Microfinance's Sub-prime Moment

The debate over whether microfinance does more harm than good has been raging long before Muhammad Yunus and Grameen Bank were awarded the Nobel Peace Prize in 2006 for their work extending micro-loans to the poor of Bangladesh. However, rather than settling the question, the award seems only to have increased skepticism in some that, given the opportunity, the poor are capable of managing their own financial affairs, while others scream more vehemently that microfinance institutions (MFIs) are nothing more than “blood sucking leaches” burdening the poor with inappropriate amounts of debt.

Then came the IPO for SKS Microfinance Ltd., India’s largest micro-lender by assets, that reaped millions for the company’s founder and early stage institutional investors. Some heralded the event as “an important step towards fully engaging mainstream capital markets in the fight against poverty,” while others, including Professor Yunus, decried it as profiting off the poor. Now there is a financial crisis in Andhra Pradesh, one of the largest micro-lending markets in the world which is being compared to the sub-prime crisis in the U.S. and is raising concerns for the survival of microfinance as a tool for alleviating poverty.

Last week the Center for Global Development hosted a timely panel discussion addressing the crisis and its implications for the global microfinance community. (You can view this discussion by clicking on the link.) Swaminathan Aiyar, a prominent Indian journalist and research fellow at the Cato Institute, made a compelling case for the underlying local political issues at the root of the crisis. He explained that in lending to the poor in India, “default is built into the system.” It is essentially a part of the political system politician use to get elected. He was not at all surprised by the crisis. “When you lend to people who are insolvent,” he claimed, “they will default no matter what interest rate they are charged.”

With the government of Andhra Pradesh giving the poor permission not to repay their loans to private sector MFIs, large scale defaults are almost certain. This will have a devastating effect on micro-lenders, many of which are likely to go under and default on their loans from Indian commercial banks. This has led a former governor of the Reserve Bank of India to call for a study of commercial bank lending to MFIs that are “profit seeking.”

In my opinion the “profit seeking” MFIs are at the heart of the problem in Andhra Pradesh and microfinance in general. As one particularly vehement, anti-microfinance blogger has pointed out “SKS Micro-Finance has become a proxy, hammer it, hammer the whole industry.” While it may be unfair to single out SKS in this way, its early success prompted a rush of for-profit micro-lenders into Andhra Pradesh leading to poor lending practices and inevitable abuses similar to what was seen in the sub-prime mortgage lending in the U.S.

As I argued in an earlier post, greed is not good for microfinance. When MFIs are under pressure to provide market rates of return to investors, loan volume and debt collection will trump collaborative efforts to assist the poor out of poverty. The participants in the Center for Global Development discussion had many good recommendations for improving the way microfinance works to help the poor including: greater consumer protection, better corporate governance, encouraging savings, establishing credit bureaus and avoiding over lending. All good suggestions but difficult to implement the face of profit maximization. Microfinance belongs in the realm of sustainable social enterprise where issues like consumer protection, savings, appropriate lending policies and transparency do not conflict with shareholder needs.

Community Development Banker Corps

It’s been quite a while since my last post. After a good run I have taken some time out to think about why I write this blog and where I want to go with it. This is partly the result of attending two excellent conferences in October and becoming somewhat overwhelmed with meeting so many fantastic people and learning so much of what is going on in the poverty alleviation field.

As readers of this blog will remember, I attended the SOCAP10 conference in early October and submitted an entry to the SOCAP Challenge which, thanks to the votes of many readers, was selected as one of the winning entries and posted on Triple Pundit. My idea for starting a social business focused on training young graduates to work in low income communities as Community Development Bankers has generated a great deal of interest and now I am working on moving the concept forward.

In mid-October I attended another conference, the Opportunity Collaboration, held in Ixtapa, Mexico. About 300 social entrepreneurs, funders and non-profit executives gathered to share ideas, learn from one another and create alliances and synergies in their efforts to alleviate global poverty. For one so new to the cause it was an exciting and humbling learning experience. Again, lots of positive feedback on what I am now calling the Community Development Banker Corps (CDBC).

So, how to move the CDBC from concept to reality and what of “Banking on the Poor?” Clearly, a business plan is needed for the CDBC and I have begun working on that. I am also looking for collaborators and fellowship and social business plan contest opportunities. I first articulated the idea for the CDBC in my post below "$120 Billion Opportunity for the Poor." Essentially the idea is to create a social business, modeled on Teach for America, to train college graduates to work as Community Development Bankers in low-income communities. I believe the biggest constrain facing anti-poverty efforts is not a lack of money but a lack of well trained, motivated people working with the poor to help them raise themselves out of poverty.

“Banking on the Poor” has morphed over the past year (almost) that I have been writing it from an account of my experience in Indonesia working with Grameen Foundation’s “Bankers without Borders” (see a YouTube clip here which features the work done by this organization including my work with PT Ruma), to a forum discussing issues affecting the poor. While I will continue to use the blog to speak out on poverty related issues in general and articulate ideas around financial access for the poor, I will also use it to promote the development of the Community Development Banker Corps.

Preying on the American Dream

Have you seen those full page ads decrying the Department of Education’s proposed "gainful employment" rule? This rule will require for-profit educational institutions receiving income from Federal student aid programs to document that their programs meet statutory requirements for preparing students for gainful employment. The ads, provided by Corinthian Colleges, Inc., one of the largest for-profit education institutions, claims the proposed rule will result in up to 100,000 working Americans losing their jobs and urge readers to “Get the facts at My Career Counts.”

A better source of information would be a report entitled Are you Gainfully Employed? Setting Standards for For-Profit Degrees by Education Sector, an independent, non-profit organization. According to this report many for-profit institutions derive most of their income from Federal government with the five largest, including Corinthian, receiving more than 77% from student financial aid programs. Little wonder that Corinthian and other institutions of its ilk are concerned that greater scrutiny on how their students fare after incurring large debt obligations to enroll in their programs might constrain the flow of government money into their coffers.

The Education Sector report opines that “The proposed standards for institutions participating in the title V, HEA programs are necessary to protect taxpayers against wasteful spending on educational programs of little or no value that also lead to high indebtedness for students. The proposed standards will also protect students who often lack the necessary information to evaluate their postsecondary education options and may be misled by skillful marketing, resulting in significant student loan debts without meaningful career opportunities.”

Doesn’t this sound like a replay of the sub-prime mortgage debacle where ill-equip low income borrowers were enticed to take out loans they didn’t understand and were ill-suited for their circumstances? Now both education and home ownership, two key components of the American Dream, are under assault by profit seeking private enterprises cashing in on government programs designed to aid low income Americans. This is more evidence that greed may do more harm than good to social ventures (see my post Is Greed Good for Microfinance?).

What I find most interesting is that the Gainful Employment rule proposes to measure the effectiveness of education programs using market data, not complex, artificial standards promulgated by Department of Education bureaucrats. There are two simple tests. One is based on the debt-to-income ratio of program graduates; the second is based on student loan repayment rates. If education institutions demonstrate that their graduates get jobs paying enough for them to comfortably repay their loans, the institutions will have continuing access to the Federal student aid funding. Only programs with poor histories placing students in adequately paying jobs will find their access to the Federal student aid programs constrained.

Contrary to the splashy ads provided by Corinthian Colleges, Inc., nothing in the Gainful Employment rule threatens the jobs of those already employed. The only educational opportunities that low income students would lose would be those shown to be ineffective in qualifying them for jobs that would enable them to repay their loan obligations and adequately support themselves. Far from thinking that these students and their careers “don’t count,” as the ad claims, the Department of Education is appropriately looking after the interests of students by promulgating this new regulation.

In my work helping low income people better manage their financial affairs I have seen cases where debt incurred to pay for education programs that failed to deliver on the promise of a good paying job has become an enormous millstone, crushing any hope for living a better life. The proposed Gainful Employment rule seems a small, reasonable step to prevent unscrupulous promoters of ineffective education programs from preying on the aspirations of low income Americans for attaining the American Dream.

Show Us the Money!

My last two blog posts were written in support of my entry to the SOCAP10 Challenge (see below $120 Billion Opportunity for the Poor and What the World Needs Now is Community Development Bankers). I focused on the issue of creating the “Human Capital” I believe is necessary for unlocking resources for high impact social investments identified in the Money for Good
report produced by Hope Consulting. In this post I want to talk about the money.

The Hope Consulting report is an extraordinary piece of work. It contains a wealth of information that will be of great use to many non-profits and for-profit social ventures seeking funding for their efforts to alleviate global poverty. As I read the report looking for information pertinent to my proposal I was struck by three findings. First, I was surprised to learn that more than 50% of the $120 billion Hope Consulting estimates is available for high impact social investments comes from existing investment funds of potential investors. Second, not so surprising to me, a majority of these individuals work with financial advisors and would prefer to execute their social investments through their advisors. Third, most existing socially-focused venture capital funds have minimum investment requirements in excess of the $25,000 “threshold” of potential social investors.

Three recommendations of the report which I found particularly relevant were: structure products with relatively low investment minimums (<$25,000); make opportunities readily accessible (i.e. through financial advisors) and position the products as investments, not alternatives to charity. The report also highlighted some potential barriers from investors’ perspective and their key concerns. The barriers related primarily to the “novelty” of the high impact social investment market. The key concern was for the risk to investors’ principal.

