With the current global economic crisis going on, people are asking many questions about how microfinance will handle the situation, and to what degree MFIs will be affected. As I was thinking about this, I asked myself “am I making the right decisions when I lend?”  I am always interested in learning about new lending platforms and usually just give each one of them a fair trial and then determine which ones I like based on user experience.  I realized that most of my decisions on who to lend to are based on how easy it is to lend and how intrigued I am by the entrepreneurs story.  However, although this makes things fun for me, it is not always the most effective solution.  To piggyback on Drew’s post discussing interest rates,  I have found some interesting posts that lenders can consider when making decisions:

-Ryan Calkins, over at SeaMo, recently made a post entitled “Nine Questions to Ask Every Microfinance Institution” which discusses some questions that the Grameen Bank has come up with to determine which MFIs are good investments.

-David Roodman discusses interests rates and lending in his blog post “When is lending just?”

Luckily, the answer seems to be no according to the new CGAP study that was just put out. Head over and take a look (PDF).

[via SeaMO]

I wanted this post to be deep, intellectual thoughts that would blow all of your minds, but realize with only a few weeks of experience, I realize I don’t have any of those thoughts.  What I can offer is some observations I have about microfinance and poverty. It seems so two-dimensional to learn about something through a book or in a classroom when you can see it first hand.  Microfinance is no different.

One thing I have learned is part of the premise of microfinance: handing out money can many times be detrimental. On one occasion when confronted with a handicapped woman unable to work and buy her own food, a group receiving loans decided to support her with their savings.  Since their savings is a great sacrifice for that group, a wealthy businessman offered to cover her food expenses for a whole year.  Initially it seemed like a great idea but is not the best option.  The right motives can sometimes foster dependence and steal dignity.

Another thing I have learned is that we can all make a difference.  If you are reading this blog, that means you have a computer and the internet (or at least access to both).  That means you have money.  There are websites that allow their users to contribute money to directly fund loans for microfinance institutions around the world.  One such site is Kiva.org.  Members can contribute any amount that they want in increments of $25 and have the choice of getting their money back at the end of the loan, contributing to other groups, or donating the money to Kiva to cover operating expenses. Esperanza International works with Kiva but there are alternatives including LendforPeace.org, which was mentioned this past week on this blog.  For those who want to help poverty and make a difference have this opportunity to make a direct impact.

It seems like poverty can bring the worst out of people.  Poverty is a cause of theft, school delinquency, and even racism.  The Island of Hispaniola is comprised of the Dominican Republic and Haiti, which is the Western-hemisphere’s poorest country.  Many Haitians emigrate to the DR because of the greater opportunities not only in work, but also education and other areas.  The Haitians work for less and are often hired over Dominicans to save employers money.  In the Dominican Republic there are similar sentiments towards Haitians as there are in the United States towards Mexican immigrants.

Loans can spur growth and friendships.  One of my main duties is to interview clients about their life situations and see how a loan will affect them and then post that information on Kiva for the lenders.  Esperanza follows what Grameen Bank does in that we have individuals in groups that cross-guarantee each others’ loans, so when one member cannot pay the others cover for him or her.  This provides camaraderie among group members and is a great way to start friendships.  Between being grouped geographically, seeing each other at biweekly meetings, and the sense of a team working for a goal, these loan groups are a great way to develop friendships.  In every meeting I have attended I have seen a lot of laughing among attendees.

Little things we take for granted can drastically affect the way of life.  The best example I can think of is rain.  This past week it rained everyday.  Most of our clients do not own cars and have to travel by foot to get to meetings.  When it rains a lot, the dirt roads become mud roads, making travel difficult.  This can cause meetings to start late or be canceled; pushing back the whole day’s schedule for loan officers who often rely on public transportation or a motorcycle for travel.  A fellow myKRO blogger and HOPE/Esperanza intern, Krista Hoff, told me about a time she saw countless houses built under a bridge swept away due to the growth of the passing river.  A Kiva fellow I have worked with told me that traffic troubles caused by a mudslide cost her four hours traveling!

My experience here has been eye opening and I am really excited to see what else I will learn in the coming months!

