I can across Soap Hope this evening as a result of a Tweet I received as a result of retweeting this article. Soap Hope’s business model, named “Good Returns,” really impressed me and I thought worthy of sharing — they invest 100% of their profits every year, for the full year, into anti-poverty non-profits. They chose microfinance as a niche to support and are currently partnered with 3 microfinance institutions (Esperanza International, Chiapas Project, and Plan Fund). 2009 was their first year in business, and they generated $20,000 in profits that was then loaned to their microfinance partners.

Their co-founder, Salah Boukadoum, has extremely ambitious goals for the “Good Returns” model — one billion dollars towards ending poverty. I applaud his efforts, and hope we continue to see additional entrepreneurs like him starting businesses that help alleviate poverty.

I just returned from Nigeria’s 3^rd Annual Microfinance Conference, where Mrs. Mariama Ashcroft of Women’s World Banking presented a paper on commercialization.  When I told her about Mykro.org, she was kind enough to give me an interview for the site. My questions and her responses below:

Kirsten Weiss: How do you define microfinance commercialization?

Mariama Ashcroft:  It’s a strategy to create a means of reaching large scale numbers of low income borrowers, with a focus on sustainability.  This means an approach that relies on strong systems, governance, professional staff, and high performance standards, and which is moving toward profitable and efficient operations and towards getting fully integrated into the financial system.  The latter in turn translates into financial intermediation – being able to mobilize deposits and access commercial funds.  Financial integration/intermediation is what draws the line between NGOs and commercial MFIs.

Kirsten: Why should MFIs commercialize?

Mariama:  The primary reason is the need to expand access.  Though the estimates vary, the numbers indicate that demand for financial services far outstrips supply.  One statistic suggests that there are two billion productive people without access to finance.  Other numbers refer to 500 million microentrepreneurs without access to credit.

Because NGOs can neither fully intermediate nor provide a broad range of financial services, it makes sense for NGOs to transform to commercial institutions.  The assumption is that when the institution can mobilize financial resources, it can expand more broadly and deeply, placing it in a better position to provide more products that low income people need.

The other part of the rationale is in terms of governance.  When MFIs commercialize, they’re held to higher performance and reporting standards.  For instance, they’re typically regulated with stricter oversight.  As one example, there are frequently minimum conditions at the board and senior management level such as the fit and proper test, which requires regulators to approve all board and senior management positions.

Kirsten:  What are the challenges to transformation?

Mariama:  The first challenge is the regulation – particularly the minimum capital requirements.  In many cases, NGOs have been able to accumulate retained earnings over time sufficient to meet the minimum capital requirements stipulated by law to become a microfinance bank.  But in many countries these MFIs aren’t allowed to be sole owners, so they must find other investors for equity participation.

Another important hurdle for transforming NGOs lies in product design and development.  Here I’m talking mainly about savings – most NGOs only take savings as a guarantee for loans.  As a microfinance bank (MFB), however, they must develop savings products that appeal to clients based on trust.  When providing credit, the MFI must trust the customers.  With savings the reverse is true and crossing that line has been a challenge for many MFIs.

The third hurdle is in terms of systems.  Under regulation, MFBs are held to higher reporting and compliance standards.  Many NGOs tend not to have these systems fully developed and in many cases must start from scratch to create them as they transform.  This can be both costly and stressful.

A fourth hurdle I’d like to mention in terms of meeting the rationale for commercialization is to be able to reach scale in terms of outlets.  An NGO can set up branches wherever it wants because it doesn’t need a sophisticated infrastructure to provide credit.  An NGO can set up a meeting under a tree if it likes.  But once you become regulated that changes, because the law says branches must look a certain way – they must have secure premises, a strong room, 24 hour security, etc.  In many cases, MFI branches can’t meet these specifications.  I know of one case of an NGO which transformed to a MFB and its operations shrank as much as 50%.  It took them over five years to return to their original size.  In another case, an NGO started with 21 branches but after transformation was only able to upgrade ten branches to reach the minimum requirements.  The remaining branches remained unlicensed and offered credit only.

In Nigeria, Central Bank policy allows MFBs to work around this hurdle by having “meeting points.”  Meeting points can be a small room somewhere with a table and a few desks – enough room for field agents to work and to meet with clients.  These are supplements to full-service MFB branches; for example, one branch might service seven meeting points.  Another good thing about Nigerian regulation is that MFB field agents can make collections in the field, then at the end of the day return to their meeting points, prepare reports, check cash, and take the cash to the branch.  This system reduces pressure on MFBs to have many branches, while increasing access to customers.

A final challenge is the risk of serving less poor clients because of the pressure for profitability.  Commercial investors want commercial returns.  This has led to a tendency to disburse larger sized loans to higher income clients.  The concept of mission drift comes into play here.

Kirsten:  What trends do you see in microfinance commercialization?

Mariama:  I see more commercial banks doing microfinance but there’s still a long way to go here.  There are also more private investors interested in microfinance, increasing the flow of funds into the sector.  Microfinance is attracting new players that aren’t even financial institutions, for example cell phone companies and other technology providers, grocery stores and gas stations serving the role of point of sales outlets.  Rating agencies are playing an increasingly important role in terms of increased demand for transparency.  Even mainstream companies are becoming interested in rating MFIs.

As a side note, I represented ShoreBank International at the same conference, and presented on Commercial Product Development.  You can view a copy of my presentation on my blog: http://mfimarketing.blogspot.com/2009/01/presentation-commercial-product-design.html.

A few weeks ago I discussed an article about how Morgan Stanely was pulling its microfinance funding after trying to make a big push into the sector. Although Mogan Stanley defended that claim, I was pretty skeptical that they were actually going to make anything happen. From what I have always known, microfinance has been in the hands of NGOs and entrepeneurs who are trying to make a difference in the world. However, things are definitely starting to change as microfinance is being picked up in the mainstream media. In his article Big Banks Move Into Microfinance-For-Profit (C, BCS, GE) Gregory Davis briefly talks about big corporations leading the way into the microfinance industry. From Citigroup and Barclays, to GE, big companies are starting to invest millions of dollars into microfinance. Although I am happy to hear that big corporations are moving in the right direction, it got me thinking about what their real motives are. Initially I was assuming that they are in it for the money, to earn a profit from charging people high interest rates. However, I recently came across an article, The Green Marketing Machine, and I began to wonder how much of the investing was just for PR. Greenwashing, which is a term used to describe how companies are misleading their consumers by leading them to believe that their practices are environmentally friendly, has started to become more popular as people are becoming more aware of what is going on in the world. Although I don’t think that companies are doing this maliciously, I would be naive to think that they are doing this out of the goodness of their hearts. At this stage, I think it is to early to tell how big of an impact big corporations will really have, but I will definitely continue to write about anything that I hear. I encourage other to do the same, because whether their intentions are good or greedy, I think that the attention that will be brought to microfinance will ultimately be beneficial.