tag:blogger.com,1999:blog-72526144478429523662024-03-13T01:38:37.349-07:00Banking on the PoorCreating access to financial services; building anti-poverty infrastructure.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.comBlogger46125tag:blogger.com,1999:blog-7252614447842952366.post-65644900891510609002013-10-22T11:10:00.000-07:002013-10-22T11:12:41.639-07:00Lend for America SummitAlmost immediately following <a href="http://www.opportunityfund.org/">Opportunity Fund</a>’s “Taste of Microfinance” event that I wrote about in my last post, I traveled to Philadelphia to attend the <a href="http://www.lendforamerica.org/">Lend for America</a> Summit, a conference for college students who have or are in the process of opening their own microfinance organizations to serve their local communities. <a href="http://stocktonimpactcorps.com/">Stockton Impact Corps</a> was there and Banking on the Poor was a sponsor.<br />
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Kudos to Vanessa Carter and her team for putting on a fantastic conference for close to 200 college students from around the country. They assembled an outstanding cast of presenters who spoke and facilitated workshops on topics of great relevance to their work. People like the ever passionate and inspiring Galen Gondolfi from one of the leading anti-poverty micro-lenders in the country, <a href="http://www.justinepetersen.org/">Justine Petersen</a> of St. Louis Missouri, who spoke on what it means to be “un-banked” in America and how student organizations can make a significant difference in the lives of their clients by helping them improve their credit scores and build their savings. <br />
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There were highly practical sessions on marketing and risk management provided by Leslie Hoffman of LEH Consulting, and a number of presentations on the importance of information systems and data needed to run an effective MFI. What impressed me was how intent the students were in absorbing the information and asking really astute questions. One of my take-aways from the conference is the observation that the students have much to learn to be effective in helping the low-income community with their financial issues. This is why in developing Stockton Impact Corps, we are focusing so much on training. <br />
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A second take-away came from a panel discussion regarding community development efforts in Philadelphia. One panelist, Bertha Sarmina, described how her organization, <a href="http://www.finanta.org/">Finanta</a>, was unable to find “qualified” borrowers to whom they could on-lend money available through the Small Business Administration. I asked whether this was because of stringent requirements of the SBA. She replied that the requirements were their own. She said the clients they serve need a great deal of mentoring to be “credit worthy.” It would cost Finanta about $2,500 per client to provide such support. I remembered this is exactly the same number Opportunity Fund came up with regarding their clients. So, my big take-away from the conference is that these student led organizations, given the right tools, are perfectly positioned to work with such lenders as Opportunity Fund and Finanta to ensure that low-income borrowers are able to make effective use of the credit extended them. <br />
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From Philadelphia I traveled to Ixtapa, Mexico for the annual <a href="http://www.opportunitycollaboration.net/">Opportunity Collaboration</a> un-conference. I’ll write more about that in my next post. For now suffice it to say it was a smorgasbord of serendipitous contacts with amazing people working to end global poverty. <br />
Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com0tag:blogger.com,1999:blog-7252614447842952366.post-69171130742713396072013-10-11T15:23:00.001-07:002013-10-11T15:26:14.726-07:00A Taste of Microfinance<a href="http://www.opportunityfund.org/">Opportunity Fund</a>, California’s largest, non-profit micro lender held a fundraiser last night (10/10/13) in San Francisco featuring several “superstar” ventures they support with working capital loans. Since its inception in 1993 Opportunity Fund (OF) has made loans totaling $39 million to small business owners in the Bay Area and Los Angeles to start or grow their businesses. Not satisfied with this level of scale, CEO and Founder Eric Weaver announced their goal of lending an additional $100 million over the next five years. Based on OF’s experience to date, this level of lending will support 5,000 new or expanded small businesses and create 15,000 new jobs. <br />
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As the theme “A Taste of Microfinance” implies, the highlighted ventures were food service providers. Outside the event venue two food trucks, “<a href="http://kungfutacos.com/">Kung Fu Tacos</a>” and “<a href="http://www.333truck.com/">Triple Dash 3</a>” offered delicious Latin-Asian fusion tacos. Inside, several other ventures such as “Chiefo’s Kitchen” (West African cuisine), “d’maize” (modern Salvadorian food) and “El Buen Comer” kept the crowd well fed. The founder of “<a href="http://eatcoolhaus.com/home">Cool Haus</a>” addressed the crowd and spoke of how her company has been able to grow into a company with $5 million in annual sales and 65 employees thanks to the support of Opportunity Fund. <br />
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Micro lenders like Opportunity Fund play a critical role in creating economic opportunity in our local communities. Small businesses create 64% of net new jobs in the U.S. economy yet many fail due to a lack of financing they need to grow. “Opportunity Funded” business on the other hand have a 90% success rate. Not all achieve the “superstar” levels of the ventures highlighted in the event, but they are able to provide a family with a living income. When roughly 40% of households in California have less the $500 in financial reserves, financing from OF is literally a life line. In addition to its lending programs, OF also provides savings programs for its clients which has enabled them to save more than $15 million. <br />
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As I write this post I am on my way to the <a href="lfasummit13.squarespace.com">Lend for America Summit</a> held this year at the University of Pennsylvania. It is a gathering of small micro financiers formed around university communities. Although these small, mostly student led organizations may never achieve the scale of an Opportunity Fund, they do have the capacity to have a significant impact on their communities. There are over 700 registered CDFIs (Community Development Finance Institutions) in the U.S. but only 10 report making at least 100 loans a year. They do however, offer critical financial literacy training, help improving credit scores, savings programs and business support services such as tax preparation assistance, help with business plans and accounting. One should also not discount the value of these programs to the students themselves. They are learning real life skills while helping others. <br />
