Connections and Partnerships: Extending Credit "Plus" Services for a Complete Solution by Microfinance Insights

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Vol.10, Jan/Feb 2009

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Interview SunEdison & SELCO on Solar Survey Product Development, Implementation and Partnerships Point/CounterPoint How Many Bottom Lines do MFIs Need? Centerfold Renewable Energy Partner Index

Connections & Partnerships: Extending Credit “Plus” Services for a Complete Solution

A bimonthly publication from Intellecap

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“To desire and strive to be of some service to the world, to aim at doing something which shall really increase the happiness and welfare and virtue of mankind, this is a choice which is possible for all of us; and surely it is a good haven to sail for.” Henry van Dyke

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proudly acknowledges the support of the Swiss Agency for Development and Cooperation throughout the last year Through our partnership with SDC, Microfinance Insights has been able to transform into a holistic brand, building knowledge and networks around the world. We wish to express our gratitude for SDC’s guidance and encouragement as we work to build sector knowledge and magnify the voices of South-South stakeholders. You have allowed us to truly set sail.

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The IntelleCash Difference: • Extensively trained workforce • Efficient operations due to standardized systems & processes • 1st microfinance loan within 60 days • Branch break-even within six months • Organizational break-even within six months

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For further info, please visit www.intellecash.com or contact kartikay@intellecap.net Ph: +91 98998 18976 , +91 11 4709 3361 4

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l volume 10 l Jan/Feb 2009

Interview

Let there be Sunlight

Harish Hande & Jigar Shah

+ Water

Blue Revolution: Microfinance, 24 Water and Sanitation in India Manju Mary George

Greening Hand in Hand: Microfinance and the Environment 27 Kathleen Robbins

Cover Story Partnerships for Greater Scale and Impact How can an MFI provide more value to clients, and meet a financial bottom line? How can an MFI design a partnership to create greater impact? Our cover story explores the risks and upsides of partnerships.

Regular Features News Board

Commentary

Global Viewpoints

Centerfold

The New Frontier: Multiplying Microfinance Outcomes Lynne Randolph Patterson Perspectives from Indonesia, Afghanistan, Kenya and more Renewable Energy Partner Index

Credit where Credit is Due: How MFIs can Utilize Carbon Credits James Dailey & April Allderdice

+ Profit

Partnerships for Profit: 33 Collaborations between MNCs and MFIs that Meet Human Needs Paul Herman & Tom Willis

+ Education

All Aboard! 37 Adding New Wheels to the Microfinance Locomotive Christopher Dunford Classroom Finance: Teaching a Culture of Saving Jerilene Creado & Vibha Mehta

Microschools: Small Investment, Large Returns Vibha Mehta

Resources

Trends

Financing Exploring Value Chain Financing Mechanisms Ranjit Koshi

Survey

Point/CounterPoint

Recommended Readings and Calendar of Events Indicators on Clean Energy, Carbon Markets, Water and more Product Development, Implementation and Partnerships

Books

Book Excerpt and Book Review

Last Word

Green: The Unofficial Color of the New Millennium Leila Seradj www.microfinanceinsights.com

56 58

Should MFIs Introduce a Third Bottom Line? Stewart Craine vs. N. Srinivasan

Event Summary

Microfinance Insights Events in Nairobi, Bali and Mumbai Ranjit Koshi and Lindsay Clinton

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readers speak “Thank you very much for your generosity in hosting such a class A event. And best of luck with your foray into Africa.” Ruth Hoffman WOCCU Attendee, Microfinance Insights Launch Event, Nairobi, Kenya

“… a quick note to congratulate you on the African issue of Microfinance Insights. Fascinating issue and an amazing amount of detail packed in.”

Ian Anderson, Principal, The Parthenon Group, London, UK

“I’m at our Mobile & NFC Payment Strategies conference, and I just wanted to say a big thank you for the copies of Microfinance Insights you sent us. The edition looks great and lots of delegates are picking up copies with interest.”

Mindy Emsley, Conference Producer, Mobile & NFC Payment Strategies Conference, Budapest, Hungary, November 24-27, 2008

“Microfinance Insights is coming along very well and bringing great insight. I appreciate your team’s efforts for making it very informative yet precise and bringing out core issues/aspects clearly.”

Niranjan Sheelavant, Nirantara Community Services, India

“I have been following the articles published in the last two issues quite closely. I must congratulate you for the very nice work done. To fellow students like me for whom it’s such an uphill journey, the magazine tells how exciting the sector is. It helps in keeping our motivation levels high.” Partha Sarthi Roy, IRMA, Gujarat, India

Coming up next...

Full Results of our November 2008 Microfinance in Africa Survey now available at www.microfinanceinsights.com

Vol.11, March/April 2009

Perspectives on Microfinance in Africa Survey Report

NOV/DEC 2008 The Crunch

Microfinance and the Global Recession

Published by Microfinance Insights

Corrections: Microfinance Insights Vol. 9, Nov/Dec Issue While we spend a lot of time trying to ensure the accuracy of our publication, a few errors escaped our attention in the last issue. In the article, “Off the Streets and into a ‘Good Family’,” we should have credited Gabriel Kadidi, Head of Information at Jamii Bora, for photographs used within the article. In the article, “The Silent Tsunami: The Role of Microfinance in the Global Food Crisis,” we should have credited WFP/Rein Skullerud for the photograph of the author, Josette Sheeran. Our apologies for the errors.

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From the Editor

Microfinance + TM

Vol. 7, July 2008

Managing Editor Lindsay Clinton Editorial Team Aparajita Agrawal, Jerilene Creado, Ranjit Koshi, Vibha Mehta Advisory Board Vineet Rai, Wim van der Beek Cover & Page Design ToonPillz For editorial, contributions, subscriptions, advertisements and other queries, please contact:

Microfinance Insights C/o. Intellectual Capital Advisory Services Pvt. Ltd (Intellecap) 512, Palm Spring, Beside D-Mart, Link Road, Malad (W), Mumbai 400 064, India Tel: 91-22-40359222, Fax: 91-22-28801572

Disclaimer

The views and opinions expressed herein by authors are not necessarily those of Microfinance Insights magazine, its Staff or its Editor, and they assume no responsibility for them.

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Dear Reader, The bottom of the pyramid (BOP) population doesn’t just suffer from economic inequality. They are victims of energy poverty and environmental degradation, two things that tend to keep them poor, even as they try to make a living. This summer, our team started to explore the ways microfinance institutions (MFIs) can combat economic poverty in addition to these other challenges. We started our research by hosting a panel discussion at the Asia Pacific MicroCredit Summit in Indonesia. We based our event on the theme “Microfinance Plus,” the idea that MFIs can use their knowledge and distribution capabilities to provide products/services beyond “plain vanilla” financial offerings, in order to address all the needs of the BOP. Many MFIs are already aware of “pluses,” like financial literacy, education, health services, and microinsurance. In fact, some have already cemented partnerships to offer these services to customers. But, during our discussion at the Summit, we focused on another “plus” opportunity that hasn’t received much credence: the provisioning of clean technologies for the microfinance customer. Clean technologies are products or processes that harness renewable materials and energy sources. Solar, biogas, wind and water are all energy sources the poor can utilize to reduce their cost base, decrease their use of natural resources, cut emissions, and reduce waste. MFIs are perfectly placed to provide these products because of their knowledge of the customer and her needs, distribution capabilities and ability to scale. But, is it their responsibility? Some would argue that we’re asking too much of MFIs. Others would ask why the poor should have to worry about such things. Can’t the wealthy focus on “greening” themselves while the poor focus on getting out of poverty? Realistically, environmental degradation should not be a class issue—it should be something we all work to towards improving, after all, we are all contributing, albeit in different proportions, to its decline. Yet, MFIs are reluctant. They have enough to worry about, they say, by being answerable to their financial and social bottom lines. If bringing in a green bottom line doesn’t lend substantial profitability on its own, they’re not sure they want to make the effort. So, let’s do the math. Imagine if ten large MFIs with 100,000 clients each partnered with LED lighting companies to bring sustainable, clean lighting to 1 million people via longterm loans. Each borrower would increase productivity by about four hours each day, increasing their profits by up to 25%. Conservatively, let’s say that each of these 1 million people previously made US$2/day. Now, they are making US$2.50—producing increased total revenue of US$500,000 a day! With increased profit, each borrower can take out larger loans—paying more interest to the MFI, which leads to its own increased profitability. Not bad, for a start. Why delay offering products that could transform the energy and water landscape of more than one-fourth of the world population? In its current form, microfinance brings economic change. But, if we elaborate upon the connections MFIs have already built, we could have a revolution on our hands. We could create generations of educated children. Greener villages. Healthier livelihoods. Empowered communities. It is not going to be easy. And, MFIs can’t do it alone. At the conference, our panelists, leaders from GreenMicrofinance, Grameen Shakti, Grameen Trust, and Intellecap (the company that publishes this magazine), emphasized that the provision of new products requires the right partners. In this issue, we’ve tried to give you a snapshot of the strategic partnerships MFIs can enter into to bring more products and services to clients. From Pro Mujer’s partnership to bring health services to Nicaraguan women, to XacBank’s efforts to create a greening policy for Mongolian customers—we hope you’ll find ideas you want to pursue. Enjoy the issue,

Lindsay Clinton www.microfinanceinsights.com

jan/feb 2009

microfinance insights

NEWS BOARD 2008 MIX Global 100 Composite Ranking Released

December 22, 2008 - MIX released its annual report ranking the top 100 MFIs throughout the developing world. Indonesia’s MBK Ventura achieved the number one spot for the first year. MIX uses a methodology based on profitability, outreach, efficiency and transparency to present a picture of well-rounded MFI performance.

Food Crisis Continues to Affect Microfinance Clients

December 17, 2008 – In several developing countries, the effects of the food crisis are still being felt, and with a greater impact than the financial crisis. CGAP’s survey of 45 MFIs in 21 countries affected by the food crisis showed that over 56% of them saw their portfolio-at-risk (PAR) increase and for 40% of MFIs, expansion slowed down as clients struggled with exorbitant food prices. About 50% of MFI managers admitted that clients affected by the food crisis saved less as they consumed more of their income to feed themselves. In addition, defaults increased for 35% of MFIs surveyed. The effects of the financial crisis can only exacerbate this liquidity risk. An upcoming USAID study on the effects of the food crisis in Bangladesh, Haiti, Tanzania, and Nicaragua helps elucidate the negative implications of the food crisis on PAR.

Results of 2008 CGAP Funder Survey Released

December 12, 2008 - CGAP released the results of the first survey of major crossborder funding for microfinance. The survey aimed to help the industry understand where money for microfinance comes from, how it is used, and where it goes. It brought together information on the microfinance portfolios of leading donors and investors. The 54 funders included in this survey committed US$11.7b to microfinance, of which US$2.5b was disbursed in 2007. The six largest funders - ADB, KfW, World Bank, IFAD, IFC, and EBRD - contributed more than 50% of the overall funding.

Moroccan Microfinance Witnesses High Default Rates December 3, 2008 - Facing an increase in

microfinance insights

non-payment, the Moroccan microfinance sector is working with the government to inform borrowers and to stabilize lending and repayment practices. In 2008, the number of Moroccan microcredit customers fell by 4%. The Moroccan microfinance industry has been hit by an increase in nonpayment, with the volume of arrears up to 5%, according to the National Federation of Microcredit Associations (FNAM). Industry figures believe that the lack of strict regulations internally and client confusion between microcredit and subsidies, on the external front, have led to the current situation.

Norwegian Microfinance Initiative Launches Two Investment Funds

December 2, 2008 - Norwegian Microfinance Initiative (NMI) launched NMI Global Fund and NMI Frontier Fund. NMI will seek to empower poor people and help create jobs, wealth, and economic and social sustainability in developing countries by financing MFIs. NMI Global Fund will focus its investments on more mature MFIs in selected regions and developing countries. The NMI Frontier Fund will invest primarily in young and emerging MFIs and in the development of new financial products and services that can benefit poor and low income people. The total capital committed to both funds is approximately US$100m.

UN Advisors Group Concerned About Improving Finance for the Poor in Times of Financial Crisis

November 29, 2008 - The UN Advisors Group on Inclusive Financial Sectors, a group of 25 experts assembled by the UN to advise the organization and its member states on issues related to microfinance, recommended a course of action to UN Secretary-General Ban Ki-moon to reach 2.1 billion worldwide who lack access to the most basic financial services. Removing systemic barriers that exclude low-income consumers from the world’s financial systems is seen as a fundamental step in the process of eradicating poverty, building wealth at the national level, and mobilizing domestic resources for development.

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The recommendations focus on the role of governments, regulators, the private sector and development partners in promoting and advancing inclusive financial services and integrating efforts and resources across industry sectors.

UNCDF Launches Microfinance Fund for LDCs

November 28, 2008 - UNCDF launched MicroLead, a US$26m fund for developing savings-led market leaders for Inclusive Finance in the Least Developed Countries (LDCs), partially funded by a grant from the Gates Foundation. Leading MFIs and other financial service providers (MFIs/ FSPs) from developing countries are showing an increasing interest in expanding their operations regionally and globally. MicroLead Fund with a total contribution of almost US$20m over the period 20082013, will provide loans and grants to leading MFIs/FSPs on a competitive basis to facilitate their entry into LDCs where access to finance is most challenging. MicroLead will also have a special window for early support to post-conflict countries.

Global Partnerships, Unitus to Reduce Currency Risks in Microfinance

November 18, 2008 - Global Partnerships and Unitus, along with a number of the world’s other leading microfinance investment vehicles, have created an organization to handle bulk currency swaps. The new organization, MFX Solutions, will allow Global and Unitus to lend in local currency. Because of the volatility of exchange rates, lending in local currency significantly reduces risk for MFIs in non-dollar or euro economies. As a result, interest rates on loans to microloan borrowers are lower. The new fund is expected to leverage US$1.5m in philanthropy to make US$20m available for microloans.

US$200m to Improve Access to Rural Finance in Vietnam November 14, 2008 - The World Bank has pledged to provide US$200m to help improve Vietnamese farmers’ access to finance. The project aims to provide loans for investments in productive assets and asso-

NEWS BOARD ciated working capital needs for micro and small enterprises, providing microcredit to the rural population, and assisting the participating credit and financial institutions to render better services and develop new products. The project will increase the total investment in Vietnamese rural areas to the minimum level of VND4228b, to be provided to 90,000 economic units and 20,000 individuals, poor households, and microenterprises. It is also expected to create 150,000 new jobs for the countryside.

SKS Microfinance in India Raises US$75m in Fourth Round

November 10, 2008 - In the largest microfinance deal in the world, Indian MFI SKS Microfinance has raised INR 366 Crore or US$75m from private equity investors, in the fourth round of fund raising. Sandstone Capital, an India focused hedge fund with US$1b capital under management, has led the deal, while the other investors in this round include SVB India Capital and Kismet Capital. The funds will help SKS leverage access to commercial finance and scale outreach over the next two years.

Microfinance Rating Outlook Report 2008 Released

October 31, 2008 - ADA in collaboration with KPMG Luxembourg, released the Microfinance Rating Outlook Report 2008 meant for investors, MFIs, and development organizations to promote transparency, and sustainability of the whole sector. The report provides an overview of the state of the MFI rating market as at the end of 2007 and is based on data collected directly from the rating agencies. According to the report, 2007 saw demand within the microfinance rating market grow by 19.5% and 539 ratings were performed bringing the global grand total to 2,280. However, this growth has not been harmonious across regions. LAC and Asia regions account for 78% of the global rating market and growth is still dynamic in 2007. n

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Microfinance & the Financial Crisis Thailand Microfinance Sector Shows Resilience to Credit Crisis

December 9, 2008 - In Thailand, despite a struggling economy, MFIs are not feeling ill effects. In Thailand, inflation recently reached a ten-year high of 7.6% (year-on-year). Thus as food and fuel prices rise, borrowers may be less likely to pay back their loans, because they will have to choose between doing so and meeting their basic consumption needs. However, another reason for microfinance’s resilience is MFIs’ growing ability to combat this problem with an emphasis on savings and risk-management products such as microinsurance. As the credit crunch continues, it is possible that MFIs may raise interest rates so they can meet their costs as funding becomes less readily available. However, it looks as though this will not happen on large scale. In fact, availability of funds for MFIs looks likely to increase, rather than decrease. As investors are seeking to diversify away from traditional financial markets, many have focused their attention on microfinance.

Effect of Credit Crunch on Ugandan Microfinance

November 26, 2008 - Uganda’s microfinance industry reported being affected by the global credit crunch.The Association of Microfinance Institutions in Uganda reported that there is a general increase in costs and this could directly affect MFI’s operations and profitability. It fears that the slowdown of microfinance will leave people that depend on it in a bad situation and they could go from success back to poverty. However, the Association expressed hope that MFIs will come up with innovative solutions to survive. A few social investors are also eyeing Uganda for microfinance investment. The financial crisis may have some positive impact on the growth of the sector.

Indian MFIs May Benefit from Slowdown

November 23, 2008 - While most companies are reeling under the adverse impact of the global economic slowdown and domestic liquidity crunch, Indian MFIs seem to have a different story to tell. Global private equity players and domestic banks are now chasing MFIs to take a stake or to extend term loans if the industry trends are any indication to go by. The reasons for the trend are many. MFI clientele are now being seen as a section of society which is largely insulated from the ripples of economic slowdown. Another reason for global interest in MFIs is the maturity of the MFIs over the last two decades.

Credit Crunch Can Provide Business Opportunity

November 21, 2008 - Cygma, the new microfinance foreign exchange risk management group, believes that the current financial situation is driving people in the microfinance industry to use foreign currency hedging facilities. The organization plans to launch its FX hedging products for illiquid and difficult-to-hedge emerging markets currencies soon. Cygma explains that the volatility of currencies, especially those in frontier markets is making MFIs wary of taking on foreign currency risk, despite the fact that offshore sources of funding could be more in demand if local sources of funding dry up due to the financial turbulence.

