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.

Here’s an interesting video interview with Bill Drayton from Ashoka.

Ben Magan, CEO of EARN

How often do you catch yourself saying “microfinance” when you really mean “microcredit?”  Let’s face it – in the world of microfinance, lending represents the lion’s share of financial activity, with savings and other services the poor second cousins.  However, in San Francisco, EARN has flipped that equation, with microsavings playing the leading role.   I interviewed EARN CEO, Ben Mangan, to learn about their program, savings and sustainability, and the role played by public policy.

Kirsten:  Why was EARN started?  What’s the mission?

Ben:  The original vision was to bring asset building products to scale.  Since the early 90s, the concept of matched savings accounts has been in play.  The first step was to prove poor people can save, which we’ve done.  The second step was to get government funding for matched accounts.  During the dot.com boom, when the concept of EARN was first developed, there was a window open for major government investment because budgets were flush.  Unfortunately, by the time the plan was finished, it was irrelevant.

Initially savings accounts for low-income earners may seem like a crazy proposition.  But if you study prosperity, it’s clearly tied to public policy.

K: What do you mean?

Ben:  Something as simple as the creation of the 30-year mortgage doubled home ownership in the US.  Even with the crisis today, home ownership is the greatest generator of wealth because it enables multi-generational prosperity.  The number one source of down payment assistance is parents because of the wealth built through their own homes.

Another example of asset building policy is the 401k.  These are pieces of the engine.  People who work in the asset building field argue policies should be expanded to low income workers.  We give by much larger multiples subsides through the tax code to middle to upper income earners.  For example, ninety percent of the home mortgage interest deduction subsidy goes to households above the income average.  Fifty percent goes to households that earn over $100,000/year.

Low income workers pay income, payroll, and sales tax yet they get a disproportionately small piece of the subsidies that create wealth through public policy – so small that it keeps them from entering the middle class.  This economy would be far more robust and sustainable if there were more opportunities to be entrepreneurs, to own homes and to have a greater civil stake.

EARN’s goal is to provide products and services that help low-income workers build wealth in a way that could be offered at true scale across the country.  We use our successes on the ground to advocate for policy changes that would realize scale.  Sometimes this push involves different models, for example a very successful pilot program called Bank of San Francisco.

K:  Can you tell me a bit about that?

Ben:  It’s an interesting pilot between the City of San Francisco, the Federal Reserve Bank of San Francisco, and EARN.  Together we compiled research that clarified the number of unbanked in San Francisco, who these people were, and through our primary research, why they were unbanked.  We then went to financial institutions and negotiated to provide products that appeal to the unbanked to open checking accounts.  The goal was to get people into mainstream banking and it’s been wildly successful.  Our initial goal was to get 10,000 people into the program.  We’ve had 40,000 in the past 24 months.  The program is being replicated in California (the Bank of California) and across the country.

K: What are they doing?

Ben: They’re creating coalitions of banks, non-profits, and the government.  I think, however, their success will depend on certain critical factors.  First, products must be demand-based.  There’s been this idea that if only we publicize checking accounts and bank services, the unbanked will join the banking system.  But we’ve found through our research and focus groups that it isn’t true.  The unbanked choose not to open bank accounts for very rational reasons.  Banks frequently have hidden fees that check cashing services don’t.  Many can’t get a bank account because of the bank credit rating system.  Or they think they don’t have the right ID.

When the Bank on SF steering committee negotiated with the financial institutions we ended up working with, we had a list of deal-breakers.  The product had to accept matricular IDs from Mexico and Guatemala, the check system [the banking credit rating system] could be waived for people who’d been on it for over six months and who weren’t on it for reasons of fraud, and there had to be some forgiveness for insufficient funds fees.

K:  Tell me about EARN’s savings product.

Ben:  We offer a matching savings account called the IDA – Individual Development Account.  We’re one of the biggest in the nation, alongside Opportunity Fund in San Jose.  We have more active accounts than anyone else, and Opportunity Fund has the most cumulative accounts.

K: What’s the match?

