No consumer likes overdraft fees. Overdraft fees are often unexpected, expensive, and in some cases undeserved. What’s more, they can wreak financial havoc on households living on a low-income.
But the larger issue is not the fees themselves. It’s the lack of transparency surrounding them and the widespread consumer distrust that results.
Edelman is a PR firm that surveys people around the world to create an annual Trust Barometer (among other things), which gauges levels of trust in different institutions. In 2012 it found that only 41% of respondents in the U.S. trust banks – which, by the way, were at the bottom of the list right along with financial services. The year’s ratings on banks are second-worst only to 2011, when they hit a low of 25% . . . Read More
Muhammad Yunus spoke to an overflowing crowd at NYU on April 15, an event jointly sponsored by the Wagner School of Public Service, Stern School of Business, and Financial Access Initiative.
Professor Yunus is known for fighting to improve the lives of millions of poor families around the world, the quest that was celebrated by the 2006 Nobel Peace Prize. These days there is a lot of talk about the impact of microcredit. But here was an opportunity to ask: what is the impact of Yunus? Given where we were, more specifically, how has Yunus changed the way we--economists, academics, policy makers and influencers--think about problems? Read More
A month ago I wrote a post singling out the Mexican state of Chiapas as a potential site of a coming repayment crisis. No, this is not a follow-up announcing that it has begun, nor am I rooting for one to start. In my next post, I will review the options that the Mexican microfinance sector has to avoid it, and what the global microfinance community can do to help. But for now, let’s dig a bit deeper into what a Chiapas crisis might mean, and why I continue to focus on Mexico, as opposed to the broader issue of excessive credit and over-indebtedness.
Let’s be blunt: not all countries are created equal. Some remember my warning three years ago about the danger of a credit crisis in Andhra Pradesh. Back then I compared a possible crisis in India to the crisis in Bolivia a decade before: "India is no Bolivia – if the bubble bursts there, the entire global microfinance sector will find itself reeling." Well, Mexico is no India . . . 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
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
The concept of social investment has received growing attention over the last decade. The core idea is simple: investing in organizations that produce a substantial positive soal outcome -- and at least some financial return. Advocates for social investment frequently use the phrase “doing well while doing good.”
While there has been much discussion of social investment, there has been relatively little actual investment. The one area where substantial flows of capital have emerged under the social investment umbrella is microfinance. Thus, there are important lessons and insights for social investment as a whole to be gained by examining the experience of the microfinance industry in trying to marry profit and social returns.
Over the last two decades, microfinance has grown from a promising experiment to a burgeoning industry that serves over 200 million people worldwide. The early hope was that microfinance would drive toward full sustainability, earning all the necessary funds for their operations and growth. Microfinance banks would earn solid profits and wouldn’t need subsidies after the banks were fully established to keep going. Muhammad Yunus himself has voiced support for the concept of “social businesses” – businesses designed to produce some financial return (which gets re-invested in the business) while delivering social returns. But it has turned out that social investors (and the subsidies they bring) remain critical if social goals are to be achieved . . . Read More
In the past few years, poor people are increasingly gaining access to financial services - to make payments and deposits - through the expansion of branchless banking. As researchers from CGAP, the Gates Foundation and other institutions have noted, partnerships between banks and other village based institutions such as post offices, retail institutions and microfinance organizations have played an important role in increasing the access to services to poor people living in low-density areas. Read More
At Ashoka, we have seen an increase in another important force. Social entrepreneurs from different fields (education, health, etc.) are creating channels through which the poor can save. To achieve their social goals social entrepreneurs are often in constant contact with people in the villages and they develop strong network of trust and credibility - more so than other more traditional organizations such as small business or local government offices. In most cases, these branchless banking solutions are located in remote villages where there are no options for banks to partner with traditional branchless banking agents (for example, large retail chains or franchises or more traditional microfinance institutions) . . .