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microfinance insights

commentary

The New Frontier:

Multiplying Microfinance Outcomes Many microfinance institutions are coming of age. They have built strong relationships with borrowers, established networks in their regions, and mastered the provision of financial services to the poor. What’s next? This is no time to rest on our laurels. The new challenge facing the sector is to apply the lessons learned to other products and services, such as health services and environmentally friendly practices. Can we change the risk equation for the base of the pyramid by providing medical care? How can we utilize group methodology to educate borrowers? Lynne Patterson, Co-Founder of Pro Mujer, a Latin American microfinance and women’s development network, asks us to stretch our imaginations.

ost of the world’s microfinance clients are women who are striving to give their children more opportunity. Women’s desire to provide better lives for their children has fueled the success of microfinance institutions the world over, as women work hard to increase family income through their micro enterprises. They repay their loans on time and use their business income to keep children in school and to improve the well-being of their families. However, over the past two decades, Pro Mujer has learned that financial services are not a panacea for the complex problems that impoverished women face. Helping women is not just a matter of giving them finance. It’s about how you do microfinance. It is about what happens before, during and after you give a woman a loan that can enable her to change her life. Breaking the cycle of women’s impoverished expectations requires educating them about their own value and potential and showing them that they can succeed. Pro Mujer’s Country Director in Nicaragua, Gloria Ruiz, knows firsthand what it is like to grow up poor and female in Nicaragua. She watched her mother sell medicine all day and then come home to housework, while her father rested in the hammock. She could not understand how her own mother would turn over the income she earned to her father and let him make all the decisions, including denying Gloria an education. Fortunately, she earned scholarships and graduated from the university with a degree in agriculture. Eventually, she came to work with Pro Mujer. The women Pro Mujer works with in Nicaragua are not just fighting poverty, they are fighting their own culture, Gloria says. She explains: “They live in poverty and are subverted by a machismo culture so ingrained it is almost genetic. They have very low self-esteem; they can’t love themselves. If a woman has very low selfesteem, she doesn’t know her rights. She doesn’t

microfinance insights

access health services to take care of herself. The businesses they start tend to fail because they don’t have the confidence needed to move forward. As long as men are the ones who have all the opportunities and the women are left behind, there will never be development.” The Power of a Peer Group Microfinance institutions can take advantage of their frequent and regular contact with women to educate and encourage them to take more control over their lives. Village banking and group lending methodologies provide opportunities for women to learn from each other and practice leadership skills. They enable women to develop the self-confidence to stand up to domestic violence and abuse. Simply being part of a group provides a safe place and social support system for women who are not aware of their rights, but all too often accept things as they are,

rather than try to change them. Women-led institutions send a powerful message to other women, as does hiring women clients and then training them to be loan officers or health educators to take on more responsibility. This shows women that they too can aspire to positions of leadership. Adela Hualuque, for example, is a former client of Pro Mujer in Bolivia. She took her first loan in 1994 for her textile business. At that time, she says, “I was too timid to speak in front of others.” But she was excited about Pro Mujer and she recruited many of her friends to join the group. Pro Mujer saw her passion for helping other women and hired and trained her to be a loan officer. Now she supervises a busy neighborhood center in El Alto. “Now I interact with others all the time.” Like Gloria Ruiz, she is very aware of the obstacles women face and she is determined to change the way they think about themselves, too.

Adela Hualuque became an empowered woman through her group interactions, and was eventually recruited by Pro Mujer.

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commentary Thinking like a Businesswoman Microfinance institutions can offer women clients the opportunity to understand the cost of credit and to avoid over-indebtedness by learning to assess their ability to repay the loan with interest. They are in a perfect position to teach clients how to borrow prudently, to manage their debt, and to save. At Pro Mujer, clients approve each other’s loans and are the first to point out to group members when they are requesting loans that exceed their ability to repay. This policy protects both the institution and the clients as it reduces risk of arrears due to over indebtedness.

“Women’s destiny is linked to their biological nature. However, many women are ignorant of good health practices and don’t know how to prevent illnesses through improved hygiene, nutrition, and primary health care.” Access to credit does not guarantee the best use of credit. Many women borrow and repay small amounts of money without improving their businesses. And, not all women are entrepreneurial. Therefore, women need business skill training to manage and expand their businesses and to identify more profitable business opportunities. Pro Mujer requires that women think through a business plan prior to receiving their first loan. During this process women compare businesses and many realize that some are much more profitable than others. As a result, they begin to take into account all their costs, including their time, and start to make more business-like decisions about how they can reduce costs and increase income. In some cases, this means starting other businesses that are more profitable. Gains Disappear without Health Services While more and more microfinance institutions are offering business and financial education, few are combining financial services with health services. As a result, it is not uncommon for illness to erase client gains in an instant and wipe out both livelihoods and savings. Microfinance institutions are well positioned to offer health education and health services directly or via alliances with public and private health services providers. Women’s destiny is linked to their biological nature. However, many women are ignorant www.microfinanceinsights.com

of good health practices and don’t know how to prevent illnesses through improved hygiene, nutrition, and primary health care. Because health services are costly and often inadequate, they don’t use them for themselves or even for their children. Pro Mujer uses group repayment meetings for health education in such basic topics as the importance of hand washing prior to eating and food preparation. Specialized staff, doctors and nurses provide health education and some health services depending on the local health infrastructure. For example, in Nicaragua, where the primary threat to women’s lives is cervical cancer, Pro Mujer doctors and nurses provide pap smears. Almost 10% of the women receiving pap smears were found to have malignant tumors which were treated through alliances that Pro Mujer forged with private health services agencies. The percentage of clients insisting on pap smears is growing annually as women see others being treated. In Bolivia, all clients pay a small fee that makes them and their families eligible to receive primary health care at Pro Mujer clinics; and in Peru, all health services are outsourced to public and private providers. While the strategy varies from country to country, based on the health infrastructure of the country, the goal is the same: to ensure that women and their families are accessing quality health services. Maximize Alliances Across Sectors Because microfinance institutions have limited resources, they can maximize their impact through alliances with the public and private sector. Pro Mujer works with the ministry of education in Peru to provide daycare for clients’ preschoolers, with Microsoft and Hewlett Packard in Mexico to provide computer training for clients and their children, with universities to provide legal services, and with a host of public and private health services providers so that clients can maintain their own health and the health of their families. These alliances provide essential services for women that the MFI can’t

deliver alone. Today the challenge is not so much the provision of financial services to the poor. Many institutions are doing that well. In fact, banks and non-traditional players are entering in droves as lending to the poor has proven very profitable. The challenge facing us now is how to apply the lessons learned to other sectors, such as health services or the environment. Microfinance institutions make ideal delivery systems for other services, especially for health services. Due to their on-the-ground knowledge of rural, impoverished communities, MFIs can take the lead in advocating for service providers to look at this market. Can health services be scaled up to become as sustainable as financial services? Are there business opportunities for clients to earn a living selling products, such as medicine or solar cookers? We won’t know until we try.

“Pro Mujer works with the ministry of education in Peru to provide daycare for clients’ preschoolers, with Microsoft and Hewlett Packard in Mexico to provide computer training for clients and their children...” The New Frontier As microfinance becomes part of the country’s financial system, it is important not to lose sight of its original purpose: to alleviate poverty. Getting a loan from Walmart to buy an appliance or from a teller’s window at a bank is a very different experience than that of being a member of a communal association that meets in a neighborhood center where clients have access to other services. MFIs can play an integral role in directing the attention of new players, and helping them understand how to work within these communities. This is the new frontier and innovators are already developing the business models and strategies that will bring complementary services and products to the poor at affordable prices. n

Lynne Randolph Patterson is the Co-Founder and Director, Pro Mujer International in New York. In 1990, Patterson moved with her family to Bolivia where she joined forces with Co-Founder Carmen Velasco to develop training programs for women receiving donated food. Since then, Pro Mujer has grown into a multinational network that includes branches in Nicaragua, Peru, Mexico, and Argentina. In addition to their microfinance services, Pro Mujer is well-regarded for its added-value education and health initiatives. For more information about Pro Mujer and its projects, please visit www.ProMujer.org.

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microfinance insights

interview

Let there be

Sunlight:

A Corporate Solar Leader and a Rural Electrification Entrepreneur Shed Light on the Future of Solar Energy for the Bottom of the Pyramid

A renowned visionary committed to renewable energy, Jigar Shah launched SunEdison in 2003 based upon a business plan he had developed in a university class. That plan became the basis of the SunEdison business model: Simplify solar as a service. This model changed the status quo, allowing organizations to purchase solar energy services under long-term, predictably-priced contracts. Today, the company is the largest solar energy provider in North America. Dr. Harish Hande has also changed the solar landscape, but his sights are set on the rural electrification market in India. Through his company, SELCO-India, based in Bangalore, he has created India’s first rural solar financing program, utilizing the networks of regional rural banks. Hande has worked on a large number of rural and urban health, education and water-related projects utilizing the power of solar energy. Microfinance Insights interviewed these two leaders to find out what is driving the growth of solar energy, how to meet the energy needs of millions of poor dark households, and what the future holds for this untapped resource.

icrofinance Insights: You both developed the idea for the companies you founded within an academic environment. Mr. Shah, your company owes its origin to an idea that developed out of an entrepreneurship class you took in college. Dr. Hande, you were studying for your PhD when you developed the idea for SELCO. Tell us about the evolution of your companies. Who are you competitiors? Dr. Harish Hande: The idea of SELCO India came to me during my PhD on rural electrification at the University of Massachusetts. My masters and PhD thesis took me to various under-developed parts of the world: Dominican Republic, Vietnam and Sri Lanka. During my

microfinance insights

field work, I spent two years without electricity in rural India. As a result, policy and environmental issues began to interest me. SELCO began as an experiment in 1994 and it still is very much an experiment. The general notion prevailing at that time was that poor people are financially backward and energy starved; hence, my commitment towards the sector started. During the mid to late ‘90s, SELCO’s process worked to capture needs, create solutions to meet those needs, and “piggy back” on third parties to finance those needs. Besides Tata BP Solar, I do not have many competitors at the rural level. In the semi-urban areas, my competitors are Orb or Shell.

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Mr. Jigar Shah: When I wrote the business plan in 1999 we were in the full dotcom swing, making infrastructure companies like SunEdison unattractive. In 2003, I realized that BP Solar (where I was working then) was not going to launch my business idea and that to realize my dream I really had to start my own venture. The catalyst was a meeting I had with a potential investor who really pushed me to start. He did not invest in the company, but without his pushing and my wife’s support I don’t think I would have had the courage. GOING GREEN Insights: Why are businesses only now turning to solar power? Why do you think they have

interview waited for so long to take the “green” turn? Mr. Shah: Not only is there a realization now, I think that the 30 year dream of solar power is finally believed by high ranking government officials, high priced consultancy firms, Fortune 500 companies, and others in important decision making positions. My feeling is that this is not really a “green revolution” as much as it is a response to a coordinated set of events that include global warming, toxic chemicals/pollution affecting children in India and China, a new focus on infrastructure investment, and a deep realization by major corporations that they will be held responsible for the lifetime environmental impacts of their products.

“The biggest challenge in any infrastructure project is political will. At some point, people have to rise up and say, “I need good roads, access to affordable electricity, good sanitation, and clean drinking water.” – Jigar Shah, Founder, SunEdison

Dr. Hande: I think there needs to be a huge change in the thought process among the large corporations. For example, in the IT sector, you have buildings encased in glass that trap heat and then you install air conditioners to overcome that. Corporate giants know and care little about the environment. While designing buildings, there are so many places where you can maximize energy efficiency: cut down lighting loads by using LED and CFL (compact fluorescent light bulb) based lighting, heating of water and critical security lights can be powered by solar, you can have rain water harvesting, septic tanks and biogas plants. From an economical point of view, too, these changes are desirable. I accept you cannot have 100% solar, but there are many places where you can have an energy mix. Insights: We can reserve the debate about the motivations of “green” corporations for another conversation. Mr. Shah, can you tell us what obstacles companies face when implementing solar power? Mr. Shah: Today there are some technical challenges around trained workers, maintenance infrastructure, and other pieces -- but these can easily be overcome. The biggest challenge in any infrastructure project is political will. At some point, people have to rise up and say, “I need good roads, access to affordable electricity, good www.microfinanceinsights.com

sanitation, and clean drinking water.” These are the responsibilities of the Central Government and should not be left to the private sector alone. Insights: Dr. Hande, your model is very different from how a traditional corporation would bring in solar. How are you financing your clean energy projects in rural areas? Dr. Hande: Even with hardcore equity, we need some money for innovation, not just technology innovation, but financial innovation and process innovation. [One group we work with] is Renewable Energy and Energy Efficiency Partnership (REEEP), an organization based in Vienna, that works with governments, businesses, industry, financiers and civil society across the world in order to expand the global market for renewable energy and energy efficiency technologies. Simply put, REEEP provides us with money to experiment. In a typical finance scenario in Karnataka where MFIs [largely] do not exist, we have to deal with regular financial institutions. There is hesitancy on the part of these institutions to lend money. For example, Regional Rural Banks (RRBs) say that they need to collect 15% down payment from the end user according to Reserve Bank of India (RBI) regulations. The end user, owing to his economic condition, finds it difficult to pay this margin money. So, we submit that 15% as the guarantee money with the bank. We then ask the bank to increase the monthly installments for the first one year so that we can recover our margin money in that time and remove our guarantee. After that one year, we can give that money to another 100 clients—by using that 15% margin money, I am leveraging 85% out of financial institutions. That 15% margin money is provided by REEEP. Here you are not only enticing the end users, but also forcing the financial institutions to create a renewable energy portfolio. SUPPORT FROM THE POWERS THAT BE Insights: Mr. Shah, what in your view can government/institutional support do to promote solar at a larger scale? Mr. Shah: The first thing they can do is to stop promoting pilot programs. India, OECD (Organization for Economic Cooperation and Development) governments, and others have promoted pilot programs for over 20 years. In fact the IFC (International Finance Corporation)

Dr. Harish Hande is bringing light to rural India

has issued a report remarking on 10 years of pilot programs. At some point, pilot programs are an excuse for not making a decision to support the only technology that can be used in every region and corner of the country—solar energy. My sense is that most countries now realize this. Energy imports, energy security, fossil fuels, technical expertise (of which solar requires very little), local job creation, and lower pollution will trump the influence of the traditional fuel industries over the next five years. Dr. Hande: We are still basking in the glory of the fact that [India] is the first country to have a separate cabinet for ministry of nonconventional resources, but what after that? We have created a mechanism to disperse capital subsidies; we are subsidizing a capital good that already exists while not creating appropriate mechanisms for other linkages to develop: like sound financial systems, awareness, skill set training for technicians for after-sales services. All these things are parts of the chain. What has been done however is that one linkage is constantly being fed, while the other linkages continue to become weaker and weaker until the chain breaks. If the government could step in, remove subsidies and allocate them to the financial and microfinancial institutions to reduce the rate of interest, over a period of time, these institutions will be in a better position to disperse this money. Solar bill 2001 was tax free, but now if I have to send a technology from Bangalore to a poor street vendor in Gujarat, she pays 4% Value Added Tax (VAT), 12% Central Sales Tax (CST), 3% Octroi, making it 18% more expensive for her. Why does she have to pay all this? To replace kerosene, which is already subsidized? You are penalizing the end user for getting away from

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microfinance insights

interview kerosene. This is the time for financial institutions to come forward and play a big role. Agricultural revolution in this country owes it to the appropriate financial models. Time we did something similar in the energy sector.

“My argument is that you cannot push technology down people’s throats. It defeats the whole purpose of microfinance and insults the intelligence of the end user.” – Harish Hande, Founder, SELCO

BRINGING SOLAR TO THE POOR Insights: What potential does solar energy hold for millions of dark, poor households, especially in the developing countries? Are partnerships with MFIs to deliver energy services a solution? Mr. Shah: If you look at rural electrification efforts in the 20th century in the OECD countries and today’s efforts in India, all of these programs are supported directly by the Central Government. Once the decision to provide electricity to the people is made by the Central Government, MFIs would be a great way to ensure that the solar products are delivered and payments are received (according to the value created to consumers) in an efficient manner. One should not substitute the responsibility of the Central Government on rural electrification with the use of market forces to do it as efficiently as possible. Insights: Agreed. But, Dr. Hande, you work directly with the rural market. SELCO collaborates with banks, NGOs, MFIs to ensure smooth credit flow and access to solar technology for the rural poor. How does your partner-

Mr. Jigar Shah thinks MFIs can ensure solar products are delivered and payments received

microfinance insights

ship model work and what challenges do you come across in the process? Dr. Hande: From the day we started, we have taken the rough course. Our partners in Karnataka (a state in South India) have been regular financial institutes like the regional rural banks. We have a strong due diligence mechanism and would like to collaborate with MFIs that have a very strong financial advisory mechanism and work on need-based loans. However, we still do not have that confidence in most MFIs. Many MFIs come to me to buy 50 two-light systems. On being asked if they have the relevant clients to cater to, they say, “When we have the loan product, people will come and buy it.” My argument is that you cannot push technology down people’s throats. It defeats the whole purpose of microfinance and insults the intelligence of the end user. You can decide what proportion of your products will be devoted to solar energy, but leave it to the end users to decide what products they choose.

but with a passion to solve it. No amount of Google searching can help you find the people you would need to work for, be it cricket bat makers or silk farmers. What excites us most is to find out how we can fit the missing links, be it through finance or technology. Our belief is that if your client is not able to afford your product, then you have the wrong product. The challenge then is how to make it affordable by changing the technology, or the product, or the financial model. Many people fear meeting these challenges, quoting transaction costs and service delivery barriers, etc. as the reasons. My question is, if we don’t do it, then who will?

Insights: Why aren’t we seeing more MFIs offer clean energy products to their borrowers? What are the risks MFIs face while dealing with energy lending? Dr. Hande: The basic risk for MFIs anywhere in the country is to ensure after-sales services of the suppliers. Because this is a new field for them, their entire credit portfolio can go wrong if they make one wrong decision. I would strongly advise MFIs to create partnerships with energy providers rather than to have a supplier relationship with them. In the former case, you are able to convince your partner to develop loan products better suited to the needs of the end users. MFIs also need to be very careful of the products in the market, especially those provided by fly-by night operators. After all, the end user will blame the MFI, not the service provider!