Ben: It’s a 2:1 match, up to $6,000.  So people can save up to $2,000 and are matched with an additional $4,000.  The main account is funded half by the government, and the other half through private donors.  For people who purchase homes, there is an additional subsidy we can access through the Federal Home Loan Bank of San Francisco.  But the majority of our savers use the account for education.  Small business is the second most popular use.

K: For their children’s education, or for their own?

Ben: For their own post-secondary education, though we are piloting a product allowing families to save for their kids’ education.  The redesigned version of this is expected to be offered in the third quarter of 2010, and our goal again is to be scalable.  This “Family Education Account” will be designed so EARN can open accounts anywhere in the state without having an office or staff there.  Ultimately, our vision is to be successful enough that we put ourselves out of the business of offering accounts as an intermediary. Once policy makes these accounts available at scale, people should be able to walk into any financial institution for some form of a Family Education Account, just as they would walk into Wells Fargo or Citibank to open a ROTH IRA.

K:  I come from the microfinance world, so I have to ask: is it sustainable?  Does it matter?

Ben:  I get a lot of argument from microfinance practitioners about this!  But I think it depends on how you define sustainability.  You can’t ignore the history of the public policy role in asset creation.  Would retirement savings be sustainable without the IRA or 401k?  There’s no way to fund these sorts of things without changes to public policy, and it doesn’t need to be overly expensive in the long term.

The UK, for example, has a program where every child born gets £300.  At age 18 they must repay the money, but they can keep the interest or capital gains earned on it, and use it for any purpose.  The British government believes that it will be used for education or entrepreneurship.  I’m frankly more skeptical that it might be used for a rave!  But I think an American version could restrict the use of the money for education or business, and with the repayment could be sustainable.

Some economists make a strong argument for sustainability through increased economic activity, for example, the Homestead Act.  Twenty five percent of the wealth in the US can be traced back to the Homestead Act.  Another example is the G.I. Bill.  Depending on which economist you talk to, that bill had an 11-1 or 7-1 return on investment.  The question of sustainability has to look beyond annual profit and loss and look at the long term economic impact of creating wealth for people.

K:  Financial literacy is something close to my heart, since so many of us grow up without basic financial skills.  In fact my current project is speaking to parent-teacher associations on the San Francisco Peninsula about techniques parents can use to develop strong financial habits in their kids.  So I was intrigued when I read that EARN has a financial education program.  Can you tell me about it?

Ben: There is a lot of evidence suggesting that financial education to adults, on its own without connection to a product, is ineffective.  So the education we provide is required for people who open IDAs.  Since they’re required to save monthly, we feel obligated to provide this education.

K: How does the program work?

Ben: It’s an eight hour program, over two sessions.  It’s very hands on and results in a budget, with a line-item on how much they’ll be saving per month in the IDA and a detailed exploration of how they’ll achieve that.

But another important part of our education has to do with our alumni association.  People have become so empowered by the IDAs that we wanted a space to channel the energy.  The alumni association provides a bundle of products and services, but the cornerstone is access to a financial coach, and we don’t use the word “coach” lightly.  Our coaches are highly trained professionals.  Everyone who goes through the coaching also gets financial planning, but the financial planning is separate in that coaching works on behavior, while the financial plan develops goals.

Within this, the EARN Alumni Leadership Group has networking events, such as expos for EARN alums.  We also have a microlending pilot to eliminate credit card and medical debt.  It’s focused on a very specific niche, where we feel we can add value.  We found that many of our saver alums still carried credit card or medical debt.  So we seeded the fund on prosper.com, a peer-to-peer lending platform.  We’re currently trying to create an EARN affinity group and to attract outside capital.

K: What question do you wish I would have asked?

Ben:  People often link us to microfinance and then can’t quite figure it out since we do so little lending.  I think the world of microfinance should increasingly expand to other types of financial products besides credit.