It seems just about every week, a journalist somewhere in the world will write a piece on microfinance and the effects the worldwide credit crisis will have on the sector. Most journalists and experts alike are optimistic that microfinance will weather the storm and could even be “the answer” to the international investment predicament we are slipping further and further into (find the article here: Raksin, Huffington Post). An article by Allianz’s James Tulloch, “Can Microfinance Beat the Credit Crunch?” presents one of the more realistic outlooks for microfinance in 2009. Though it strays from the common “nowhere but up!” optimism, it offers a silver lining to the crisis’ impact on microfinance worldwide;

The downturn could [force] MFIs to grow less aggressively and focus on consumer protection, transparency, and governance. “Are we building a ‘bubble’ of over-indebtedness? If so, then a slowdown in growth will provide the opportunity to reconsider the basics of underwriting,” said Cecelia Beirne of MicroVest at the CGAP event.

There is no doubt that microfinance is a pretty resilient investment alternative, and the growth of MFIs (microfinance institutions) through the Asian and Latin American economic crises of the 1990’s and early 2000’s is an encouraging sign that microfinance may reside just below the economic current that can affect the regions of operation.  Today, the sector has not been greatly affected by 2008’s volatility and economic decline. Though past performance is encouraging, it is a different sector today than it was three years ago, not to mention 10-15 years ago. In that period, microfinance investment, exposure, and commercialization has increased exponentially (with projections that at one time had predicted private investment in microfinance to increase from $2B USD to $20B USD by 2015; IAMFI).  Let it be known that I, like the many that are optimistic that microfinance may even benefit from the credit crunch, are cut from the same cloth… we all want to microfinance to succeed in its efforts to alleviate poverty worldwide. I also know there are many out there, like myself, that think microfinance is so close to the tipping point of becoming a mainstream issue and investment avenue. This feeling can lead to a concern that the progress microfinance has made (and deserved) in recent years may take a serious hit because of the current crisis. I personally do not find this concern to be a very valid one. The concerns over the impact of the financial crisis can essentially be split into two camps; the financial concerns and the ideological concerns.

Financially speaking, I do believe funding will become more expensive and harder to find in 2009 (even though investment funds have heralded microfinance and healthcare as the two sectors with the most opportunity… seeing an opportunity and access to the capital to pursue that opportunity are two very different things). Realistically speaking, I think individual microfinance institutions will have considerable woes in 2009.  However, ideologically speaking, I do not believe microfinance will be hurt by the crisis, and in that regard, the progress and attention gained over the past few years will hardly dissipate (just seeing investment funds spotlighting microfinance on par with a sector like healthcare is something quite incredible). Financially speaking, investment in microfinance will likely focus more on the larger, less speculative, and less aggressive MFIs. This will pose serious problems for the majority of MFIs that are still in their nascent stages of operation. Ideologically speaking, the crisis hasn’t hurt people’s interest and advocacy for microfinance. October 2008 was quite possibly the most volatile and economically disruptive month in the US over the past 50 years. However, it is interesting to note that October 2008 was also the month that Kiva raised the most in a single month in the history of its operation to that point (which was then surpassed by November and December of 2008).

The financial concerns, though significant, and the continued ideological progress could turn out to be a microfinance idealist’s dream. 2009 could be a year in which the commercialization and over-aggressive growth of microfinance wane, but attention and interest grow… which would certainly make 2009 an interesting year for microfinance– 2009 could be the year that 2008 catches up to microfinance, but the “gathering clouds” may certainly have a “silver-lining.”

I was reading over the Kiva newsletter and came across Buildkiva.org, which is the introduction of a new API where developers can find new and creative ways to expland what Kiva is already doing.  I’ve seen some great stuff come from developers working on things in their spare time and tech companies, so I can’t wait to see what happens when those ideas get applied to microfinance.
For any developers out there who want to work on microfinance stuff in addition to Kiva, we are always looking for volunteers to help us build a bigger and better community here at myKRO

Microfinance lending platforms are part of a new wave of innovative websites that help connect people like you and me with entrepreneurs around the world.  I’m sure it’s no secret which platform I prefer, however, I like to give each up and coming platform a fair trial, so I always like to highlight any new platforms so that people can make their own decision.
Last week, LendForPeace.org was officially launched by four students from the Wharton School of Business at the University of Pennsylvania.  Here’s a few words from the founders themselves:

