The Self-Help Group Microfinance Model

This month Frances Sinha is writing about lessons from her important new book, Microfinance Self-Help Groups in India: Living Up to Their Promise. This post introduces the book.

In India, Self Help Groups or SHGs represent a unique approach to financial intermediation.  The approach combines access to low-cost financial services with a process of self management and development for the women who join as members of an SHG. The SHGs are formed and supported usually by NGOs, or (increasingly) by Government agencies and sometimes directly by banks. SHGs are linked to banks first with a group deposit account, then for credit, which is disbursed to the group and in turn distributed to the members.  There is a process of group formation and group leaders and members of trained on managing the savings and credit.  Often too SHGs are linked to wider development or community programmes. SHGs are thus seen to confer many benefits, both economic and social, providing new and real opportunities for rural women that challenge the traditional barriers that women face.  SHGs enable women to grow their savings and to access the credit which banks are increasingly willing (or directed) to lend. SHGs can also be community platforms from which women become active in village affairs, stand for local election or take action to address social or community issues (the abuse of women, alcohol, the dowry system, schools, local water supply). 

SHG numbers have grown rapidly since 2000, across India first in the more developed south, now too in the north.  The SHG ‘bank-linkage’ programme is the flagship microfinance programme of the National Bank for Agriculture and Rural Development (NABARD) which has actively supported the development of this programme since the early 1990s.  For some time, NABARD’s website announced:  Did you know:  more than 400 women join the SHG movement in India every hour; an NGO joins our microfinance programme every day? 

Read More

Stuart Rutherford reacts to the Sa-Dhan National Microfinance Conference

Stuart Rutherford  is the author of The Poor and Their Money, and founder of SafeSave, a microfinance institution in Bangladesh.

I’ve just finished up an engagement at the Sa-Dhan National Microfinance Conference 2010 on 'Financial Inclusion and Responsible Microfinance', organized in collaboration with the Federation of Indian Chambers of Commerce and Industry (FICCI). Beyond my own panel (with economist Reetika Khera and Vijay Mahajan of BASIX), I had some time to take in some of the others.
 
I noted some good presentations on m-banking and the ‘business correspondence’ model for banks, including some very forward thinking by people in various parts of the government. My takeaway was that the banks may, at long last, be back in the game of providing basic services to the poor and very poor, and may even be pushing the MFIs onto the back foot. If the government/RBI tweak the regulations a bit more to make the business correspondence model more profitable (and it seems they may do that) we could see banks very quickly signing up clients through mobile phones or portable biometric point-of-service devices in the hands of village agents, and offering a service that really is "close at hand, frequent, flexible-but-disciplined, and above all reliable". I saw some of that at work in rural Uttar Pradesh, and was impressed. I noticed that some of the language used by several of the speakers was very close to lessons we put forth in Portfolios of the Poor, so directly or indirectly I think our views are becoming more and more mainstream in India.

Although the big MFIs in India are still stuck with a credit-only model (because most of them are not legally entitled to take deposits), much of the conference was about savings and payment systems – a big contrast to the situation a few years ago. . . 

Read More

Week of March 14, 2010

Follow us on Twitter @financialaccess

3/19: Financial architect finds out how the poor live on $2 a day http://bit.ly/a7bUfq#microfinance

3/19: FAI report "Half the World is Unbanked" published in the McKinsey Quarterly: http://bit.ly/avouNe #microfinance

3/18: "Microfinance: Dream vs.reality" http://bit.ly/b9FwHO #microfinance

3/18: Stuart Rutherford: "Poor households in the financial diaries used 9-10 different financial tools to manage their money" http://bit.ly/99GsNE

3/16: Interview with Stuart Rutherford:"Micro-finance guru unveils new vision for poor" http://bit.ly/cDo346 #microfinance

3/16: Idea of the day: "coping diaries" (like financial diaries) examining how people cope in both normal and crisis periods. http://bit.ly/c0Mw8B

3/16: New book explores the SHG movement in India: "#Microfinance Self-Help Groups in India: living up to their promise?" http://bit.ly/aeqZ4J

Beyond Kiva

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

The role of microfinance in dealing with disasters

A recent Newsweek article praises the role of microcredit in disaster recovery.  The piece singles out Fonkoze, the leading microfinance institution in Haiti, for their ability to get cash to its clients while bigger banks remained paralyzed. The article suggests that a new role for microfinance is to help economies respond to shattering tragedies like the Haitian earthquake.