K: It’s interesting you bring that up, since the savings focus of EARN was what made me want to speak with you.  When I first started my career in microfinance overseas, I saw a tremendous focus on savings.  However, over time the savings component diminished and there were several reasons for this.  In some cases, restrictive legislation made savings problematic.  In others, inflation was so high that it really made no sense for borrowers to save money – it was much more rational to invest it or borrow at fixed rates.  Finally, some MFIs found that the savings was so successful that clients didn’t need to borrow as much; the MFIs (and I won’t name names) realized that they could be more profitable if they cut back on the savings and pushed people into taking more credit.  At any rate, I think this all goes back to the definition of microcredit – which is debt-specific – vs. microfinance, which really encompasses a range of financial services.

Me:  Thanks for letting me interview you on a Sunday, Elisabeth!

Elisabeth:  Thank you!

Me:  What inspired you to write this book?

Elisabeth:  The book really came out of the United Nation’s Year of Microcredit in 2005.  As a result of that, the UN formed a high level group called the UN Advisors Group on Inclusive Financial Sectors, headed by HRH Princess Maxima of the Netherlands, who’s an expert in this topic area.  It also had experts from governments and major banks, and ACCION was represented.  A group of private sector representatives said, “The private sector has a role here, so what can we do to attract the private sector to be more of a contributor to financial inclusion?”  We decided we needed some good examples, a kind of road map, and some information on how big the market is, and that’s the book.  I should also mention that Visa provided financial support for the book because they were also part of the UN advisors group.

Me:  Your book mentions the entry of some big local firms, like Visa and Sequoia Capital, into microfinance.  Can you tell us about a case that you won’t be discussing in your presentation to the SVMN this week?

Elisabeth:  In the Silicon Valley, a lot of companies have been interested in supporting the development of MIS, the information technology that goes into running microfinance, and have gotten involved in a lot of different experiments on that score.  It may seem a little mundane, but systems for financial services are typically designed for big banks, not microfinance institutions.

Me:  I should explain I used to work in microfinance, in the field, and MIS was my bête noir!  Everything felt jerry-rigged.

Elisabeth:  Right.  MFIs don’t have a lot of spending power so big companies tend not to move into that market.

Additionally, a lot of companies have been involved behind the scenes in microfinance, Microsoft for example.  You see things like the head of the board of Grameen foundation is ex-Microsoft and another ex-Microsoft person – Mike Murray – co-founded Unitus.  So a lot of people have gotten involved individually as entrepreneurs in this space.  I think that’s true on the investment side too.

Me:  What question should I have asked you?

Elisabeth:  About the takeaways for private businesses that want to get involved.  One, let’s acknowledge you need a deep market understanding of low-income people; that their special characteristics don’t make them unviable customers.  You need to understand how low-income people work in order to have good products that work for them.  Financial services support people’s fundamental needs and that’s why they are viable customers: they’re willing to pay for services that meet those basic needs like housing, shelter, education, etc.  So when you see an unmet need what you see is an emerging market opportunity.

Another message would be about partnering with MFIs, because MFIs can introduce private businesses to their market segments.

My final message is to absolutely approach entry to this market with a strong consumer protection awareness and a commitment to make social goals part of the overall goal of the business.

Want to learn more?  There are still spaces available to attend Elisabeth’s presentation at the SVMN on September 16^th in Santa Clara.  For more information, go here.

After twelve years in the field, I found myself a bit behind the tech curve when I returned to my home in the Silicon Valley.  So after attending Stephen Goodman’s (from Sun Microsystems) presentation on Emerging Market Models to the SVMN, I decided to circle back and get some questions answered from a Luddite’s view.

Stephen Goodman

Me (Kirsten): Thanks for taking the time to chat with me Stephen.

Stephen: Of course!

Kirsten: I have to admit, when you said that back-end technological support was one of the key needs in microfinance, I felt like cheering.  Why is this so hard?

S: In my presentation, I’d brought this issue up in the context of the mobile platform.   Mobility is so powerful because it’s handheld, it’s simple for communities that haven’t grown up in the PC environment, and there are sophisticated and sleek applications being developed.  But a lot of the pressure to develop is focused on the front end – what’s on the screen.  What MFI professionals must not forget is that there’s a back end needed, many times a substantial and robust back end.  Let’s say you do have a smashing success and your client base grows – what are you going to do for, say, storage and security? Many times this aspect of technology deployment isn’t as well thought out as the user interface.  Mobility is happening, they’re reaping the successes, but they’re having growing pains.

