28th July 2014
This month, Women’s World Banking closed a $50.6 million private equity fund, which will be largely invested in microfinance institutions supporting women. But if private equity plays a growing role in microfinance, it is one of many new forces shaping the services available for the poor.
For a start, technology could increase dramatically the impact of the small loans offered to low-income communities. Just look at the transformative effect the mobile phone has had on money management for people in developing countries.
Mobiles have facilitated everything from cash transfers to real-time access to commodities prices for farmers who once had to travel miles to markets before being able to discover the going rate for their crops.
Now, other handheld devices are changing the way micro-services are delivered. For example, Opportunity International, a microfinance provider, equips its loan officers with tablets that help them do everything from gathering information about borrowers to enhancing their training sessions with video and graphics.
Technology can cut the cost of delivering microfinance services, helping lower the traditionally high interest rates institutions need to charge to administer such small loans.
One entrepreneurial start-up is harnessing technology to address one of the most onerous of these administrative processes – the credit assessment. First Access has developed a low-cost means of predicting credit risk scores using mobile phone data.
Since mobile phones are used for cash transfers, they capture information such as consumption patterns and seasonal changes in business activity. Meanwhile, the number of unique incoming callers provides a picture of the relative strength of an individual’s social networks.
“It’s not to say there’s a causal relationship between how you use the phone and how you will repay,” explains Nicole Stubbs, the company’s co-founder and chief executive. “But this is the only reliable source of reliable information we’ve had on quite a big population.”
She says the technology could dramatically reduce the cost of lending, and therefore the cost of borrowing. “The end goal is have more affordable capital available to everyone, especially people who are low risk,” she says.
Technology can also help institutions gain a better understanding of their customers. In a deal signed this month, for example, IBM will help India-based Janalakshmi Financial Services, a microfinance provider, develop advanced analytics to generate insights that will inform the development of new financial products, payment options and services.
But while technology may be transforming microfinance, the nature of microfinance itself has been changing.
First, it is now well accepted that loans are far from the only form of financial service that help the poor. For families vulnerable to shocks such as the death of a relative or crop failure, having money to fall back on can prevent such events from pushing them back into abject poverty.
“Savings products are life altering,” says Vicki Escarra, chief executive of Opportunity International. “It gives them a cushion for tough days.” She says that at Opportunity International, demand for savings products is now six or seven times higher than the demand for loans.
Micro-insurance is another critical risk management tool for poor families, argues Felipe Botero, an inclusive insurance specialist working with the Microinsurance Centre to develop partnerships to insure the world’s poor.
“Everyone manages risk informally from the richest to the poorest and we do it in different ways but the poor are least able to do that,” he says. “Insurance is not a silver bullet, but it’s part of the portfolio of risk mitigation tools.”
For smallholder farmers, crop insurance is particularly valuable. And it does more than offer financial protection if crops are destroyed – banks will be more willing to lend if they believe farmers are less likely to default on a loan in the event of drought or flood.
The challenge, though, is that the cost of assessing individual losses and detecting fraud is high while the premiums paid by smallholders for insuring crops and livestock are extremely low.
One solution is an indexed insurance product such as the one offered through the Global Index Insurance Facility, managed by the World Bank’s International Finance Corporation.
When weather or other catastrophic events take place, payments can be made immediately using a pre-defined payment formula, such as a certain level of rain or an earthquake registering a certain magnitude on the Richter scale.
But while these kinds of financial products help smallholders and other entrepreneurs develop more stable sources of income, some argue that services are needed for individuals who don’t necessarily want to start their own businesses.
Micro-franchising is one option. Franchising is a way for someone to buy into an established brand, receive the training needed to run the business and access support such as assistance with securing permits and licences.
David Lehr, a TechSoup Global director and a consultant on business approaches to addressing poverty, believes the model, if simplified, could help people in poor communities develop new sources of income by offering them a proven business model that can be standardised and easily replicated.
Lehr saw the potential of micro-franchising when working on a project to establish a network of small health stores in isolated communities in Guatemala. “You can go into business for yourself, but not by yourself,” he says. “It’s lowering the risk through a proven business concept that caters to the needs of a particular market.”
To take off, micro-franchising must be linked to other services, such as training and technical support. Yet this applies to many of the services offered to low-income communities. What started as a system of making small loans to the poor will only succeed in changing lives if it becomes part of an ecosystem of micro-services that goes far beyond access to credit.
THE GOOD STUFF
Here, I invite my interviewees to name a favourite charity and – in the spirit of Mixing It Up – a favourite cocktail.
Nicole Stubbs @nicole_stubbs @1stAccess
Charity: Surmang Foundation
Cocktail: a White Russian
Vicki Escarra @VickiEscarra @OpportunityIntl
Charity: Opportunity International
Cocktail: a Manhattan
Felipe Botero
Charity: Pro Mujer
Cocktail: Seltzer water and lime
David Lehr
Charity: Mercy Corps
Cocktail: a Cuba Libra, a Margarita or a Pisco Sour