The sentiment points to a larger insight: Microfinance can do more to help families respond to emergencies in general.  Sometimes those emergencies arrive as a national crisis that affects hundreds of thousands of people. But more often, they are local.  Sometimes the emergency is felt just by a single family in a community.  It could be an illness that keeps a husband from working and putting food on the table because he can’t pay for medical treatment.  Or it could be a bad harvest that means there’s no money to pay for children’s school fees. Research from financial diaries in India and Bangladesh shows that nearly half of the families surveyed reported a serious injury or illness in the past year. And in South Africa over 80% of families reported needing to pay for a funeral in the past year.

While the narrative of microfinance as small business finance still has currency, that’s too narrow a vision. We blogged recently about how Fonkoze recapitalized nearly 14,000 loans in the wake of the 2008 hurricane. It’s exactly this kind of flexibility that poor households need when faced with emergencies. Grameen Bank has built more flexibility into its notoriously standardized products. But why aren’t more institutions designing products flexible enough to work better with poor households’ uneven cash flows?

Read More

First insights from Mongolian microfinance impact study

The blog over at the European Bank for Reconstruction and Development (EBRD)recently featured a post by Senior Economist Ralph De Haas, who describes a randomized evaluation of microfinance in Mongolia that recently completed fieldwork.  Although analysis is ongoing, with full results expected in July of this year, data from the baseline is already providing interesting insights.  Dr. De Haas points out three particularly interesting stats:

1. Almost half of the women in the study, who were identified to participate specifically because they were in need of access to finance, already had loans at the time of baseline. (46%) 

2. Most women have long term debts-the majority of loans reported had been taken out in 2007-2008.

3. The majority of this debt (70-80%) was reported to have been spent on consumption, not business activities.

Read More

Can you actively manage five financial accounts?

In this excellent post, Kate McKee highlights the intensive financial life of Hiram, a smart Kenyan entrepreneur with a thriving car rental business.  Because one single institution cannot meet all his financial needs, Hiram has to patch together services from five different institutions. 

He has five financial accounts, each for a specific purpose –
1. Loan from an MFI
2. Loan from another MFI
3. Business account at a large international bank only to cash checks
4. Savings account at another bank to deposit cash
5. Mobile account (M-PESA) to allow him to receive electronic payments and reduce the amount of cash he needs to carry around.

The evidence is mounting that poor households rely upon an array of surprisingly complex financial tools, and lead active financial lives because they are poor, not in spite of it. They create “portfolios” that leverage both informal networks and formal institutions to address their immediate and long-term needs . . . 

Read More

Trends in microfinance investing

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

How microfinance can help Haiti

The recent tragedy in Haiti serves as a stark reminder of just how vulnerable the poor are in the face of emergencies. When crises hit, households often turn to family and friends for help, and the news stories from Haiti are full of inspiring stories of charity.  But the news reports also bring home the fact that in large-scale disasters, like the earthquake in Haiti, it’s hard to rely on acquaintances, neighbors, friends, and family members.  No one has much to spare.

There’s hope that microfinance institutions can help provide a path towards recovery and reconstruction, despite the devastation.  

Fonkoze is the largest microfinance institution in Haiti and one of the most admired in the hemisphere. Following the earthquake, the organization’s response was immediate. Within a matter of days, all 41 of its branches in Haiti were operational, providing the opportunity for customers to make withdrawals and receive transfers from friends and family members abroad. Fonkoze also developed a Relief and Rehabilitation Fund, which will be used for a range of purposes including: “providing relief to staff members, opening an emergency operations center, delivering remittances, acquiring equipment and facilities, and assisting clients who have lost their business and homes.”

This is not the first time that Fonkoze has faced disaster . . . 