By definition, social investors are not interest in a high return—if any at all—mainly just the security of their investments which to them represents the sustainability and efficacy of the businesses in which their funds are being invested. Hence, my rationale for the need for the Human Capital capable of managing high impact investors’ funds in a manner that gives them confidence in the relative security of their investments.

The report states flatly: “Financial advisors are the key to this market.” This argues for an investment vehicle fully compliant with securities regulations that are tradable and easily marked-to-market. Furthermore, it would be helpful to offer some incentive for financial advisors to offer such a product to their clients. Although challenging, I do not believe these are insurmountable requirements.

The Hope Consulting report gives specific examples of organizations already offering products that are successfully attracting high impact investors. With a little tweaking and the right marketing I believe we will be able to attract social investors into the business of community development banking.

What the World Needs Now is Community Development Bankers

The SOCAP10 Challenge has moved into the final week of voting and, thanks to many of you, my proposal to develop more human capital—people trained to help low-income communities create, fund and manage businesses that can alleviate poverty—is currently one of the leading ideas to win the competition. However, the competition is far from over and there are many other good competing ideas. If you haven’t already voted, go to Myoo Create and do so by September 14th.

One thing that voters seem to find compelling about my idea is that it will also create exciting entry-level jobs for young college graduates who are entering the market in a very difficult economic environment. I have made the analogy to Teach for America which is drawing top students from leading universities and training them as teachers in inner city schools. I believe we can tap into this same rich vein of talent to find graduates interested in becoming what I have called “community development bankers.”

In my last blog post (see $120 Billion Opportunity for the Poor below) I crunched a few numbers and estimated it would take about 175 community development bankers (CBD) to deploy $100,000,000 in Individual High-impact Investments (IHI) to reach about 5,700 low-income entrepreneurs over the course of one year. Assuming each IHI had an average tenor of three years, we would need almost 70,000 CBDs to deploy the entire $120 billion the Hope Consulting report estimates is available for funding IHIs. Now that is scale!

But let’s be modest and say we are only going to work with 10% of what is available. That is still about 7,000 CBD jobs and funding for around 700,000 low-income business owners. How to do this? Clearly, we need to collaborate with academic institutions and experienced MFIs and banks to develop the curricula and provide venues for training. Preliminary discussions I have had with a few institutions have been encouraging. I am convinced that within a year we could have programs in place in leading business schools, liberal arts colleges, community colleges and university extension programs.

The short-term goal would be to create a pipeline of CBDs of about 2,000 per year so that in three years we would be close to having a cadre of young bankers working in low income communities capable of deploying IHIs of about $3 billion per year. But for whom, exactly, do the CBDs work? Again, taking Teach for America as a model, as school districts employ the students trained by Teach for America so would existing non-profit MFIs, already working in low income communities around the world, employ the trained CBDs.

One might ask what would motivate these non-profits to hire the CBDs? The answer is that they come trained to be effective community development workers and they come with funding! More about this in my next post. For now it’s important to continue developing enthusiasm for this idea by voting for Build Human Capital for Social Investing at Myoo Create.

$120 Billion Opportunity for the Poor

A few months ago I wrote a blog piece entitled Build It and They Will Come in which I commented on an op-ed piece in the Financial Times concerning ways banks might help the poor. The author wrote about how more funds might be raised to assist the poor. I argued that we needed better anti-poverty infrastructure to ensure that funds are effectively deployed in the fight against poverty.

Now comes a research paper from Hope Consulting entitled Money for Good that shows there is $120 billion in potential funding for individual impact investments for the poor. Now that’s a lot of money! But I still think we need to focus on infrastructure to make this money work for the poor. “Unlocking” this resource will be a major topic at the upcoming SOCAP10 conference to be held in San Francisco October 4th 5th and 6th. In fact, the conference has initiated a contest called the “SOCAP10 Impact Challenge” to generate ideas. You can read Banking on the Poor’s modest proposal and vote for it here.

The rationale of my proposal to unlock even a fraction of this $120 billion is that we must create human capital for community development much in the way Teach for America is creating human capital for the classroom. Social investors need assurances that their funds will be invested responsibly and effectively. I have argued that for-profit financial institutions won’t do this work because it is too costly and doesn’t generate sufficient returns to meet the requirements of mainstream investors. However, I believe an enterprise of the type defined by Muhammad Yunus in his book Building Social Business could make a sustainable, scalable business distributing investors’ funds to low-income entrepreneurs.

As described in my entry to the competition the major components of my proposal are:

1. To create certificate programs at academic institutions to train students for jobs as community development bankers;
2. To place the “certificated” community bankers with non-profits and MFIs serving low income communities; and,
3. To work with financial institutions to provide loan processing and portfolio management services.

Over the next few weeks I will discuss here in more detail each of these components but I thought I would start by looking at some key numbers.

Let’s assume that we are looking at building a portfolio of Individual High-impact Investments (IHIs) for low income entrepreneurs in the U.S. Proposals for such funding usually fall in the range of $10,000-$25,000. Let’s assume an average IHI is for $17,500. This would mean approximately 5,700 entrepreneurs could be funded for $100,000,000 which is less than one tenth of one percent of the amount Hope Consulting estimates is available for such investments.

Now let’s assume that each IHI pays a 3% up front fee and 6% p.a. fully amortizing over a term of 3 years. That translates into an effective interest rate to the entrepreneur of approximately 7.35% p.a. Allow 3% of the 6% spread to provide social investors with a modest return and use the remaining 3% spread and the upfront fee to cover the costs of managing the program (mainly salaries for the Community Development Bankers). Once the portfolio is fully invested it will generate approximately $7.8 million in revenue after paying investors their 3%.

So how many Community Development Bankers (CDBs) are required to invest $100,000,000 in IHIs and how much should they be paid? Seeking out and mentoring viable businesses run by low-income entrepreneurs will be people-intensive, time consuming work. I believe 175 well-trained CDBs originating a little less that three transactions a month could successfully place $100,000,000/year in quality IHIs. After three years each would be managing a portfolio of about 100 IHIs at various levels of maturity. My “back of the envelope” analysis seems to indicate they could earn about $35,000/p.a.

Banks and financial advisors to the wealthy are understandably reluctant to recommend directly to clients alternative social investments. However, as the Money for Good study indicates, their clients are looking for effective ways to employ some of their wealth for social causes. Working through a social enterprise focused solely on providing low income communities with access to individual impact investment funds could be the link for unlocking the $120 billion.

Please go to Build Human Capital for Social Investment and cast your vote for Banking on the Poor’s proposal. This is a work in progress so comments and suggestions are very welcome.

Is Greed Good for Microfinance?

“Greed is good. Greed is right. Greed clarifies, cuts through and captures the essence of the evolutionary spirit” proclaims the character Gordon Gekko in the movie Wall Street. Milton Friedman, a Nobel laureate in economics, asked in a televised interview “Is there some society that doesn’t run on greed?” He went on to opine that “The world runs on individuals pursuing their separate interests…The only case in which the masses have escaped grinding poverty…is where they have had capitalism and free trade.”

So should we be shocked to see investors making millions from the IPOs of large microcredit enterprises such as Compartamos in Mexico or more recently SKS in India? The blog Philanthrocapitalism praised this development as “an important step towards fully engaging the mainstream capital markets in the fight against poverty.” Really? Now that donor funded non-profits have pioneered an infrastructure into the bottom of the pyramid, it’s okay for market-oriented lenders to exploit this access to the poor to provide financing at rates that will satisfy “mainstream” investors? I think Muhammad Yunus is spot on when he calls this development “pushing microfinance in the loan sharking direction.”

Mainstream capital is increasingly aware of the money to be made in the fight against poverty. In my last blog (July 20 below), I discussed how Wal-Mart is profiting from the IPO of Green Dot, the largest issuer of pre-paid cards for low income consumers. Gary Rivlin, a former journalist at the New York Times, has written a fascinating book, Broke USA, that shows how entrepreneurs have figured out how to get rich off the poor. All the big pay-day lender chains are publicly traded companies that seem to have no trouble funding their operations with loans from big banks too timid to lend directly to the poor.

What is particularly disturbing about the SKS IPO is the involvement of some directors and major donors of the non-profit Unitus. Apparently, while supporting SKS in its pre-IPO phase with funds donated to the non-profit, they set up a separate for-profit investment vehicle to invest directly into SKS and subsequently benefit from the IPO. We can debate the virtues and “rightness” of greed but one thing has always been clear—it tends to corrupt.

For-profit MFIs have an inherent incentive to push high cost debt onto the backs of the poor in the same manner as pay-day lenders. For this reason, the “social business” model espoused by Professor Yunus is a much better solution for increasing capital devoted to fighting poverty. His idea is that low income borrowers should be able to support a business run on the basis of “no-loss, no dividend.” If the poor have to pay the kind of risk premiums required to attract “mainstream” investors then they are no better off than borrowing from village loan sharks or pay-day lenders and their ilk.

The causes of extreme poverty are many and complex. Greed has certainly played a role. It’s hard to see how greed will end poverty. Frankly, it seems obscene to suggest that focusing on one’s individual self interests is a good way to help the poor and end global poverty.