– Harish Hande, Founder, SELCO

Insights: Your end users are a selection of silkworm farmers, flower pickers, migrant cricket bat makers. These are people who would conventionally rely on kerosene lamps or battery operated lamps. How does one bring about a behavioral shift in this segment to adopt solar technology and in banks/MFIs to finance such innovative projects? Dr. Hande: As a student, you sometimes get up from bed at four in the morning for there is a mathematical problem that you have not been able to solve, and you get up not with dejection,

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“What bothers me about MFIs and other financial institutions is their credit structure. A 17% interest rate over a period of 15 months for a product as costly as solar makes it practically unaffordable for the poor.” If you look at a woman whose livelihood rests on making baskets and she needs light for two hours a day, the challenge is in tailoring our system to meet her needs. The transaction costs may be high the first time, maybe even the second time, but after several attempts I would have created a cookie-cutter model. For the cricket bat makers, the innovation was in the refinancing of the margin money and making the cricket bat makers bankable for the local financial institutions. And while designing the technology took us just five minutes, making them bankable took much longer. What bothers me about MFIs and other financial institutions is their credit structure. A 17% interest rate over a period of 15 months for a product as costly as solar makes it practically unaffordable for the poor. Technology is often blamed as too costly, but it can be made affordable if the loan term is increased. You do not have a housing loan spread over 15 months; similarly, this [kind of product] has to be looked at from a longer time perspective. THE RIGHT PRODUCT, THE RIGHT REACH Insights: How do you ensure that your products are developed and used effectively? Dr. Hande: To date, a lot of people have come

interview to us with solutions, and expected us to fit the problem to it. That makes the process cumbersome: you’re developing a product and then you’re searching for the segment of society it can cater to. But, we partnered with MIT D-Lab and Colorado State University so that we would identify a problem or two and a certain number of students each year will be working on finding solutions to those problems at MIT. Looking at the seriousness of these problems, I would expect 90% of these students to be graduates and post graduates. For example, if you look at vending cart pullers, they need to prevent their stoves from falling while going downhill. There are so many of them, millions, but no one pays attention to their problems. We have developed LCD screens and iPods, but we cannot develop a cart for a vendor to safely transport her snacks, a better cook stove that uses less wood, a better lighting system to save her from rain! There is a lot that has been done with cook stoves, but our tests on them for the last 10-11 months show they are no good. People have designed these stoves with a “one size fits all” approach without looking at what the needs of the people are. For example, people do not want to give up on their wood-based stoves; they want the smell of wood in their rice. How then do we design stoves that maintain a certain proportion of wood, are made specifically for rice or wheat, and are ideal to cook for four or six people? We posed the problem these vendors face to the [MIT] students, and they worked for eight or nine months, at the end of which they came up with an impressive design. We will be prototyping it by January, and developing it further. Insights: What does your after-sales service entail? Dr. Hande: We try to generate awareness at all levels of our work. For example, we work with the SEWA bank in Ahmedabad and give demonstrations of our stoves in religious institutions like churches and mosques. Then a woman who is using the system for the last few months gathers 30-40 women and shares her experience with them. Similarly, when any of our technicians go to repair a system, he ensure he does it in the presence of 30 other women so that they understand the technology works. THE EFFECT OF FUEL PRICES Insights: We’ve been watching the price of www.microfinanceinsights.com

fossil fuels rise and fall recently. How does the movement in the price of fossil fuels affect the demand for, and ultimately the investment in, solar energy products? Mr. Shah: This is a common myth. It is true that as prices go up, people feel more scared and this causes them to be more open-minded toward solar power. However, the majority of the cost of electricity is really tied to investments made in the past and so our financial analyses for our customers won’t really change substantially with the fuel price changes we have seen. Dr. Hande: I would say more than the price, it is the inability of conventional fuels to reach 60% of our population that contributes to the success of solar. Solar is expensive for the rich and affordable for the poor, because the rich have access to subsidized sources of energy anyway. As I mentioned before, to design solar products for the rich is like compensating for their inefficiency. Insights: How can solar energy sources penetrate markets already ruled by coal and natural gas? Mr. Shah: Solar receives 90+% approval from the general public in every survey. The question is about the criteria used for decision-making. For most government officials, the installation of a $US4bn coal plant is easier than trying to use that money to provide loan guarantees to MFIs to support the electrification of all 100 million rural households in India without adequate electricity today. When you have a central coal plant, you can also more easily avoid the democratization of electricity. Powerful individuals control the coal, transmission lines, and other key infrastructure. No one except the home owner controls the electricity coming from their own roof. Insights: Dr. Hande, how do you measure the economic and social impact that SELCO’s presence has had on rural households? Dr. Hande: I am very surprised by the impact. Even today, if someone tells me a person bought a two-light system, I am in awe. For so many of my clients, it’s equivalent to two years of their salary (US$300-325). In the parts of the country where we operate, [this purchase] is the second most expensive thing, after their hut itself. If it does not work for them, it’s the difference between getting lunch and not getting it. During one of my visits in Karnataka, a little girl came to offer me tea. Her father asked me if I re-

Vegetable Sellers Using Solar Lights

membered her. He said, “This is the girl, right before whose birth you had installed the solar light in our home. So, she was delivered, not under a kerosene lamp or a candle, but under your light.” In the months of March-April, so many parents call us to say, “My son/daughter has passed the exam only because of your solar light.” So many kids do not know that any other light except solar exists. We started operations in the early ‘90s, so an entire generation, especially in Karnataka, grew up believing that solar was the only source of energy. That to me is our success! SOLAR TRENDS Insights: What are the trends in the solar sector? What figures do you predict for solar in the next decade? Mr. Shah: Our expectation is that solar will reach 1% of total energy globally by 2015 moving towards 3% by 2020. From there, it should increase 1% per year until 2050, when it will reach 33% of global electricity production. This does not mean that any existing power plants have to be shut down. The commitment has to be to use zero-emission electricity generation sources to meet 100% of incremental electricity needs after 2015 -- the same commitment called for by Dr. Pachauri from the United Nations Intergovernmental Panel on Climate Change. Dr. Hande: Do we have a choice but to switch to solar? I remember 15-20 years ago, people would say, “Oh, solar is for the future,” and “the costs have to come down,” not realizing that the alternate sources are already expensive. Forty four percent of households in Karnataka do not have electricity. Decentralized energy supply seems to be the only option if we have to get them out of poverty. n

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cover story

Partnerships for

Greater Scale and Impact

After several decades of developing and refining MFI operations across geographies, there remains broad scope for the creation of a diversified product portfolio with greater customization to client needs. How can an MFI provide more value to clients and meet a financial bottom line? How do you design and execute a partnership to create greater impact? Manju Mary George, Vice President of Business Advisory at Intellecap, explores the risks and upsides of partnerships and offers examples of successful bottom of the pyramid initiatives.

here are nascent efforts by select MFIs to direct their credit towards alternate developmental needs such as water and sanitation, and household energy infrastructure. But the majority of institutions still offer the usual: a US$200 income generation loan repayable in 50 weeks. Even in a dynamic and fast growing global market like India, 70% of microfinance loans are of this type. In comparison to India, the neighboring market of Bangladesh is producing leaders like Grameen Bank and BRAC, which are experimenting with projects that address holistic developmental needs of low-income segments. In order to provide value to clients, what should MFIs do, how much should they

diversify their activities and loan products, and when and how should they do it? Growth Trajectories When compared to mainstream business strategy and diversification, MFIs hardly seem to behave any differently. Traditionally, businesses go through three distinct phases in their business model and product evolutions (see Figure 1): • an early stage “institutional focus,” where a company designs and implements a business model, scales it up, and reaps efficiencies of standardization; • a middle phase of “product focus” when a company leverages its existing infrastructure

to deliver a more diversified product portfolio; • a “client focused” approach where business and product strategies are informed mostly by client needs and preferences Giants like Virgin Records, General Electric, Starbucks and Google demonstrate that standardizing a company’s “plain vanilla” offering lends stability to a corporation as it scales up and builds a client base. Should business development be any different for MFIs? Yes, say those who believe MFIs should grow slowly, and provide a diversified scope of products to a core group of customers, e.g., BASIX in India. No, say others who Photo: Nicoline Hermans

microfinance insights

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cover story think MFIs should reach out to a large clientele with a standard product and then diversify their product portfolio through their alreadyestablished delivery infrastructure, e.g., SKS in India. Why does an MFI need to diversify? Even as we debate the timing of product diversification and the role envisaged for an MFI, almost all stakeholders can agree on the inherent benefits of product diversification, seen from both the developmental and social lenses. A microfinance customer is often deprived of basic financial and developmental services and most vulnerable to financial risks. These clients seek a more holistic service delivery from MFIs and to that extent need multiple credit products—for consumption, for asset creation, for investments in working capital. They have additional financial service needs – savings, insurance, micro pensions. In urban areas, for instance, low income segment populations might have better job opportunities than their rural counterparts but will need credit for lump sum payment requirements such as for housing, education and water and sanitation solutions. Clearly, an MFI that tries to address these multiple needs will have a higher chance of creating client loyalty. At the same time, the MFI benefits from greater client retention and a beefed up financial bottom line as new revenue streams open up. While horizontally scaling operations with a single product remains an option, this strategy seeks up-front investments into activities such

Figure1: Typical phases in business and product evolution Phase1 Focus

Institutional Standardize business model and scale up

Phase2

Phase3

Product Diversify products and leverage infrastructure

as creation of new infrastructure, management bandwidth and technology. In comparison, product diversification often helps an MFI deepen its relationship with its existing clients and geographies with minimal incremental investments into infrastructure, hence reaping cost efficiencies. Moreover, as competition stiffens, MFIs will need to differentiate themselves. As liquidity available to MFIs reduces due to the global financial crunch and operating costs increase due to rising inflation, MFI margins will come under pressure. Many MFIs, especially those that have received external equity investments, and hence have growth and return obligations, will be forced to adopt value-enhancing measures such as increasing interest rates or seeking new product lines and revenue streams. Creating value through partnerships Strategic alliances or partnerships are often adopted as growth and value creation measures by many corporations. Taking a cue, MFIs can explore partnerships that have business and social value. The operational domain of an MFI—the rural and urban poor—is increasingly becoming a customer segment for corporations and social enterprises seeking market expansion

Client Design client-led business and product strategies

and local enterprise development. Forging complementary partnerships with a company experienced in supply chain management, marketing and distribution can provide greater value for clients at minimal costs while enhancing social impact. Such partnerships help the MFI reach a larger client base, and the supply chain linkages created by the partner mitigate the credit risks among relatively new clients. In such a scenario, an MFI needs to see itself as being part of a larger ecosystem—a supply chain which can better address the client’s needs and create two sustainable businesses in the process. Partnerships designed to explore complementarities between MFIs and other business and developmental mandates are relatively nascent in their operations. Clearly, more concrete insights will emerge while implementing these partnerships. Select examples from around the world are discussed in Box 2. The readiness checklist While external factors such as competition and stakeholder expectations could be major drivers for product diversification, it is important to ensure that the decision to diversify is well aligned with the institutional mission, business

Box 2: Select Global Examples of MFI Partnerships for Greater Value Creation Partnership

Geography Focus area and nature of partnership

Grameen Bank and Danone Foods

Bangladesh

• Nutrition - In addition to making a nutritional yogurt available to microfinance clients, it seeks to create multiple supply chain jobs at the processing plant: micro farms supply raw materials and Grameen ladies are involved in direct marketing of the product. Grameen Bank offers working capital financing; Danone provides technical expertise; and GAIN, an NGO, leads the social marketing efforts. The partnership is coordinated through a new legal entity, Grameen Danone Foods.

Grupo Bimbo and FinComun

Mexico

• Food retail - FinComun will offer microcredit and insurance services to the baking company’s distributor network. In a parallel pilot, Bimbo shopkeepers will be trained as FinComun correspondents to sell insurance policies, collect small loan payment, provide information to microfinance clients and in the process, augment their income.

British Petroleum (BP) – Swayam Shikshan Prayog (SSP) and Covenant Centre for Development (CCD)

India

• Household Energy – BP supplies smokeless, low cost cooking solutions and Adharam Energy Private Limited, a company established by SSP and CCD distributes it via a network of women entrepreneurs called Jyotis. SSP and CCD provide working capital to the Jyotis. In addition, SSP augments the business development skills of the Jyotis.

CREPA and SODECI

Côte d'Ivoire

• Water - In three neighbourhoods of Abidjan, CREPA Côte d’Ivoire, an NGO, partnered with SODECI, the public water utility, to enable poor households to connect to the network. CREPA pre-finances the connection fees for the clients as a loan.

www.microfinanceinsights.com

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microfinance insights

cover story plan, and internal capabilities. There should be clear buy-in from the MFI team to design and implement a partnership. While the developmental origins of many MFIs and their “high touch” model can prove to be one of their greatest strengths in being effective partners, it is equally important to ensure adequate commercial acumen exists within the organizational structure and staff, especially as it deals with corporate partners. On an operational level, it is important to ensure that the MFI can make institutional resources available to support the partnership, including managerial bandwidth, human resources, financial and intellectual capital. The design considerations The period of design and initiation of the partnership will form one of the most important phases in the entire process. This phase should help facilitate the evaluation of strategic benefits for each party and estimation of resources to be deployed. Each partner should also take stock of the risks during this phase. Choosing appropriate domains or projects to work on is critical. Partnerships should build on existing delivery infrastructure, domain expertise and appraisal abilities of MFIs. Beyond the alignment of institutional objectives and potential business and social benefits of an idea, it is important to decide on a scope that is feasible and manageable between the two partners and their internal capabilities. A second aspect to be evaluated is the project’s leverage potential – can this partnership be replicated and scaled up across many more geographies? Can the learnings be used to build on further projects and are there supplementary benefits such as personal development for the MFI and partner’s team? If one were to sequence potential diversification options, product ideas that have direct or indirect income generation implications should ideally be prioritized. For instance, a new loan product to a farmer or a micro entrepreneur supported by a partner that does business (procures or supplies)

Why partnerships?

• Realize faster growth and enhance business value and social impact • Foster innovations • Exposure to new skills, viewpoints • Validate MFI competencies, strengths • Realize long-term vision

microfinance insights

with them seems a better focus area than offering financing for a pure consumptive purpose. It is important to define the right roles for the MFI and its partners. Most often, corporations and other players trying to reach out to rural areas perceive MFIs as the “last mile” for delivery of their goods and services. Initiatives that perceive MFIs to be “distributors” of their products often show lesser chances of scaling up than those that see them as “financiers.” The former approach places excess and unfamiliar demands on MFI manpower and distracts it from its core business, while the latter plays on the MFI’s core competence in community mobilization, simple, client-friendly lending and collection processes. As demonstrated in business and early measures by MFIs, partnerships can take multiple forms including strategic alliances between two independent entities or joint venture structures with co-ownership by partners. Hindustan Unilever’s alliances with multiple Indian MFIs and the partnership between Bimbo and FinComun in Mexico form examples of the strategic alliances, whereas Grameen Bank’s joint venture with Danone Foods follow the latter approach. The choice should be made post evaluation of multiple factors such as the extent of trust and the tradeoffs involved in achieving institutional objectives and goals. Adequate market research is an integral part of new product development. Even while MFIs enjoy a close association with their clients, it is critical that they evaluate the client needs and preferences especially when introducing new products. The risks Product diversification and partnership strategies are not without risks. Geeta Goel, Grants Officer of Michael and Susan Dell Foundation, states “Many loan products that MFI clients need, for instance, for purchase of water and sanitation solutions by a corporate provider, go against the DNA of traditional microfinance – they are not direct income generating assets. Given this, will they be sustainable?” They may need concessional support of risk underwriting mechanisms at least in the early stages of their introduction. If effectively designed, the model itself can incorporate risk-mitigating measures. For instance, loans towards vocational skill training is of a consumptive nature and new and risky to the MFI, but an employment guarantee

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and payroll deduction by the partner can act as risk mitigants. There can be risks in execution as well. “Inadequate senior management commitment or worse, internal resistance from people promoting existing products can dampen a partnership,” says Siddhartha Chowdary, ACCION’s Country Head for India. Inadequacy of internal systems such as Management Information systems to support new products poses an additional risk. An ecosystem facilitating partnerships While the MFI and its partner form the core of the partnership design and implementation, many other actors in the larger ecosystem will have supplementary roles to play in ensuring scale and success. MFIs often mention commitments around time, financial capital and intellectual capital and resultant trade off with their institutional scale as constraints to taking up new projects. Additionally, the risks of a new product and the lack of buy-in from on lending partners such as banks makes new product adoption less attractive to MFIs. Collaborations with third party technical partners and financial assistance that helps design, pilot and monitor new products and partnerships can help MFIs, especially those with non-profit origins. Funders who provide guarantee support for new products, hence improving the confidence of on-lending banks can play a crucial role. Further, government and policy-making bodies can devise measures that help facilitate effective partnerships. Channeling its development budgets to create effective financing mechanisms that underwrite the risk of partnership activities or promote critical components such as social marketing and developing policies that incentivize financial providers such as banks to lend to such partnership activities are examples of affirmative policy actions. Partnerships present an opportunity for MFIs to create a future that reinforces business considerations and social objectives simultaneously. Those who have started experimenting with the idea are focusing on the next big challenge – scaling up. Leveraging such partnerships and synergies with partners with greater reach and presence in the mainstream, MFIs could emerge as flag bearers of sustainable financial inclusion and development agenda as opposed to being marginal financial players who got narrowly integrated into mainstream financial systems. n

global viewpoints

Microfinance plus services can take many forms. In some cases, “plus” can mean simply diversifying a product base so that customers have access to additional services. In other instances, it implies advanced thinking from the MFI to expand its message, or heed a third bottom line. We spoke to practitioners around the world who are bringing their customers new products and innovative services. One field manager is fighting the chill of Mongolian winters to establish a greening policy. A communications maverick from the Nairobi slums has created a radio show to market his MFI. In Afghanistan, microfinance has contributed broadly to peacekeeping efforts. Whatever the “plus” element, MFIs and leaders are doing their part to bring more than just finance to the poor.

Catalyzing the Use of Green Products Ulaanbaatar is the second coldest city in the world and a large percentage of a family’s disposable income goes towards energy. When families cannot afford this energy they turn to non-renewable sources, which pollute the air. Mongolia’s largest MFI, XacBank, has developed a “green products policy” to encourage energy efficiency as well as improve the standard of living among its urban low-income segment. Microfinance Insights talks to Sam Grant of XacBank about Mongolia’s market and plans for improving energy efficiency. Profile

lies in the ger districts to burn plastic and other refuse.