K: Maybe I’m projecting, but it seems that one of the biggest barriers to technology in microfinance is intimidation.  Implementing new technologies like M-banking, or even a decent management information system, seem overwhelming.  What steps can microfinance managers take to move forward?

S: I have two answers.  One is that technology is getting simpler and more powerful at the same time. Simpler in that it’s amazing how you can engage in technology and not be a technologist.   Around the world there are legions of younger folks and smart entrepreneurs who have technology ingrained into their personal and professional skill set, and I think you’ll find there are a lot of people who are less intimidated with technology.  The technology wave, adoption, is getting more powerful so there are communities, like open source, that one can be a part of. And on the other side, solutions, like cloud computing, for those that would never think to set up a system themselves.

I also think that people in the microfinance space shouldn’t feel obligated to become technologists.  They have a business model to execute on and a need to focus on their enterprise, their customers and I think technology will be that enabler if applicable.  They won’t have to spend 40% of their time being a tech manager. Back to the concept of computing becoming more powerful while simpler: cloud computing, a perfect example. Instead of having to buy a bank of servers and hiring IT management, one could use utility computing.

K: Cloud computing sounds like an interesting option for small to mid-size MFIs.

S: It is!

K: Can you tell me a bit about it?

S: Cloud computing isn’t new. You have centralized computing power, a data center, and it’s shared.  But instead of the computing power being at your desk, it’s in a more centralized place, remote and in the “cloud.” Some of the characteristics of cloud are its service model – you’re not buying a product; you’re buying a service.  You don’t have to buy software.  It’s scalable and elastic – you can add more or reduce.  If all of the sudden your data or client needs expand, you can scale your cloud capacity.  There are different models of how cloud services are  paid for but many are metered according to usage – again, helpful in a scaleable SME environment. In the past, you’ll often find a small organization buying computers with huge computing capacity they don’t really use or need – using cloud computing you only pay for what you use.  It also uses the web and the technology tends to be fairly straight forward and developed. Finally, we can’t forget that the main interface is a web browser, mobile or not, thus increasing accessibility.  We’re finding that small and medium sized organizations can really take advantage of it.

K: Do you know of any examples in the microfinance realm of cloud computing?

S: We are just starting to hear about MFI teams using cloud computing. Just like open source, it wouldn’t surprise me that we’ll learn of more cases in the near future. Mifos, an open-source based MFI-centric information management system has received a lot of attention recently. We have yet to hear of the equivalent in the cloud space.  But with that said, I bet people are using cloud computing and don’t even realize it.  For example, I know international NGOs using Google docs for their organization as a new and better way of collaborating.

K: I worked with a microfinance bank in Pakistan that used open source software, and they raved about the flexibility and low cost.  But I was left feeling that it takes a large institution – such as a bank – to manage open source software.  Am I wrong?

S: Yes and no.  It’s not black or white; you don’t use all open source or not. And you’ll find open source in all sizes of organizations. For example, one of our executives had a meeting with a banker, who’s very regulated, and the banker said they don’t and couldn’t use open source because of perceived security concerns.  The sales representative in the meeting modestly raised his hand and said, “Actually, we know your team is using open source.  We’ve have multiple records of official downloads.”  So you’ll see banks use it in some areas and not in other areas. The same goes for MFIs or smaller enterprises. Open source should be part of a smart technology portfolio. Another misconception about open source is that you’d need a very advanced tech team.

K: That’s my concern!

S: If you’re creating and building on it, yes, you need good tech people.  But there are open source options out there you don’t have to build on, so it really depends.

K: You mentioned in your presentation to the SVMN that Africa is the technology “hotbed” these days.  Why do you think that is?

S: Because necessity drives innovation. There are some genuine problems.  I don’t say that cynically, but it does create a certain level of motivation.