Prepaid Cards Coming to Wall Street

A few months back I wrote a post about prepaid cards available from Wal-Mart and a company called Green Dot (see my post of March 18, Anti-poverty Infrastructure at Wal-Mart?). Apparently, this is very a good business. Green Dot is going public this week and Wal-Mart has been allocated 36% of the offering as an incentive to promote the Green Dot’s cards to its customers.

At the same time Visa has launched a campaign touting the benefits of prepaid cards for the financially underserved. “Core to this campaign is Visa’s ability to reach consumers who may not realize they can enjoy the benefits of a Visa product, and experience a better alternative to a cash-and-carry lifestyle” said Hyung Choi, head of Visa’s prepaid products in the United States. Sounds very good. However, Visa doesn’t offer cards directly, their “partners” do. And who are these partners? Many are the same pay-day lenders and check cashing companies who make a living enabling the “cash-and-carry lifestyle” for which Visa claims to be providing an alternative.

Are these prepaid cards really good for the poor? Where are all the big banks in this scramble for the business of those at the lower end of the economic spectrum? If the likes of Green Dot, Wal-Mart, Western Union can make money serving the poor why not main street commercial banks whose scale of operations would make it possible to offer less expensive products?

The banks of course were already making lots of money off the poor from overdraft charges and high interest on credit cards. In fact, a recent study showed how even pay day loans can be less expensive than overdraft fees. The financial services reform legislation just passed by the Congress will make it more difficult for banks to reap these benefits so expect other banking fees to go up. (See my post of June 17, Changes in Bank Regulations Will Impact the Poor.)

So, what is the best option for those with fewer financial resources? While the prepaid product is no panacea, it is clearly safer than cash. If properly managed, the prepaid card can be more economical than a traditional bank account. To make the product work most effectively deposits should be made directly from employers or government payers such as social security. Cash “reloads” should be for the maximum amount and as infrequent as possible to reduce the impact of the reload fee.

Cash withdrawals should be similarly as large and infrequent as possible to minimize ATM fees. Many prepaid cards also have transaction fees for making purchases with the card so these too should be limited and only for high value amounts such as the weekly shopping bill at the supermarket. Using these cards for small purchases such as snack food should be avoided at all times.

A prepaid card will only allow one to spend what has been deposited to the card so it is critical to have a budget and keep track of how much is being spent. Many providers are eagerly waiting for the moment the card owner wants to make a purchase and there is insufficient money on the card. That’s when the seductive loan offers will come and card holder will find himself taking out a loan that is every bit as costly as the traditional payday or car loan. If the prepaid card helps instill the discipline to live within one’s means it will be a benefit to the poor. If it is just a back door the same old predatory lending products it will do more harm than good. The Wall Street investor on the other hand will probably make out just fine.

Helping the Poorest of the Poor

When I started this blog almost six months ago I was not sure where it would lead me. I began by chronicling my trip to Indonesia to assist PT Ruma, a micro-franchising social venture that provides poor women with the capability to earn money by selling cell phone air time in small amounts to the people in their communities. It was my first hands-on experience in the field generally called “micro-finance” and the beginning of an education.

I remain involved with PT Ruma and will be travelling again to Indonesia to work with the management on improving their financial systems and reporting and developing financial products for their bottom of the pyramid client base. However, the experience has started me thinking about how to help the bottom of the pyramid—the poorest of the poor—in this country.

It’s been almost a month since my last blog posting. During that time I have been able to spend some time with the clients of a number of organizations that strive to help those who have fallen through the social safety nets into extreme poverty. They are homeless, often suffer from addiction and many also suffer with mental health problems. They live on the streets or in homeless shelters. They do not have bank accounts, most do not have jobs. About one third are veterans who have served our country. Whatever assistance they do receive barely keeps them alive from month to month.

I am in awe of those who work to help these desperately poor people and am inspired by those who succeed in taming their demons if only for a little while. They have, against the odds, climbed out of deep hole only to face a steep hill. Among the challenges that threaten to push them back into the hole is learning to handle their meager financial resources.

Much is written in the press and blogosphere these days about the promise of “micro-finance” as a means for ending global poverty. What is usually discussed is credit—providing loans to the poor so that they can start their own businesses and lift themselves out of poverty. However, those receiving such credit are not the “poorest of the poor.” They are often well educated and generally successful though perhaps not able to obtain bank financing for their business idea.

Those in extreme poverty need jobs and the ability to build financial resources through saving products. I am excited to be working with low income clients who have managed to get their addictions under control and are striving to put their financial lives in order. I think I can help them. But I want to do more.

Muhammad Yunus’ latest book, Building Social Business, inspires me to think about at creating a local social business. Taking PT Ruma as a model, I am looking to collaborate with other like minded social entrepreneurs to create a micro-franchise social venture that will create jobs in the US for the poorest of the poor. I have some ideas that I will be writing about in future posts. Anyone who wants to join in is welcome.

Changes in Bank Regulations Will Impact the Poor

New rules to limit fees banks charge on overdrafts and credit card transactions are expected to result in new charges for basic banking services. In recent years offers of free checking accounts without minimum balance requirements made it possible for low-income customers to establish bank accounts in lieu of using high cost check-cashing outlets. To off-set lost revenue from new bank regulations, and to speed their recovery from losses resulting from sub-prime lending, banks will begin charging customers whose business does not generate sufficient revenue to cover the costs of their free checking accounts.

According to an article in today’s Wall Street Journal it typically cost a bank $250 to $300 per year to maintain one checking account. Customers who use multiple services such as home mortgage and/or home improvement loans, open investment accounts or have high credit card activity, easily cover the cost of a free checking account and will likely continue to enjoy this perquisite. The poor, who do not have the means to use these more “profitable” products, will face paying higher fees or be forced back to the check-cashing stores.

Although from a pure economic point of view basic low cost checking and savings accounts at banks or credit unions will still be a better deal for the poor than the cost of using check cashers and pay-day lenders, the added burden of the higher fees will likely deter many from establishing or maintaining accounts with reputable financial institutions. This needn’t and shouldn’t be so.

Many products the more affluent bank customers use, which entitle them to free basic banking services, have built in tax subsidies that make them even more attractive and affordable. I refer to the interest deductability of the home mortgage interest expense and the income sheltering capability of such investment products as health savings accounts, individual retirement accounts (IRAs) and 529 college savings plans. Such products are estimated to provide hundreds of billions of dollars in benefits annually to those with the income to take advantage of them. This is not a bad thing. But where are the beneficial products for the less well off?

Financial institutions have a right to cover the cost of their services but they should also be encouraged, perhaps required, to provide services low income families need and want at prices they can afford. Technology is bringing down the cost of basic banking services around the world. Countries such as Kenya and Pakistan offer low cost mobile banking services to the poor why can’t we do the same in the United States?

Checking accounts are expensive, “low tech” and outdated. Banks have been trying to get their clients to “go paperless” for years. That is why if one has the means to access one’s accounts on-line and execute financial transactions electronically, one enjoys lower pricing and a full range of banking services. Financial institutions should be welcoming lower income clients with Individual Development Accounts (IDAs which function like IRAs but can be used of education and saving for starting a business or buying a home), low cost electronic passbook savings accounts and stored value cards for making payments and on-line purchases.

Creating such products is not rocket science—it’s being done in developing economies. There is no excuse for not developing this technology to serve the poor in the United States.

Graduation Day

This is the time of year for graduations the life transitions they represent. My niece just graduated 8th grade and is excited to be headed to high school. High school graduates are looking forward to college or a job; college graduates, employment or graduate school. Despite the tough economy, the prospects for those with degrees are better than those without. Education is still the most reliable passport to financial security. We wish these graduates well and have high hopes for their future success.

Recently, I attended two very different graduations—those for men “graduating” from year long residential rehabilitation programs run by two Bay Area non-profits that serve recovering addicts and alcoholics. Like traditional academic graduations there were inspiring speeches. But at these ceremonies the inspiration came from the graduates who spoke so movingly of their gratitude to those who helped them overcome their addictions and literally save their lives.

For anyone who has never experienced the ravages of addiction and the hopelessness and despair it breeds, it is difficult to comprehend the magnitude of the accomplishment of these graduates. It was humbling to hear them recount with such passion, humility and even humor, how they had struggled and how much they appreciate those who had helped them. One common theme was that this “graduation” was really a beginning, not an end. They acknowledged that their fight is not over, would never be over. In the glow of recognition for what they have already achieved, they brimmed with resolve and confidence that they will be able to move forward and live sober, productive lives.

Listening to them, hearing the encouragement from friends and family who had come to celebrate their achievements, I wanted to believe that they would all be able to build on their hard-won recovery. I am not a trained social worker or expert on addiction but I know their future is much more problematic than that of this season’s crop of academic graduates.

I worry that among the difficulties these grads face is a lack of good options for handling their financial affairs, as modest as they may be. In fact, I have learned that the only financial services they are likely to be familiar with and have easy access to are predatory pay-day loan and check cashing outlets. These grads have received some rudimentary advice regarding their finances, but in talking with them and the staff of the programs, it is clear they are not as well prepared in this area as they could be.

I began writing this blog as an exercise of discovery. How can a banker help the poor gain access to appropriate and effective financial services? I am beginning to see how I might play a useful role in this area. I am learning. I think I have just “graduated” to a new level of understanding. Graduations are also called “commencements” for a reason. Time to get to work.

