect funding model (as Roodman pointed out). And this isn’t necessarily a bad thing—provided institutions are transparent about it.
In fact, indirect lending is in many ways a smarter model. Microfinance institutions (MFIs) serve essential functions: they’re in the best position to know customers, determined the most favorable prospects, and allocate resources for the biggest impact.
Kiva works with microfinance institutions across the world, and the funds pass through Kiva to the MFIs. MicroPlace, which is owned by eBay and registered as a broker-dealer firm with the Securities and Exchange Commission (SEC), operates under a different model. Investors purchase securities, which in turn fund guarantees or loans for microfinance institutions. The MFIs benefit from having a local presence, and they are best equipped to handle regulatory hurdles. They can also offer assistance to borrowers in completing information and understanding the terms of the loans. Individual lenders like you and me are not in a particularly good position to assess who’s a truly worthy (or unworthy) borrower, and the indirect lending model eliminates obstacles that web-based peer-to-peer lending sites face. Read More
Funds investing in MFIs, commonly known as microfinance investment vehicles or MIVs, have grown dramatically in both number and size over the past several years. CGAP and Symbiotics report that there were 103 MIVs active in 2008, up from only 23 in 2000, and despite constraints imposed by the financial crisis their total assets grew by 31% in 2008.
At a recent panel discussion hosted by the Microfinance Club of New York, panelists offered their perspectives. One of the more provocative ideas concerned the fact that MIV investment is highly concentrated: one estimate is that only 250 of the roughly 10,000 microfinance institutions worldwide are “investable.” They are the large commercial micro lenders created primarily by downscaling banks and by the formalization of NGO lenders.
But another path to commercial scale is consolidation. In other words, if mergers and acquisitions increased in the microfinance sector, more existing institutions could become eligible for commercial investment. Commercialization is a well-documented trend in microfinance, and consolidation can’t be far behind. It could offer benefits to both institutions and borrowers.
Still, it raises one immediate concern. Microfinance institutions structured as NGOs tend to be smaller and more reliant on subsidized funding, but their average loan sizes are smaller. Usually, average loan size is interpreted as a proxy for the poverty level of customers, so if non-commercial micro lenders become scarce the supply of loans for poorer customers might dry up. Read More
The post was originally published as a guest post on the CGAP Microfinance Blog.
There’s a lot of debate about how best to regulate microfinance. Regulators face the tricky job of safeguarding the stability of the financial sector while simultaneously providing flexibility for institutions focused on the unbanked. Global evidence shows that even well-intentioned regulation and supervision can hamper the ability of institutions to reach poorer populations.
We don’t need more “best practices”. We need ways to think about tough and imperfect tradeoffs. At the Financial Access Initiative, we’ve been wrestling with how best to help policymakers navigate these decisions. We turned to regulatory expert David Porteous to lead the effort. In a new series of Policy Framing Notes, he sums up the tradeoffs that policymakers face, outlining the “regulator’s dilemma”.
The first Policy Framing Note in the series looks at the tradeoffs regulators encounter in trying to encourage healthy forms of competition. Porteous’s focus is on “access enhancing” competition—competition that balances the interests of the individuals (microcredit borrowers, in this case), the institutions that serve them, and society as a whole.
Part of the regulator’s dilemma is that encouraging competition can increase the pressure on microfinance institutions Read More