Our research uncovered something that wouldn’t be a surprise to practitioners working on this geographically and demographically huge continent – there is a lot of new and innovative economic activity going on, now. Investment and commitment is growing. Along with that is growing technology uses and adoption.  There’s a wealth of opportunity – of smart, emerging and established universities, of thriving SME sectors, and so what we find is that there are a lot of really dynamic things going on there.

Though it’s not a completely blank canvas, Africa has an environment where you can leapfrog technology.  There are many cases where there is no legacy system of old infrastructure you have to overcome.  As a result, the newest technology, for example, mobility, is so successful.

You often hear about the hesitation regarding the economic payoff of Africa.  It may not fit with the US model of quarterly returns, but we’re starting to see long term investments from the past pay off.  You have to be part of that – to get in the game – to reap the benefits.  If you don’t invest, you won’t be able to contribute and share the rewards.

K: What question should I have asked you that I haven’t?

S: Around new engagement models. What are the new and savvy engagement models that corporations are employing?

We’ve learned that in the ICT (Information and Communication Technology) space we’re in enables change, and contributes to positive economic and social utility. It might not be selling product at the base of the pyramid but it will be in helping to build and sustain the ecosystem of these emerging communities.

If you want to be part of this growth of these emerging communities then it’s not always about working with the end consumer of the project, but maybe it’s about supporting the the vendors, policy leaders, MFIs, or municipalities, for example.  It’s not enough to focus on the top, bottom, or middle of the pyramid, but the innovators, incubators and influencers which support, which make up the economic growth.

Microenterprise, social enterprise, and, what I call, tech enterprise are the really interesting new business/marketing models.  If, as a corporate leader, you do not align your sales, marketing, thought leadership, product development, sales channels and other aspects of your business model to intersect at some level with these organizations and, leaders, than you will not evolve as they do. Microenterprise is a different scale, sometimes hard to connect with, but we see SMEs dominate so much of the economic growth in emerging markets it would be foolish not to consider some strategy of engagement.

I’m excited about the hybrid model of social enterprises because they’re about building both social and economic opportunities.  Finally tech enterprise – there are a lot of technologists out there building to solve problems, but who might not realize they’re also building a business.  Many are associated with universities and labs.  Better partnership or collaboration could lead to even more wonderful applications of their work.  A lot of people are talking about building the business, but there are pockets of people who just like building the technology and solving problems.

The point is that there are new and evolving business and marketing models that parallel technology and enterprise innovation, all happening outside western markets. Tap into these transformation and you’ll grow your opportunities, significantly.

Check out Stephen’s presentation to the Silicon Valley Microfinance Network on the SVMN website.

Here’s a good interview on NPR with Anthony Pace, the executive director of The Plan Fund.  Here’s a little background on The Plun Fund:

Starting in 1999 The PLAN Fund has been committed to making a positive difference in the lives of working class entrepreneurs. The PLAN Fund is a non-profit organization whose mission is to assist entrepreneurs to achieve success in starting and or expanding their small businesses. Our program’s underlying goal is to increase our member’s economic self sufficiency through entrepreneurship by developing sustainable businesses. Through 2008 we have distributed 490 business loans worth almost $725,000 our average loan size is $1,475.

Source: SeaMo, good stuff Ryan.

April Rinne, Director of Water Credit

The “classic” model for microfinance entails lending for income generation. But the microfinance community is starting to experiment with ways to bring the power of microfinance for other purposes related to the needs of the poor and under served in the developing world. I interviewed April Rinne, Director of WaterCredit, about the role of microfinance in delivering improved access to water and sanitation.

Q: Tell me about WaterCredit.

WaterCredit is an initiative of Water.org, which operates in approximately ten countries in Asia, Africa, and Latin America. Water.org was officially launched earlier this month with the combination of WaterPartners International and H2O Africa. This gives us a much broader platform to engage in a variety of water-related work, including WaterCredit, and it also blends the strengths of the two co-founders of Water.org – Gary White, who co-founded WaterPartners, and actor Matt Damon, who co-founded H2O Africa.