Microfinance aims to accomplish two difficult goals at the same time: to create meaningful social impacts and to give investors a decent return on their money. The success of microfinance rests with getting the balance right. Fortunately, not all investors demand high financial returns, and not all demand high social returns. That diversity of preferences among investors gives room to maneuver. The crises in microfinance emerge when the balance between doing good and doing well gets too far out of whack.
“Microfinance & Social Investment” is a new research paper from Jonathan Conning and Jonathan Morduch. The paper begins with controversial debates currently facing microfinance, but the authors’ larger goal is to describe a framework for understanding the roles of social investment and commercial investment. By putting a corporate lens on microfinance, the study explains the rationale behind high interest rates, the difficulties serving the poorest markets, and the differences between non-profit versus for-profit microfinance institutions . . . Read More
Muhammad Yunus has sparked a new round of debate. In a January 15, 2011 New York Times opinion piece, "Sacrificing Microcredit for Megaprofits," the Nobel Peace Prize winner and founder of the Grameen Bank assails microfinance institutions seeking profit, likening them to the moneylenders he had meant to stamp out. Going a step further, Yunus calls for stricter government regulation to cap interest rates and protect the poor.
Yunus’s arguments take a swipe at mainstream orthodoxy within microfinance. Dogma these days holds that interest rate caps should be resisted, and profit should be pursued in the bid to attract outside investors . . . Read More
What do Jack the Ripper, the shortage of affordable housing, and cataracts have in common? They are all problems that can and have been addressed by social finance. Jonathan Morduch recently shared his wisdom on the subject during the Chief Economist Talk series at the World Bank. Read More
Social finance is becoming an important new area of research for FAI. As we delve into that arena, look for blog posts on this topic by us and others. Here we’re pleased to feature a guest post from impact investors Gray Ghost Ventures.
How does Gray Ghost define impact investing?
Impact investing is a pretty broad arena. The part we focus on is looking for market-based investment solutions to poverty alleviation—the merger of both societal impact and financial return. It’s a broad spectrum, but within that we’re probably closer to the expectation of market-like returns, whereas others would not necessarily be on that edge—there are others who are seeking social impact and a financial return, not necessarily market-like. While we respect all the different pieces, we think that unless you get a financial return, you’re less likely to get to scale and replicability, because it’s less sustainable and more dependent upon other sources of funding that are more fickle and erratic . . . Read More
For those of you who couldn’t attend Wednesday’s event, “Microfinance's Social Impact: Cutting through the Hype,” sponsored by the Microfinance Club of New York and hosted by FAI, here’s a recap.
The panel featured FAI’s Jonathan Morduch, David Roodman, a senior fellow at theCenter for Global Development, Chris Dunford, President of Freedom from Hunger, and Jody Rasch from Moody’s Investors Service.
We were happy that the moderator started the event by making the important distinction between social performance measurement and impact evaluation. Social performance measurement seeks to answer the questions of how MFI clients are doing, and how MFIs can help serve those clients better. Social impact evaluation, which is the focus of much of FAI’s research, tries to answer the question of what would have happened to people in the absence of microfinance. . . Read More
Never in history have the world’s rich been positioned to do so much for the world’s poor. The wealthiest 20 percent of the population has 72 percent of the world’s purchasing power, while the bottom 40 percent has a mere 4 percent. So why don’t we do more?
At FAI, we’ve been giving this a lot of thought lately. It’s a complicated question, and no one factor is to blame. For starters, we’ve been at the aid game for a long time, with disappointing results; clearly, no one really knows what works. What’s more, when accountability for results is limited, we lack incentive to fix inefficient programs. Then there’s the fact that we don’t want to create dependency via handouts. And finally, there’s the sheer size of the problem. When the need is so very large, how can we do anything more than scratch the surface? Sometimes it’s hard not to feel that our efforts are futile.
One popular suggestion has been to leave economic progress to the market. But while market-based solutions can be very effective, markets are not magic in and of themselves. Sometimes we need to deliberately direct market forces to the right places. This is what “social investing” does. And we think this is an idea whose time has come. Read More