XacBank, Mongolia

How were the energy efficient products developed and what costs and/or cost savings are associated with them? For the population living in gers there are several energy efficiency products available that can save families significant portions of their disposable income. The stove is the centerpiece of every ger and functions as both heat source and cooking instrument. GTZ, the international development organization, has been working with local producers to craft an improved energy-efficient stove. The latest model uses Chamotte firebricks produced from kaolin clay found in the Gobi Desert. The stove optimizes the burning process through a secondary air channel. The Institute of Physics and Technology found the stoves to reduce fuel consumption by a little less than half. If every family living in a ger adopted these two home improvements total fuel consumption could be reduced by at least 580,000 tons.

Sam Grant PIA Fellow

What makes Mongolia a suitable market for energy efficient products? Inhabitants of Ulaanbaatar’s ger districts struggle each year to heat their homes and cook their food. Mongolia’s capital, in addition to being cold, poses unique challenges to controlling air pollution. Every year for the past three years, 36,000 Mongolians on average have migrated from the countryside to Ulaanbaatar. The city’s infrastructure has not been able to keep pace with newly arriving families who find empty plots of land to set up a ger (a circular domed dwelling that is portable and self-supporting). The current municipal heating grid only services 40% of Ulaanbaatar’s residents. The other 60% must burn coal and wood to combat winter temperatures that average -20ºC/-4ºF. Many families are “fuel poor” meaning they spend a large amount of their disposable income on heating and cooking. The average apartment in Ulaanbaatar uses 50,000 MNT (US$ 40.50) on heating during the winter, while the average ger uses around 150,000 MNT (US$121.70). This financial burden forces many desperate famiwww.microfinanceinsights.com

Can you explain the role of XacBank in providing suitable heating solutions? XacBank has joined with the Ulaanbaatar municipal government, BSP Construction, and our local Channel 5 to build affordable apartments

Heating a Mongolian ger costs more than heating an apartment

for 11,000 families. These apartments utilize economies of scale and offer greater insulation than a ger. The Bank is currently looking into alternative green energy sources to heat and power the remaining planned apartments. The apartments have been priced well below the market average in order to attract poor to medium income families. What roadblocks do you foresee in the widescale implementation of green products? There are three major barriers hindering the scalability of green products in Mongolia: lack of information, poor distribution channels, and prohibitive up-front costs. XacBank plans to address all three of these issues by distributing information on the availability and benefits of energy efficiency products through its extensive credit officer network. With approximately 1,000 employees, 74 branch locations, and the

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microfinance insights

global viewpoints trust of the Mongolian public, XacBank is wellpositioned to encourage the uptake of green products. Each credit officer will be trained to assess a client’s living conditions and make the

appropriate green product recommendations. FMO, a Dutch development bank, has created a training module that MFIs can use to integrate social and environmental responsibility into

their business operations. The less money our clients spend on fuel the more money they will have to start businesses or save.

Unconventional Loans Bring Clean Results Nepal depends on the importation of petroleum products and coal to meet its energy needs, but its energy demand is no where close to being met. Biogas plants are a smart solution. Besides offering a source of clean fuel, biogas reduces fuelwood consumption, provides nutrients to the soil, and utilizes human waste. Yet, biogas programs have been hard to develop on a large scale. Lack of access to appropriate loans for the construction of biogas plants is a major cause. Prakash Raj Sharma of Nirdhan Utthan Bank Limited discusses how biogas and sanitary loans can help meet the energy demand. Profile

Prakash Raj Sharma General Manager

Nirdhan Utthan Bank Limited (NUBL), Nepal You offer unconventional products like biogas and sanitary loans in addition to the usual credit services. Tell us about the loan methodology and structure. NUBL is a specialized microfinance development bank that targets the underprivileged population of Nepal. Our main loan products focus on income generating activities. However, we also provide specialized loans like biogas, sanitary, education, etc. The biogas loan was started with the intention of improving the health of rural women and providing the household cleaner fuel and rich organic manure to increase agricultural productivity and generate income. The loan is available to those who wish to establish a biogas plant of four to six cubic meters. This loan product is targeted at clients who have successfully completed the first loan cycle for income generation (“General Loan”). The biogas loan is open only for clients who have federated in groups. The maximum loan size is NPR 20,000

(US$260). The loan can be availed with collateral and without collateral. If it is obtained with collateral, the loan period is five years and if it is provided under group guarantee, then the loan period becomes shorter. The interest rate for this loan product is lower than the other products. We charge only 15% declining rate on this product. Many readers aren’t familiar with a sanitary loan. Can you tell us about it? The sanitary loan is for installing a hand pump (tube well) and/or toilet (pit latrine). The intention of this loan is to improve the health of our clients. The tube well loan is intended to provide clean drinking water and the sanitary loan is used to finance toilet construction. The maximum loan size for this product is NPR 10,000 (US$130) payable within two years. What partnerships does the Nirdhan Bank have with NGOs and other financial organizations to bring biogas and sanitary loans to clients? NUBL has been working with other organizations to promote biogas loans to clients. It has worked with AEPC (Alternative Energy Promotion Center), BSP

Biogas plants are a smart energy solution in Nepal

(Biogas Support Program), WINROCK International, Plan Nepal and several biogas companies. How do you think these partnerships help Nirdhan achieve its objectives? The partnerships have been very useful. BSP has helped us in the orientation to our staff about biogas. We have aimed to install about 4,000 biogas plants within the current fiscal year. In the initial period, NUBL worked with Plan Nepal in the eastern area where clients were provided a financial incentive of NPR 1500 to 3000 (US$20-40) to rework their toilets to generate biogas. Similarly, WINROCK played a coordinating role between biogas companies and NUBL for the promotion of this product.

Harnessing the Power of Radio As microfinance markets become more competitive, MFIs have become more sophisticated in the way they promote their products and services. Many of them are moving beyond typical methods, like posters and company t-shirts, and are using the power of radio to spread their success stories. PNG Microfinance Ltd (PML), an MFI in Papua New Guinea, launched a radio show in late 2007, that reaches the mostly rural population. A similar radio program has been started in Ikeja, Lagos by the Business Broadcasting Network in Nigeria. In a competitive market like Nairobi, where there is a new bank around every corner, radio has become a way to educate potential borrowers about the products and benefits of microfinance. Gabriel Kadidi, an entrepreneurial staff member who is passionate about media, told us about his radio show when we visited him a few weeks ago.

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global viewpoints Profile

Gabriel Kadidi Head of Information Department, Senior Information Officer Jamii Bora, Kenya

Where does the show air? Who listens? My radio show is called “Step 2 Step Moments with Kadidi” on 99.9 Pamoja FM. The show is intended to uplift and give hope to people. I air my show in Kibera, the biggest slum in subSaharan Africa, with a population to close to 1.2 million. That is where I grew up, so I understand the lifestyle. The only positive thing [about growing up there] is that ghetto life teaches you lessons no university in the world can.

members. I used my show to give hope and inform listeners about our products and preaching of peace. The membership in that branch shot up from 6,000 members to 50,000 members [in less than a year]! Jamii Bora assisted the affected members by giving disaster loans and reconstructing Toi Market which is one of biggest open markets here, that was burnt down due to skirmishes. My show has been a big success, and it has been proven from the feedback I have received since I started. We get text messages from listeners, and we have 20-30 callers during the program. Close to two million listen to the show.

Why did you start this show? It is my dream to get people out of poverty by sharing the stories of members of Jamii Bora who have actually made it through the provision of small loans to prove to others that microfinance is the way forward to fight poverty. There is no excuse not to fight poverty. I believe that God did not create poverty. All can fight it, given the opportunity.

So, the show serves as a platform to encourage people to join Jamii Bora. What kind of stories do you share on the show? I do interactive interviews by inviting guests on my show to motivate others and tell them how their lives have improved. Through my show I also realize, people do need more than just access to finance. They also need insurance, education, healthcare, housing. So, I share all these products that Jamii Bora gives during my show.

What role can media play in advancing the mission of microfinance institutions? The role of media in microfinance is very important. Since I started my show, which came along after the post-election violence that Kenya experienced [at the end of 2007 and early 2008], the Jamii Bora branch office in Kieran had 6,000

What do you envision for the future of your radio program? Since I am a journalist by profession, my dream is to start our own national Jamii Bora FM radio station. I believe this is a unique idea for the microfinance world. I would also like to make it possible for my show to be on blogs and web

Kadidi speaking to callers at the radio station

radio so I can spread the message and the voices of people and products of my organization. How has the show affected people in the slum? I was touched my show has actually had an effect on the youth in Kibera. They have transformed from committing crimes and doing drugs, and joined Jamii Bora. They have formed groups and have started doing business; for example, they have opened salons, carwash services, rubbish collection and they have become advocates of peace. I do agree with Dr. Muhammad Yunus the Nobel Prize winner when he said, “One day our grandchildren will go to the museum to see how poverty was.” I will use the media and radio to prove the same. Listen to Kadidi’s show in Nairobi on 99.9 Padmoja FM on Wednesdays from 8pm-9pm, Fridays from 1pm-2pm and Saturdays from 2pm-3pm. Kadidi can be reached at gabriel. kadidi@jamiibora.org or on his mobile at +254721-476-324/738-158-091.

Bringing Peace to the Process For over 30 years, Afghanistan has withered under the weight of civil war and foreign invasion. The most recent military intervention has not helped its economy—40% of the population is unemployed, and two-thirds live below the poverty line of US$2. Microfinance operations here are relatively new, only developing within the last decade. While they are providing a helpmeet in terms of much needed finance, they are also doing much more—giving women something to live for, and men a reason not to fight. Several microfinance institutions spoke with us about how microfinance has been used for peacekeeping in Afghanistan. We have featured one response below from MADRAC in Kabul. Please visit www.microfinanceinsights.com for additional responses from BRAC Afghanistan and the Afghanistan Rural Microcredit Program. Profile

Najibullah Samim Managing Director

(MADRAC), Afghanistan Why is it worthwhile to conduct microfinance operations in a war zone? War drastically destroys the economic and social infrastructures in any community and hence www.microfinanceinsights.com

leads to increasing needs for financial support to a specific segment of the society. In such a situation, microfinance, as a proven tool to establish a way towards the financial viability of communities, matters. Helping war-affected people get back to their businesses and use their skills to enhance their livelihoods is possible only by providing them a loan, or making them to do a small saving.

A baker and microfinance borrower in Kabul

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microfinance insights

global viewpoints Hence, in a post war country like Afghanistan, microfinance is very necessary due to the following reasons: • It creates employment opportunities for men and women and thus it is a source of income for families. • It helps in the establishment of income generating activities, especially for those who have returned home from a long migration. • If people have employment, they will not take part in war. How is microfinance changing the landscape in Afghanistan? The operational condition in Afghanistan is different than other countries in the region due to destroyed economic and financial systems, hence bringing change through microfinance takes time. But, fortunately, the social prespective and the ethical values of people have helped microfinance to be respected as the single source of financial support, because other formal financial systems, even though they are just about to get stabilized, are not sufficient and supportive for the poor. Thus, referring of people to MFIs is a social change that engages poor people with a systematic and sustainable source of finance. It also helps them get their society to a stage of financial viability, and approach local and regional markets to introduce and market their products.

Microfinance has long been promoted as a tool for empowerment and community building. What are the intangible benefits of microfinance in your experience in Afghanistan? In a quick glance, the role of microfinance in the empowerment of women in Afghanistan is considerable. Since women earn something for their families, they have more control over the family assets and thus have gained the power to take part in any decision-making of the family. In addition to that, they are more respected in the family and since they can easily take part in any social ceremony in the community, they are also more respected by the community. Their opinion and decisions are also considered in sending their children to school, etc. Their involvement in the family economy has made for a peaceful family environment. The marketing and selling of the products produced by male members of families is also one of the factors that helps males to rely on their own sources of income through self employment, rather than being attached with warlords and get engaged in war and internal conflicts. In an environment like Afghanistan where there is low-economic activity, how can an MFI reach financial viability? Even though the economic activities are low in Afghanistan especially in the rural areas, there is a huge market for microfinance in Afghanistan. One of the initiatives that enable MFIs to achieve

financial viability is to diversify their products for different segments of the market. They should tailor their products based on clients, needs. We have good examples in Afghanistan where 4 out of 13 MFIs have already reached operational sustainability in less than 4 years. What sort of operational changes have to be made in order to engage in microfinance activities in an insecure environment? As per my experience, the following operational changes have to be made: • Community elders (local community councils in the case of Afghanistan) have to be taken into account and to be involved in clients’ selection. This will ensure good repayments and in case of any default, they can help MFIs in repayments. • The loan products need to be designed and adopted based on Islamic lending principles in order to reduce the communities’ resistance against interest bearing loans. • A good guarantee/collateral mechanism should be introduced especially for larger loans. • A continuous and closed coordination between the government and MFIs to be in place for engaging the government in supporting the MFIs’ operations and staff in case MFIs face any threats.

Shariah Compliant Microinsurance As microfinance grows, so does the need to extend protection to clients—for their businesses, lives, and health. The growing field of microinsurance is continuing to see much innovation: trigger-based flood insurance in Colombia, index-based weather insurance in Mongolia, funeral insurance in South Africa, just to name a few. From Allianz to Prudential, mainstream insurance providers, seeing the potential in the bottom of the pyramid and the ready network MFIs offer, are extending their services down the pyramid. With their help, microinsurance is fast-becoming a “plus” service for many MFIs. Microfinance Insights explored the relationship between insurance companies and MFIs by asking Muhammed Taufiq Rahman at Allianz Indonesia about launching their Shariah-compliant microinsurance product. Profile

Muhammed Taufiq Rahman Head of Microinsurance Allianz Life, Indonesia

What kind of MFIs do you seek to partner with and what is your partnership model? Allianz partners with all MFIs: commercial banks, rural banks, cooperatives, credit unions, and social foundations (that operate with both

microfinance insights

shariah/takaful and conventional principles) and share our vision of providing insurance solutions to low-income households. Our model is based on the agency-partnership structure. As an insurance company, we provide the product and also the necessary training to our partners, who are responsible for all the sales, administration and even settling claims.

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Allianz Indonesia staff memebers

global viewpoints What are the advantages/disadvantages of partnering with MFIs? For Allianz, there are several advantages in partnering with MFIs. First, customer base. Most of our MFI partners have been in operation for years so they have a large customer base for us to tap into. Second, our partner MFIs provide direct promotion of our product to other MFIs. Third, administrative work becomes more efficient, since our MFI partners do almost all of it, even settlement of claims. Perhaps the only disadvantage is that Allianz does not have direct access to the end customers. For MFIs looking to expand their offerings to include microinsurance, what can you tell them about the costs and implementation? As a third party administrator, our partner will have to allocate additional resources to carry out the necessary administrative work such as pre-

mium collection, claim payment and reporting. Allianz will provide free staff training and also socialization for all of their branch offices. The whole process takes 1-2 weeks. What are the major challenges you face when working with MFIs in Indonesia and do you think these challenges can be overcome? The biggest challenge we face is that most of the MFIs in Indonesia are small, so we need to be selective in choosing our partners. There is also a lack of insurance awareness among the MFIs and the customers. Lastly, MFIs are located almost everywhere in Indonesia; not just on the island of Java, but also in Sumatra, Kalimantan and so on. This poses a challenge for us, because we need to promote ourselves at a nationwide level.

With reference to Allianz’s Islamic microinsurance product, did you enter into any partnerships for developing and testing the product? Payung Keluarga Shariah (meaning “Family Umbrella”) is Allianz’s microinsurance product, on offer for as little as Rupiah 6000 (US$0.66). We launched it in response to requests and also because we’ve already gained positive experience with our shariah insurance business. Our PKS product offers the same premium rates, benefits and follows most of the same procedures, (as the regular insurance products). The main difference is that for our microinsurance shariah product, Allianz Indonesia manages the fund collected from the premium, according to Islamic accounting and investment principles, which prohibits investments in businesses related to alcohol, gambling and so on.

Ensuring “Health for Our Families” Poorly developed and under-funded health care and education systems are the biggest challenges to the economic growth of Cambodia. Although the repayment rates are high in Cambodia, health problems remain the main concern for those unable to pay back their loans. GRET, a solidarity and international cooperation organization, observed that only 5% of Cambodians have insurance. GRET, which has multiple partners for several projects, launched an experimental rural health insurance program in 1998 to enable families to cover health care costs without risking impoverishment. The program is called “SKY,” a Khmer acronym for “Sokhapheap Krousar Yeung” meaning “Health for Our Families.” Cedric Salze, Director of the program at GRET, speaks about what prompted SKY to start operations in urban areas and what is preventing MFIs from delivering health insurance products in Cambodia. Profile

Cedric Salze Director SKY Health Insurance GRET Cambodia

What are your challenges in convincing BOP customers about the need for insurance? There are two main challenges. One is that the awareness about health insurance is very limited in Cambodia. Moreover, the level of solidarity within the village is very low; people do not trust each other. It makes asking the rich to pay for the poor, young for the elderly, and health for the sick out of question. Also, I think it is difficult to make people pay for something that may not happen at all, especially when they are so poor. This is the main reason we launched our urban insurance program, to compensate for the loss made in the rural scheme by the margins

made in the urban scheme, by facilitating cross financing. Do you think there is a rural/urban health divide? What do you think the special needs of each of these sections are in terms of insurance? Urban people have easy access to health care facilities like hospitals while in rural areas, people wait to seek appropriate health care. As a result, you invariably find a difference in their insurance needs also. That is reflected in the sales of our insurance product. We are currently catering to 75,000 people, of which 5,000 are in Phnom Penh and the rest in the Province. Two years ago, we started working in the urban areas also, but so far our main focus has been on forging partnerships, and marketing has remained a neglected area.