With WaterCredit, we put microfinance tools to use in the watsan sector. It connects the microfinance and watsan communities to scale up access to credit and capital for individual- and household-based watsan needs. It is the first program of its kind, linking microfinance with watsan through multiple models and across multiple countries. WaterCredit currently operates in India, Kenya and Bangladesh. We work with eleven partners – a variety of commercially-oriented MFIs and NGOs.

Q: How does WaterCredit work?

This depends on the needs of the local community as well as the robustness of the indigenous microfinance and watsan sectors. We partner with watsan NGOs and MFIs, linking them together to share expertise and information and facilitating relationships to provide access to finance for MFI clients with unmet watsan needs.

WaterCredit loans may be used for sinks, latrines, water pumps, rainwater harvesting equipment and other basic watsan products. The rural communities we serve are those in which women (and often girls) may spend up to six hours a day walking to fetch water from a remote source. Frequently the water is dirty, which adds problems of water-borne disease. In urban areas women may spend the same amount of time queuing for water, which is often also of poor quality. By making loans for things that benefit access to water and hygiene, we’re able to free up that time to use for other productive purposes, while lowering the incidence of water-borne disease and providing financial empowerment.

Q: Why credit instead of grants?

For water projects to succeed, you need local ownership, management, and accountability. One way to cultivate that interest is through sweat equity provided by the local community (and we may provide a grant to match that), but another simple yet more powerful instrument to use is debt. If end-users of WaterCredit know they have to repay the capital provided, they’re more likely to take accountability seriously. In addition, by providing appropriate debt capital that is then repaid, we are able to release and leverage the grant capital for much more effective purposes. To this end, we provide “smart subsidy” grant capital to MFIs and watsan NGOs for the “software” costs associated with the development of a WaterCredit loan portfolio, such as product development and market assessment costs. We expect the “hardware” costs of launching a new watsan loan product to be the responsibility of the MFI, and in turn that any WaterCredit loan portfolio is financially sustainable.

Scalability is critical to the WaterCredit model, because there are more than 900 million people in the world without reliable access to clean, safe water. Microfinance has shown its ability to scale successfully over time, by adapting financial tools that are appropriate to the needs of the poor and underserved and requiring an ability to repay. The watsan needs of the poor simply won’t be met if we look at the situation only through a grant-based funding filter.

Q: Can you tell us a bit about the microfinance mechanism that WaterCredit uses?

We’ve provided catalytic grant capital (smart subsidies), debt capital, and a variety of credit enhancements (e.g. first loss loan guarantees and standby letters of credit) to attract additional commercial capital to the table for MFIs. The loans made by WaterCredit partner MFIs may be to individuals, households or groups of households via SHGs.

Q: What are the loan terms like?

WaterCredit loan sizes and terms vary by country. The global range is between $100-300 and the average size is $150. The loan tenor is usually between 18-24 months, and the interest rate is set by MFIs in relation to the rates of their other income- and non-income generating loan products. In India it’s generally been between 18-22%. We’re very careful to work with our partners on setting appropriate terms, and undertake market assessments when needed to ensure we’re striking a range between ability to repay.

Q: Who takes out the microloans?

About 90% of our clients are women, which isn’t surprising since they’re more connected to the home and are often the ones who fetch the water.

Q: What else would you like to say about WaterCredit?

Until now, watsan organizations and MFIs have talked to each other occasionally at best. Watsan organizations generally don’t have in-house financing expertise, and vice-versa, MFIs don’t have in-house watsan expertise. I believe we’re at the beginning of seeing that situation change. It will take time, but given the growing water strains and watsan needs of the global community, it won’t be possible for watsan and microfinance communities to remain in separate silos.

To quote a couple oft-used puns (the water world is full of them!) – though WaterCredit may seem like just a drop in the bucket today, I think we’re very early on to something that’s going to turn out to meet overflowing demand – and a flood of success – in the years and decades to come.

April Newman, SVMN

What’s the connection between Northern California and microfinance? I interviewed April Newman, Interim Executive Director of the Silicon Valley Microfinance Network, to find out.

