Hi! Everyone,

I am back with my next update and apologize for the delay, for we do live in a world where we need to ensure that results are always there to back up our claims. Now that the business part of the year is over, I am back to a subject I love - Micro finance and the opportunities it presents for the poor

I make it a point to meet as many micro finance institutions and self help groups as possible, spend some days on the field with them, their members, to observe the impact of micro finance

As we know, there are two schools of thought in micro finance in India, one is the Self Help Group Model championed by the Public sector banks & NABARD and the Grameen Model propogated by most of the MFI. While I shall not be dwelling on the pros and cons of these models, as this has been done to death by many people, one thing which strikes me as remarkably similar is the sense of accomplishment and pride amongst the members of both these paths.

I met members of a SHG association in Tamil Nadu and what struck me was the confidence these members displayed while talking to strangers, the lucidity in their thought process and their ability to overcome extreme odds. Remember, these are people who are in the hinterland, traditional and conserative by nature, unlike the India we associate with the cities. These very people who normally do not talk to strangers especially men, would invite me to their house for a cup of coffee, and ask me questions relating to business. They were sure of their numbers and were happy that this sort of activities gave them a sense of pride and standing in society, which even their husbands acknowledged, during my chat with them. The sense of discomfort which they had earlier because of women empowerment was being replaced albeit grudgingly in some cases by the acceptance that women had their own standing in society

To illustrate further, I met a lady Yellamma in a village which is around 100 km from Hyderabad. She used to run a small grocery store in her village. Contact with MFI and women groups opened up a new world of opportunities to her. She bought a second hand refrigerator for Rs 4000 i.e ($89)and started storing the usual stuff and in addition water.

Pretty soon she realized that the demand for water was higher than for colas and other stuff, but the price point at Rs 10 i.e.(20 cents) was very high. She started stocking water in satchets and selling the same for 4 cents each. She ended up selling water bought at Rs 8 (17 cents) for Rs (18) 40 cents. Thus began her voyage into entrepreneurship, discovery of marketing, price points, things which we read in Management text books.

Today, she has repaid her loan and makes a weekly net profit of  Rs 200 ($ 4.50), and this has given her the confidence to explore further. She now has tied up with FMCG good distributors and stocks toothpastes, shampoos, other goods at the price points convenient for her customers, which in turn ensures that her business continues to expand and remain profitable. Even though she borrowed at 20% diminishing, the return on capital for her was exceedingly high in excess of 200%. She converted 3 cents margin to 32 cents

The point I am trying to make is that there are many such Yellammas in India who need an opportunity to tap their business acumen and come out of penury and micro finance is providing the opportunity to them.

However this is not without its pitfalls. Microfinance is certainly a good thing, but too much of a good thing is also bad. which I shall highlight in my next blog

Continuing from a point in one of Candice’s earlier post , where she said that one of the readers had commented, “Why is it that the poorest of the poor do not have enough money to save in the first instance” it is interesting to note that the evolution of microfinance has been because of just that reason.
Microfinance began as micro credit with lending as the prime focus. Over time, there was a realization that the population segment serviced could profit through access to a broader set of financial services than just credit. For this to happen, the approach had to be different from the traditional one. The “bank” reached out to the customer, placing an emphasis on convenience and flexibility to customers, something which is traditionally associated with mainstream private banking. This encouraged the people below the poverty line to be self reliant rather than depend on loans, grants or be at the mercy of money lenders.           
Once the concept of asset creation for the poor as a means of eradicating poverty took hold, the logical next step in evolution was asset protection, using microinsurance as the tool.
Microinsurance is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.

When low-income people suffer from a risk event such as death,illness or property loss, a series of consequences including income loss, asset loss, need for money invariably occur.

People tend to respond by drawing on formal & informal group mechanisms, use up savings, borrow at exorbitant rates from moneylenders, sell assets etc. which becomes a vicious cycle. 