What role can MFIs play in the delivery of health care services? Currently in Cambodia, it is difficult to say if MFIs can play a substantial role. It is surprising that less than 5% of the people in Cambodia have an insurance product of any kind. We have contacted a lot of MFIs in the country to see how we can collaborate with them to offer health insurance with credit products. Most MFIs are young (less than 10 years) and have little interest in selling health insurance products. They feel that they do not need insurance products, because the repayment rate in Cambodia is very high. People tend to repay their loans even if they are sick. Plus, if the insurance scheme does not work well, people will complain to the MFIs and in a scenario of such high competition, MFIs fear losing their customers. As of now, MFIs seem reluctant to collaborate but we need to wait another five years to make a concrete statement. n

Credit: Photo on page 19, Tengis Bilegsaikhan Photo on page 21, Kirsten Wiess, Microfinance Insights Photo Contestant

www.microfinanceinsights.com

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microfinance insights

+ water

BLUE REVOLUTION Microfinance, Water and Sanitation in India

Every 15 seconds, a child under the age of five dies from lack of water and clean sanitation somewhere in the world.1

his alarming statistic highlights the huge unmet need for safe drinking water and sanitation (popularly known as “watsan”), especially among low-income households and communities. India, home to a sixth of the world’s poor, accounts for an estimated 700 million people lacking access to basic sanitation. A staggering 2.1 million children die each year before they reach their fifth birthday.1 A look at the supply side shows many public sector-initiated infrastructure projects that have failed to create access and quality, and many more non-governmental initiatives that have failed to achieve scale and financial sustainability. Private sector efforts, mostly limited to informal operators, provide access to solutions at highly exploitative terms. This presents an opportunity for well-designed interventions to address the unmet demand for clean water in a scalable, sustainable manner. Water and sanitation providers can draw an analogy here to microfinance, another bottom of the pyramid (BOP)-focused intervention which offers a similar middle path – semi-formal providers of microfinance have emerged as an alternative to inaccessible formal financial institutions and exploitative money lenders. It has demonstrated a working model of interfacing with low-income segments, utilizing innovative delivery models and products, and doing it all at a commendable scale with financial sustainability. This experience can provide valuable lessons for the water and sanitation space. In addition to the parallel learnings in the two fields of water and sanitation and microfinance, the high degree of overlap between their target clients presents an opportunity for direct synergies and collaborative efforts. Microfinance providers, who have traditionally focused on income generation loans, are increasingly looking at addressing their client’s infrastructure and asset creation demands as well. Loans towards creation of water and sanitation solutions could

microfinance insights

form one such opportunity. The Contours of the Opportunity Microfinance can positively support scaling up of water and sanitation solutions. Geeta Goel, Grants Officer of the Michael and Susan Dell Foundation an urban-based microfinance funder, explains, “Research and empirical evidence suggests a much higher usage and maintenance of basic services (such as water and sanitation) when there is a sense of ownership and the household has contributed (in part or whole) towards the cost of installation of such services. The microfinance platform can be suitably leveraged to allow people access to credit to make such contributions.” The ongoing efforts to integrate microfinance into watsan solutions broadly fall into two categories: one, interventions led by non-profit or community-owned organizations focused on watsan solutions or community development, and two, approaches led by for-profit businessoriented organizations seeking opportunities to diversify loan products and enhance client services.

“The water and sanitation space presents a similar opportunity to that of microfinance – to create alternative and scalable business models that reach out to millions of poor people with affordable, accessible solutions.” NGO-led Efforts to Integrate Watsan and Microfinance NGOs and community-based institutions, such as co-operatives and cooperative banks involved in developmental activities, have initiated efforts to use microfinance to increase outreach of watsan solutions. Such efforts have ranged from the provision of guarantees, the extension of revolving funds to communities, and the facilitation of

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loans from commercial banks. However, many of them remain at a small scale, often because watsan is seen as a component in a larger livelihood intervention. See Box 1 for select examples. Commercial MFI-led Efforts to Integrate Watsan and Microfinance Involvement of fast-growing MFIs in the watsan sector has been comparatively limited. However, the results of these limited interventions have been highly promising and many MFIs are exploring ways to start new pilots or implement full-scale adoption of watsan programs. For example, the outcome of the pilot launched by Water Partners International saw an overwhelming demand for watsan credit and over 90% repayment, and led to the creation of a new MFI, Guardian, focusing solely on watsan related products. Select scale-oriented interventions have taken a few different approaches - one relates to developing a flexible watsan credit product. Another focuses on developing watsan distribution chains for watsan off-the-shelf consumer products, together with a credit facility. And a third approach focuses on integrating sanitation to products such as micro Why are MFIs attractive partners? • The potential client base for microfinance, poor households, is estimated to be between 60 million to 90 million; • The current outreach of Indian MFIs stands at 10.7 million; • Indian MFIs are one of the most efficient and profitable players globally; • In the wake of the financial crisis, MFIs are increasingly looking at new product lines and opportunities to augment revenue by leveraging their existing delivery infrastructure and business models. Source: Intellecap, 2008

+ water health insurance. See Box 2 for select examples. Achieving Scale: The Way Forward Given the huge unmet need for water and sanitation solutions, “scale” is a key desired outcome of any effort that seeks to integrate water, sanitation and microfinance. Scale-oriented MFIs can bring in this key advantage and become effective partners in such efforts. Many are looking at product diversification to seek new revenue streams and deepen their engagement with their clients. While partnerships with watsan could be an opportunity for many, some scale-focused MFIs will prefer to focus on their core business of financing as opposed to taking on roles such as demand creation/social marketing, product distribution, and after-sales service. Hence, it is im-

portant to ensure that the design of such efforts takes an ecosystem approach where multiple collaborators take on complementary roles required for a sustainable, scalable intervention. Designing, piloting and implementing such partnerships often requires participation from technical and financial service providers who can work with MFIs and water and sanitation providers. The Michael and Susan Dell Foundation has initiated multiple efforts in this area (see Box 3) bringing together various actors and providing financial support in the form of grants for pilots and financial guarantees to leverage onlending funds for such loans. Business models that build on existing infrastructure and processes are better poised to achieve scale. In a favorable development, many

traditional private sector water utility companies are introducing inclusive business models focused on low-income segments. Many seem to evaluate the role for microfinance to scale up their initiatives. In India, Guardian, extends loans for procuring water connections from an existing utility. Such a model presents a great opportunity for a scale-focused, symbiotic relationship between large-scale private sector companies with financial and technical strengths and MFIs that are adept at working with banking with communities. Project scalability can improve inclusivity, either by expanding one effort to reach the majority of the target population or by replicating the project in several geographies (i.e., franchising). In either strategy, it is important to identify mod-

Box 1: Dominant NGO-led models Integrating Microfinance and Watsan in India Type/Model of Intervention

Examples

NGOs providing microcredit, mobilizing Self-Help Groups (SHGs) mic- • Homeless International / Integrated Village Development Program rosavings, facilitating bank linkages sometimes by providing guarantees (IVDP) - loans for toilets, water filters; for financing watsan infrastructure. • Water for People/ local NGO – financing toilet infrastructure loan; • FODRA (Fountain of Development Research and Action) - mobilizing SHG savings and facilitating bank linkages for financing toilets NGO/CBO led water and sanitation programs as part of bigger slum • SEWA/Parivartan in cooperation with the municipal government upgrade or livelihood-oriented goals. NGOs promoting water intervention as part of their risk management strategy

• Myrada’s risk management strategy through watershed management

Box 2: Dominant Commercial MFI-led models integrating Microfinance and Watsan in India Type/Model of Intervention

Examples

Microfinance for watsan infrastructure credit

• Water Partners International piloted watsan programs with two MFIs: BASIX and Gramalaya (and its spinoff MFI, Guardian) provide credit for any watsan-related expense between INR 3,000 – 10,000 (US$60200) (water connections, toilet constructions) • Indian Association for Savings and Credit (IASC) is supported by HDFC Bank to provide toilet infrastructure credit • BASIX in Hyderabad has initiated two pilots (one focused on household water purifiers and the other focused on a community-based purification system) with Eureka Forbes, a mainstream company that manufactures air and water purification systems

Microfinance for retail distribution, training and service provision for watsan products

• Hindustan Unilever Limited (HUL) marketing Pureit water filters through NGO-SHG networks • Gramalaya trains SHG groups in cement fabrication and brick making services to build toilets for villagers; toilets are financed by credit provided by the MFI, Guardian

Combining health insurance and sanitation

• Indian health insurer TATA-AIG and BISWA, a micro-finance company; • WASTE, a Dutch-based international environmental network; Dutch bank SNS Reaal; and Maastricht University’s Faculty of Health Sciences have come together to create a micro health insurance product that takes into account the sanitation situation of the target group to determine the applicable premiums

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microfinance insights

+ water els that can transcend geographic specificities and demonstrate scale faster. There is a need to “institutionalize” the model/s so that the system of actors and resources are available to deliver the services across geographies. Ongoing research and business-oriented technical assistance can be a critical component in this respect. Project Flows, the joint initiative by FMO, Cordaid, Intellecap and Goodwell, is one such example (see Box 4) that seeks learnings from existing pilots and proposes to design and implement business models that can achieve significant scale across the country.

“Factors holding back sanitation are widely understood; it is action that is needed.” - Asian Development Bank

In addition, the presence of meso-level financing vehicles will have a role to play in catalyzing and effectively supplementing watsan efforts focused on low-income segments. Opportunities

Project Flows seeks new solutions for India’s water problem

for support through financing include the creation of a guarantee fund to underwrite the risk of new product introduction within MFIs; an SME development fund that provides financing

and working capital for enterprises; a technology fund that supports innovative indigenous solutions, and grants for development of effective social marketing media and its implementation. These structures will effectively support a scalable integration of microfinance, water and sanitation. The water and sanitation space in India presents an opportunity to design creative solutions to a critical development problem plaguing the country, especially its poor. There is a need to build demand amongst low-income segments, leverage macro infrastructure, design decentralized supply side solutions and micro entrepreneurship models, and ensure appropriate policies and financing to support all the above. Perhaps, the Asian Development Bank framed the core issue best: “Factors holding back sanitation are widely understood; it is action that is needed.” n - By Manju Mary George, Vice President, Business Advisory, Intellecap Photo: McKay Savage

Box 3: Michael and Susan Dell Foundation (MSDF)’s Involvements in Microfinance-facilitated Watsan Projects MSDF believes that an effective model for delivery of water/sanitation services to low-income households requires a strong blend of availability of finances to households, engineering support for construction of the required infrastructure, government participation/commitment to providing the services and necessary connections, and skills on community awareness and mobilization. Guided by this belief, it has initiated different models of microfinance-enabled delivery of basic services to the low-income households in urban India. In its project with Water Partners International, MSDF worked with leading watsan NGOs and leading MFIs to facilitate microfinance loans for water and sanitation solutions. In a second pilot, it works with Mahila Housing Trust (MHT) of SEWA in Ahmedabad and Surat in Gujarat, wherein MHT effectively combines the roles of an engineer and a com-

munity mobilizer and solicits government participation and budgets. Finances to the households for their share of contribution to the infrastructure cost are being offered by SEWA Bank, in the form of savings and credit. In a third pilot, MSDF works with BISWA (a leading MFI) and USAID in Bhubaneshwar, Orissa wherein the government is a passive partner to the project in the pilot stage, but has committed active participation and budgetary allocations in the scaling up of the pilot after a successful, sustainable implementation can be demonstrated. In addition, MSDF proposes to launch two additional pilots in the next few months, where it will test a composite project, integrating the efforts of strong MFIs and some leading engineering firms.

Box 4: Project Flows – An initiative by FMO, Cordaid, Intellecap and Goodwell Flows seeks to create one or more long term program(s) or model(s) that provide water and sanitation solutions to the low-income population in India, in a manner that is demand-driven, financially sustainable in the long run and scalable to create extensive impacts. Structured into three different phases – research, design and implementation – Flows will take stock of the learnings from multiple water and sanitation pilots implemented in urban and rural India, identify (micro) financing and design opportunities to scale-focused business models and implement them. In doing so, Flows forges partnerships 1. State of Asia-Pacific’s Children, UNICEF Report, 2008

microfinance insights

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with like-minded funding agencies, water and sanitation solutions providers, MFIs and SME capital providers and other stakeholders. At the end of Phase 1 in fall 2008, Flows identified six business models – small scale water networks in urban areas, point of use water filters, decentralized water treatment plants, total sanitation programs, payand-use toilets, and ecosan (ecological sanitation) toilets with biodigesters – as areas for further design interventions for scale.

greening

Hand in Hand: Microfinance and the Environment

MFIs are adopting mobile banking technology quickly, allowing poor customers to go from 0 to 60 in their utilization of branchless banking tools. Can we do the same for alternative energy sources by transforming the poor into clean, renewable energy users? MFIs have the power to push this agenda; do they have the responsibility? Kathleen Robbins, Director of Clean Energy at Green Microfinance, shares her thoughts.

oday, the microfinance movement touches 9. Creating partnerships is crucial. Partnership the lives of over 175 million people and with stakeholders is the key to appropriate encontinues to expand, and yet organizations and vironmental protection in development. their clients rarely consider their environmental 10. Participation in project planning and deciimpact. Although the green house gas (GHG) sions is for everyone. Participation must be emission of most people in the developing world inclusive, equal and fair. is minimal due to “energy poverty,” the impact At the Asia Pacific Microcredit Summit in of this population on the environment can be Bali this summer, Professor Muhammad Yudevastating. There are three main ways in which nus said, “I see bad omens ahead; the increased microfinance clients affect their environment prices of fuel, the rising cost of food, looming and themselves: climate change, continued environmental degradation and the slowing economy all will first • Unsustainable use of natural resources hit those least prepared: the poor in developing • Pollution of the air, water and land • Disproportionate health issues and illnesses. countries.” To help guide MFIs, the Generally Accepted Environmental Principles (GAEP) were developed. These (listed in short form below) represent the combined wisdom of more than 30 microfinance stakeholders around the world. 1. The environment is a sacred trust. The earth and all its life are interconnected and sacred. 2. Addressing the human spirit is essential. Environmental and human integrity are inextricably linked. Improving inner human quality results in improving the environment. 3. All microenterprises impact the environment. Do no harm. Eliminate or mitigate negative impacts. Seek positive impacts. 4. Environmental protection makes good economic sense. 5. Creating cost-effective solutions is vital. 6. Each person is responsible. Responsibility means personal ownership and action. 7. Agencies should work with local, national and international governmental agencies to promote sound environmental practices and policies. Agencies should help people understand why the environment is important to their lives. Donors and agencies should model good environmental behavior. 8. Benefits and costs are short and long term. True costs include environmental and health costs. Agencies should identify, account for, and mitigate environmental costs. Costs of creating environmental benefits should not be borne solely by MFIs or their clients. www.microfinanceinsights.com

“We have a choice. We can allow developing countries to continue along their current trajectory, knowing that we could end up with another China. Or we can change the status quo.” While MFIs and their clients can do little about GHG emissions on a global scale, technology such as solar, both photovoltaic and thermal cooking, and biogas and biomass have become both affordable and practical for MFI clients. Using these methods can help end “energy poverty” and address environmental, sociological and health issues. Beyond that, borrowers can also use these technologies as a “productive asset” which if deployed wisely and creatively can improve the financial well-being of their family. In the past, few organizations have taken on this challenge, instead focusing on providing traditional financial products to their clients and concentrating on ensuring their organization’s financial stability. A few pioneers such as Grameen Shakti in Bangladesh and SKG Sanga in Karnataka, India have demonstrated that it is not only desirable to meet this critical demand, but also possible to address energy poverty and

the health and environmental problems created by it at the same time. MFIs such as WESCO and ESAF in India are beginning to provide their clients with clean energy options while organizations such as GreenMicrofinance are working to provide training and access to funding for such programs. Difficulty in accessing loan funds for clean, renewable energy was identified as a major barrier to the expansion of these programs at the Financing Village-Level Energy for Development in Asia Pacific Workshop held in Manila in April of 2008, and access to funds continues to be an ongoing challenge for MFIs. In Haiti, biofuel programs such as the Jatropha Pepinye have been developed using a public-private partnership to enable the poor to participate in the biofuel revolution in a country that has already been environmentally devastated. As the carbon trading market develops, programs like these may receive a significant portion of their revenue through this evolving market while providing a boost to the rural economy and addressing the environmental and energy needs of the country. Earlier this year, China became the largest total emitter of GHG (the US remains far ahead per capita), mainly because they continue to add coal fired power plants at the rate of one every two weeks. We have a choice. We can allow developing countries to continue along their current trajectory, knowing that we could end up with another China. Or we can change the status quo. Just as mobile phones have allowed people in developing countries to “leap frog” the evolutionary step of landline phones and provide communication for all, the availability of affordable, clean, renewable energy sources provides that same opportunity to jump forward towards energy abundance for all. n

Kathleen Robbins is the Director of Clean Energy at GreenMicrofinance (GMf), a pioneer in merging the environmental and microfinance sectors. GMf’s objective is to provide educational, technical, and financial services to assist the world’s poor as they transition to a sustainable, affordable, and healthy energy future. jan/feb 2009

microfinance insights

greening

Credit where Credit is Due: How MFIs can Utilize Carbon Credits

Microfinance institutions are missing out on an innovative source of finance that has the potential to help borrowers improve their quality of life and the environment by switching from traditional energy to clean energy technologies. Why should MFIs encourage their clients to use clean energy technologies? How can MFIs interact with the mainstream carbon markets? James Dailey and April Allderdice, Co-Founders of MicroEnergy Credits, explain how.

n 2007 companies in Europe purchased US$30bn in carbon credits. What does this mean? This amount of grant financing was paid to cover the gap in cost between modern clean energy technologies and traditional “polluting” fuels. The Carbon Markets were created when the Kyoto Protocol, an international treaty designed to prevent climate change, went into effect in 2005. Developed countries that signed the Protocol agreed to cap their carbon emissions by giving allowances to companies in key industries. When a company in a developed country pollutes beyond its allowance, it is legally bound to purchase a “carbon credit” from another company that has polluted less than its allowance. It can also purchase a carbon credit from a project in a developing country that uses a clean technology. Now MFIs can access this innovative source of finance to help their clients improve their quality of life and the environment by switching from traditional energy to clean energy technologies. Financing these clean energy technologies can be a sustainable product line for MFIs, and is even more attractive when Carbon Market revenue streams are considered. Clean Energy Products Can be a Sustainable Product Line for MFIs A successful example is Grameen Shakti, the renewable energy sister-company of the Grameen Bank in Bangladesh. Grameen Shakti markets three energy technologies to its clients. These are solar home systems, improved cookstoves and biogas digesters. Grameen Shakti has sold over 180,000 solar home systems to its clients in Bangladesh. These energy products enable households and microenterprises to reduce their energy expenditure on kerosene, wood and charcoal. Moreover, clean fuels avoid

microfinance insights

health problems problems caused by smoke and pollutants in the home or fire. Finally, these renewable energy technologies put microfinance clients on a path to achieving energy selfsufficiency. After they pay off their systems, clients own their own source of electricity or biogas with minimal ongoing costs, and they are insulated from common problems such as power outages or increases in fuel or utility prices. In fact the traditional energy sources that many microfinance clients depend on are in many ways part of a vicious cycle. Building a clean energy path may become an integral part of every microfinance client’s journey out of poverty.