Q: What does Silicon Valley have to do with microfinance?

The Bay Area and Silicon Valley have the technology, expertise, and venture capital of few other places in the world. Social entrepreneurship is quite vibrant in the Bay Area as well. If you think about MicroPlace or Kiva, they were both born here and that doesn’t seem to be a coincidence because they bring together elements of investing, technology, social entrepreneurship and microfinance.

Q: How did Silicon Valley Microfinance Network (SVMN) get started?

The idea was to connect the Bay Area’s human resources, investment interests and technology with the growing interest in microfinance, which was particularly high three and a half years ago when we formed. Tracey Turner was one of the co-founders of SVMN, and she also founded MicroPlace around the same time. Dave McClure was another co-founder and he came from the technology side. The microfinance community here needed a place to get together, connect, and share what’s going on.

Q: What are the objectives of SVMN?

Our goal is to mobilize resources into the field of microfinance to increase its impact in reducing poverty. Resources include people – volunteer staff, permanent staff, consultants, and innovation; funds, to increase the amount of investment in microfinance; and technology. Technology is one of the key components of how microfinance will achieve scale in the future. To link those resources, that supply, with the demand within the microfinance field, we have three pillars, or what we call the three “N’s”: kNowledge, Networking and eNgagement.

Q: What SVMN activities do you feel have had the most impact so far?

The major program is our monthly Speaker Series. It’s a set of talks where we bring in world class leaders in microfinance and they speak on some current issue, trend, or challenge in microfinance. These events serve a threefold purpose: 1) to educate people on a current topic; 2) to get them in the same room and same space to discuss and collaborate and think what can they do in their positions to address the topic; and 3) to serve as networking events.

Q: What does the future hold for SVMN?

Our next speaker event will be on August 19th and it features Stephen Goodman. The topic will be the intersection of emerging technologies and emerging economies. These two areas are an exciting breeding ground to watch and direct consciously. You can link to our home page for more information on the event.

Q: Is there anything else you’d like to say?

We have over 1,000 members with a broad range of backgrounds and experience. Some have been in microfinance for 20 years and some have just gotten into it. We even have members outside the Bay Area – including internationally – because we have created a microfinance community where people can stay connected; there’s a need for communities like SVMN.

SVMN really is for anyone who’s interested to learn more about the field and hopefully get involved in other ways – for example to volunteer. A lot of people in our membership are transitioning from a different sector into microfinance or looking for a way to use their skill sets in this area. I encourage people to check out our website, http://SVMN.net, and attend our Speaker Series. By coming to our Speaker Events you can start to get to know us and meet some of the community members and see what we’re about.

Evelyn Huang leads the Small Business Loan Program at Opportunity Fund, an organization which also provides matched savings accounts, finances affordable housing in Silicon Valley, and lends to real estate projects bringing investment in to low-income communities. Opportunity Fund is also one of the hosts of the Microfinance California 2009 conference, on May 28, 2009.

Kirsten Weiss: Tell me a bit about Opportunity Fund’s microloan program in California.

Evelyn Huang: Microfinance in the Bay Area is targeted towards working people – hard work isn’t always enough to build a solid economic foundation. For example, a single parent with two kids in the bay area needs around $65,000 per year to get by, but a minimum wage earner won’t earn that. Opportunity Fund focuses on individual families, businesses, and communities with the goal of building a financial system. We see microfinance as a comprehensive approach to financial education, savings, business loans, and investment in communities and homes. At Opportunity Fund, we provide Individual Development Accounts (IDAs) targeted toward working families, combined with financial education and matching funds they can save and use for education, retirement, citizenship, etc. We also provide small business loans – lending to support entrepreneurs who don’t qualify for commercial business loans but need and can use capital. Finally we provide community real estate lending, financing non-profit developers to build affordable rental and for-sale housing complexes and also things like community facilities, like child care centers, etc.

Kirsten Weiss: What are the loan sizes within your microfinance program?

Evelyn Huang: The loans range from $1,000 to $200,000. However, 90% of our loans fall within the $1,000-10,000 range.