The secondary impacts of this shock leads to reallocated household resources, depleted assets & reserves. Lack of income leads to borrowing at high rates which leads to further borrowing to pay past debts, usually resulting in selling off of the assets needed for stable income and defaulting on the loans. This drives the family into penury.Micro insurance incorporates elements of both financial services and social protection, as facilitating savings and protection of assets is of more help than mere lending.

Microinsurance also has been characterized by the same issues as Microcredit, notably lack of access and costly mechanisms of delivery formally.
Several models of microinsurance delivery are in use internationally. These models fall into the following groups:
o         Partnership Model: Where an insurer is paired with a bank or Micro Finance Institution (MFI) to offer effective and efficient microinsurance products. In this model, the insurer manages the insurance risk and the financial organization acts as the agent for the product(s).
o         Community-based Model: This model is prolific in numerous countries, usually focused on health financing. Organizations including International Labor Organisation (ILO) and the Centre for International Development and Research (CIDR) promote this model and work with communities to help them develop and administer a risk fund. The multiple responsibilities, limited capacity of local people, and limited support make these programs difficult to reach organizational sustainability.
o         Provider Model: Some missionary hospitals develop and offer their own insurance schemes with community groups. These have been difficult to manage because insurance skills are limited among hospital administrators. Most of these programs are run through the books of the hospitals, and are unable to reasonably provide data on the sustainability of these schemes.
o         Full Service Model: In some cases, regulated insurers develop products that effectively help them move down market without a marketing partner. In other cases, the MFI itself takes on the insurance risk.
o         Social Protection Model: In these models the government takes on the responsibility of insuring its citizens (or some portion of them) using “contributions” usually from the employed population.
The key to the spread of microinsurance is the presence of community initiatives and SHG (Self Help Groups), which are aided by the government and also by the banks and other financial institutions.
I shall write about the India story in my next article

This is a response I wrote by email to a recent respondant on our last post.  It was exciting for me that our blog got the attention of a student in the US, so I’d like to share my response with everyone.  I wonder just how many university programs around the world in Development, Economics or Finance spend time on microfinance.

Dear Brennan
Happy to see that we have been able to attract readers from the USA- many thanks for your interest.

Yes, education is a critical success factor in micro insurance/finance. Let me tell you about what I discovered yesterday.
I was in Hyderabad to visit with one of the larger and more successful micro finance companies. Currently they provide loans to more than 300,000 Indians whose income is below the poverty level.
They have a very systematic approach to granting loans.
The first thing they do is get the people who need money to form “self-help” groups with a minimum of five members. This group is then educated for three hours on:
-          understanding money- they make sure they can properly count money
-          then they talk about what a loan is
-          then discuss interest, how it is calculated and why it must be paid
-          Then how they are all tied together to show that if you borrow an amount, it must be paid weekly- every week for 50 weeks.
-          Then there is a test- if the group does not pass (each member must understand), the loans are not granted.
-          Each member must show that in fact they can sign their name- there are no thumb prints in this financing system!

In the processing of a loan, for each member, the other four agree that they will be responsible for paying back the loan if the member has a problem. It is NOT a written promise, but a commitment to take on responsibility for each of the loans.

Once the loans are granted, then all the relevant information about the borrower is fed into the micro finance records at Head Office (with remote data entry by the local micro-finance representative). Insurance is then applied for – so that in the event of death before full repayment, the outstanding balance is then written off by the micro finance company and the deceased member’s family receive an advance of Rupees 1000 to help with burial expenses. Once the insurance claim is processed (first investigated by the local micro-finance rep, the balance of the insurance funds (after repayment of the Rupees 1000 advance) are paid out to the remaining family members.

To me, this micro-finance company is doing all the right things! Yes they are helping the family to become self sufficient, but they are also educating the borrowers in financial matters, and creating a common base of understanding and trust with their customers. They show that they truly care for the people they lend to, and in return they build a relationship of trust and respect. Needless to say, this group has more than 98% of all loans fully repaid. Continue reading ‘Education - a critical success factor’

One of our readers asked in his recent comment “what of the poorest of the poor that do not have enough money to save in the first instance? I am curious how to help them - is that the work of charities alone?” David commented by saying that savings can start at any level and explaining how the mechanism of self-help communities and savings groups helps this problem.