Is Saving More Important than Credit?

This was the question raised at the second plenary session at last week’s Microfinance USA 2010 conference. As part of the conference team of bloggers, I was assigned to cover Andrea Levere’s opening address. She is the President of the Corporation for Enterprise Development (CFED) which helps disadvantaged communities build financial assets through matched savings programs and advocating public policy initiatives that create products for low income households.

The US government spends upwards of $367 billion a year on wealth building policies such as home mortgage interest tax deductions, 401k retirement savings plans and, more recently 529 college savings plans and health savings accounts. However, these initiatives primarily benefit the rich with over 45% of the benefits going to households earning $1.25 million per year. In her speech, Ms. Levere outlined a more balanced, three point approach for assisting lower income people build their financial assets.

1. Matched Savings
Savings are an essential anti-poverty tool and with the proper incentives the poor will save, according to Ms. Levere, at “unimaginable rates.” Saving encourages the poor to aspire to own their own homes and send their children to college. It was noted that homeowners with Individual Development Accounts (IDA) were two to three times less likely to have faced foreclosure during the recent recession and that children with savings accounts were seven times more likely to go to college.
2. Matching Sources and Uses of Funds
The key to business success is having access to the right kind of funds for differing business needs. The well-to-do can start businesses with equity raised from friends and relatives; the poor need equity grants or the “patient capital” that come from such funders as Opportunity Fund, one of the sponsors of the conference.
3. Eliminate Barriers to Scale
Ms. Levere stated that US MFIs need to learn to use the internet more effectively to build scale for micro-savings products. She mentioned SaveTogether.Org as one US-based social business working to do just that.

Microfinance is not a “silver bullet” that will single handedly eliminate poverty but is a critical tool for solving this very complex issue. Now is the time, Ms Levere concluded, to get the public policies right for creating better options for the poor to build their assets and become as productive as they can be.

In the panel discussion that followed her address Ms. Levere asked each panelist to respond to the question “Is Saving more important than Credit?” I thought the first respondent, Ben Mangan, President and Co-founder of EARN, a local San Francisco non-profit that has assisted over 3,000 low income savers accumulate more than $4 million in savings, got the answer right when he said “It depends.”

Mangan pointed out that not everyone is an entrepreneur and able to make good use of micro-credit for building a business. Both credit and saving provide opportunity but saving also provides a form of insurance for the poor and is, in his words, “a ‘long-tail’ product that encourages the poor to make more aspirational decisions.”

I thought about this comment later when viewing “To Catch a Dollar,” the documentary about Mohammad Yunus and the founding of Grameen Bank. When he discovered that poor women, struggling to make a living weaving baskets, were being victimized by money lenders he did not suggest that they start savings accounts. Instead, he made the initial loan that help them break free from these Bangladeshi “pay-day lenders.”

Where one sits on the spectrum of poverty also matters with regard to the relative importance of credit or saving. Those at the very bottom of the pyramid have little to save and much to gain from access to reasonable credit. As one moves up the economic ladder one can afford to have greater aspirations which can be met through efficient saving products. In reality, both are important and are essential tools in the fight against poverty.

Muhammad Yunus Speaks on Social Entrepreneurship in San Francisco

Dr. Muhammad Yunus kicked-off the Commonwealth Club’s series of talks on social entrepreneurship today in a speech at the Fairmont Hotel. The event doubled as a book signing for his new work, “Building Social Business—The New Kind of Capitalism that Serves Humanity’s Most Pressing Needs.” Dr. Yunus and Grameen Bank, the institution he founded in 1976 to provide credit to poor women in Bangladesh, were co-recipients of the Nobel Peace Prize in 2006 for their work in developing microfinance.

In his speech Dr. Yunus traced the evolution of his thinking from the founding of Grameen Bank to his present passion for promoting social businesses that serve the poor. In 1974, while teaching economics in Chittagong University, he observed first hand the effects of a devastating famine on the poor of Bangladesh. He realized the elegant economic theories he had studied were next to useless for these people.

Venturing outside the gates of the university he began to learn of the underlying problems afflicting the poor, locking them in a cycle of poverty. Principally, he realized their lack of access to reasonable credit kept them in the clutches of the money lenders. With the equivalent of a mere $27 he was able to break this cycle of exploitation for 42 women. If he could do so much for so little Dr. Yunus wondered why banks shouldn’t be able to do much more for the poor?

Unable to convince the established banks that the poor were indeed “credit worthy” and would not only pay back their loans but also use them to lift themselves and their families out of extreme poverty, he founded Grameen Bank. Today the bank has over 8 million clients, 97% of whom are women, 2,600 branches and over 20,000 employees. The bank lends more that $100 million per month and experiences a 98% repayment rate on its loans. “Compare this performance to that of the big banks during the current economic crisis and tell me who is credit worthy,” Dr. Yunus said.

Lack of credit was not the only problem he uncovered. Lack of sanitation, health care, access to information, education, nutrition were among the many issues Dr. Yunus saw affecting the poor. “When I see a problem I create a business to address it” he stated. But the form of the businesses he creates is different from the normal for-profit companies. Social enterprises are enterprises either owned by the poor or have been funded by social entrepreneurs willing to forgo a monetary return on their investments.

As discussed in his new book, social business have dual “bottom lines” one social and the other economic. They operate as for-profit businesses to ensure their sustainability, but forego an economic return in order to achieve a social impact. He cited Grameen’s collaboration with the French company Danone to produce a special yogurt product for malnourished children in Bangladesh as an example of such a social business.

And now Dr. Yunus brings his poverty fighting philosophy to the United States. Since January of 2008, Grameen America has opened three branches in New York and one in Omaha, Nebraska, to serve the needs of poor entrepreneurs. Employing the same group lending methodology pioneered by Grameen Bank in Bangladesh, Grameen America has already lent to more than 3,000 low income small business owners in the United States with the same 98% repayment record. He announced that Grameen America will open a branch in San Francisco this summer.

The poor did not create the conditions that trap them in a cycle of poverty, nor are they to blame for the many crises, financial, environmental and social that threaten the world today. That is the fault of systems predicated on economic theories that view humankind as motivated purely by profit and self interest. There is, according to Dr. Yunus, another side to human nature, a selfless side that rushes to help when disaster strikes. Build businesses that appeal to the selfless side of human nature and he believes we will find solutions to the problems that keep more than 2 billion people in extreme poverty.

Outsourcing Micro-loan Underwriting and Portfolio Management

How can micro-lending institutions cut operational costs and devote more resources directly for the benefit their clients? Micro-loan Management Services (MMS), a unit of ACCION Texas, offers loan underwriting and portfolio management services that may do just that. Gustavo Lasala, CFO of ACCION Texas-Louisiana gave a presentation at the Microfinance USA 2010 Conference that covered the development and features of their outsourcing product that is now used by 20 different MFIs in 14 states.

ACCION Texas saw the opportunity for this product after 10 years of their own lending experience and efforts to develop back office processes that would yield better loan decisions and more efficient management of their loan portfolio. It was a two track process that included a “look-back” analysis of their portfolio to develop a loan scoring and predictive model, and a quantitative decision grid for making yes/no loan decisions.

The effort came together in August 2004 in a combined decision grid/predictive engine that they make available to clients on-line. MMS’s service is not “visible” to the loan applicants (the clients of their clients). It is accessed by the loan applicant via a link on the website of the MFI.

Since MMS began offering this service they have processed over 5,000 loan applications resulting in 500 loans closed at a cost of $200-300/ loan. According to Gustavo, this is 25-30% of the cost their clients would have spent doing the processing in house. MMS currently has 450 loans under management. Their product also enables institutions, such as Citi Bank to purchase micro-loans for their own portfolio.

MMS looks for client MFIs with loan portfolios of $1 million or more and who have the intention to grow their businesses. According to MMS, benefits are not limited to lower monetary costs but also extend to better credit decisions and loan officers’ ability to spend more time with their clients.

Clearly, the outsourcing of the loan application process and portfolio management to an outsider requires a high degree of trust. Nevertheless, the benefits of lower costs, higher quality portfolios and more time and money to spend on serving low income entrepreneurs may outweigh the risks.

Banking on the Poor at MFUSA 2010

This year the Microfinance USA conference will be taking place in my home town of San Francisco. I am very excited to be attending and blogging on several sessions at the conference, and I see this as a great opportunity to continue my research on how basic financial products can be adapted for use by low income entrepreneurs.

Having worked most of my career in the banking industry, I am particularly interested in the session focused on “Serving the Unbanked.” There have been a number of recent articles in the press and blogosphere, lamenting the high cost of micro-credit and criticizing large financial institutions who appear to be reaping inordinate profits from their lending to low income clients. This is certain to be a hot topic at the conference and, as an experienced banker and volunteer with Grameen Foundation’s Bankers without Borders, it is a key issue that interests me.

Other sessions of interest include Microloan Management Services which will be covering the provision of portfolio management services for other MFI’s by ACCION Texas, as well as the Kiva Lender-Borrower Meet-UP.

Having worked as a banker in Asia I started learning about microfinance when I became a Kiva lender. Kiva has recently taken some criticism for extending its activities into the U.S market, however I think it is great to have Kiva’s network of lenders available to American low income entrepreneurs.

