After spending 12+ years abroad, microfinance for me will always evoke dusty bazaars and foreign places.  I’ve been home a year now and have gotten used to the idea of the many microfinance programs operating in California’s Bay Area, with its urban areas and wildly varying incomes.  Still, I found myself a bit surprised when I learned about a microsavings program operating in my home town of San Mateo, California.  After all, San Mateo County has one of the highest average incomes in the nation.  But an average is just that, and there are always people who fall well below the mean.

HIP Housing, as its name implies, focuses on finding housing solutions for the economically disadvantaged.  How does microsavings play a role?  Self-sufficiency Director, Carolyn Moore, explains.

Q: Tell me about your savings program with Opportunity Fund.

Carolyn:  At HIP Housing, I work with low income parents who are in school.  The self-sufficiency program pays a portion of their rent so they can focus on school, finish it, and eventually earn an income that will pay for their own rent.  The key is that I’m working with a low-income population which has an education plan, and this makes them a good fit for the Individual Development Account (IDA) savings fund through Opportunity Fund because the money you save and the matching funds must be used for education, small business, or a home purchase.  With the high housing prices in the Bay Area, most clients spend it on a small business or education.

We’ve been working with Opportunity Fund for the last three years.  The IDA works as a savings account with matching funds.  The client saves a minimum of $25/month and has two years to save up to a maximum of $2,000.  Everything is matched 2:1.  So if they save $2,000, Opportunity Fund throws in $4,000.

Q: Who are your typical clients?

Carolyn: Most of my clients are single moms because when you say low income parent that’s usually what that means, though we do have a few single dads and couples.  A lot might have been teen parents, who got out into the working world and realized you can’t make it on a high school education or less in this area so they decided to get some kind of training to increase their earning power.  Our program is 1-2 years of rental assistance, so we require the education plan be completed in 1-2 years.  So I’m working with people doing relatively short term educational programs, e.g. administrative assistant training, medical assistant, dental assistant – i.e. entry level vocational training at the community colleges.

Q:  Can you give me an example of a success story?

Carolyn:  I have a single dad with two kids who has been in the program for about two years.  He was cutting hair on the side but you can’t do that without a license, so he needed to go to school.  There’s a barber school in San Francisco that cost $6,000 but he didn’t have the money.  When he came to our program we cobbled together various sources, including the IDA.  He didn’t have $6k immediately so we had to get him some other funding through the Workforce Investment Act, which is retraining through the welfare system to get started.  By the time he got through the first part of the program he had saved enough in the IDA to pay off his education.  Now he has a job with Philgood Cuts in San Francisco.

It’s hard to go to school, take care of your kids, and work.  The majority of my clients have part time jobs.  It would have been difficult for this particular client to be able to assemble the various resources on his own.

Q: How are you funded?

Carolyn: We have various funding sources.  This program gets a lot of money from the County of San Mateo.  We also get money from private foundations and individual donors.

Q: What haven’t I asked that would you like to tell me about?

Carolyn: Save Together.  Opportunity Fund is one of the partners, and it’s an IDA in the Kiva model where individual philanthropists can go on-line and make a donation to an individual in their community.  So a low income person goes on line and says they need $6,000 for cooking training.  An individual donor can then go on-line, think it’s a good idea, and donate $25, and the IDA can build that way.

World Vision recently launched their own Kive-like lending platform named Micro. They are the latest microfinance lending platform to launch, joining more established players such as Kiva, Wokai, and Microplace. It looks like the site was launched in September (also on UrbanMinistry), but I was made aware of the site from SocialEarth’s blog post today. According to their site, World Vision has disbursed 3,500,000 loans totaling more than $1.8 billion since 1993, has 604,000 active entrepreneurs, and loaned $396 million last year — so they are not new to microfinance by any means. Loan sizes range from $25 all the way up to $500+. Currently, Micro only offers loans for entrepreneurs in Rwanda, Mexico, and the Phillipines — but I’d guess they will be adding new markets in the coming year.