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I had the chance to talk in some depth with one of the young entrepreneurs at the Taste of Microfinance event—Cathleen Li, the owner and pastry chef of <a href="http://ouiouimacaron.virb.com/">Oui Oui! Macaron</a>. After graduation from college, Cathleen set out to learn how to make pastry, especially the particularly tricky French macaroon. I can attest she succeeded spectacularly! Her macaroons are delicious. She has been selling her confections through other retail outlets, including the Kung Fu Taco truck. Now with the help of a loan from Opportunity Fund she will be able open her first brick and mortar shop. Her passion for pastry and her drive to succeed are impressive--clearly OF is backing a winner. But it has not been easy. How many other young entrepreneurs like Cathleen are out there waiting for the assistance a Lend for America MFI might be able to offer?<br />
Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com0tag:blogger.com,1999:blog-7252614447842952366.post-10976375097350298532013-10-06T14:43:00.000-07:002013-10-06T14:43:06.414-07:00"It Takes a Village"Again, a long hiatus between posts. I certainly did not expect that it would take this long to make good on the promise in my last post to write about the development of Banker Corps—now called Impact Corps—a platform for student-led microfinance organizations to bring financial services to low-income communities. The first such organization is being launched in Stockton California. <a href="http://stocktonimpactcorps.com/">Stockton Impact Corps</a> is the result of a yearlong study conducted by students at the University of the Pacific’s <a href="http://">Global Center for Social Entrepreneurship</a> that documented the needs of the low-income community in Stockton for financial services. <br />
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Unsurprisingly, the students discovered through their research that there are no easy answers to the myriad challenges facing low and even moderate-income citizens in our highly competitive, market driven economy. In fact, they discovered that it literally “takes a village” to have even a hope of creating meaningful opportunities for the poor to lift themselves out of poverty. They found a number of local groups working on various aspects of the problem but none that provides a comprehensive program resulting in tangible financial services such as reasonably priced credit. <br />
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Stockton Impact Corps aims to fill that gap. By working collaboratively with other community based organizations and stakeholders in mobilizing community resources for creating economic opportunity in Stockton, students from the University of the Pacific and Delta Community College will be developing their own skill sets while creating meaningful impact on the financial and social issues facing the Stockton community. Stockton Impact Corps aims to achieve the following outcomes:<br />
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1. New small businesses will be able to access the needed capital to begin or expand operations;<br />
2. Small business owners will be able to sustain their operations through an elevated level of financial literacy and business know-how;<br />
3. Clients will gain greater access to traditional financial services; and <br />
4. University of the Pacific and Delta College students, through collaboration with other local community based organizations, will acquire a greater understanding of the issues confronting the low-income community and how they can assist in increasing financial inclusion and economic activity. <br />
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Another facet of the original vision of Banker Corps, training for students who aspire to work in the community with low-income entrepreneurs, is also being implemented with the launch of Stockton Impact Corps. A comprehensive program covering areas such as presentation skills, personal finance, basic accounting, marketing, business plan development, credit analysis and loan processing is an integral part of Stockton Impact Corps. <br />
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Although the incubation period has been much longer than I anticipated, Impact Corps is emerging from a deliberate and collaborative process that, I hope, augers well for its success. Banker Corps’ original vision remains well embedded in the vision for Impact Corps and that includes a future mechanism for leveraging the donor bases of the Impact Corps entities by providing social impact investors with a reliable way to invest in Impact Corps assets. <br />
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But more on that in a future post. Banking on the Poor is proud to support the <a href="http://www.lendforamerica.org/">Lend For America</a> annual <a href="https://lfasummit13.squarespace.com/">Summit</a> in Philadelphia next week and to help introduce Stockton Impact Corps to the greater community of student-led microfinance organizations. <br />
Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com1tag:blogger.com,1999:blog-7252614447842952366.post-9944137375090085392012-09-17T02:47:00.000-07:002012-09-17T02:52:38.265-07:00Honey Care AfricaIt’s been far too long since I last posted to this blog. I have been busy developing the <a href="http://bankingonthepoor.blogspot.com/2010/12/community-development-banker-corps.html">Banker Corps</a> concept--which will provide trained college graduates to work in low income communities in the United States--with a group of students at the University of Pacific. (I will write a separate post on this later.) Meantime, I have begun another overseas project with Grameen Foundation’s Bankers Without Borders (BWB) in Kenya.<br />
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As readers may recall, I began this blog to write about my first BWB project with a social venture in Indonesia called <a href="http://bankingonthepoor.blogspot.com/2010/02/three-weeks-with-pt-ruma-in-jakarta-was.html">P.T. Ruma</a>. This time I am working with Honey Care Africa, a social enterprise now over 10 years old started by local Kenyans to enable small farmers in East Africa supplement their income by selling honey from bee hives maintained on their farms. The Honey Care introduced a modern beehive model that produces higher quality and higher volume yields than the traditional models typically used by small farmers.<br />
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Honey Care works across the entire honey value chain—from manufacturing and selling hives to farmers; harvesting and processing honey and distributing the final product to retail outlets in Kenya. The Honey Care brand is known locally for its high quality and social impact. Honey Care currently supplies approximately 25% of the Kenyan market and works with over 2,000 farmers and impacts the lives of more than 25,000 individuals.<br />