Kirsten Weiss: How does microfinance in the US differ from microfinance in developing countries?

Evelyn Huang: There are two general microfinance issues that are really different: the environment and the business model. On the environmental side, the cost of living is very different in California than in many international arenas. Starting a business in California takes a lot more up-front capital, there are frequently more rules and regulations, and the dollar amount required for loans is higher. For example, $200 won’t do much for someone running a business in California. There’s also more critical competition for the microlender. People can come to this country with no credit history or financial education and they will receive credit card offers in the mail. With that type of credit availability, makes the US a much more competitive environment for microlenders. The last environmental issue has to do with the concentration of borrowers. In a lot of microfinance, potential borrowers are highly concentrated, lending microfinance to the village-based model. However, in the US, borrowers are more widely distributed across geography, industry, and loan size needed, which means that our business model as an organization has to be different. As to our business model, here in the US we not only provide capital but also training resources. We meet with clients one-on-one and provide business and credit advice. Given the lack of concentration of borrowers, we have higher marketing and advertising costs. In general, the interest rates we charge will also be a lot lower than those in the microfinance industry internationally. I don’t think domestic microfinance can be a profitable business; it has to be subsidized.

Kirsten Weiss: How is the current economic downturn affecting microfinance in the US?

Evelyn Huang: We’re seeing more demand for microfinance throughout the spectrum of clients. On the higher end, we’ve had applicants with good credit scores and who potentially could have been served by a bank in the past, but can’t get a commercial loan today. Since 2008, we’ve found the percentage of clients with credit scores over 700 – which is quite good – has doubled. On the bottom half we’re seeing applicants in worse financial shape in general. Examining all the applicants that came to our program, we’ve seen increases in clients with tax liens and judgments against them. The mortgage market has also affected clients like ours. The percentage of clients who actually owned a home increased from 17 to 24% – small numbers, but this is an expensive place to live. If you’re a low-income person in our program you’re probably over-indebted if you own a home. The average mortgage outstanding has increased from $260,000 two years ago to $445,000. Homeownership can be an asset but a lot of low income clients are severely over-leveraged. These are the people who hold subprime loans that convert to higher interest rates and unmanageable payments. We see a lot more of these instances in this crisis. In part we’re responding to that by pushing a lot more education. A lot of the clients that call us, if they’re in poor financial circumstances, we’ll try to talk them through as much as we can as well as refer them to other agencies which might have more in-depth knowledge, e.g. to legal counseling on mortgage issues. As to how the environment’s changing and how it’s affecting us as a microfinance institution, it’s harder to make new loans. I think part of that is the amount of risk that we can take. Our delinquency rate is going up because people are having a tougher time. The clients to whom we’ve made loans are losing their jobs; these are typically wage earners and the first to be let go, and they’re highly dependent on their income to cover their expenses. I think the total number of loans we’ll do in this fiscal year will probably drop 15% because clients are in more difficult financial situations and in order to protect our financial health as an organization. On the positive side, the clients that we have worked with – our existing clients that have gone through our business consulting – are in general well prepared. We did a survey of our existing borrowers, asking how their businesses are doing and how the crisis is impacting their personal financial situation. Forty percent of the respondents reported their businesses were experiencing some kind of difficulty. But the vast majority of the clients also said that they did not expect to experience any change in their personal financial situation. They felt they had the tools and knowledge to weather the storm. Our clients are making intelligent decisions. One client told me, “it’s a difficult time but I understand when this happens that I need to cancel my cable and lower the number of minutes on my cell phone.” So they know what they need to do to manage their personal finances during this downturn.

Kirsten Weiss: Is there anything else you’d like to add?

Evelyn Huang: I’d like to let people know about the Microfinance California 2009 conference, at Stanford University in Palo Alto on May 28^th. It’s the first state-wide conference on microfinance in California, where participants can learn more about microfinance, visit Bay Area microfinance borrowers, and meet with practitioners, leaders, and investors. You can learn more about it at: http://www.microfinancecalifornia.org/home/

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.