I’m certainly a fan of anything that brings microfinance into the spotlight and am thrilled that World Vision is tapping their existing donors to help raise capital for microfinance, but am yet to be convinced software development time and effort should continue to be spent on building technology to power lending platforms. As I said in August, I’d still like to see Kiva.org open source, or white-label, some of their software to other players in the market who want to specialize in a particular geographic area or type of business; that would enable development time and dollars to be spent building features on top of some of the great P2P lending technology that already exists.

For those interested in following Micro’s progress, you can follow them on Twitter here. Head over to SocialEarth for more details.

This month, SeaMo (Cosponsored by the UW Global Business Center) is throwing another one of their great microfinance networking events, Microfinance & Microbrews.  This month, Kushal Chakrabarti will be speaking about Vittana.  Here’s some more details about the event:

What: VITTANA, a new Seattle based microfinance organization pioneering education loans in developing countries
When: Wednesday Nov. 18th – Doors open at 5:30pm, presentation begins at 6:15pm
Where: Spitfire 2219 4th Ave, Seattle WA
Who:You and other professionals, students and community members learning about Vittana.org directly from co-founder Kushal Chakrabarti Named a Gamechanger for Philanthropy by the Huffington Post
Why: We know the value of microfinance loans to support adults launching small businesses, but what about giving young people a way to fund their secondary and college educations? Vittana.org is doing just that – going directly to students with loans from us to fund knowledge development around the world.

This month, the Grameen Foundation launched the Ingenuity Fund Challenge.  The Ingenuity Fund is a new program that inspires individuals to start their own fundraising efforts to help and inspire others to become a part of microfinance.  There are millions of people around the world who have ideas, with the Ingenuity Fund, Grameen is trying to tap into that resource.
From November 2009 through February 2010, Challenge participants will develop compelling, creative personal fundraising pages on Grameen Foundation’s website, and raise awareness of and funds for Grameen Foundation’s work through personal networks, social media and other offline activities.  By joining this campaign, not only are participants helping spread the awareness of microfinance, but the participant who has the most ingenious web page and outreach effort will travel abroad with the Grameen Foundation to visit one of their on-the-ground microfinance or technology programs. They’ll document the experience through blogging, photos and videos featured on the Grameen web site, giving a new voice to the global community that believes poverty is unnecessary.

Take the first step by creating a fundraising page!

Click here for the official rules

“Why would borrowers in Nicaragua protest against microfinance?” my friend Michael asked me a few days ago.

Michael and I both majored in Latin American Studies at Berkeley. His email re-ignited my excitement for microfinance in Latin America. When I was studying abroad in Chile I interned with an organization called Accion Emprendedora, which sparked my interest in the intersection between business and social good.

Michael sent me this fascinating article: “No Pago” Confronts Microfinance in Nicaragua by Elissa Pachico:

Last January in northern Nicaragua, as a crowd of hundreds blockaded the Panamerican Highway late into the cool Monday night—soaking tires in gasoline before setting them on fire, hurling rocks at police and TV cameramen, bringing traffic to a standstill for 10 miles—the words once again began appearing in news reports and political speeches and inside the National Assembly debate halls: No Pago, No Pago!

In the months that followed, the refrain was hardly absent from the airwaves—not on May 12, when a group of 20 people smashed the windows of a truck belonging to a local microfinance organization, or in early September, when some loan officers were so harassed by protesters barricading their office doors and badgering the clients who attempted to enter that they decided to stop showing up to work altogether.

These incidents are only a few examples of the bad feeling that microfinance institutions (MFIs) have inspired among a section of the rural population in north and central Nicaragua. Confronted by the bold protests of the Movimiento de Productores, Comerciantes y Microempresarios de Nueva Segovia, or more colloquially as the No Pago (I Won’t Pay) movement, politicians are growing increasingly nervous that the group’s protests are scaring away international investors and could strike a heavy blow against the country’s shaky economy. (more)

Since reading this, I’ve researched like the committed and curious student of Latin America that I remember from college, perhaps for the first time for the 2.5 years I’ve been living in China.