This comment reminded me that often supporters of microfinance want to know how they can help. At ING, we have a employee committee called ING Microfinance Support. This committee consisting of 3,000 Dutch employees provides a mechanism for ING employees to support microfinance initiatives. First the group works to spread the message about microfinance by organizing network events and seminars on the topic. Second, ING Microfinance provides a way for ING employees to invest in microfinance through the purchase of funds from Oikocredit, our Microfinance partner in the Netherlands. Finally, the committee organizes and finds willing staff to participate in technical assignments at a Microfinance Institution abroad. This helps microfinance institutions to gain valuable technical knowledge, while giving ING employees a chance to make a direct impact as well as learn about microfinance first hand.

But what if you are not an ING employee? How can you help? As a start, education is key. Most people are not aware of microfinance and its power to help the poor, so learning about it yourself and spreading the message is a great start. If you would like to invest in microfinance business, Kiva is an on-line non-profit which helps connect lenders in developed nations to entrepreneurs in the developing world. You can provide loans to your choice of entrepreneurs through PayPal. If you are a resident in the Netherlands, here ING recommends 3 different funds.

Sites like Kiva for borrowers and lenders in developed countries are already becoming popular. Communities lend to each other and avoid high bank fees and interest rates, while still being feasible and profitable for both parties. Perhaps sites like Kiva for entrepeneurs in the developing world will become equally popular.

India is well along the road to institutionalizing microfinance practices in rural areas and in fact, also in larger semi-urban areas. The government has a policy to support these activities, and has even required registered/licensed life insurers in the country to file products and plan as to how they will expand their micro-insurance activities!

Many government bureaus also help finance these programs- by paying part of the insurance premiums for organized groups.

Non-governmental agencies are springing up all over India- helping crafts-people, farmers, union members and others to band together to form cooperatives and buying/selling groups. For example, farmers may join together in order to make sizable pesticide or fertilizer purchases- as prices much more advantageous than they could do on their own. In other cases, craftsmen band together to sell their output in volume, thus helping make sure that each individual’s work can get to the market!

These NGOs then get involved in all aspects of the lives of their buying/selling groups. Micro finance is a natural path to follow.

Other countries have seen a very different path in the development of microfinance. For instance, in Bangladesh, the country with the first ever micro bank, the industry began and continues to be lead by a private bank. (Read the book “Banker to the Poor” to learn about Muhammad Yunus’ incredible successes) Meanwhile other countries in Asia, like China, are far behind.

One point in Yunus’ book is that governments and NGOs can only take microfinance so far. He believes that private multinational institutions like ING must get involved in order to see the industry progress. Commercializing these products will ensure more products, better products and better services, which in turn will help the poor to rise out of poverty at a quicker rate.

The question is - how does one convince more multinationals to join and invest in this sector?

I am in Hong Kong at the moment- and as I see just how most people here benefit from this vibrant and strong economy, I can’t help but think of the hundreds of millions of rural and financially poor Indians who would never have the benefit of such a life!

Microfinance (read about Microfinance on Wikipedia), the practice of lending tiny amounts of money (perhaps equivalents of US$ 100-150) to allow the individual to become somewhat self sufficient, has a long history now. I am sure you have heard of the tremendous success that these programs have had in Bangladesh (read about Grameen Bank) where it all started.

Today, these kinds of programs are everywhere in developing countries - helping millions of individuals to be able to start their own micro-manufacturing, craft, or sewing business or enhance their chances of improving farm output with the purchase of better equipment. Armed with something as simple as a non-electric sewing machine, families have been able to earn cash incomes for the first time!

My fellow colleagues and I have started this blog because these are exciting times for Microfinance in India where I am located, and indeed elsewhere in the world - we want to share these ideas and this journey with the hundreds of thousands of other people out there that are passionate about making a difference to poverty through finance. Corporate giants like ING can contribute so positively to the lives and well-being of millions of otherwise impoverished individuals and families! We look forward to hearing your ideas and to sharing this journey with you.