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However, Honey Care has never attained the scale required to be self-sufficient. New management is addressing this issue with a new strategy that will increase the supply of honey available to consumers at the Base of the Pyramid and create hundreds of jobs for rural workers. This new strategy is designed to reach more than 50,000 farmers and impact the lives of more than 400,000 individuals over the next six years.<br />
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Creating sustainable solutions that enable those at the Base of the Pyramid to lift themselves out of poverty is difficult work. The new strategy is a huge challenge and I am very excited to be even peripherally engaged in helping to achieve it. My role is to assist the finance director and his team in creating the financial management tools necessary for measuring the company’s progress in implementing the strategy and achieving its aggressive financial goals.<br />
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Throughout my professional career I have had the opportunity to work in many countries and to hire and mentor local staff. It is always a humbling experience to meet young people who have had to work especially hard to achieve levels of competence comparable to their peers from more advantaged countries. To begin with, they are almost all bi-lingual as the resources they need to develop their skills are predominately available only in English.<br />
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The staff at Honey Care is exceptional in this regard and I know I will learn as much from them as I hope to teach. Seeing the depth of talent and passion to succeed gives one great confidence that the developing world itself will be the major factor in the alleviation of global poverty. Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com1tag:blogger.com,1999:blog-7252614447842952366.post-25695261468201753252012-03-09T13:28:00.002-08:002012-03-09T13:28:53.094-08:00Larry the Shoeshine GuyI had mixed emotions reading C.W. Nevius’ blog <a href="http://blog.sfgate.com/cwnevius/2012/03/07/larry-the-shoe-shine-guy-leaves-the-corner/">post</a> at SF Gate on Tuesday. On the one hand it was so disheartening to read that “Larry the shoeshine guy,” about whom Nevius had written several inspirational columns, seemed to have fallen again on difficult times. Then again, I was glad to hear that Larry was still alive. Like many other San Franciscans, I had been moved by the columns about Larry and made efforts to help him by patronizing his shoeshine stand and, later, contributing to a fund established to help him through a very bad medical situation. After not hearing about Larry for about a year, I thought he might have passed away. <br>
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Then yesterday my wife called to say she had seen Larry back on his corner shining shoes. My shoes were looking a little scruffy so I went to see him. Sure enough, there he is, back on Market and New Montgomery in his customary dress shirt and tie, open for business again. Now this is good news and bad news. It’s good to see him back, with his up-beat attitude, fighting the good fight against his problems and trying to make a living. The bad news is that he’s only back where he started and whatever caused the setback he may have suffered is an ever-present threat to cast him into even greater desperation. <br>
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Everyone makes mistakes, has lapses in judgment. For most, such errors usually result in little more than inconvenience. For those in extreme poverty however, the consequences of bad choices, bad luck, changes in economic circumstances out of one’s control, are literally life threatening. <br>
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Larry’s back but he needs help. He needs business and he needs encouragement. Let's not give up on him.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com1tag:blogger.com,1999:blog-7252614447842952366.post-51843486664467579302011-09-28T18:01:00.000-07:002011-09-28T18:03:19.406-07:00The Homeless as TheaterTwo months ago I wrote a piece about <a href="http://bankingonthepoor.blogspot.com/2011/07/families-in-distress.html">Families in Distress</a>. It was prompted by a very disturbing report done by <a href="http://www.cbsnews.com/video/watch/?id=7358670n">“60 Minutes”</a> on the growing number of families and children living in poverty in the United States. What is so shocking about the report is that it shows that even normal, functional families are can face unthinkable hardship and humiliation through little or no fault of their own. As uncomfortable as this makes us feel however, we are inspired by their determination to stay together and overcome their problems. <br>
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<i>Hunter’s Point</i>, a new play by Elizabeth Gjelten being performed at St. Boniface Church in San Francisco as a benefit for The Gubbio Project, deals with a different cast of characters who we more easily identify with as “the homeless.” These are hardened street people, fierce outsiders used to hustling the tourists or gaming the system. But are they really that different from the families in the “60 Minute” report? Sure, they are a little crazy—some even clinically so. But don’t they also have families, people who care for them? Shouldn’t we feel the same empathy for them as we do for the more “normal” homeless families struggling to make it?<br>
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The core of the play is the relationship between two sisters: one, Eva, is homeless and clearly psychotic; the other, Ruthie, is guilt ridden about her inability to help her sister as she pursues her career as a travel writer. Eva knows she is not well but she also knows the medicine she is given only drives her deeper into her illness. She is desperate to find a clinic that provides a drug-free, “moral treatment.” But such is not to be found within the social welfare system. In fact, Eva’s options keep diminishing as programs are cut. <br>
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It is not coincidence that the play is being performed at St. Boniface, or that it should be benefiting The Gubbio Project which I wrote about in a <a href="http://bankingonthepoor.blogspot.com/2010/04/learning-about-bottom-of-pyramid.html">posting</a> a year and a half ago. Click on the link to the right and see a video about the project which provides sanctuary to people like Eva every day. Then go see the play. There are three more performances on September 29th and 30th and October 1st. It’s not only good theater, it’s good for the soul and for a good cause.
Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com0tag:blogger.com,1999:blog-7252614447842952366.post-91271079922372305542011-08-31T15:15:00.000-07:002011-09-21T16:29:34.766-07:00Regulators and the Underbanked
What can banking industry regulators do about payday lending and other predatory products of so the called alternative financial service providers? In most States, not much, unfortunately. National regulators such as the Office of Controller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have no remit to regulate these non-bank purveyors of dubious financial services. The new Consumer Financial Protection Bureau which was established as part of the recent Dodd-Frank financial reform bill, can only act to control the payday lending industry with the approval of individual state regulatory entities.<br>
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With the economy continuing to linger in the doldrums of a jobless recovery, a majority of Americans appear unable to meet a $1,000 emergency expense. According to a recent report by the <a href="http://www.nfcc.org/newsroom/newsreleases/FLOI_July2011Results_FINAL.cfm">National Foundation for Credit Counseling</a> only 36% of American households have the funds available to meeting an expense of this modest magnitude. No wonder the business of the payday lenders is booming and some commercial banks are beginning to offer their own payday-style products. <br>
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So-called “direct-deposit advance” loans are increasingly being used by low-income consumers with bank accounts linked to some form of direct deposit like a paycheck or social security benefit. Much like the payday loan, they are for a short duration and come with effective triple digit interest rates. Although they are less expensive than the typical payday loan, consumer advocates argue that they still lead to crippling dependency on debt. In fact, the Center for Responsible Lending urges regulators to immediately stop the banks they supervise from making such loans. <br>
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But would this really be helpful? After all, low income consumers do need the money and the bank product is arguably better than that offered by the alternative financial service providers. Would not such regulatory action simply drive these borrowers in greater number to the more predatory lenders. Instead of prohibiting banks from offering short-term, payday-style credit, why not require them to offer a product that meets the consumers’ needs and helps them to manage their debt needs responsibly? <br>
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Market purists would argue that banks should take such action on their own and this would be one more example of over intrusive government regulation. But the opportunity for short-term gain often trumps sound long-term corporate strategy. The subprime lending crisis that largely precipitated and certainly exacerbated the current economic crisis is ample evidence of this. And who would argue that stringent, government mandated warnings on the dangers smoking hasn’t induced large segments of the population to give up very harmful behavior? <br>
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In fact, regulators already have a tool, the Community Reinvestment Act, sufficient to encourage and reward banks for lending more responsibly to low income communities. As I reported in my previous blog post, <a href="http://www.emergeworkplacesolutions.com/">Emerge Workplace Solutions</a>, a for-profit social venture works with employers and mainstream financial institutions to provide financial wellness coaching and credit products that help workers re-build rather than destroy their credit. And now Citibank is pioneering with the Center for Community Self-Help in developing a “Micro Branch” model to compete with payday lenders in low-income communities. <br>
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Until we can outlaw the underlying need in low income communities for short-term credit it makes no sense to prohibit mainstream banks from providing it. However, we can and must ensure that this need is met in a way that alleviates rather than causes greater poverty.
Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com3tag:blogger.com,1999:blog-7252614447842952366.post-24317112773392591152011-07-20T10:39:00.000-07:002011-07-20T10:51:31.307-07:00Market Forces and the Underbanked Consumer<br />
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The blog piece I wrote a few weeks ago about “Understanding the Underbanked Consumer” generated an interesting comment on one of the discussion sites I posted it to. The commenter asked "why market forces don't bring new competitors into a segment that spends $29 billion each year on financial services” especially since these underbanked consumers seem to be only asking for “basic things like clear communication, simplified products, and respect in exchange for their business.”<br />
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It’s a good question. Part of the answer, I believe, is that the lower-income market segment is very expensive to serve. Providing “clear communication, simplified products and respect” is a high-touch proposition and there isn’t much upside in this market segment for traditional financial service providers. Higher end products sold through on-line media are much easier and cheaper to sell, and higher end clients can be “cross-sold” higher value, higher margin products such as investment services, insurance and small business loans and services. <span style="border-bottom-color: windowtext; border-bottom-style: none; border-bottom-width: 1pt; border-left-color: windowtext; border-left-style: none; border-left-width: 1pt; border-right-color: windowtext; border-right-style: none; border-right-width: 1pt; border-top-color: windowtext; border-top-style: none; border-top-width: 1pt; color: black; padding-bottom: 0in; padding-left: 0in; padding-right: 0in; padding-top: 0in;"><o:p></o:p></span></div>
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Secondly, it must be recognized that the lower-income segment is inherently more risky and engaging in high-risk, low-return business activities is not something shareholders or regulators tend to appreciate. The FDIC may claim that it encourages the banks it regulates to make “small dollar loans” to low income clients. However, when the examiners show up they often criticize banks for making loans to low-income borrowers and require them to increase reserves for such loans. Regulated financial service providers are actually “dis-incented” from serving the low income consumer. </div>
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Consequently, despite the requirements of the Community Reinvestment Act and the desire to demonstrate good corporate social responsibility, mainstream financial service providers are primarily located in higher income communities. Pay-day lenders, or as they prefer to be called, alternative financial service providers, are left to fill the void for financial services in low income communities. Even worse, according to <a href="http://showdowninamerica.org/files/payday-final-091410.pdf">this interesting report</a>, some of the largest mainstream banks actually fund the predatory business practices of the pay-day lenders! </div>
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It needn’t and shouldn’t be so. Mainstream financial institutions can partner with social ventures focused on serving the working poor to bring services to financially stressed lower and middle income consumers. One good example is <a href="http://www.emergeworkplacesolutions.com/">Emerge Workplace Solutions</a>, a for-profit social venture that works with employers and mainstream financial institutions to provide financial wellness coaching and credit products that assist workers re-build rather than destroy their credit. </div>
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In these challenging economic times workers are increasingly living closer to the financial edge. They must pay more for health care, higher tuition for their children and increased contributions for their retirement. Their ability to save for life’s emergencies has been greatly constrained, making them all the more vulnerable to “alternative” lenders when emergencies do arise. </div>
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The <a href="http://www.emergeworkplacesolutions.com/">Emerge Workplace Solutions</a> model is designed to bring scale to the high-touch business of providing financial services to the low income market segment. It is a rare catalyst for bringing market forces to bear on the issues facing the underbanked consumer. </div>
Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com4tag:blogger.com,1999:blog-7252614447842952366.post-30843046136095214282011-07-13T10:39:00.000-07:002011-07-13T10:39:15.741-07:00Families in Distress<br />
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It is never easy to look poverty in the eye.<span style="mso-spacerun: yes;"> </span>Even when it is some poor benighted street
