Wednesday, May 26, 2010

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.

Monday, May 24, 2010

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.

Thursday, May 20, 2010

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.

Tuesday, May 11, 2010

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.

Tuesday, May 4, 2010

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.