So, why have the borrowers been protesting?  Here are some reasons I’ve uncovered.

High Interest Rates

Microfinance institutions in Nicaragua charge interest rates of as much as 21%. The protestors contend that this rate should be no more than 8%.  Yes, 21% sounds like a large percentage of a small loan.  However, microfinance institutions have high transaction costs, based on the labor-intensive process of managing repayments.

Though this is a much-cited reason for these protests, I don’t think it’s sufficient to justify the violence.

Encouragement from President Ortega

President Daniel Ortega has supported the protestors, with both explicit endorsements and direct involvement in a rival credit institution.

On July 12, 2008, Ortega visited the north of Nicaragua and made the following speech, as reported by Microcapital.org:

[He] called on the population to protest against MFIs charging usury interest rates in order to convince them to renegotiate their rates: “We need to end this policy of usury…go march and plant yourselves in front of the offices of the usurers…Be firm! The usurers don’t have any other option: either they renegotiate or they renegotiate”. Ortega did not cite a particular MFI, and several microfinance organizations in the region were forced to close their doors due to protests led by a group of farmers called Movement of the Producers of the North (MPCS).

Mr. Ortega, a onetime Marxist revolutionary who led Nicaragua from 1979-1990, was re-elected in 2006 with 38% of the vote.  In his campaign, he pledged to end “savage capitalism” and bring in foreign investment to help the 80% of Nicaraguans who live on less than $2 a day.

The state also recently started a new credit union called Alba-Caruna, which uses aid money from Venezuela. The website venezuelaanalysis.com describes the program in this way:

Caruna is the body that administers funds made available for development projects in Nicaragua within the framework of the Bolivarian Alternative for the Americas (ALBA). Currently, ALBA’s member countries are Cuba, Bolivia, Dominica, Nicaragua and Venezuela. The Honduran government has announced that it too intends to join ALBA shortly. So Nicaragua’s experience is important as an example and model of the economic alternative based on solidarity and fair terms of trade that ALBA represents.

A peer reviewer responding to an article on the Global Integrity Report describes the organization in entirely different terms, as “a compatible private microfinance bank loyal to Daniel Ortega.”

Regardless of one’s perspective on Venezuela’s influence across the Americas, it is clear that Daniel Ortega has a personal interest in Nicaragua’s microfinance sector.

Reversed Social Capital

In the book Influencer: The Power to Change Anything, the authors cite Muhammad Yunus’ work with the Grameen Bank as an ideal example of a “high-level influence tool – the power of social capital”(173). The book defines social capital as “the profound enabling power of an essential network of relationships”(174).  By organizing Bangladeshi craftswomen into solidarity groups, he built the social capital necessary to ensure that these housewives-turned-entrepreneurs would repay their loans on time.

I believe that in Nicaragua, the “No Pago!” movement has had far more success in leveraging social capital than the local microfinance institutions.  As reported in the Latin American Herald Tribune, “The leader of the protesters, Omar Vilchez, said on La Primerisima radio that they would continue until Congress approves a debt moratorium and the microlenders suspend for three years asset seizures from delinquent borrowers.”  Omar Vilchez also happens to be the former mayor of the town of Jalapa.  He has denied direct connections to Daniel Ortega and Alba-Caruna.  By attracting media attention, he convinced other borrowers to follow his example.  In the words of Influencer, he turned “a me problem into a we problem” (181).

I argue that strategic use of social capital has contributed to the success of microfinance in many places, but in Nicaragua it has contributed to its failure.

One Borrower, Many Loans from Many MFIs

One borrower involved in the Jalapa protests had amassed $600,000 in debt, ostensibly from many different MFIs  Taking out a loan to pay off another loan nullifies any poverty-alleviation effects, and locks borrowers into a cycle of debt.  This is not only true in Nicaragua; a friend who served as a Kiva Fellow in Peru witnessed a similar trend there.