person whose poverty seems self inflicted we want to turn away and pretend he
or she isn’t there.<span style="mso-spacerun: yes;"> </span>But with the economy
continuing to wallow in the doldrums of an at best anemic recovery, families
are falling into homelessness to levels not seen since the Great
Depression.<span style="mso-spacerun: yes;"> </span>According to <a href="http://www.cbsnews.com/video/watch/?id=7358670n">this shocking report</a>
seen on the program “60 Minutes” 25% of children in the <st1:place w:st="on"><st1:country-region w:st="on">United States</st1:country-region></st1:place> now live in poverty. </div>
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The stories of these innocent victims of economic hard times
are almost unbearable.<span style="mso-spacerun: yes;"> </span>Imagine going to
school so hungry you will ask another student for the food they may not want to
eat themselves.<span style="mso-spacerun: yes;"> </span>Or having to get on a
school bus in front of a cheap motel where your family has moved after losing
your home to foreclosure.<span style="mso-spacerun: yes;"> </span>Or enduring
the shame of seeing you father stand by the side of a road with a sign that
reads “Family of Five, Please Help.”<span style="mso-spacerun: yes;"> </span></div>
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8 million families and 16 million children in distress in <st1:country-region w:st="on"><st1:place w:st="on">America</st1:place></st1:country-region> is
overwhelming social welfare systems and charitable organizations struggling to
provide needed assistance.<span style="mso-spacerun: yes;"> </span>As
individuals, we feel powerless to help.<span style="mso-spacerun: yes;">
</span>Last year I wrote about <a href="http://bankingonthepoor.blogspot.com/2010/05/home-and-hope-for-working-poor.html">Home & Hope</a>, a non-profit organization in <st1:place w:st="on"><st1:placename w:st="on">San Mateo</st1:placename> <st1:placetype w:st="on">County</st1:placetype></st1:place>
that is specifically designed to engage individuals in the effort to assist
homeless families.<span style="mso-spacerun: yes;"> </span></div>
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I can say from personal experience with this organization (I
have joined the board and have spent the night with some of our families in a
shelter) that we can and must become personally involved in creating solutions
to the tragedy of families becoming homeless in <st1:country-region w:st="on"><st1:place w:st="on">America</st1:place></st1:country-region>.<span style="mso-spacerun: yes;"> </span>The Home & Hope/Family Promise model
keeps families together while helping them to reconstruct their lives and
transition back to employment and housing.<span style="mso-spacerun: yes;">
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Witnessing the bravery of the children is especially humbling.<span style="mso-spacerun: yes;"> </span>Listen to the boy in the “60 Minutes” piece
state with such conviction “as long as you’re with your family you will make it
through this…all of it.”<span style="mso-spacerun: yes;"> </span>Or the young
girl say “when things get better we know there will still be people struggling
and we will be able to help them.”<span style="mso-spacerun: yes;"> </span>We
must find it in us to respond to such courage.<span style="mso-spacerun: yes;">
</span>Family of five, please help.</div>
Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com4tag:blogger.com,1999:blog-7252614447842952366.post-74360502191783128332011-06-21T12:47:00.001-07:002011-06-21T12:47:36.241-07:00Understanding the Underbanked ConsumerThe second session at the recent Microfinance USA conference Banking on the Poor was asked to review concerned financial services for the underbanked consumer. The session was subtitled “…and the Future of Financial Services.” This was a bit of an over-reach and, frankly, I was a little disappointed at the depth of this session. Nevertheless, it is a critical subject for millions of American families and if anything, the session underscored how more needs to be done to serve this market segment. <br />
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Why would one pay a large fee to cash a government check or pay a bill? What induces some people to pay an effective annual interest rate of 400% for a short-term secured loan? Two studies, one by the Center for Financial Services Innovation (CFSI) and another by the Pew Charitable Trust (PCT) provide some answers to these questions and were the basis for the session concerning “Understanding the Underbanked Consumer and the Future of Financial Services.” <br />
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Rachel Schneider outlined the findings in the CFSI study which found an ethnically mixed population of 21 million American households with little or no bank relationships. According to the CFSI study these low-income consumers spend $29 billion per annum on financial services. While the study determined there was significant overlap between the unbanked and subprime borrowers, some 25% would be considered prime borrowers and 42% simply had too thin a credit profile to qualify for prime credit products. <br />
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The study also found that the banked and the un-banked borrow and save for essentially the same reasons. Roughly 40% of both populations borrow because they have trouble covering living costs from current income. And, the major reasons for savings for both groups are also similar—emergency fund, retirement, college savings, buying a home purchase and purchasing a car. <br />
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However, the un-banked must rely on so-called “alternative financial service providers” (AFS) who tailor their product offerings to be more appealing to the unbanked while those with access to banking services address their needs at lower costs and often with government subsidies. As a consequence, while both banked and under-banked low income consumers were hard hit by the economic downturn, those with access to standard banking products faired much better. <br />
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The PCT study, presented by Eleni Constantine, documented the interesting phenomenon that as many low income consumers seem to be exiting banking relationships as opening accounts. This suggests that as individuals circumstances change for better or worse, they gain or lose options in the financial services arena. <br />
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So why might rational consumers opt for products and services that are significantly more expensive? Both studies pointed to the greater simplicity of the AFS products and how AFS providers made greater efforts to make low-income consumers comfortable. The studies quoted participants as saying they felt more appreciated and respected by the AFS providers and that their products, such as pre-paid cards, kept them from bouncing checks and running up large credit card balances. <br />
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The PCT study forecast a growing need for low-income financial products and services—especially for credit—and noted the growing participation of retailers, such as Wal-Mart in catering to the needs of the underbanked. It recommended that credit products be integrated with savings products and credit repair services, and warned that the growth in financial services provided by non-banks risked the creation of a two-tier system for the banked and the unbanked. <br />
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Ms. Constantine concluded that recent regulatory efforts designed to protect consumers from high banking fees could actually push more low-income consumers out of the banking system and into the high cost environment of largely unregulated alternative financial service providers.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com1tag:blogger.com,1999:blog-7252614447842952366.post-32496549359075258582011-06-14T11:48:00.001-07:002011-06-14T11:48:39.058-07:00Shame Fame and Video GamesBanking on the Poor attended the Microfinance USA conference again this year. It was held in my old neighborhood in New York City which I help “gentrify” when I moved to New York to begin a corporate career more than 30 years ago. From the conference center I could look across the street and see our old apartment which now sprouts an urban forest on the roof where I had installed a hot tub. How ironic that I would return for a conference dedicated to finding solutions to poverty! <br />
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I think there is a good blog piece in that irony which I will work on for posting later. However, as with last year I was invited to blog on some of the conference sessions. Here is the first which dealt with new ways to engage the “wired generation” in financial literacy. <br />