I anticipate the conference will provide much material for my blog. If you are able to make it to the conference let’s meet up; if not, follow my posts from the conference and here at Banking on the Poor.

Home and Hope for the Working Poor

A few weeks ago I wrote about meeting Raj Rambob, Executive Director of "Home and Hope," a small non-profit in San Mateo County that works with local religious congregations to provide temporary shelter for working poor families that may have become homeless as a result of a financial setback such as the loss of a job. He invited me to come to their offices to learn more about what they do and discuss how access to financial services tailored to the needs of the working poor might prevent such occurrences or assist families to recover from such setbacks.

"Home and Hope" has been operating for ten years and is affiliated with "Family Promise," a national organization in operations for more than 20 years. "Family Promise" developed the model "Home and Hope" uses for organizing local congregations of all faiths to provide an evening meal and a safe place to sleep for homeless families. There are currently 31 congregations in San Mateo County participating in the program which at any one time can serve up to five families consisting of as many as 14 individuals.

"Home and Hope" operates a day center where families can store limited belongings, access showers and laundry facilities, care for pre-school aged children and use computers and access the internet. Raj explained that the typical stay for their families averaged 55 days in previous years. Last year, as a result of the worsening job market, this tenure increased to an average of 93 days.

Congregations provide services on a rotating basis for one to two weeks at a time. Home and Hope operates with six paid staff who work with 45 coordinators from the congregations and over 1200 volunteers. I commented that this seemed to be an extraordinary number of individuals to be involved in an effort that could only serve 14 individuals. Raj agreed that “efficiency” was not a primary goal of the program. However, maximizing exposure to the problem of homelessness and engaging the community in finding solutions was a key benefit of the model.

Raj cited examples of how direct community involvement has led to hopeful outcomes for some guests in the program. One individual, noting the late night studies of one high school student, provided the opportunity for that student to attend community college after graduation. Another offered a live-in elder care position for one of the program guests.

While no case is typical, Raj related the story of one family that had operated a successful mobile canteen business serving workers at construction sites in the county. With the downturn in the economy and resultant decline in construction, their business became so bad they could not afford to renew their business permit and were forced to go out of business. After going through their savings and liquidating their fixed assets they lost the capacity to pay rent and became homeless.

Through contact with a volunteer from one of the congregations, this family has been able to find work in a culinary related business and gain access to low income housing. While this is certainly a hopeful outcome, it is unlikely that the family has regained its former level of economic security. One might ask where they could have turned for assistance before losing their assets or now, how they might be able to restart their business?

Coincidently, it was announced yesterday that Grameen America, the non-profit microfinance organization dedicated to fighting poverty in the United States will be launching its operations in San Francisco this summer. Already, from branches in New York and Omaha, Nebraska, Grameen America has lent over $5 million and provided financial education to entrepreneurs living below the federal poverty line in the U.S. Hope indeed that Raj’s guest may find homes again soon.

Innovative Solutions for Addressing Global Poverty on Display at the Global Social Venture Competition

The finals for the 11th Annual Global Social Venture Competition took place in Berkeley on April 22nd and 23rd and what a contrast it was to the conference I attended two days prior and described in my previous post. This was an amazing competition that began with over 500 entrants from more than 30 countries. The 16 finalists presented business plans for social ventures using technology and innovative approaches to solving social and economic problems that give rise to global poverty.

I was able to see almost all of the final presentations and can attest to the extraordinary level creativity, professionalism and passion exhibited by all the teams. Ruma, the Grameen Foundation supported social venture I have been mentoring took second place. This is a micro-franchising operation that has already helped more than 2,000 poor women in Indonesia start their own businesses and lift their families above the poverty line that I have written about in earlier posts.

The first place winner of the competition was a team from Stanford University that has started a company called Re:Motion Designs. They have developed a polymer-based polycentric knee joint that can be manufactured for less than $20. In a very moving and powerful presentation they demonstrated the life-changing nature of this invention for poor amputees living in developing countries.

The winner of the Social Impact Assessment award was a team from UC Berkeley called WE CARE Solar that provides obstetric health facilities with solar power for lighting, mobile communications and essential medical devices. The innovative portable, plug and play solar-electric system they have developed is being distributed, installed and maintained by local market-based capacity and partnerships. Their product is designed to reduce maternal and infant morbidity and mortality in developing countries.

The conference also featured two excellent keynote speakers, Wilford Welch the author of a new book “The Tactics of Hope—How Social Entrepreneurs are Changing our World” and Neal Keny-Guyer, the CEO of Mercy Corps, a leading international humanitarian and development organization with operations in 40 countries. Both stressed the critical role of social entrepreneurs in creating new solutions for addressing the problems of global poverty with new approaches and solutions that bridge the efforts of traditional NGOs and government ODA with market oriented enterprises.

Wilford Welch described the role of social entrepreneurs as being primarily focused on solving social or environmental problems, “riding the boundaries” between waves of change from one paradigm and the next, looking for systemic solutions, seeking replicable and sustainable solutions, open to establishing alliance with disparate and unlikely partners, listening at the local level to the people affected by social problems and engaging in intergenerational collaboration. In fact, to this latter point, I was excited to learn that as a member of the “Encore Generation” I have a role to play in this intergenerational collaboration!

Neal Keny-Guyer also talked about the social entrepreneur reaching out to traditional NGOs with new ideas and bringing the changes that are happing in India, China and Brazil to more fragile states. He outlined the basic principles of social entrepreneurship as: putting people first; practicing the 3 Rs—Relief, Recovery and Reconstruction; doing what’s best for the local economy and seeing crisis as opportunity. He noted that prior to the recent earthquake that devastated Haiti the country had been, on a per capita basis, one of the largest recipients of Official Development Assistance. Nevertheless, the country had a very low level of self-sufficiency. The current relief, recovery and reconstruction efforts in Haiti, he noted, should be seen as an opportunity to re-build the country such that it becomes sustainably self sufficient.

In the final analysis, my take-away from both conferences is that while we need to ensure that we are doing our share in terms of providing official assistance to developing countries, this will not be sufficient to end extreme global poverty. Without the efforts of social entrepreneurs bringing innovative business approaches and developing new technologies that directly address the needs of the poor, we will not create sustainable, scalable solutions that will eradicate poverty. The passion and creativity on display at the Global Social Venture Competition is best evidence I have seen that there is hope for ending global poverty in our time.

A National Interfaith Conference on Global Poverty

I spent the past two days (April 20th and 21st) at the “One Voice of Faith” conference on global poverty at St. Mary’s Cathedral in San Francisco. The cast of speakers was impressive including: Ruth Messinger, President of the American Jewish World Service; Dr. Bonnie Anderson, President, House of Deputies of the Episcopal Church; Rev. Dr. Heng Sure, Director, Institute for World Religions and the moderator, Maha ElGenaidi, President, Islamic Networks Group. Panelist came from an array of notable organizations: Catholic Relief Services; RESULTS; Bread for the World; the UN Millennium Campaign. What made the event most worthwhile for me however was meeting three remarkable individuals running two small non-profits that are actually doing the hard work every day needed to put an end to global poverty. More about them follows below.

The fight against extreme poverty is expensive but is morally and, arguably, even economically the right thing to do. That 1.1 billion people in the world live on less than $1 per day is more than scandalous. That wealthy countries, and their citizenry, have a responsibility to alleviate the needs of the poor is consistent with the teachings of every faith. This interfaith conference focused on organizing the advocacy needed to move the US government to meet its Millennium Development Goals (MDG) commitment.

In 2000, the United Nations unanimously adopted a resolution known as the Millennium Declaration that, among other noble objectives, calls for the eradication of global poverty. Information on the MDG and the campaign to end global poverty can be found at www.endpoverty2015.org/. President Obama has committed to present the US’ plan for achieving the MDGs in his speech to the UN General Assembly this coming September.

Speakers and panelist pointed out that the recent global economic crisis has seriously affected the political will in the US to live up to our MDG commitments. Therefore, we were encouraged to engage in a concerted campaign to lobby our representatives in Congress regarding key anti-poverty legislation and support of the “Point 7 Now” initiative which calls for the US government to commit 0.7% of GNP to Official Development Assistance.

Alex Baumgarten, Director of Government Relations for the Episcopal Church, noted that Americans are “by far the most generous giving to private charities but don’t trust the government to efficiently distribute foreign aid.” It was further noted that Americans have a grossly inflated notion of just how much of the federal budget goes to foreign aid. In fact, while we are the most generous when giving from our own pockets, we are by far the most parsimonious giving from our public treasury. According to some statistics, the 0.16% of GNP the US contributes to ODA is the lowest among the 22 OECD countries.

But to Mary Burns, who along with her husband Bob, founded and run the Kasimu Education Fund, these are all just words and statistics she’s heard many times before. While we talk, she says, children are starving for food and education in the Manyesa area of Malawi where they have helped build a school, fund a small local micro-lending operation and provide scholarships to local youths to attend high school and teaching college. I spoke with Bob about the micro-lending activities and the availability of other financial services to the people of Manyesa. They are basically non-existent he said and desperately needed. I told him about some of the initiatives I know about to bring mobile banking services to the poor in Africa and promised to come back to him with some ideas.