“Using our site, you can make a loan directly to a vetted micro-entrepreneur in the West Bank.  We work with US government-approved microfinance institutions on the ground to deliver your capital along with training and guidance to low-income individuals who are interested in starting or expanding their own small businesses.  Your loan is repaid over a set period of time as your micro-entrepreneur builds economic self-sufficiency and a stake in peace.
Founded by two Jews and two Palestinians, LendforPeace.org (”LFP”) was created to enable people of all faiths and backgrounds to make a tangible difference in the Israeli-Palestinian conflict.  To learn more about our mission, read a Message from the Founders.”

LendForPeace is a pretty straight forward lending platform that gets right to the point, and doesn’t require a lot of hoops to jump through.  For people that are newer to microfinance lending, this is a huge plus because they won’t be distracted from what they are trying to do.  I am also a huge fan of microfinance platforms that focus on certain geographic regions.  Similar to Wokai’s bold move in China, LendForPeace focuses primarily in the Palestinian territories, which as we all know in quite the hotspot.
Ryan Hogarth, from Microcapital.org, goes into depth about LendForPeace in his article “MICROCAPITAL STORY: A Kiva-like Internet Microfinance Brokerage “Lend-for-Peace” is Founded for Palestine.”

At first glance, LendForPeace.org seems very promising.  I am excited to make my first loan and to see what kind of impact it can have.  If anybody has any feedback or would like to share an experience with LendForPeace.org, feel free to let us all know.

Learn more microfinance lending platforms.

As the Obama administration has taken over, I have begun to wonder what role microfinance initiatives will take amongst the new leadership. On January 13 current Secretary of State Hillary Rodham Clinton included statements on microfinance in her speech at the Senate Confirmation Hearing.  Clinton declared:

Today more than two billion people worldwide live on less than $2 a day. They are facing rising food prices and widespread hunger. Calls for expanding civil and political rights in countries plagued by mass hunger and disease will fall on deaf ears unless democracy actually delivers material benefits that improve people’s lives while weeding out the corruption that too often stands in the way of progress.

Our foreign policy must reflect our deep commitment to the cause of making human rights a reality for millions of oppressed people around the world. Of particular concern to me is the plight of women and girls, who comprise the majority of the world’s unhealthy, unschooled, unfed, and unpaid. If half of the world’s population remains vulnerable to economic, political, legal, and social marginalization, our hope of advancing democracy and prosperity will remain in serious jeopardy. We still have a long way to go and the United States must remain an unambiguous and unequivocal voice in support of women’s rights in every country, every region, on every continent.

As a personal aside, I want to mention that President-elect Obama’s mother, Ann Dunham, was a pioneer in microfinance in Indonesia. In my own work on microfinance around the world – from Bangladesh to Chile to Vietnam to South Africa and many other countries — I’ve seen firsthand how small loans given to poor women to start small businesses can raise standards of living and transform local economies. President-elect Obama’s mother had planned to attend a microfinance forum at the Beijing women’s conference in 1995 that I participated in. Unfortunately, she was very ill and couldn’t travel and sadly passed away a few months later. But I think it’s fair to say that her work in international development, the care and concern she showed for women and for poor people around the world, mattered greatly to her son, and certainly has informed his views and his vision. We will be honored to carry on Ann Dunham’s work in the months and years ahead. (Hilary Clinton’s Statement at Senate Confirmation Hearing)

New Sec. State Hilary Clinton and former President Bill Clinton have long been involved in microfinance initiatives.  Bill Clinton wrote about such topics in his book Giving and both have actively encouraged the work of the Grameen Bank and Kiva (which naturally I am quite excited about since I am currently helping with the work for Kiva).

Aside from the Clintons, Nancy Barry, a close advisor to President Obama, was formerly the President of the Women’s World Banking for several years and holds close relations to the Obama family, as she worked with Ann Dunham, President Obama’s mother.

President Obama himself has traveled Kenya and visited micro-finance locations within the country (BBC News: Obama Draws Crowds on Slum Tour).