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In the break-out session on “Designing Products that Promote Financial Capability” participants outlined efforts to use social networking technology and video games to change consumer behavior related to personal financial decisions. Rob Levy of the Center for Financial Services Innovation (CFSI) moderated the session which addressed the apparent ineffectiveness of traditional financial education programs to improve the “financial capability” of American consumers. <br />
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According to a recent study by the CFSI, 49% of U.S. households are unable to meet monthly expenses from current income despite years of financial literacy training. Furthermore, the CFSI study rated U.S. consumers deficient in other factors they define as key determinants of financial capability such as using a budget and having the ability to select and manage basic financial products and services. <br />
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The CFSI concludes that to be effective in promoting financial capability practitioners must “think beyond the classroom” and design programs that are relevant, timely, actionable and ongoing. Financial literacy education must be linked to access to financial services, leverage technology, incorporate the principals of behavioral economics and utilize cross-sector partnerships. <br />
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Innovations for Poverty Action (IPA) has been engaged in the international sector since 2002 and recently turned its attention to the issues of high debt, low financial resiliency and low savings in the United States. Brooke Berman explained that IPA sees the problem of low financial capability in a broader social context. That is, behavior considered rational for the individual (e.g. maintaining a reserve of savings) is not often viewed as optimal from a social perspective. <br />
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IPA solutions stress such techniques as commitment contracts and automated reminder messages that, in effect, shame consumers who spend rather than meet announced savings targets. This is a similar approach some weight-loss programs or anti-smoking campaigns work to get participants to change unhealthy behavior. Ms Berman described the “Borrow less Tomorrow” (BoLT) program in which participants identify debt they know they should pay down, commit to a repayment schedule and enlist their social network contacts to provide peer pressure to achieve their goals. <br />
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Doorways to Dreams (D2D) has developed a number of video games designed to teach adults about financial capability and help them change financial behavior. Tim Flacke said that D2D’s approach is predicated on their belief that poor financial behavior is a “demand side problem”—people are inherently resistant to changing behavior. D2D has produced what they describe as “financial entertainment” which differs from traditional financial literacy training by being engaging rather than earnest, targeted rather than comprehensive, interactive rather than static and accessible rather than restriced. Their games are available at www.financialentertainment.org. <br />
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Piggymojo, works at behavior change by making savers “heroes” to their partners. Designed to be used by couples, the program turns impulse saving into a better “feel good” experience than impulse spending. The founder of Piggymojo, Jayson Halladay, said that a family with an annual income of $45,000 typically spends 20% of their income, or $8,000 on impulse, inessential purchases. Piggymojo rewards people when they make a decision not to spend by sending a text to the other half say that he/she, rather than buying something, put the cost of the purchase into a joint savings account. The program tracks the respective “saves” of each partner and creates an image over time of the goal the couple has mutually agreed to save for. <br />
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These approaches to improving financial capability are clearly not your father’s kind of financial literacy training. Designed to appeal to the “wired” generation it will be fascinating to see if these innovations take hold and produce a more fiscally responsible generation.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com0tag:blogger.com,1999:blog-7252614447842952366.post-46228602289401104442011-03-27T14:38:00.000-07:002011-03-27T20:00:09.187-07:00Grameen Bank Undermines the Work of the GovernmentIf you have yet to see the excellent documentary by Gayle Ferraro, <b>To Catch a Dollar: Muhammad Yunus Banks on America</b>, March 31st would be the perfect time to do it. Not only would you see an inspiring portrayal low-income Americans struggling to lift themselves out of poverty with the help of Grameen America, but your presence in the theatre that day would send a message of support to Professor Yunus who, incredibly, finds himself under attack from political elements in Bangladesh that threaten to turn his Nobel Prize winning financial institution into an instrument of patronage and corruption. <br />
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Many commentators attribute the attacks on Grameen Bank and its founder to Professor Yunus’ audacity to criticize the Bangladeshi government and suggest he might form his own political party and run for office himself. However, as David Bornstein noted in his op-ed piece <a href="http://opinionator.blogs.nytimes.com/2011/03/21/microfinance-under-fire/?pagemode=print">“Microfinance Under Fire”</a> in the New York Times on March 21, 2001:<br />
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<blockquote></blockquote>Bangladesh has a long history of banks and cooperatives being used as political instruments. The state-owned banks have regularly extended loans to elite borrowers (who default at high rates) as a form of patronage. Unlike Grameen, which is financially self-sufficient, the state banks are perpetually in need of cash infusions from the government.<blockquote></blockquote><br />
Perhaps it is just the existence of a bank that serves the poor without government assistance that is anathema to Bangladeshi politicians. Bornstein also suggests an ideological reason in a subsequent New York Times column, <a href="http://opinionator.blogs.nytimes.com/2011/03/24/grameen-bank-and-the-public-good/?ref=microfinance">“Grameen Bank and the Public Good”</a> (March 24, 2011) that “people in the government, as well as across Bangladeshi society…don’t think microfinance helps the poor and…that socially-minded businesses, like Grameen Bank, undermine the work of the government.” So, the solution to global poverty lies in getting out of the way and letting the government do the work?!! Why didn’t we see that? Amazing.<br />
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Clearly, what is upsetting to politicians in Bangladesh and elsewhere, and maybe even in the United States, is a solution to poverty that involves empowering the poor. As Professor Yunus states in the trailer to the film which you can see <a href="http://www.tocatchadollar.com/">here</a>, Grameen wants to bring a new kind of development theory where “banks lend money, not to make money, but to help people.” Now, there is a novel concept that is sure to disrupt governments' efforts to help the poor! <br />
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The film is being screened in 227 theatres throughout the United States on March 31st and attendance will be an important barometer of support for microfinance and Professor Yunus. The Grameen Foundation and the Yunus Center are beating the drums for supporters to turn out and, if necessary, host screenings of the film in their local areas if none is currently scheduled. By going to this <a href="http://www.tocatchadollar.com/host-a-screening/">link</a> you can buy tickets for venues already in place or offer to host one yourself. <br />
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It would be impressive to see a large turn-out driven by the power of social media especially given the very short notice.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com0tag:blogger.com,1999:blog-7252614447842952366.post-78449093335570375832011-01-05T15:41:00.000-08:002011-01-05T17:00:25.891-08:00Consumer Protection Rules Blamed for Increasing Use of Loan SharksA recent op-ed piece in the <i>WSJ</i> (“Dodd-Frank and the Return of the Loan Shark” 1/4/11) blames an apparent rise in the number of Americans using payday lenders, pawn shops and local loan sharks for credit on the new federal limits on how credit-card issuers can price and adjust interest rates. These limits, mandated by Card Accountability Responsibility Disclosure (CARD) Act passed in 2009, protect consumers from exorbitant fees and interest rate adjusts. An unintended consequence of the legislation, claims the author, is that banks have had to raise interest rates, reduce credit limits and increase other banking fees pushing lower-income Americans into the laps of payday lenders who charge interest rates 10 times higher than bank credit card issuers. <br />