Just listening to Mary and Bob talk about their passion for helping the people of this poor corner of the world achieve a measure of self-sufficiency by 2015 was truly inspiring. And, they are not alone. Bob told me of finding about 100 other small non-profit/NGOs based in Santa Clara and focused on helping the people of Africa. I have added a link to the Kasimu web site. Check out the video it is really amazing.

Then there is Raj Rambob, Executive Director of Homes and Hope, a San Mateo County based non-profit that provides temporary housing for families that have become homeless during the economic crisis. He told me of his family’s commitment not only to poor of San Mateo but to his grandparents ancestral village in India where they too support a school.

I have no doubt it is necessary to fight the good fight with regard to our government’s commitment to the MDGs but I have greater confidence in the Bob and Mary and Raj’s of this world. It may feel good to stand in a circle and sing Kumbaya but Bob and Mary and Raj are doing the work that will ultimately enable the poor to raise themselves out of poverty.

Learning about the Bottom of the Pyramid

Apologies to readers of this blog (and thankfully there are a faithful few) for the long delay in generating a new post. The chance discovery of financial services available at Wal-Mart, which I discussed in my last post, impressed upon me how much I do not know about existing options for the poor in the U.S. In a recent development regarding Wal-Mart it was announced last week that they have joined the Secure Remote Payments Council, a non-profit industry group that supports the growth, development and market adoption of debit based internet eCommerce and mobile channel payment methods.

I have been thinking about how much else I might not know in this space. Who are all these people categorized by the U.S. government as “under-banked” and how can their needs best be addressed? Twenty-five percent of American households (see previous post) is a lot of people—maybe as many as 100 million give or take a few. This is far more than the just the homeless and illegal immigrant populations, although they would certainly be counted as among the “under-banked.”

Access to financial services is a critical problem whether for poor entrepreneurs in Indonesia or the homeless in the U.S. But it is by no means their only problem. Appropriate remedies need to be based on just where the poor fit on a continuum from the “poorest of the poor” to the “working poor” to people at the lower end of the middle class where the loss of a job or catastrophic medical emergency might lead to a precipitous slide into poverty.

Over the past two weeks I have spent some time talking with people who deal with the lowest end of the spectrum in San Francisco. At St. Boniface in the Tenderloin, an area of the City synonymous with the down and out, I met Laura Slattery who runs the Gubbio Project. Homeless people who have spent the night on the street are welcomed into the church to rest and use the facilities. While her clients stretched out in the pews for a few hours of rest we chatted quietly.

The church was less crowded than usual she explained because it was the first of the month, the day the City hands out checks. Where would they cash their checks I asked; what do they do with their money? Laura wasn’t sure. They probably pay too much to cash their checks and many will use the funds to find solace in drugs or alcohol. Some might get off the street for a few nights by taking a room in a single room occupancy (SRO) hotel. One thing was sure, Laura knew most would be back in the pews before the month was half over.

We walked the neighborhood visiting other programs serving the poor. At Hospitality House we met a woman, herself formerly homeless and a drug abuser, who now counsels others at the Self Help Drop -in Center. We asked if she thought a stored value card that could be acquired at Wal-Mart or Walgreens would be a valuable aid to clients. She didn’t think so. When they need money the most, she explained, it is usually late at night when the urge for a “fix” hits them the hardest. Then they have no option but to use the card to buy something they don’t need to get some cash back to buy their drugs. They’re better off just holding the cash she thought.

Laura suggested we have lunch at St. Anthony’s Dining Room, a facility adjacent to the Church that has been serving meals to the poor for six decades. I felt uncomfortable eating food meant for the poor but as it was the first of the month, demand was less than usual and Laura assured me there would be plenty for everyone. Besides, she said, you should learn what it feels like to receive charity and dine among the less fortunate. She was right. It was a humbling experience. One more lesson about what it means to be poor.

As we exited the dining hall I spotted two neatly dressed men at a table with information for veterans. They were volunteers from the VA providing outreach to homeless veterans. One-third of all homeless, they explained, are veterans. At their suggestion I called later in the day at the VA clinic located South of Market and learned about the Veterans Industries/Compensated Work Therapy program which works on placing homeless vets in jobs. I have some further meetings scheduled with the managers of this program and will no doubt be writing about this in future posts.

The following week when I returned to volunteer at the Gubbio Project Laura introduced me to Sister Carmen at Faithful Fools, a street ministry that, in their words, “…meets people where they are through arts, education, advocacy and accompaniment…” The Faithful Fools seem to act as a bridge between those on the street and those seeking to help. They conduct periodic “street retreats” for people interested in connecting with homeless.

Again we raised the topic of stored value cards for the poor with Sister Carmen. Perhaps it would be helpful for some she said but like the case worker at Hospitality House, she was under no illusions that the product would impede the purchase of drugs. She told us of one enterprising Chinese woman who had a wireless POS device she would use out on the street to provide cash to holders of ETB cards (electronic food stamps). This “innovative” service allows the poor to get cash without having to actually buy items permitted under the food stamp program. While certainly innovative, this hardly the kind of “assistance” the poor need to extricate themselves from poverty.

“Banking on the Poor” will promote the kind of financial access and infrastructure that we hope produces more constructive results. If you have time, check out the Gubbio Project web site. The video clip on the site is really quite moving. Just click on the link I have added to the list on this blog.

Anti-poverty infrastructure at Wal-Mart?

It is always a humbling experience learning how much you don’t know. An article in yesterday’s Wall Street Journal about Wal-Mart’s plans to expand the number of its stores offering “bank-like services” really knocked me down a peg or two. I can’t recall that I’ve ever been in a Wal-Mart (and what does that say about me?) so I wouldn’t have been aware that some of their stores have what they call “Money Centers.” Places where people can cash checks for a nominal $3.00 fee; obtain pre-paid Visa Debit cards; pay bills and transfer money, all without having to have a bank account.

According to the article, government estimates 25% of U.S. households are essentially “un-banked.” The president of Wal-Mart Financial Services is quoted as claiming that banks are really not interested in this customer base and that they see a lot of space to “service customers’ basic financial needs.” She goes on to say that these money centers do three to five million (that’s million) transactions every week! Talk about “banking on the poor.”

In going through the Wal-Mart Money Center web sites, I came across another company I have never heard of that offers a product called Green Dot MoneyPak. Green Dot’s stated mission is “to be the leading provider of financial services to the large community of Americans underserved by traditional providers” (i.e. banks). Green Dot MoneyPak cards, which come with either the Visa or MasterCard logo, can be purchased at a number of retail outlets such as Walgreens, Radio Shack, K-Mart and 7-Eleven.

The charge for “opening an account” (buying the card) is $4.95. Re-loading the card is free with direct deposit or cost $4.50 per transaction. Up to $500 can be loaded at one time so this amounts to less than a 1% commission. Like the Wal-Mart Money Card, these are essentially cash top-up cards that individuals can use to store value (cash) until they need to use it anywhere Visa or MasterCard is accepted. They can also be used to fund PayPal accounts to enable on-line purchases and pay bills.

When I enquired at a local Walgreens I was told they do not require any identification for purchasing the Green Dot product with cash. The cards can be registered to ensure against loss and this may require standard government identification. Companion cards can also be purchased so funds deposited by one party can be withdrawn by another. Both Wal-Mart and Green Dot work with MoneyGram to effect money transfers both domestically and internationally.

So the question is: do these products provide the poor with access to bank-like services at a reasonable cost and convenience? They certainly provide a way for the poor to convert their cash to virtual funds and this is a big step in gaining access to payment type- financial services. Storing money on cards is certainly safer than carrying cash and the ability to remit funds to another party, say a family member in another state or country safely and at a reasonable cost, also seems of great value.

Wal-Mart and Green Dot do not have banking licenses so they cannot make loans or provide savings accounts. But they do seem to have scalable access to the un-banked working poor. Perhaps this infrastructure could be partnered with MFIs to provide working capital micro-loans and/or with banks or credit unions to provide access savings accounts? I think it is an idea worth exploring.

"Build it and they will come"

The March 8th edition of the Financial Times contained an op-ed piece that caught my attention. Entitled “How banks can better help the world’s poor” I thought it would be particularly appropriate to the theme of this blog. In the article the author, Alexander Friedman a former investment banker and chief financial officer of the Bill & Melinda Gates Foundation, outlines four steps he believes the financial and social sectors can take together to help the world’s poor:

1. Foundations could “carefully lend” against a portion of their assets they do not give away each year;
2. The private client and wealth management businesses of financial institutions could work with foundations to syndicate grant-making opportunities;
3. Banks could expand “on their current, limited efforts in community lending” to “structure deals that serve the poor;” and
4. Governments could “bring about a revolution in giving and investing” by providing tax incentives for “high quality social impact investments…”

After giving the article some thought, however, I found myself disappointed in this prescription for helping the poor which, in essence, is all about raising money. Certainly we can agree that more funding for anti-poverty programs would be a good thing and that eliminating global poverty will require a lot more of it. Nevertheless, if we have learned anything in the effort to date, just throwing money at the problem won’t make poverty go away.

I believe we also need to be building anti-poverty infrastructure and banks can make huge contributions in this effort. In an excellent recent book, "Portfolios of the Poor", the authors meticulously document the need for safe, reliable financial services that are tailored to fit the needs of the poor.