Read More

The Regulator’s Dilemma: Navigating Competition Policy

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

Week of February 7, 2010

Follow us on Twitter @financialaccess

2/9: The Regulator’s Dilemma: Navigating Competition Policy http://shar.es/mn2lq via#microfinance

2/9: Cell-phone banking offers financial help to Third World - http://bit.ly/5DF7fH#microfinance

2/9: Forbes.com: "How to protect the world's most vulnerable banking clients" http://bit.ly/aMKwNu #microfinance
  
2/8: RT@poverty_action: IPA research that's good for your heart (literally!) http://www.newsweek.com/id/233006

2/8: MICROCAPITAL PAPER WRAP-UP: Behavioral Foundations of Microcredit http://bit.ly/aUu5dB #microfinance

2/8: FAI invites you to an event with Muhammand Yunus at NYU on March 5th. RSVP at http://bit.ly/apyrMl #microfinance

Smart subsidies for microfinance

In a recent column, Nicolas Kristof of the New York Times advocated donating to BRAC, one of Bangladesh’s oldest microfinance organizations. But at a recent U.S. Committee on House Financial Services hearing, Damian von Stauffenberg, chairman of MicroRate, argued against putting donor money into the microfinance sector, saying that donations dilute the MFI’s entrepreneurial drive, lead to inefficiency and lower the quality of operations.

Von Stauffenberg’s fears aren’t unreasonable. Much of the excitement around microfinance stems from the possibility of achieving massive scale through highly efficient operations. And as microfinance moves toward a model of increasing commercialization and focus on sustainability, profitability has become one benchmark by which to measure institutions. But there is a time and a place for donor money, provided it comes in the form of “smart subsidies.”

The idea behind a smart subsidy is that subsidies are neither inherently useful nor inherently flawed. Rather, their effectiveness depends on how they are designed and deployed. There are several concrete ways in which subsidies can help increase the scale of microfinance, and open access to commercial funds and outreach.

First, they can help multiply scale by “crowding in” additional capital. . . 

Read More

Week of January 31, 2010

Follow us on Twitter @financialaccess!

2/4: FAI research from "Half the World is Unbanked" cited in Susy Cheston's Congressional testimony on #microfinance. http://bit.ly/di2KfN

2/3: New version of the FAI paper "Microfinance Games" available at http://bit.ly/9cH7I4. #microfinance

2/3: New version of the FAI paper "Behavioral Foundations of Microcredit" released at http://bit.ly/bOSd15. #microfinance

2/2: Microfinance requires no donor money, says MicroRate's Stauffenberg http://bit.ly/cun4Ej What about "Smart Subsidies"? http://bit.ly/9TmsrC

2/1: RT @poverty_action An "anti-nudge" on the way to Mexico...http://poverty-action.org/node/2570

2/1: Great video of Sendhil Mullainathan alking at TEDIndia: "Solving social problems with a nudge". http://bit.ly/cplO1A

2/1: New microinsurance journal launched at http://micro-risk.com/. #microfinance

The future of securitization in microfinance

Pulling off this securitization was no small feat.  Two of the elements of this deal that make it so important are the experience and rigor of the participants.  That experience translates into hard-thinking about the details of the contract.  For that reason, it's especially worth drawing out the key details that make the deal work.

The fact that IFMR Capital is putting their some of their own money on the line is a big deal.   It does two things.  1) It reduces risk for other investors directly by absorbing losses beyond the "first losses" absorbed by the microfinance institutions themselves. 2) It means that IFMR Capital should have an ongoing interest in trouble-shooting problems that might arise with the micro-lenders.  If I were an investor, those 2 facts would help me sleep much better at night.

Alex at India Development Blog has a really nice post in which she addresses the concern that "Diversification doesn't help in the case of economy wide problems."  She writes:

"It is certainly true that diversification doesn't help in situations where the entire economy is affected. However, given the short tenure of these loans it would require a sudden large shock to the economy to lead to high defaults . . ."

Read More

How peer pressure can help you save

What do you think would make you more likely to save—being paid a higher interest rate or the social pressure of making a public commitment to save more and then having your peers monitor your progress?  A new paper from Felipe Kast and Dina Pomeranz (hat tip to the CMF folks for blogging it first) finds that while both strategies help to increase savings, the peer commitment mechanism comes out on top...

Read More

Week of January 24, 2010

1/28: Reading @IFMRTrust's response (http://bit.ly/d8eEgB) to our post (http://bit.ly/80FNV2) on their first multi-originator securitization.

1/27: "The Economics of #Microfinance" is on Stuart Rutherford's Top 5 list of books on the poor and their money. http://bit.ly/cZNOoP

1/27: From Princess Maxima: Microfinance needs to come as part of a rounded policy aimed at fighting poverty effectively. http://bit.ly/8uXp1g

1/25: Jonathan Morduch tells stories from the financial diaries on CBC: http://bit.ly/I8qo(use CTRL+F to search for Morduch) #microfinance

Topics: Big Picture, Commercialization, Portfolios of the Poor and Poverty