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This is nonsense of course. I wrote a blog post last June that <a href="http://bankingonthepoor.blogspot.com/2010/06/changes-in-bank-regulations-will-impact.html">Changes in Banking Regulations Will Impact the Poor</a>. The fact is, through excessive overdraft charges and higher interest rates, the poor have been subsidizing many banking services used primarily by the more affluent. Now that new rules make it more difficult for the banks to reap profits from poorly informed consumers or those whose financial circumstances result in poor credit ratings and reduced credit limits, banks must charge everyone more transparently for their services. One way or another, we will all pay more—either directly through new fees or indirectly by forgoing interest on deposits that might earn more if invested elsewhere. <br />
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In another <i>WSJ</i> article published today (“At Banks, New Fees Replacing Old Levies”) a spokeswoman at Chase is quoted as saying “We don’t want to raise fees on our customers, but unfortunately, regulation is forcing us to do it, and as a result, some customers may end up unbanked.” More nonsense. Chase just needs to cover its cost and make a return for its shareholders. Fair enough. Just don’t blame the regulators for the fact that they must raise fees to compensate for the profits they were making over-charging for over drafts and late payments on credit card balances. <br />
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Serving the large number of people in the U.S. who are unbanked is a serious issue. The ranks of the unbanked are not growing because of consumer protection laws. They’re growing because too many people have been out of work too long and they are running out of financial resources. They are also growing because financial institutions in the U.S. haven’t developed innovative products and services that are available to the poor in many developing countries. <br />
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Rather than focusing on real solutions for serving the under-banked, financial institutions and their lobbyists are more inclined to spend their efforts convincing the new Congress to undo some of the recent financial reform legislation they find so inconvenient. What better way to do this than to claim it would help the poor?Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com3tag:blogger.com,1999:blog-7252614447842952366.post-16436672806630341342010-12-16T13:38:00.000-08:002010-12-16T13:38:47.413-08:00Microfinance's Sub-prime MomentThe 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.<br />
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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. <br />
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Last week the <a href="http://www.cgdev.org/content/multimedia/detail/1424664/">Center for Global Development</a> 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.” <br />
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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.” <br />
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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. <br />
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As I argued in an earlier <a href="http://bankingonthepoor.blogspot.com/2010/08/is-greed-good-for-microfinance.html">post</a>, 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.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com0tag:blogger.com,1999:blog-7252614447842952366.post-38339002779891434062010-12-01T11:15:00.000-08:002010-12-01T11:15:43.273-08:00Community Development Banker CorpsIt’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. <br />
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As readers of this blog will remember, I attended the SOCAP10 conference in early October and submitted an entry to the <a href="http://www.socialcapitalmarkets.net/">SOCAP</a> Challenge which, thanks to the votes of many readers, was selected as one of the winning entries and posted on <a href="http://www.triplepundit.com/2010/09/how-to-build-human-capital-for-social-investing/?utm_source=twitterfeed&utm_medium=twitter">Triple Pundit</a>. 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. <br />
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In mid-October I attended another conference, the <a href="http://www.opportunitycollaboration.net/">Opportunity Collaboration</a>, 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). <br />
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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 <a href="http://bankingonthepoor.blogspot.com/2010/08/120-billion-opportunity-for-poor.html">"$120 Billion Opportunity for the Poor."</a> 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. <br />
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“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 <a href="http://www.youtube.com/watch?v=hFL-lc7_KZM">here</a> 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.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com1tag:blogger.com,1999:blog-7252614447842952366.post-47720290958932205312010-09-22T20:58:00.000-07:002010-09-22T21:03:48.524-07:00Preying on the American DreamHave you seen those full page ads decrying the Department of Education’s proposed <a href="http://www2.ed.gov/legislation/FedRegister/proprule/2010-3/072610a.html">"gainful employment"</a> 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 <a href="http://www.mycareercounts.org/">“Get the facts at My Career Counts.”</a><br />
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A better source of information would be a report entitled <i>Are you Gainfully Employed? Setting Standards for For-Profit Degrees</i> by <a href="http://www.educationsector.org/sites/default/files/publications/Gainful-Report_RELEASE.pdf">Education Sector</a>, 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. <br />
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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.” <br />
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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 <a href="http://bankingonthepoor.blogspot.com/2010/08/is-greed-good-for-microfinance.html"><i>Is Greed Good for Microfinance?</i></a>).<br />
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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. <br />
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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. <br />
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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.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com2tag:blogger.com,1999:blog-7252614447842952366.post-62957777143116543012010-09-13T21:33:00.000-07:002010-09-13T21:35:08.753-07:00Show Us the Money!My last two blog posts were written in support of my entry to the <a href="http://www.socialcapitalmarkets.net/index.php?/component/option,com_wordpress/Itemid,64/p,1569">SOCAP10 Challenge</a> (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 <a href="http://www.hopeconsulting.us/money-for-good/">Money for Good</a> <br />
report produced by Hope Consulting. In this post I want to talk about the money. <br />
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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. <br />
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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. <br />
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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. <br />
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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. <br />
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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.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com0tag:blogger.com,1999:blog-7252614447842952366.post-24972485456245037852010-09-08T10:34:00.000-07:002010-09-08T20:34:38.316-07:00What the World Needs Now is Community Development BankersThe <a href="http://www.socialcapitalmarkets.net/index.php?/component/option,com_wordpress/Itemid,64/p,1569">SOCAP10 Challenge</a> 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 <a href="http://www.myoocreate.com/challenges/socap-impact-challenge/entries/507">Myoo Create</a> and do so by September 14th. <br />
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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 <i>Teach for America</i> 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.”<br />
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In my last blog post (see <i>$120 Billion Opportunity for the Poor</i> 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!<br />
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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. <br />
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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 <i>Teach for America</i> as a model, as school districts employ the students trained by <i>Teach for America</i> so would existing non-profit MFIs, already working in low income communities around the world, employ the trained CBDs. <br />