President Obama’s leadership holds experience and dedication to the field of microfinance.  The question is, what will become of it?  Where will the cause rank amongst the presidential agenda? I recently joined “Microfinance for Obama”, a part of President Obama and Vice-President Biden’s campaign page, with high expectations.  I’m the fifth member (not quite what I expected).

Eduardo Jimenez has been a Senior Microfinance Consultant to the Central Bank of Philippines since 2000, and was the Team Leader in crafting the Philippines Microfinance Literacy Program (PMLP).  He presented his paper, “Building Financial Literacy in Microfinance Clients,” at the 3^rd Annual Microfinance Conference in Nigeria, and agreed to talk with myKRO.org about financial literacy and microfinance.

Kirsten Weiss: Why should the microfinance industry concern itself with financial literacy?

Eduardo Jimenez:  The industry should be concerned about empowering the three major stakeholders in the industry: clients, microfinance providers and regulators.  Microfinance clients need to be clearly informed so they can make intelligent decisions.  Next, in terms of the providers, informed clients make informed decisions which result in good portfolios.  Good portfolios mean good assets and more income, both for the suppliers and for the clients themselves.  Finally, the oversight or regulatory agencies – the external stakeholders – might have less heartache if those they regulate have good portfolios.  As an example, look at what’s happening within the banking and regulatory system in the US now.

Kirsten: Tell us about the Philippine experience with its financial literacy program, the PMLP?

Eduardo: The PMLP started over two years ago as a commitment by the Philippine government to see a strengthened microfinance sector.  The National Credit Council, which is comprised of several agencies, including regulators, felt that they need to work on financial literacy to reinforce the gains made so far in terms of policies and regulations.  The Asian Development Bank supported us in terms of technical assistance, and I became involved as team leader.

As I looked at the literature and documents on financial literacy programs from other countries, I could see what needed to be done.  But as I interacted with the sector, including regulators, providers, and community based institutions, I discovered they had their own needs and perspectives.  As a result, we integrated some of these issues into the PMLP.

There are five modules which look at how to increase savings and investment, the roles and responsibilities of clients, the right use of credit, consumer protection, and microinsurance.  Sector stakeholders requested we add two more modules: on microfinance in general – e.g. what it is, the legal regulatory framework, and the national strategy – and information on available business development services (BDS).  The latter focused on an overview of what BDS is, what’s happening in the context of BDS in the Philippines, and how business owners can link to existing BDS providers.

Kirsten: What are the challenges to delivering financial literacy programs?

Eduardo:  One is cost.  All the providers see the need for financial literacy, but at some point these programs are conducted separately from credit operations and that is a bit costly.  Financial literacy is an investment on the providers’ side.  To reduce these costs, they typically empower the account officer or field trainer within the particular institution to walk alongside the client and conduct the training over time, perhaps over a month or so.

Another challenge is popularizing financial literacy programs among other sectors.  For example, I think the habit of savings as a discipline is critical.  The Central Bank worked with the Department of Education, crafting modules to integrate a savings training program into the regular educational programs of its elementary schools.  It took more than six months to design a module that finally was integrated into three existing topics and pilot tested in schools.  After pilot testing, it became part of the national education.  You need to integrate financial literacy into the educational system at an early stage.

Kirsten: What are the lessons learned?

Eduardo:  You have to approach financial literacy training from where the clients are coming from – i.e. don’t use the typical lecture or the teaching methodology for adult microfinance clients.  When you’re dealing with adults, with an average age over 45, you have to be creative when introducing the concepts of savings, investments, and insurance in order to stimulate these concepts and the principles.  Because the target market is “mature,” trainers need to be adaptable, using adult training techniques.

Next is the challenge of getting other educational and training institutions, including academic agencies and other NGOs, to embrace the principle of financial literacy.  Again, financial literacy training is a cost to their programs, but I think when they understand the value they will embrace it.  We don’t want to see a repetition of what’s happening in the current global economic and financial meltdown.  What we’re seeing in the West is a grim reminder that people need to become financially literate.

Kirsten: What else would you like to add?

Eduardo:  The goal of microfinance is the double bottom line – sustainability of the institution, and empowerment of the clients and transformation of the communities.  Financial literacy is an effective tool to empower clients.