“The traditional energy sources that many microfinance clients depend on are in many ways part of a vicious cycle. Building a clean energy path may become an integral part of every microfinance client’s journey out of poverty.” How does the Microfinance Carbon Program enable MFIs to Receive Carbon Revenue? MicroEnergy Credits is the first company to offer a complete solution, helping MFIs finance clean energy products and receive revenues from the Carbon Markets. MEC works with Dublin-based EcoSecurities (LSE: ECO), a premier carbon trading firm, to turn the clean energy investments financed by MFIs into securities known as “carbon credits” which are marketed on either the voluntary or the compulsory carbon markets. Until now, the carbon markets had focused almost exclusively on large projects, because the transaction costs associated with carbon projects were too high to justify small projects. MEC aggregates the

jan/feb 2009

Carbon credits: a new idea for MFI revenue

carbon credits from a global pool of MFIs, creating sufficient volume to reduce the transaction costs. This opens up the market for microfinance clients to take advantage of this valuable new source of finance. Other efforts in the market target related problems. For example, Energy Links, an initiative of Accion, launched in 2007, develops and documents new approaches to financing and marketing energy products via microfinance networks. They have initially focused on low cost, high efficiency LED lanterns. Another player in the market is E+Co, which invests in clean energy product suppliers in emerging markets. E+Co’s approach promotes products that MFIs might find attractive for their clients. E+Co also incorporates carbon finance in its investment package. Arc Finance is a new organization launched in 2008 with the goal of bridging knowledge and resource gaps between the energy and microfinance sectors. Arc develops innovative linkages between MFIs and energy businesses and also supports the improvement of existing energy lending programs in Africa, Asia, Latin America, and the Caribbean. MicroEnergy Credits was launched on 5 May, 2008 at FINCA Uganda where it is providing carbon credit revenues for three products including solar energy systems, energy efficient stoves and efficient handheld lanterns, based on demand for those products by FINCA customers and utilizing different suppliers. MEC is also planning to announce several new partners in Asia and Africa in early 2009. Who Should Receive the Revenues from Carbon Offset Sales? In a sustainable market, many players come together to create a carbon offset. The client purchases the product; a distributor provides equipment; the MFI provides financing; and

greening there may also be a manufacturer, an NGO and a donor in the mix. In the current regulatory environment, all or any of these players may make the case that they should receive the carbon offset. However, in every instance the choice needs to be clear because there can be no “double counting” of carbon offsets.

“MFIs may be the perfect conveyors of carbon revenues because they can easily structure the carbon revenues into high value benefits to the client such as reduced interest, longer loan terms, improved education or after-sales service.” Many programs may coexist to provide carbon finance for the market served by MFIs. For example, a supplier may work with a carbon firm to receive carbon revenues for all of their products, or a donor may work with a local or national government to provide carbon finance for a set of clean energy investments. However, MEC’s “MicroFinance Carbon Program” has key benefits in cases when an MFI is involved. MEC believes the MFI can play a critical role in “brokering” the energy product to its client base. MFIs may be the perfect conveyors of carbon revenues because they can easily structure the carbon revenues into high value benefits to the client such as reduced interest, longer loan terms, improved education or after-sales service. Since the suppliers of clean energy products benefit from the expanded market, and in some cases reduced effective cost to clients, they also benefit from foregoing their claim on the carbon revenue for these markets. Carbon revenues can be renewed every year as long as the client continues to use the clean energy product, and the MFI continues to monitor the investment. Thus, the program encourages the MFI to work to ensure that the energy technologies are maintained in good working order year after year. Additionally, microfinance institutions can benefit repeatedly when clients expand their use of clean and energy efficient technologies as their quality of life and capacity to invest increases. The MicroFinance Carbon Program encour-

ages MFIs to establish a long-term stake in their clients’ energy choices, helping link clients to locally available options that benefit their income, health, and the global environment. What is the Linkage Between the Carbon Markets and the Poor? Those following the debates about the Kyoto Protocol of the United Nations Framework Convention on Climate Change in Bali, and recently at Poznan, realize that a key critique of this global international accord centers on the relationship between the Carbon Markets and the more than two billion people that suffer from energy poverty. It prompts the question, “How can we ensure that a broad based clean energy future is invested in efficiently?” These issues have been difficult to answer, not because the poor don’t need clean energy, but rather because the carbon market players in the early years of market development have been wholesalers, and have focused on the largest clean energy projects. Sadly, these large projects cannot reach the poor who do not even have access to the electric grid. The MicroFinance Carbon Program asks: “What clean energy technologies can improve your clients’ lives?” If your client wishes to invest in clean energy technology, the global community is willing to provide some additional support to share the burden of saving the planet. Envisioning a Microfinance Carbon Industry In order for the microfinance industry to become a more significant player in the carbon markets, MFIs need to demonstrate two things. First, they must show that they are good brokers of clean energy systems—in other words, that they can help connect their clients with the right technologies and ensure the technologies stay in good functional condition over the long term. Second, they must prove that they are good bookkeepers of the carbon offsets. The carbon markets are a financial system and depend on transparent, verifiable records of the history and current status of the energy assets. As MFIs build their track record in these two areas, increasingly they will be viewed as important intermediaries by the carbon markets and will be able to capture

more of the value in the carbon value chain. MicroEnergy Credits is committed to encouraging industry development and to passing on more value to MFIs as the price of carbon goes up, and as the market aggregates more volume. MEC encourages every MFI to think about their clients and the carbon offset opportunities they have. Each microfinance client has the opportunity to get on a clean energy path by improving the lighting and cooking in their home and in their business, school and clinic—this is a value the MFI can cultivate over time, and for which they now can accumulate carbon credit revenues.

Linking Carbon Markets to the Poor Carbon Markets Microfinance Carbon Program

Microfinance Institutions

BOP Households Next Steps If your MFI is interested in providing loans for clean energy and energy efficient products, partnering with a company like MEC can help. Partners can assist in the identification of clean energy products, program design, staff training and ongoing support. If your MFI has already established a capacity to lend for clean energy products, MEC can work with you to calculate the carbon emissions offset by the clean energy products and incorporate the practices needed to capture carbon market revenues from the offsets created as you scale up the energy lending to more clients. n

James Dailey and April Allderdice founded MicroEnergy Credits in 2008. For more information, please send an email to info@microenergycredits. com or visit www.microenergycredits.com. www.microfinanceinsights.com

jan/feb 2009

microfinance insights

Renewable Energy Partner Index

Base of the pyramid clients cannot access renewable energy products themselves; therefore, local organizations, NGOs and MFIs can serve as the facilitator, provider and educator about new energy resource options. As we conducted research for this issue, we came across many companies that are engaged in innovative renewable energy work. Some are large companies that replicate products and services around the world. Others are small projects implemented in one village. We are sharing our findings with you, so that you can learn more about new models for the delivery of sustainable energy and clean technology. This list is by no means all encompassing. If you have additions, please send us an email at microfinanceinsights@ gmail.com and we will add the company name or project online at www.microfinanceinsights.com.

WATER and SANITATION

Barefoot College // Rajasthan, India The Barefoot College, located in Tilonia in Rajasthan, India, works with local communities to engage them in setting up and maintaining systems for providing easy access to drinking water. Several villages now benefit from community piped water supply systems, designed, planned and implemented entirely by the village people. These communities pay a small monthly fee for this connection. The College has trained over 1,000 hand pump mechanics to carry out all repairs for the 45,000-plus hand pumps in Rajasthan. There are almost 50 women mechanics in this team. A number of women have been trained as barefoot engineers, to fabricate and construct overhead water tanks, having a capacity of 100,000 liters of water. Several women are now equipped to plan, supervise and implement a droughtproofing initiative of desiltation of village ponds. These activities provide much-needed steady income for women and helps strengthen their positions in these deeply patriarchal communities. Website: www.barefootcollege.org/prog_rwh.htm Centre Régional pour l’Eau Potable et l’Assainissement à faible coût (CREPA) // Ivory Coast CREPA (a civil sector organization) works with the local public water utility service to pre-finance water connection fees as a loan to all households in a neighborhood, then trains the community to mobilize household savings to repay the loan and pay ongoing water bills. CREPA first arranges micro-loans for households to get water connections. A fund is created to continue the support to the connection fees and a household committee is set up. To reimburse the funds, a box is installed in each user household into which 100 CFA (US$0.20) must be deposited everyday. The household committee carries out weekly checks to monitor this. At the end of the month, the household pays the water bill and the leftover money is used toward repaying the loan for the connection. The project is ready to be replicated in other areas. Website: www.reseaucrepa.org

Eureka Forbes // India World Vision and Eureka Forbes, an Indian water purification company, have joined together to create cleaner water in India. The specialized water purification equipment installed in Indian villages are part of a partnership aimed at “developing comprehensive water purification products and solutions portfolios for the rural poor. Website: http://www.worldvision.in/?1136 KickStart // Kenya By enabling farmers to pump out water directly at source and push water uphill—thereby eliminating the need to pay for pumping and transporting water—KickStart’s Super MoneyMaker Pressure Pump is transforming Kenya’s subsistence farms into highly profitable enterprises. Exploiting the pump’s ability to draw water up from 23 feet (7 m) and irrigate up to 2 acres of land, thousands of farmers are using the gadget not only to irrigate their own crops, but are selling the water to others at a profit. Incomes have increased as much as ten-fold for many of these “farmerpreneurs.” Website: www.kickstart.org/tech/technologies/micro-irrigation.html Lesotho Bank/National Sanitation Program // Lesotho In the 1980s, Lesotho’s public sanitation system was the cause of many preventable diseases. Ventilated improved pit technology was soon adopted from other countries in the region and promoted as a better sanitation option. The Lesotho bank began to offer individuals loans to build these latrines. The revolving fund set up for this, and each loan was to be paid out over a period of 2 years. The program has created over 56,000 latrines. Website: www.sulabhenvis.in/admin/upload/pdf_upload/af_bg_lesotho. pdf

Manna Energy Foundation // Rwanda With funding through carbon credits, the Manna Energy Foundation is installing close to 500 water treatment systems and biogas generators for secondary schools in Rwanda. The project will reach a population of 236,000 students, which amounts to 3% of the Rwandan population. The water treatment plants will use gravity and photovoltaic filtration systems, and the Ecotact // Kenya Ecotact’s sole objective is to develop innovative social investments in envi- biogas generators will take human and kitchen waste and capture the waste ronmental sanitation in Africa and beyond. The enterprise is developing methane, which can be used in high efficiency cook stoves. different flagship social initiatives that include the innovative IKOtoilet Website: www.mannaenergy.org (awarded an Ashoka award in 2007) and IKOvillage for social housing models that optimizes ecological sanitation to its full potential. They also have Naandi Foundation // India a municipal waste management initiative that is exploring turning women Through a collaborative partnership between villages, technology partners waste pickers into viable and vibrant economic micro-ventures. and the states, the Naandi Foundation is facilitating the availability of safe drinking water to citizens in the Andhra Pradesh and Punjab states of India. Website: www.ecotact.org

microfinance insights

jan/feb 2009

The village panchayats support the development of water purification plants in the villages, and the partnership supplies water to villagers at a nominal user fee, which pays for the operations and maintenance that make the plant sustainable. A public education program in the villages also creates an environment for greater understanding of health, hygiene and sanitation issues among local citizens. Website: www.naandi.org. Sulabh Sanitation // India & Bhutan Sulabh International is operating and maintaining more than 6,000 community toilet complexes in some 1,100 towns and cities across India, and one in Bhutan. These low-cost toilets require just 2 liters flush water, and the toilet blocks are equipped with electricity and a 24-hour water supply. Soap is provided free for hand washing. Users pay a small fee that goes toward the wages of an on-site caretaker who is charged with cleaning and maintaining the facilities. Sulabh is also operating and maintaining about 100 such complexes at important railway stations. Impressed with Sulabh’s efficiency and cost-effective methodology, the Indian Railways is considering handing over the management of its entire sanitation services to this civil sector organization. Website: www.sulabhinternational.org

enous (to Tanzania) oil-bearing tree, Croton. The tree produces 15-25 kg of seeds annually with 32% oil content. The company is currently exploring a partnership with UNDP. Website: www.AfricaBioFuel.com AguaSolara // Based in Germany; licensed sellers around world This German company has created several innovative environmental products that allow off-the-grid customers to generate clean water, create their own fuels, and produce electricity for cold storage. One of their most interesting products is a solar powered water purifier. They also have a large biogas fermenter that produces free gas and electric power for up to 100 people. They have also created water purifier modules for farms and villages. The company issues licensed sellers in Africa, South America and Asia. Website: www.AguaSolara.com

Husk Power Systems // India Husk Power Systems (HPS) provides power to tens of thousands of rural Indians in a financially sustainable, scalable, environmentally friendly, and profitable manner. HPS has created proprietary technology that costeffectively converts rice husks into electricity. HPS uses this technology to produce 35-100 kW “mini power-plants” that deliver electricity as a payfor-use service to villages of 2000-4000 inhabitants in the Indian “Rice Belt.” The creators are recent graduates from the Darden School of Business at UN HABITAT// Lao PDR UN-HABITAT is the United Nations agency for human settlements. It is the University of Virginia. mandated by the UN General Assembly to promote socially and environ- Website: www.huskpowersystems.com mentally sustainable towns and cities with the goal of providing adequate shelter for all. In Lao PDR, UN Habitat has invested in a revolving fund for GlobalResolve (GR) // USA neighborhoods to connect piped water directly to individual households. GR is a program started at Arizona State University (ASU) in 2006 that starts The water is used for drinking and low-flush toilets. Each home pays a fee village-based ventures in developing countries by introducing sustainable for the connection and for usage. These fees feed back into the revolving technologies that address economic and health issues. GR partners with fund, which is then used by another neighborhood. Before the intervention universities, NGOs and other organizations in the target country to form is rolled out, an aggressive awareness raising campaign is set in motion, fol- global teams of students, faculty and other professionals that identify needs lowed by a rigorous neighborhood survey to determine the community’s and work to implement solutions that stimulate local entrepreneurship and willingness and ability to pay for the service. produce replicable business ventures. Current projects include jatropha biodiesel, clean water, and smokeless stoves in Ghana. Website: www.unhabitat.org Website: http://globalresolve.asu.edu/ Water Partners Intl // India Through its Water Credit Initiative, WaterPartners International is providing SOLAR/ LED LIGHTING SYSTEMS microfinance for installing water and sanitation systems to poor communi- Appropriate Infrastructure Development Group // Guatemala and ties who do not have access to traditional credit markets. By providing these elsewhere groups with the credit tools they need, WaterPartners is enabling them to AIDG creates and incubates small businesses that manufacture, install and take charge of and design solutions to their water and sanitation needs. In repair green technologies for people living between $2-4 a day. These techIndia, WaterPartners provided loans for safe drinking water and household nologies help communities and families meet their basic needs for energy, toilet facilities for urban slum residents. Loans were disbursed by WaterPart- sanitation and clean water, basic services that will improve their health and ners’ local implementing partner, Gramalaya. The latter teamed up a local change their lives. Their first business, XelaTeco, recently completed a UN MFI, BASIX, in order to develop the infrastructure they needed to make the funded project to bring renewable electricity to 200 people in the Western loan distributions. BASIX educated Gramalaya on the qualifications for loan Highlands of Guatemala. Plans for creating similar businesses are under eligibility and helped them to develop financial systems to process the loans. way. The approach has been very successful so far, with a 90% repayment rate. Website: www.aidg.org Website: http://water.org/waterpartners.aspx?pgID=1015 Barefoot Power // India and Africa BIOGAS Barefoot Power designs and manufactures lighting products for the poor AfricaBiofuel // Tanzania in developing countries. Barefoot Power designs and develops its products AfricaBiofuel is a triple bottom line company working to produce the indig- in Australia; manufactures them in China; and distributes in Africa and www.microfinanceinsights.com

jan/feb 2009

microfinance insights

The Energy and Resources Institute (TERI) // India The Lighting a Billion Lives (LaBL) project is run by TERI. The model is unique: they partner with an NGO that sponsors the solar set up of one village (US$7500). The package includes a solar charging station, which is installed to receive the best sunlight. An entrepreneur in the village is nominated to manage the charging system, and he/she rents solar lamps to other villagers. The model allows skeptical villagers to try out new lighting d.light Design // India, Tanzania and elsewhere d.light creates off-grid lighting and power solutions for the poor. Several systems, and ensures that the products are cared for (often in a community, Stanford business school students developed their LED lighting solutions villagers don’t know what to do with an LED light when it runs out of batteries, and they throw it away. This system prevents that). in a class called Design for Extreme Affordability. Website: http://labl.teriin.org Website: www.dlightdesign.com India. They also provide assistance with business plan development and financing on all levels of the supply chain. They can assist in attracting financing from international fund providers and for small scale entrepreneurs from MFIs. Website: www.barefootpower.com

E+Co // 28 Developing Countries around the World E+Co is a non-profit investment firm that provides business support services and capital to energy enterprises in Africa, Asia and Latin America. They have offices in 10 locations. One of their investments is MOP, a womanowned business in Uganda, that produces organically grown, solar dried fruits for local and international consumption. MOP purchases fruit from local farmers in the Masaka region, then dries it using solar powered drying and heating systems. MOP employs 250 people. Hundreds of others benefit indirectly through improved farming activities and diminished post harvest loss. Website: www.eandco.net

THRIVE // India, Kenya, Afghanistan, Cambodia THRIVE helps develop LED lighting solutions for rural villages. Solutions include solar intelligent street lights and vendor lights, in addition to LED task lamps and lanterns. The organization is based in Hyderabad, India and offers a course in Rural Technologies. THRIVE helps corporations structure Corporate Social Responsbility programs to being LED lighting to villages. Website: www.thrive.in