Ineffective Incentives Within MFIs

Both borrowers and loan officers need incentives that ensure the prompt repayment of loans.

Caroline Bressan, a Senior Portfolio Associate with the Calvert Foundation, explains in this excellent Q&A with Microfinance Focus.

From an investor’s perspective, one thing that can be done is to fund those MFIs that are working to create positive incentives for those borrowers that do make their payments on-time. One example of this is BANEX in Nicaragua. They are currently raffling a new truck at each of their problem branches only to those clients who have kept making their loan payments. Another possibility is making certain types of loan products available only to those borrowers with a clean payment record or by creating a separate loan name for those same borrowers such as an Excellence Loan or Gold Level Loan, thereby creating something that they could be proud of.

Another lesson learned from this crisis is to scrutinize not only the procedures and policies of an MFI, but also the implementation of these practices. With the growth we’ve seen in the industry over the past few years… credit policies were relaxed in favor of higher growth rates. Many loan officers were incentivized based on the growth of their portfolio alone. Instead of focusing only on growth, the importance of portfolio quality and knowing their clients should also be stressed in loan officer training sessions and reflected in compensation packages. If loan officers are incentivized in the right way, they will put more energy into choosing the right clients for the MFI and avoid repeating what happened in Nicaragua, where some clients took out loans with no intention to repay. (more)

Drop in Remittances

With the U.S. economy in recession, Nicaraguan laborers working in “el Norte” have not been able to send as much money home.  I’ve heard that remittances are have dropped for the first time in Mexico, by 20% this year. And some Mexicans have sent money to support relatives in the U.S. Since Nicaraguans and Mexicans work in similar industries in the U.S., I think it’s fair to assume that the impact on remittances in Nicaragua has followed a similar trend.

Overall, Nicaragua’s “No Pago” movement can be seen as a “perfect storm” in which many factors contributed to the collapse of the microfinance ecosystem.

What do you think?  I look forward to hearing your comments!

Casey Wilson recently had a great email that she sent out about the recent articles about Kiva in the NY times that I thought was worth posting:

You might have read Stephanie Strom’s article “Confusion Where Money Lent via Kiva Goes” in the New York Times a few days ago.  This issue has been making the rounds since David Roodman’s post a month ago.  As a fellow “peer-to-peer” microfinance organization, we thought it was important for us to follow up with our own supporters on this issue.

To be clear, contributions on Wokai go to microfinance institutions (our “Field Partners”) in rural China, who are in charge of distributing the loans to the borrowers and collecting repayment.  A borrower can in fact receive a loan from a Field Partner prior the time the loan is “100% funded” on the Wokai website.  Below are two excerpts from Wokai’s FAQ that might shed more light on the issue.

Can a recipient’s loan start before it is 100% funded?

Yes. Once a Field Partner has posted a recipient’s profile online, Wokai Field Partners can use their own capital to issue that recipient’s loan. Wokai then reimburses this capital to the Field Partner once the recipient’s loan has been 100% funded. If the recipient’s loan is canceled for any reason, the recipient will no longer be designated as a “Wokai recipient” and that Field Partner will permanently fund the loan with its own capital reserves.

What happens if a recipient’s loan does not get 100% funded by the final fundraising day?

If a recipient’s loan is not 100% funded by the time it reaches zero “Days Left”, then Wokai will either extend the recipient’s fundraising period by one month or, if there is any specific reason why contributors are choosing not to fund the recipient, Wokai will cancel the recipient and allow contributors to select a new recipient to support.

Wokai is committed to being transparent in its processes.  To that end, we discuss our field partner relationships right on our “About” pages.  We even received credit from David Roodman in his original post for being very open about our relationships with field partners.

To read more about what Wokai does, visit their site at Wokai.org