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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 <i>Build Human Capital for Social Investing</i> at <a href="http://www.myoocreate.com/challenges/socap-impact-challenge/entries/507">Myoo Create</a>.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com2tag:blogger.com,1999:blog-7252614447842952366.post-34100818615894335472010-08-19T19:55:00.000-07:002010-08-19T19:55:15.496-07:00$120 Billion Opportunity for the PoorA few months ago I wrote a blog piece entitled <a href="http://http://bankingonthepoor.blogspot.com/2010/03/build-it-and-they-will-come.html">Build It and They Will Come</a> in which I commented on an op-ed piece in the <i>Financial Times</i> 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. <br />
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Now comes a research paper from Hope Consulting entitled <a href="http://www.hopeconsulting.us/money-for-good/">Money for Good</a> 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 <a href="http://www.socialcapitalmarkets.net/">SOCAP10</a> 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 <a href="http://www.myoocreate.com/challenges/socap-impact-challenge/entries/507">here</a>. <br />
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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. <br />
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As described in my entry to the competition the major components of my proposal are:<br />
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1. To create certificate programs at academic institutions to train students for jobs as community development bankers;<br />
2. To place the “certificated” community bankers with non-profits and MFIs serving low income communities; and,<br />
3. To work with financial institutions to provide loan processing and portfolio management services. <br />
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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. <br />
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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. <br />
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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%. <br />
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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.<br />
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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. <br />
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Please go to <a href="http://www.myoocreate.com/challenges/socap-impact-challenge/entries/507"><i>Build Human Capital for Social Investment</i> </a>and cast your vote for Banking on the Poor’s proposal. This is a work in progress so comments and suggestions are very welcome.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com0tag:blogger.com,1999:blog-7252614447842952366.post-1993023860998925602010-08-09T16:53:00.000-07:002010-08-10T09:05:06.705-07:00Is 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 <i>Wall Street</i>. 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.” <br />
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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 <i>Philanthrocapitalism</i> 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.” <br />
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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 <i>New York Times</i>, 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. <br />
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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. <br />
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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. <br />
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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.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com4tag:blogger.com,1999:blog-7252614447842952366.post-22949376291724152052010-07-20T18:18:00.000-07:002010-07-20T19:11:37.564-07:00Prepaid Cards Coming to Wall StreetA 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, <i>Anti-poverty Infrastructure at Wal-Mart?</i>). 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. <br />
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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. <br />
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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? <br />
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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, <i>Changes in Bank Regulations Will Impact the Poor</i>.) <br />
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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. <br />
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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. <br />
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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.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com1tag:blogger.com,1999:blog-7252614447842952366.post-20595046255537499342010-07-14T17:26:00.000-07:002010-07-14T19:18:40.130-07:00Helping the Poorest of the PoorWhen 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. <br />
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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. <br />
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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. <br />
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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. <br />
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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. <br />
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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. <br />
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Muhammad Yunus’ latest book, <i>Building Social Business</i>, 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.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com1tag:blogger.com,1999:blog-7252614447842952366.post-12511825254198854452010-06-17T19:02:00.000-07:002010-06-17T19:02:44.885-07:00Changes in Bank Regulations Will Impact the PoorNew 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. <br />
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According to an article in today’s <i>Wall Street Journal</i> 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. <br />
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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. <br />
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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? <br />
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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?<br />
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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. <br />
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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.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com2tag:blogger.com,1999:blog-7252614447842952366.post-75180373383647152672010-06-09T09:00:00.001-07:002010-06-09T09:00:36.480-07:00Graduation DayThis 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. <br />
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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. <br />
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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. <br />
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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. <br />
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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. <br />
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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.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com1tag:blogger.com,1999:blog-7252614447842952366.post-82655258856008837182010-05-26T11:20:00.000-07:002010-05-26T11:20:08.830-07:00Is 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. <br />
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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. <br />
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1. Matched Savings<br />
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. <br />
2. Matching Sources and Uses of Funds<br />
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. <br />
3. Eliminate Barriers to Scale<br />
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. <br />
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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. <br />
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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.” <br />
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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.” <br />
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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.” <br />
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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.Daniel Krepshttp://www.blogger.com/profile/13514419660099247252noreply@blogger.com0