WIND

VANREPA // Vanuatu VANREPA was established as an NGO to promote and deliver renewable energy solutions to islanders. Their leading project provides schools with Light Up the World // Based in Canada; partners around the world Light Up The World Foundation (LUTW) is an international humanitarian low, cost-effective wind generators, which not only lower the school’s costs organization dedicated to illuminating the lives of the world’s poor. LUTW but also teaches children about environmental sustainability. provides advisory services and products to MFIs and helps them determine Website: www.vanrepa.org product affordability for borrowers, evaluate interest rate levels and design repayment models. They have worked on projects in Papua New Guinea, Blue Energy // Nicaragua A non-profit that provides sustainable energy solutions -- particularly hybrid Costa Rica and a few places in Africa. wind and solar energy. They manufacture wind turbines and other comWebsite: www.lutw.org ponents close to the area of usage, and then create the necessary capacity to support long-term operations. Their first installation was in Nicaragua Lighting Africa // Africa Lighting Africa is a joint IFC and World Bank program that seeks to support -- where they primarily work -- and to date they have a total of eight instalthe global lighting industry in developing affordable, clean, and efficient lations in six locations. The combination of solar panels and wind turbines modern lighting and energy solutions for millions of Sub-Saharan Afri- complement each other and ensure functionality in almost all weather cans who currently live without access to the electricity grid. The organi- conditions. zation supports a range of partners including international lighting firms, Website: www.blueenergygroup.org local lighting firms, governments, entrepreneurs, investors, donors, and academia. The website provides a wealth of information, including a posting Grameen Shakti // Bangladesh board for organizations and product manufacturers looking for partners. This sister company of the Grameen family was founded to create synergies In addition to pilots in Ghana and Kenya, they are implementing programs between renewable energy technology and micro-credit. They specialize in in Ethiopia, Rwanda, Senegal, Tanzania and Zambia. solar, biogas, cookstoves, and organic fertilizer, and also have a program that aims to create 100,000 green women entrepreneurs. Grameen Shakti is conWebsite: www.lightingafrica.org ducting research to utilize wind energy in the coastal areas of Bangladesh. GS installed four hybrid power stations (combination of wind turbine and diesel Promethean Power Systems // Based in US; operating in India Promethean is developing a solar-powered refrigeration system for com- generator) which are connected to four cyclone shelters, three of which are mercial cold-storage applications in off-grid and partially electrified areas Grameen Bank branches and one exclusively used as a cyclone shelter. Apof developing countries. They hope that their refrigeration technology will pliances powered with this system are light, fan, water pump, etc. enable food suppliers to store and preserve perishable food items—such as Website: www.grameenshakti.com n milk, fruits and vegetables—without the need for expensive diesel-powered generators. Website: www.coolectrica.com/

microfinance insights

jan/feb 2009

+ profit

Partnerships for Profit:

Collaborations between MNCs and MFIs that Meet Human Needs What opportunities exist when generating human impact and profit? What are the challenges to creating this sustainable and profitable growth? Paul Herman and Tom Willis of HIP Investor Inc. share their latest research and analysis of these types of questions – and ideas for potential partnerships that can emerge among MNCs and MFIs.

he largest industrial company in the world, General Electric, generates 10% (US$17bn in 2008, compared to most recent annual sales of US$172bn) of its revenue from eco-efficient and eco-healthy products. More than 100,000 global employees and retirees of tech titan IBM regularly volunteer to help society. High-tech leaders Intel and Advanced Micro Devices (AMD), which make most semiconductors for PCs, are both seeking to serve the next billion customers with low-priced computing tools. Global multi-national corporations (MNCs) seeking more profit are expanding into highgrowth, lower-income economies. Microfinance institutions (MFIs) have a large customer base of 100 million reliable entrepreneurs seeking to build the health and wealth of their family. These citizens also desire a cleaner environment and equal opportunities. By comparison, the 50 largest global companies comprise about 20 million workers. For forwardthinking MNCs, partnerships with MFIs offer the opportunity to meet these “human needs” by generating both positive “human impact + profit” – or what we call “HIP.” Opportunities to Create Human Impact + Profit (HIP) among MNCs and MFIs MFIs naturally solve human needs both directly and indirectly. The family income generated from successful microloans increases economic independence, and provides the funds for better education, increased access to health care and time-saving tools, such as a mobile phone. Most MNCs today have focused their products on the needs of higher-income customers, mainly the world’s richest billion citizens – with the high prices to match. When companies realize the benefit of adapting their products (and pricing) to the remaining five billion, they can generate positive human impact as well as profit. New products from MNCs cross five categories of human need – health, wealth, earth, gender equality, and trust. MNCs can tap the inherwww.microfinanceinsights.com

ent strengths of MFIs and their solid networks of customers experiencing increasing incomes. Let’s examine how this works.

“Most MNCs today have focused their products on the needs of higher-income customers, mainly the world’s richest billion citizens – with the high prices to match. When companies realize the benefit of adapting their products (and pricing) to the remaining five billion, they can generate positive human impact as well as profit.” Health. Achieving top physical health typi-

cally requires affordable health care, including medical devices for diagnostics. Industrial conglomerate GE historically made expensive, custom-designed devices incorporating the latest technologies. However, after GE engineers visited Africa to implement the company’s US$20m charitable contribution, they discovered that very few GE Healthcare products were present in hospitals. While in Africa, they sketched out new designs of existing products that used already

existing low-cost technologies. Combining an off-the-shelf laptop with health diagnostic tools via a standard computer cable resulted in an ultrasound laptop. This product delivered health benefits at 80% lower prices than the previous generation of products – and expanded the access to health care in African and Asian communities. (In addition, the engineers’ innovations also lowered GE’s production costs by 8% as the new approach is applied to other products.) Since this new device can be financed for US$300 per month, or about US$10 per day, local hospitals may be able to expand coverage to more paying patients. In addition, MFIs can help build a health-care system regionally by, for example, training the children of MFI clients to become medical professionals. Announced in September 2008, Grameen Healthcare is initiating this novel approach in Bangladesh with its partners Pfizer, GE Healthcare and the Mayo Clinic. While this is mainly a non-profit structure, a similar model could combine for-profit MFIs with for-profit health partners, generating positive health results and viable economic rewards. Wealth. Traditional tools for generating in-

A Mobile Metrix agent in a Brazilian favela, compiling a census of demographic, health and economic information

jan/feb 2009

microfinance insights

+ profit come focus on physical production, including farming and textiles. The 21st century tools for building income are computers. But lowcost computers and Internet-enabled mobile phones were not a viable option until recently. Computer-chip maker AMD is pursuing a vision of “50x15,” or 50% of the world’s population (3 billion) having access to the Internet by 2015 (a mere six years away). This bold vision energizes engineering talent, who always seek to solve the toughest problems. AMD’s commitment to this audacious goal spurred their involvement in the One Laptop Per Child (OLPC) program, which distributes US$200 low-cost computers, with the most sophisticated “mesh” network connectivity, to low-income youth around the world in 30 countries to date, from Rwanda to Peru. Kids with these new tools go to school more, perform better in class, and frequently teach their parents how to use them, says OLPC. MFIs could become an intermediary to finance education for successful entrepreneurs – or possibly partner up with MNCs. Infosys, with its demand for high-tech talent and teamwork, has extended its support back into the Indian school system. New high-school programs teach business as well as technical skills so that Infosys can hire highly capable workers and keep attrition at least half the rate of its competitors. Infosys, headquartered in India, also quantifies the value of its overall talent in its 180-page annual report – and creates financial statements that values employees as assets, a departure from

traditional accounting practices. MFIs could extend into the multi-year education financing business – which is a new growth market serving billions of citizens – and consider a repayment stream from future income of the newly trained tech talent, thereby creating new jobs as well as enhanced profits.

“MNCs can stumble when understanding the social mission of MFIs – which is why many of these partnerships start with the foundation staff of MNCs.” Earth. Clean air and water, as well as renewable

energy, is another core human need. Microfinance clients have the opportunity to use cleaner cooking in their daily lives (e.g., solar cookers) and cleaner energy (e.g., biogas digesters). In addition to the health benefits of lower smokeinduced illness, these eco-solutions can generate “carbon credits” for lower emissions. A new company, MicroEnergy Credits Corp., works with MFIs to create, aggregate and sell these credits for financial profit as well as positive human impact. MEC also partners with publicly listed EcoSecurities Corp in London to broker these credits to other corporations; the overall market for mandatory carbon credits is US$30bn annually. (For more information on MicroEnergy Credits, see page 28) This evolving market creates a richer opportunity for MFIs to finance energy that promotes both cleaner “earth” and “health.”

Five categories of human problems

microfinance insights

jan/feb 2009

Gender Equality. Parity among gender, eth-

nicity, and income still faces many hurdles across the world. One indicator of inequality is domestic violence, especially among rural women. However, when a one-room house is doubled to a two-room house, domestic violence can drop dramatically, on average around 40%. To enable a dramatic shift, the building-products conglomerate Cemex (based in Mexico) advanced a program to sell cement to expand housing in rural areas, in partnership with social entrepreneurs in the region. Also helping equality, another subsidiary of Cemex called Construmex helps overseas family send remittances back home in the form of financial credits for building products. MFIs can provide financing for housing expansion in either case, while also advancing equality for women – also a core mission advancement given that on average, more than 90% of MFI clients are women. Trust. Accurate, transparent information about citizen populations is not always available. In the favelas (inner city neighborhoods) of Brazilian mega-cities like Rio de Janeiro or Sao Paolo, for example, communities of 50,000 people might be undercounted. By partnering with high-tech firms Palm Inc. and IBM, MobileMetrix trains and enables youth in that community as MobileAgents™,-- who are trained to survey the citizens’ job skills, education and health conditions. MNC clients, such as Johnson & Johnson (J&J) in health care, benefit from this survey by being able to purchase information that is not easy to gather for developing products that are inclusive of that community. For example, when a dengue epidemic affected 250,000 in Rio de Janeiro earlier this year, MobileMetrix helped locals in the favelas understand more about the epidemic, the role of mosquitoes in spreading it, and how to intervene. After this education, MobileMetrix found “a 45% increase in identification of the dengue mosquito and 100% increase in people who could identify the dengue egg. And for J&J’s purposes, MobileMetrix found that 75% of the population would use J&J’s anti-mosquito lotion again and 59% would buy it,” says Melanie Edwards, founder and CEO of the company. MFIs too can be a source of aggregate customer demographics and core human needs for MNC partners – which can generate new income for that precious market information. In summary, MFIs and MNCs can partner for “microfinance-plus” services and products by assessing five categories of human problems

+ profit – health, wealth, earth, gender equality and trust. How do an MFI and MNC design a partnership that delivers mutual benefit?

“Since the MDGs address human problems, and more than twothirds of corporate employees want their employers to address social issues, the MDGs provide a starting place to measure positive human impact.” How To Design HIP Partnerships among MNCs and MFIs Because of their trusted client relationships with active entrepreneurs, MFIs have an attractive asset for MNC partnerships. Designing a mutually beneficial partnership requires MFIs to think as MNCs – and help bridge their understanding of this unique audience and opportunity. We share three potential strategies with you that can benefit both MFI and MNC: 1. Encourage Products That Make Money for Micro-Entrepreneurs, Too Building family wealth takes an entrepreneur. Building community wealth takes a network of entrepreneurs; just as Grameen Phone accomplished in Bangladesh, and Grameen Healthcare is designing with GE Healthcare. What is the next community tool to benefit family income and time? It could be a washing machine from Whirlpool, now selling at a more affordable local price (US$150) in India, Brazil and China. Entrepreneurial home-based mothers could establish new franchises by selling washing services or renting access to the machines, expanding the market for both MFIs and their MNC partners. Whirpool has invested US$20m in India in 2008 to build this market for their products. By teaming together, MFIs and MNCs can map the needs of the community, understand which products best serve the community’s needs, and design new franchise opportunities that deliver human impact and profit. 2. Tap Micro-Entrepreneurs to Be Leaders of Sales Networks Telecom companies understand the power of the network very well. Smart, the leading mobile company in the Philippines has captured 60% of its 34 million customers by empowering “buddies” to transfer prepaid time – for a slightly marked-up price – that they have already purchased. These 20 million “smart buddies” are essentially entrepreneurs working on behalf of the www.microfinanceinsights.com

phone company, making a 15% commission for themselves and in the process helping to expand the market for the MNC in a cost-effective manner. In a similar fashion, an MFI can empower its network of leading entrepreneurs with larger income-generating opportunities through partnerships with MNCs. Natura Cosmetics of Brazil and Avon of the USA are both successful MNC models that have built vast networks of women entrepreneurs – and continue to profit. 3. Collect Information about Group Demand – and Purchasing Power With its handheld Palm computing devices, Mobile Metrix gathered the needs of the community. The leading three human problems the favela community reported it wants to solve are: HIV/ AIDS, teenage pregnancy and domestic violence. If MFIs can similarly survey their communities and present them to MNCs, together they can jointly create solutions that serve the purpose of human impact and profit. In addition, this collective buying power is more likely to be heard by customer-driven companies. There are many more strategies, but these three provide the highest-leverage starting points to attract and focus an MNC on the needs and purpose of an MFI community. Challenges to Creating Sustainable, Profitable Growth We have found at least three challenges in designing and operating successful cross-sector partnerships: a shared vision and mindset; measuring both human impact and profit, and embedding accountability into shared decisionmaking. A. Ensuring a Shared Vision and Mindset The first step towards success is ensuring goals are shared. Both organizations need to have an appreciation for the other. MFIs tend to understand the MNC point of view, since many are economically profitable. While emerging markets have out-grown high-income countries in GDP growth for the last three decades,1 few MNCs have sought for-profit initiatives with MFIs. Many MNCs have yet to realize a new attractive customer segment – microloan borrowers tend to spend more money on consumer durables and other productive assets over time than those who do not borrow.2 But MNCs can stumble when understanding the social mission of MFIs and related NGOs, which is why many of these partnerships start with the foundation staff of MNCs. The One

Laptop Per Child (OLPC) foundation brought together head-to-head competitors AMD and Intel, but disagreements eventually arose about how to roll-out globally and share the business benefit. Intel is now pursuing these new markets separate from OLPC and AMD. By partnering with MFIs, corporations have an opportunity to establish themselves uniquely in these markets and develop an important competitive advantage – but MFIs need to ensure alignment on core goals. At IBM, Alexander Bloch agrees with the opportunity: “Three billion people on this planet live on less than US$2 a day and most of those people have limited or no access to basic banking services. This is clearly an unsustainable proposition, and we feel that there is an opportunity to capitalize on this market upside potential.” B. Measuring Impact and Profit The Millennium Development Goals (MDGs) offer a common framework to ground both MNC and MFI partners in a unified direction. Since the MDGs address human problems, and more than two-thirds of corporate employees want their employers to address social issues, the MDGs provide a starting place to measure positive human impact. One major MDG is gender equality. With a women-focused business model, MFIs have successfully contributed to more gender equality and poverty reduction at the same time. In MNCs, the top quartile of firms with a higher proportion of women on the Board of Directors delivers 42% higher profit and 53% higher return-on-equity than the bottom-quartile laggards, according to Catalyst.org. MFIs can find common ground with MNCs on this HIP metric with companies that are leaders like Procter & Gamble and PepsiCo. At Cisco, the goal of a global “human network” has led to several initiatives that support improvement in the MDGs.3 In the MFI field, Cisco is partnering with Relief International in Lebanon to train two MFIs to make loans of 10% to 50% of the capital required for Internetenabled businesses. In poverty reduction, Cisco is a partner with British Telecom in the Lifelines service in India and soon Kenya, where the agricultural helpline tied to mobile phone voicemail and messaging typically yields higher prices for crops of 25% to 150%. While MDG-7 seeks environmental sustainability, some global energy firms seem to have concentrated on health issues like HIV

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microfinance insights

+ profit (MDG-6) to stabilize the workforce. However, the top ten’s current profits and 95% of the US$139bn in capital spending are tied to fossil energy. An MFI partner like MicroEnergy Credit Corp, the carbon credits broker run by Grameen alumni, enables clean-energy results in the MFI community. “MDG Credits” covering both clean energy and poverty reduction can be traded for revenue in new partnerships among MFIs and energy companies. A leading example of a HIP initiative in global energy is Total, headquartered in Paris, and unique among most big oil competitors. Total is gradually building revenue in emerging economies through new forms of energy access, including pilot solar-power programs in Venezuela, South Africa and Morocco. Total’s goal: one million low-income people on the grid by

1. World Development Indicators 2008 2. CGAP 3. See all the initiatives at http://www.cisco.com/web/about/ac227/ ac333/cisco-and-citizenship/millennium-development-goals. html

2010, supported by US$135m in investments – an opportunity ripe for MFI partnership. Without a common scorecard to gauge progress on both impact and profit from each side, and how it drives the economic vitality of each organization, partnerships can drift apart. C. Aligning Accountability and Decision Making MFIs must be cautious when partnering with corporations to ensure that they continue to offer responsible loans to borrowers. Banco Azteca, a subsidiary of Grupo Elektra, Latin America’s largest household retailer, is accused of taking advantage of borrowers by offering loans under misleading terms. The bank and retailer work in tandem to generate higher profits through increased sales and interest income based on expensive and confusing loans. While profits

provide a basis for sustainable business models, it is important that corporations and MFIs apply the same standards in emerging markets and areas with limited regulation that they do in developed economies with developed legal systems. Irresponsible lending cannot provide a sustainable model: it offers high profits in the short-run, but it hurts consumers and, therefore, business in the long-run. Successful MFI-MNC partnerships solve a human problem, pursue a strategy that grows the impact and profit of both MFIs and MNCs, and mitigate the challenges through proactive and synchronized management. MFIs and MNCs have many opportunities to partner – and can create compelling benefits by teaming up: positive human impact and profit. n

R. Paul Herman is Founder and CEO, and Tom Willis is a Portfolio Analyst at HIP Investor Inc., based in San Francisco, California, USA. As creator of the HIP 100 IndexTM and the HIP ScorecardTM, the firm provides indices and research for investors who seek to make money by doing good (through human, social and environmental results). HIP also consults to corporations, governments and organizations seeking to realize sustainable, profitable growth.

Sun Cooked! Tirumala Tirupati Devasthanam, a large temple, in South India with a staff of over 10,000, also has another claim to fame. The temple is equipped with the world’s largest solar steam cooking system, comprised of 106 rooftop-mounted parabolic concentrators that generate steam for cooking up to 30,000 meals daily. The system helps curb fuel consumption by nearly 50%, saving INR1,700,000 a year (US$35,000). The giant SK 14 Parabolic Solar Cookers that made the system run were installed by Gadhia Solar, the world’s biggest producer of solar steam production systems. How does it work? A blackened cooking vessel is placed at the focus of the parabola where the sunlight concentrates and food is cooked at 250o C /482oF.