Although micro-loans are playing a vital role in helping to lift the poor out of poverty, increasing attention these days is being given to micro-savings and mobile payment products. However, serving those at the base of the pyramid with such products is difficult and expensive. Banks should work with local MFIs (Micro-Finance Institutions) and social enterprises such as PT Ruma and Microfinance Solutions (mentioned in previous posts) to reach poor clients and provide them with the basic financial services they need to run their businesses and protect and grow their families’ assets.

Today social entrepreneurs use the internet to raise increasing amounts of money for a wide range of anti-poverty programs. In fact, some commentators fear that the fund raising ability of such social enterprises as Kiva, in the near term, may be out-pacing the ability of MFIs to deploy the funds effectively. Without sound anti-poverty infrastructure such well intentioned efforts to help the poor can flounder.

So what else should the financial and social sectors be doing to help the poor? Briefly I would offer the following:
1. Foundations should invest more in the human capital required to run social enterprises that focus on the needs of the poor;
2. Wealthy individuals who utilize private client or wealth management services should invest some of their time and resources in these social enterprises;
3. Banks should find ways to tailor their products services to meet the needs of the poor and create greater access to the banking system; and finally,
4. Governments should enact effective consumer protection regulations for the poor while also encouraging and enabling banks to work with the poor.

Mr. Friedman is correct that now is the time for the financial and social sectors to work together to change philanthropy. But we also need to create the capacity to absorb and effectively deploy increasing levels of funding. Build the right anti-poverty infrastructure and the investors will come.

Microfranchising

An unanticipated yet highly gratifying effect of writing this blog has been the reactions, feedback and new contacts it has generated. You don’t see this in direct comments on the blog itself, but I do receive comments by e-mail and on discussion boards where I have posted links. I have been learning a lot from this communication with others who have the same interest in creating access for the poor to financial services.

For example, just yesterday I had a fascinating conversation with the founder of a US based social enterprise, Microfranchise Solutions LLC, (MFS) that is very similar in concept to PT Ruma, the micro-franchise company I am advising in Jakarta. The mission of both of these firms is to create and support business opportunities for poor entrepreneurs. As I have reported in previous posts, PT Ruma is initially focused on establishing poor woman as retailers of cell phone airtime. MFS’s first franchise business is a taxi company in Lima, Peru.

Although there is quite a difference in the relative size of the two franchise operations, in concept they are very similar—create jobs for the poor, not handouts. Give the poor access to the capital resources required to run a business and the training to be successful. Another commonality is that the use of technology is absolutely critical to their success. Ruma is using mobile telephone technology to link Village Phone Operators to their accounts with airtime wholesalers, allowing them to deliver airtime to their customers via SMS.

MFS is no less innovative in its use of technology. First, the taxis they finance are fitted with special GPS equipment which allows them to track the vehicles they have financed and disable them if they are stolen or misused. This technology has the added benefit of allowing social investors who have provided financing for a discreet vehicle to literally see the impact of their investment via Google Earth! Secondly, the vehicles also have an embedded microchip that allows for the collection of loan repayments every time the driver fills his car with fuel.

It was this feature that really caught my attention because it is another example of using innovative technology to provide a financial service, in this case loan repayments. That the repayment is effected via a surcharge on a resource the driver needs to run his business neatly matches his revenue with two of his expenses, fuel and financing. I don’t know how the arrangement with the gas station works but it is ingenious and could probably be expanded to allow for the driver to pay money into a savings account or a stored value card or virtual card in a “mobile wallet.”

Both PT Ruma and Microfranchise Solutions are looking for the next franchise product to layer onto the networks they are building into the base of the pyramid. Because both of their current businesses address the “cash-in” problem of serving the unbanked, a financial product, such as mobile savings may be a good option for both.

One final word about MFS, they do offer social investors with an interesting value proposition spelled out on their web site at: http://www.microfranchisesolutions.com/. I encourage readers to take a look at it.

Mobile Money

We understood from the beginning that PT Ruma’s initial micro-franchising product, retailing cell phone air time, would not be the only product it would use to enable poor entrepreneurs to lift themselves out of poverty. There would be other products that would be both commercially viable and socially relevant to the entrepreneurs’ communities. We have learned that the VPO networks PT Ruma is developing are valuable access points to the so-called “base of the pyramid” market segment in Indonesia. I Believe we now need to learn how to use these networks to deliver essential financial products such as savings accounts, micro-insurance, and safe money transfers (payments) through their mobile telephones.

This is certainly not an original or even new idea. Such capabilities are already widespread in developed and even some developing markets. However, the difficult part is providing these products to “unbanked” populations such as the VPOs and their customers. While doing some on-line research on this issue I came across a statement by a telecommunications executive in a presentation at a recent conference on mobile banking. She stated that it is “quite a leap between selling air time top-up cards and rolling out a distribution network that can handle cash-in and cash-out and meet know your customer requirements…” She also observed that telecommunications “operators are learning the difference between their business model and that of a financial institution…especially when it comes to systems and internal process…”

As a former banker, these statements really resonated with me. She put her finger on several key issues that inhibit the development of mobile banking for the unbanked poor. First is the issue of getting the poor’s cash into the system or converting it to “mobile money.” Second, there is adhering to anti-money laundering (AML) and combating the financing of terrorism (CFT) rules with workable know your customer (KYC) procedures. Third, is having robust systems capable of combating the inevitable attacks of cyber criminals and accurately accounting for both the cash and electronic ins and outs of customers financial resources. And finally, ensuring adequate regulatory supervision and consumer protection.

This is certainly not an exhaustive list of the challenges to bringing mobile banking and mobile money to the poor but it does illustrate some of the primary challenges. PT Ruma’s current franchise operation is already converting customers’ cash into an electronic product that, in some ways can function as electronic or mobile money. This is mostly true for the VPOs who can store value in the form of air time credit. By retaining their earnings with PT Ruma or the wholesaler, they are effectively increasing a current asset—working capital—which can be turned into cash when they sell to their customers and retain some of the cash, rather than replenishing all their working capital. In fact, this may be the safest, most convenient method the unbanked VPOs currently have for accumulating savings.

For the accumulation of air time to function as a savings vehicle for the customers of the VPOs the matter is a little more complicated but certainly not impossible. One possible solution is the issuance of stored value cards to which the air time purchaser can transfer from his mobile phone the value of his air time. This is where the need for robust systems comes into play. Again, not an insurmountable obstacle, but one that must be dealt with effectively by an entity with sufficient technology resources. There are many at work in this space, including Grameen Solutions, the applications development arm of Grameen Foundation. PT Ruma would be a perfect venue for testing the mobil money applications Grameen Solutions and Obopay are working on. (See http:www.bankabillion.org).

The three weeks with PT Ruma in Jakarta was an educational experience on several levels. I learned much about micro-finance in general and how it works Indonesia in particular. I also learned about the people who are so passionate about working in micro-finance and the need to adapt financial products and services that work for the more affluent to serve the needs of the poorest. Of course I also managed to acquire some meager new tech skills by blogging about my experience. Now I would like to turn these skills, and what I have learned, to a more general subject: how to make banking more accessible and useful to those at the “base of the pyramid.” Hence, the change in the title of the blog to “Banking on the Poor.”

In coming up to speed on PT Ruma’s business model it was immediately clear how critical the banking system in Indonesia is to their ability to execute on their plan. The faster the village phone operators (VPOs) could convert their sales of air time to credits with the air time wholesaler, the greater their sales volume and subsequent profits. Working in their favor is the basic infrastructure of the banking system itself. Banks in Indonesia transfer funds among themselves using a highly efficient, real time clearing system that insures virtual instantaneous credit. Theoretically, a VPO working just outside a bank branch could make a sale, deposit the funds from that sale in her account and then transfer the funds to the account of the wholesaler and replenish her inventory for the next sale.

Unfortunately, things aren’t so easy for the poor. PT Ruma’s VPOs do not have their own bank accounts and even if they did, they rarely live in easy proximity to a bank branch. They must rely on PT Ruma’s field officers to physically pick up their receipts and make the deposits for them. This leads to delays in having the sales proceeds credited to the wholesaler and the replenishment of their inventory. To increase sales, the VPO must increase the amount of her “working capital” on deposit with the wholesaler.

To mitigate this situation, PT Ruma has limited capacity to assist the VPOs’ sales with temporary inter-day bridge loans. But this is not a sustainable, long-term solution. Although the VPOs need to be encouraged to build up their working capital over time, they also need more efficient access to the banking system and access to working capital credit.

PT Ruma is working on three fronts to address the financing needs of the VPOs. First, field officers are being trained and rewarded to educate their VPOs on the virtue of building up their own capital. Having working capital in the form of air time inventory is actually a very effective form of saving for the VPOs, much safer and more useful than cash in the cookie jar. Secondly, working with Grameen Foundations “AppLab” and Qualcom, a new technology application called the “Top Up” app is being developed that will improve the delivery and speed of information on the VPOs sales between PT Ruma, the banks and the wholesaler. Finally, PT Ruma is developing new channels of financing for itself and the VPOs to facilitate higher sales volume and greater profits for the VPOs.

Heading home (at least for now)

The three week assignment with “Bankers Without Borders” has passed quickly and today I return to San Francisco. It has been a fascinating experience. I know I have not done it justice in this attempt at a blog. Jakarta has certainly changed since I was last here in the mid ‘80s. Back then the Japanese had a joke about Indonesia that went: “Indonesia de wa hito oran, go-han nashi.” This is a play on words. “Hito” means person in Japanese. The word for person in Bahasa is “orang.” “Oran” in Japanese means lacking. “Go-han” is Japanese for rice. Rice is “nasi” in Bahasa and “nashi” means “nothing” or not there in Japanese. So, to the Japanese in the 1980s, Indonesia was a country with no people (worth anything) and no rice (worth eating).

I doubt this joke has much currency in Japan anymore. It is truly impressive to see the development of a strong, well-educated middle class that is creating a truly modern, multi-cultural, secular society in the world’s fourth most populous country where Islam is the largest religion. The young people working at PT Ruma are technologically, linguistically and culturally as competent as their peers anywhere else in the world. They are intellectually curious, eager for new ideas, quick to adapt, and intent on ensuring that their country takes its place among the modern, developed nations. With its vast natural and human resources there seems little doubt they will achieve this goal.

The food is also delicious and world class. I was pleased to see that The Oasis, a restaurant I had fond memories, is still going strong. It is located in an old Dutch colonial home that is full of art and artifacts from around Indonesia. They serve Indonesian cuisine in the “Rijsttafel” tradition. It is both a visual and culinary experience not to be missed. It was somewhat disappointing, however, to see that the restaurant seems much more “upscale” these days. Seems to have become a little stuffy and lost some of its old charm. Nevertheless, still a treat.

There is still much to be done to assist PT Ruma achieve its goal of becoming a sustainable social enterprise assisting the poor to lift themselves out of poverty. I have been very privileged to work with them on this endeavor and look forward to continuing helping them in the future. Perhaps there will be more chances to post from Jakarta in the future.

Another Trip to the Field

On Saturday we ventured into the field again to meet with VPOs and learn about their businesses and how we can help them. Joining us were two consultants with Vision Spring, a non-profit dedicated to improving the access of the poor to eye care. We wanted to see what kind of eye care was available in the poor communities and whether Vision Spring's program could be offered through PT Ruma's network of VPOs. In addition to myself, there were two other "Bankers without Borders," Elaine Chang and Sultan Haider. They are doing a project for PT Ruma looking at reporting requirements for running both the social and business sides of the operation. The link below should give you access to photographs taken of the trip. http://picasaweb.google.com/daniel.j.kreps/20100130#

The first VPO we visited was in an "upper" low class (poor) neighborhood in the peri-urban Tangarang area on the outskirts of Jakarta. Ibu Marni is one of PT Ruma's most experienced VPO. In fact she runs a "hub" of 18 VPOs and makes more from that activity than from her direct sales of 10-12 per day. Her husband earns about $150/month as a construction worker. They have two children, one in junior high and one in senior high school.

After discussing the air time sales business the Vision Spring consultants inquired about the availability and quality of eye care for the community. Ibu Marni reported that the neighborhood is regularly serviced by itinerant sales people offering eye tests and reading glasses for around IR300,000 (US$30). Such sales are always made on a 10 month installment basis. She said she could do this business as well if she could offer the same credit terms. She herself had never had an eye exam so one was conducted for her. It turned out her vision is pretty good--20/20 in one eye and 20/30 in another.

We moved on to another VPO not too far away but in a distinctly less affluent neighborhood. Sirma, a recent high school graduate, runs her her business through her family's "wareung" or roadside stand. Her business also seems to be going quite well. She makes about 10 transaction per day and contributes 10-12% of her household's total income.

Finally, back closer to the city, we visited Ibu Trirahyu, a VPO in Tomang, a very poor neighborhood along the river. This was quite a remarkable visit. Ibu Trirahyu was actually the first VPO "hired" by PT Ruma. She has learned that if she increases her "working capital" (her balance of air time in her account with the wholesaler) she can actually increase her sales without requiring any additional outside financing. She understands that only a portion of her cash flow from sales of air time represents her profit and if she retains some of the profit she can grow her business. This is a lesson we must learn to replicate with other VPOs who see their sales constrained by a lack of inventory (air time balance with the wholesaler) and who request bridge financing to consummate their sales. This often causes delays in the delivery of air time to their customers even though they have already paid the VPO for it.

After our meeting with Ibu Trirahyu, we took a short walk through her neighborhood. In spite of the incredible density and poverty we were impressed by its relative orderliness. Many dwellings had small gardens of potted plants and cages with song birds hanging from the windows. Everyone was very friendly to this strange group of foreigners wandering along the tiny lanes that endlessly twisted through this vast area housing thousands of poor families. I asked about the level of crime in the neighborhood and was told it was actually quite low. Everyone knows everyone here.

The Progress Out Of Povery Index

So how would one measure the “social bottom line” of an enterprise that is dedicated to assisting the poor in raising themselves out of poverty? As described on the Progress out of Poverty web site, Grameen Foundation has spent considerable effort and resources addressing this question and, as a result, developed country specific indices (PPI) for about 30 countries that measure the relative poverty level of individuals and households at a particular point in time. Using this tool social investors and entrepreneurs can be assured that a social enterprise is indeed targeting the poor with its programs and the social impact of these programs can be measured over time.
The indices are derived from large, current national income or national expenditure surveys conducted by census bureaux or the World Bank. These surveys contain up to 1000 data points which are consolidated into about 100 discreet categories such as size of household, education levels, dwelling characteristics, durable goods ownership etc. These are then subject to regression analysis to produce 10-12 simple questions which predict with a high degree of probability an individual’s or household’s likelihood of having a specific income level.
PT Ruma is using the PPI for Indonesia to identify potential poor entrepreneurs to train and deploy as Village Phone Operators (VPOs). Yenni, the young lady pictured in an earlier post, has a PPI score of 46. According to the PPI Index for Indonesia, this means that her household is 80% likely to be living below a daily per capita income of $2.50. The money she earns as a VPO therefore, makes a significant contribution to her household’s well being. Perhaps this may mean that her little sister, seen kneeling beside her, will one day have the opportunity to finish high school.
Below are the 10 questions used to determine a potential VPO’s PPI score and likely income level:
1. How many members does the household have?
2. How many household members aged 5 to 18 are currently attending school?
3. In the past week, how many household members ages 11or older worked or had a job/work/business?
4. What is the main source of drinking water of the household?
5. What type of toilet does the household have?
6. What is the household’s main flooring material?
7. What is the household’s main ceiling material?
8. Does the household own a refrigerator?
9. Does the household own a motorcycle?
10. Does the household own a television?

Reloading

As my first posts have not created much of a rhythm for this blog I thought I would step back and try to put more context around what has brought me to Jakarta and what my role is here. I hope this will lead to a more fluid and interesting story that is easier for me to write on a more frequent basis. Everyday I have fascinating experiences but I haven’t managed to put them into a format that makes it easy to share. I guess there is an art to blogging and as this is my first attempt I ask for you indulgence as I try to find my muse.

After retiring about one year ago I began looking for meaningful activities where my experience in international banking and consulting could be impactful in socially relevant ways. I am very grateful to Grameen Foundation for giving me this opportunity to be a volunteer on its project to help launch a social enterprise in Jakarta called PT Ruma. “RUMA” is an acronym that comes from the words Rekan Usaha Mikro Anda which means “your micro-business partner.”

The company was conceived by two talented young Indonesians, Aldi Haryopratomo, currently at Harvard Business School working on an MBA, and Budiman Wikarsa, an MBA from the Kellogg School of Management at Northwestern. Both earned engineering degrees at Purdue and have extensive experience working in consulting for companies like BCG and McKinsey. They have put together a very impressive team of young Indonesians, who I will try to introduce in subsequent posts, to implement the mission of the company which is “empowering the poor and the poorest with profitable microfranchise business opportunities and delivering socially relevant products and services to underserved communities.”

Grameen Foundation’s role has been to organize initial support for the company in the form of both finances and technical assistance. Qualcomm corporation has partnered with Grameen to provide grant money and assistance with the technology that drives Ruma’s business model. Sean DeWitt is the Grameen’s manager on the project. He coordinates the contributions of assistance from various sources, including me, and provides advice to the leadership team on social enterprise management.

My introduction to the concept of the “social enterprise” came through reading Professor Muhammad Yunus’ book Creating a World Without Poverty. Dr. Yunus won the Nobel Peace Prize in 2006 for his pioneering efforts in developing micro credit for the poor. The basic premise of the book is that poverty can only be eliminated by creating business opportunities for poor people so that they, through their own initiative and ingenuity, will lift themselves out of their impoverished condition. This will require, Dr Yunus posits, social entrepreneurs such as Aldi and Budi, who are willing to invest their resources in “social business” which manage to both social and an economic bottom lines. Investors in a “social business” forego an economic return unless and until the social bottom line objectives are achieved.

PT Ruma’s Articles of Association provide that dividends cannot be paid to shareholders unless and until it is sustainably achieving its social mission as defined by scorecard targets derived from the “Progress out of Poverty Index” (PPI) created by Grameen Foundation for Indonesia. The PPI is itself a fascinating and ground breaking concept that I will write about in my next post. If you are interested in reading about it in detail I recommend you go to http://www.progressoutofpoverty.org/.