To learn more about Gadhia Solar, visit www.gadhiasolarenergy.com.

microfinance insights

jan/feb 2009

The world’s largest solar steam system at Tirupati Temple in South India.

+ education

All Aboard!

Adding New Wheels to the Microfinance Locomotive Over the last several decades, microfinance institutions have created an infrastructure of service delivery to the poor. Tens of thousands of microfinance field officers fan out across the developing world every day to meet groups of borrowers. These relationships and channels can be used to leverage the delivery of services beyond credit, bringing greater benefit to the end customer. And, microfinance institutions could make financial gains in the process. Christopher Dunford, President of Freedom from Hunger, explains the rationale behind this shift and his organization’s experience with providing education along with credit.

icrofinance institutions (MFIs) make money from the poor by providing loans, often giving them a safe place to save, and sometimes other financial services, like life insurance. This is a real breakthrough – a private sector approach to supporting the efforts of the poor, the very poor, and even people who are so poor they are chronically hungry.1 This works because the poor are accustomed to paying very high interest rates to get loans when they need them, usually from a local moneylender. MFIs offer a much better financial deal to the poor who are looking for loans to start or expand their tiny businesses, pay school fees, replace the roof, or deal with a medical emergency.

of knowledge and experience and especially poor health are huge obstacles for them,2 even just to be able to repay a loan with interest, much less make enough money from the loan to become food secure, and rise out of poverty.

Reaching the Masses Everyday, tens of thousands of field agents on bicycles and motorcycles, on foot, or via public transportation walk, cycle or drive across the developing world to meet with groups of (mostly) poor women. These meetings are opportunities to deliver more than microfinance. Consider, for a moment, an image of a train. The locomotive is a local financial institution offering group-based microfinance. It is fueled by the financial margin on credit operations, which may in turn be fueled by savings. Credit and savings products address only one factor of many constraining the poor—a lack of liquidity. Increasing income and assets alone is a slow and insufficient strategy for combating serious issues such as childhood malnutrition, avoidable maternal and neonatal mortality, the spread of HIV/AIDS, and suffering due to preventable illness such as diarrhea and malaria, as well as lack of basic business and household money management skills. When people are so poor they’re chronically hungry, their hope for leaving chronic hunger behind depends on having access not only to money but also to information and linkages to whatever services are locally available, especially health services. Lack

Connecting the Dots Freedom from Hunger’s recent research in Benin and Burkina Faso in West Africa revealed a shocking statistic – an average of 30% of the income of poor, rural families goes to the treatment of malaria. One disease takes nearly a third of their income. Clearly, they need more than money and

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“When people are so poor they’re chronically hungry, their hope for leaving chronic hunger behind depends on having access not only to money but also to information and linkages to whatever services are locally available, especially health services.”

they need to know how to prevent malaria. Most rural West Africans do not know that being bitten by a mosquito is the one and only cause of malaria. Consider how hard it is to persuade someone to sleep under a mosquito net if she doesn’t know that mosquitoes are the cause of malaria. It is hotter to sleep under a net, and difficult to put it up properly. Why bother? You wouldn’t do it unless you knew that if you didn’t, you would get malaria and get very sick and maybe die, especially if you are very young or pregnant and malnourished. It’s pretty basic education, and it saves lives. Who Will Provide the Education? This is a long-standing question for the international development community. Why can’t we look to MFI field staff all over the world? Consider the train diagram again. The arrival of the locomotive with its credit and savings wagons attached is welcomed by the poor. But, consider how much more welcome it would be if the locomotive brought added value in the form of education by the microfinance staff

Figure 1: The MFI locomotive, fueled by credit and savings, can easily provide education, medical care and business development services

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microfinance insights

+ education and linkages to other services, like medical care, health protection products (like mosquito nets), business development services, and so on. There is a limit to how much freight this locomotive can haul to the poor, but that limit is not so low that no more than credit and savings services can be delivered while still being a profitable financial institution.3 Freedom from Hunger saw the opportunity and developed it into Credit with Education, in which the field staff of the MFI provides both financial and educational services and, increasingly, linkages to other services and products offered by other, non-financial service organizations. Freedom from Hunger has built Credit with Education institutions from scratch in Bolivia, Honduras and Uganda; has trained whole credit union federations in Benin, Burkina Faso, Mali, and Togo in West Africa; has developed individual credit and savings cooperatives in the Philippines and Ecuador; and has created rural banks in Ghana and the Philippines to offer Credit with Education as a profitable new line of service. By June 2008, Credit with Education providers served more than 775,000 women in 14 countries. Considerable evidence from extensive field research in the 1990s shows the impacts of Credit with Education for the women who participate and for their families, especially their young children. Summary analyses of the various studies4 show the following general impacts: • Effects of Financial Service: women have more income & assets; households have smoother consumption and cope with shock better • Effects of Education: women learn essential information and put much of it into practice regarding breastfeeding, child feeding, diarrhea treatment, immunization, family planning, and HIV/AIDS prevention and coping • Combined: women’s empowerment is bolstered; children’s diet and nutrition improve; client satisfaction and demand increase More recent studies show positive impact on women’s business practices, repayment performance, and loyalty to the Credit with Education provider,5 as well as improved knowledge and practices essential for malaria prevention and treatment.6 While there is extensive evidence of impact, there is less evidence of the poverty level of the clients who experience these impacts. Research in Ghana7 and Mali8 shows that the wealth distribution of Credit with Education members

microfinance insights

mirrors the overall wealth distribution in their communities. Despite the program terms, a certain number of women from better-off households will join Credit with Education. And despite their extreme poverty, a surprising number of women from the poorest, most foodinsecure households will also join.

“Consider how hard it is to persuade someone to sleep under a mosquito net if she doesn’t know that mosquitoes are the cause of malaria. It is hotter to sleep under a net, and difficult to put it up properly. Why bother? You wouldn’t do it unless you knew that if you didn’t, you would get malaria and get very sick and maybe die... It’s pretty basic education, and it saves lives.” In the Mali study, women from the poorest third in the community were interviewed— women who had never joined the program, current members, and ex-members—in separate focus groups. The discussions revealed little to no evidence of the poorer women being systematically excluded either by better-off members or by program representatives. However, some poor women were self-excluding, choosing not to join out of fear for their already precarious economic situations. Yet this self-exclusion was not common enough to cause major underrepresentation of the poorest third among the Credit with Education clientele.

Does Credit with Education Serve Poorer Clients Better Than the Other Products of Local Financial Institutions? Credit with Education clients were in the relatively poorest client category for both credit union federations studied in Mali.9 The same result was found in a study by IFPRI10 study of the OTIV 11 credit union federation in Madagascar using the CGAP12 Poverty Assessment Tool.13 Credit with Education members were the poorest group in the sample collected; “classical” members of OTIV were significantly better-off compared to both non-clients and Credit with Education group members. Extending credit union services beyond the towns and large villages in which the branches are typically located seems to be more important than loan terms (including joint liability groupings) or even preferential lending to women. Products brought to the villages reached a relatively poorer clientele. Group-based lending, in general, appears to be a more efficient (and therefore a more affordable) mechanism for delivering services in rural areas, and any services taken to rural areas seem to reach relatively poorer clientele. Executives of most local financial institutions have reacted positively to their experience with Credit with Education. The most general reason is that Credit with Education is very often a profitable line of service. Of the 26 institutions reporting the operational self-sufficiency (OSS) ratio for their Credit with Education lines of service, 24 are reporting greater than 100% (all but two of these 24 report more than 115% OSS). Their persistence in providing Credit with Edu-

Fig2: How do we convince people to use mosquito nets when they do not know malaria is caused by a mosquito?

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+ education cation over the years indicates a degree of satisfaction with the performance of the line of service in helping the institution meet its objectives. Thirty-five of the 48 reporting institutions have been providing Credit with Education for more than five years (nine of them for more than 10 years). Moreover, this group-based service delivery design has spread within countries (from rural bank to rural bank, from credit union to credit union) by demonstration and word-ofmouth influence of early adopters. There has been a similar diffusion internationally – from Burkina Faso to Mali, Togo, Madagascar and Benin (through the Desjardins network mostly) and from the Philippines to Ecuador (through the World Council of Credit Unions). In Burkina Faso, the Reseau des Caisses Populaires du Burkina (RCPB)14 initiated its pilot test of Credit with Education in 1993, at which time the federation’s loan-to-savings ratio, or transformation rate, was 22%. The transfor-

mation rate improved to 150% in 1998, partly due to widespread adoption of the group-based line of service, which had allowed credit unions to transform surplus urban savings into loans for a rural market. These new clients generated regular income for the credit unions through interest payments on these redirected savings while achieving the social mission of the credit union to serve the community.15

“Willingness to explore the limits of Credit with Education is related to willingness to trade some microfinance profit for social benefit, but not to sacrifice profit altogether. ”

Willingness to explore the limits of Credit with Education is related to willingness to trade some microfinance profit for social benefit, but not to sacrifice profit altogether. Not all attempts have been financially successful, but most have continued to provide Credit with Education, because it is a profitable line of service that gives the institution a competitive advantage. Why? Because they are adding value to the financial services at interest rates that match or only slightly exceed the competitors. Thus, group-based microfinance can provide a novel vehicle for other self-help supporting services even in places where there would otherwise be no services of any kind at all. n

Christopher Dunford is the President of Freedom from Hunger, an international development organization working on poverty, food security, education and women’s empowerment in seventeen countries across the globe. Dunford can be reached at cdunford@freefromhunger. org. See http://www.freedomfromhunger.org/programs/cwe.php for more on the Credit with Education program.

1. Dunford, Christopher. Evidence of Microfinance’s Contribution to Achieving the Millennium Development Goals. Davis, CA: Freedom from Hunger, 2006. 2. Dying for Change: Poor People’s Experience of Health and Ill-Health. Washington, DC: The World Bank, 2001. 3. Dunford , Christopher. “Building Better Lives: Sustainable Integration of Microfinance with Education on Child Survival, Reproductive Health, and HIV/AIDS Prevention for the Poorest Entrepreneurs.” Chapter Two in Daley-Harris, Sam, ed. Pathways Out of Poverty: Innovations in Microfinance for the Poorest Families. Bloomfield, CT: Kumarian Press, 2002. 4. MkNelly, Barbara, and Mona McCord. Credit with Education Impact Review No. 1: Women’s Empowerment. (October 2001); MkNelly, Barbara, and Mona McCord. Credit with Education Impact Review No. 2: Economic Capacity and Security (Sept. 2002); MkNelly, Barbara, and April Watson. Credit with Education Impact Review No. 3: Children’s Nutritional Status. (October 2003) – Davis, CA: Freedom from Hunger. 5. Karlan, Dean and Martin Valdivia. Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions. New Haven: Yale University, 2006. 6. Gray, Bobbi, et al. Microfinance Against Malaria: Impact of Freedom from Hunger’s Malaria Education When Delivered by Rural Banks in Ghana. Davis, CA: Freedom from Hunger Research Paper No. 8, January 2007. 7. MkNelly, Barbara, and Christopher Dunford. Impact of Credit with Education on Mothers and Their Young Children’s Nutrition: Lower Pra Rural Bank Credit with Education Program in Ghana. Davis, CA: Freedom from Hunger Research Paper No. 4 (March 1998) 8. Nteziyaremye, Anastase, and Barbara MkNelly. Mali Poverty Outreach Study of the Kafo Jiginew and Nyesigiso Credit and Savings with Education Programs. Davis, CA: Freedom from Hunger Research Paper No. 7 (May 2001) 9. ibid 10. The International Food Policy Research Institute 11. Ombona Tahiry Ifampisamborana Vola 12. Consultative Group to Assist the Poor 13. Lapenu, Cecile, Manohar Sharma and Eliane Ralison. “Assessing the Relative Poverty Level of MFI Clients – Development of an Operational Tool: Synthesis Report for the Case Study of OTIV Desjardins in Madagascar.” International Food Policy Research Institute research report. April 30, 2000. 14. RCPB (Réseau des Caisses Populaires du Burkina) is a network of financial cooperatives that gives the underserved rural population of Burkina Faso access to financial services. See www.rcpb. bf for details. 15. Stack, Kathleen and Didier Thys. “A Business Model for Going Down Market: Combining Village Banking and Credit Unions” The MicroBanking Bulletin 5. September 2000.

www.microfinanceinsights.com

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microfinance insights

+ education

Classroom Finance:

“

The Aflatoon Song

Our school is so wonderful N’ we’ll come to school everyday.

Teaching a Culture of Saving

An innovative new program in India is working to change the financial landscape for poor children. Schools across Maharashtra and several other Indian states have started to instill in children a culture of saving and responsible spending—to prevent them from falling into a debt trap, like many of their parents. Several members of the Microfinance Insights editorial team recently visited three schools involved in the MelJol program to find out more.

n a recent field visit to a school district five hours outside of Mumbai, fifty children transported us as they sang and danced to the Aflatoon song. Ramdas, one of the boys came forward after the song to explain the meaning, and as he did, we couldn’t escape the remarkable glint in his eyes and the almost infectious enthusiasm in his voice. At the age of 14, Ramdas is the class President of Aflatoon, a classroom savings program and he has gifted his mother a sari on Diwali, the Indian festival of lights. Ramdas is among the 100,000 children whose lives have undergone a tremendous transformation ever since they have realized what it means to “save as you spend.” And helping them understand this concept more practically is MelJol, an organization based in Mumbai, India that seeks to develop children’s citizenship skills by making them aware of their rights and responsibilities and providing them opportunities to contribute positively to their environment. An Asset for Volatile Micro-economies Agriculture is the mainstay of the Indian economy, an occupation that relies on seasonal variations. Post harvest seasons usually mean income and prosperity. With little tendency to save, many rural farmers resort to borrowing from money lenders (who charge exorbitant rates of interest) during the lean post-harvest seasons. The phenomenon of “quick spending and no saving” is equally prevalent among younger family members. Parents often give their children money during festivals or when they visit them in school. Some children also make additional money by taking up small jobs outside of school hours. But this money is least available when it is needed the most. As Pabitra Banerjee, COO of Meljol reveals, “Approximately

microfinance insights

Songs, games and play, Studies will fill our day N’ we’ll come to school everyday.

Listen to stories, friends we’ll make, To learn new things an oath we’ll take N’ we’ll come to school everyday. We will read, write and learn, And then become Aflatoon! N’ we’ll come to school everyday.

one-third of the students come from homes where there is no habit of saving.” Banking for the Children, by the Children The Aflatoon program was first introduced in Maharashtra, India in 2001, starting with around 600+ schools in Thane district. Prior to creating MelJol bank accounts, the children would store their money in insecure ways, so that it would eventually get stolen/ misplaced. The Aflatoon banks ensured the children’s money stayed safe. After considering the positive impact of the program on children and parents, the program was replicated in surrounding districts in subsequent years. The program launched in phases: introducing the Aflatoon and MelJol characters to students, making them aware of their basic rights, instilling in them notions of equality and hygiene, and finally exposing them to banking and savings. The Aflatoon banking program is targeted at students ages 12-14. A common “class bank” lies with an appointed teacher where students can deposit and withdraw money once a week. The

“

day-to-day functions of the bank are handled by student officers: a President, a Secretary and a Treasurer, appointed through class elections on grounds of honesty and capability of handling money. Savings generally vary between INR520 (US$0.10-0.40) per child at any given time. Children often prefer keeping their money in the school bank, which they can withdraw any time for stationery, sweets, etc.; responsible spending is encouraged, rather than splurging. Parents visiting their children often deposit money in their child’s account for future use. Therefore, the school functions as a bank, not only for the students, but also for their parents, who have no access to the formal banking system. When a school manages to collectively save around INR5,000 (US$102), savings are deposited in a formal bank by school teachers. Children collectively manage the interest and use it for socially relevant causes like cleanliness drives, or campaigns to encourage villagers to give up alcohol or smoking. There is a regular meeting held between the children and the parents called Bal Gram Sabha (a child-village meeting) where

Who is Aflatoon? Aflatoon (meaning “explorer” in Urdu) is a unisex fireball that has come from space to earth and inspires children to “separate fiction from fact” and “explore, investigate, think then act!” MelJol’s Aflatoon is a role model and seeks to make children explore within their own environment through songs and poems with important messages. There is also “Mel” (the boy character) and “Jol” (the girl character), who ask questions and find answers to prove that being children does not mean they cannot make a difference.

jan/feb 2009

The Aflatoon character, a yellow fireball, excites children, and encourages them to save.

+ education children describe their monthly activities and demonstrate that they can be drivers of positive change. What is remarkable about the Aflatoon program is its emergence as a bottom-up initiative. While visiting a school as a part of their regular monitoring, MelJol officials observed how children pooled money to enable hospitalization of a fellow student when he fell ill. Sudden events like this often leave poor people unprepared to cope. MelJol realized formalization of this practice would enable people to respond to such needs quickly and efficiently. Teachers and education officers prefer using the popular and inexpensive program as it responds to socioeconomic needs within the community. This is reflected by the fact that the program has rapidly spread despite limited resources. Between 2007 and 2008, 1,500 schools implemented MelJol’s program and it now reaches 100,000 children. Creating Social, Financial Empowerment The MelJol-Aflatoon program aims to instill the habit of saving among the children that come from marginalized socio-economic backgrounds. Through the savings program, the children learn how to handle money and gain a sense of responsibility. The children themselves decide how much and what to spend on. Saving and withdrawing their pocket money gives the children an idea of how the banking system operates, so that one day when they begin to earn themselves, they will better understand how to budget and set up bank accounts. Financial empowerment at a young age is vital to help these children step out of the poverty cycle their families have become enmeshed in. Empowerment may come from being able to purchase their own stationery, uniforms, presents for their families, or even by contributing to their family income. Jayashree Kanauja, a 13-year-old girl at the Ulhasrao Bhuir Ashram School in Vikramgad, Maharashtra said, “I have been the Treasurer for the past year and realize that saving allows us to purchase pens, pencils and send money to our parents in case of an emergency.” When asked what she wanted to do after studying, she responded that she will continue to save money and wants to be a teacher one day. The program teaches the children how to directly impact their environment by acting on issues they deem important. Some examples www.microfinanceinsights.com

include chewing of tobacco, anti-child marriage, health and sanitation, personal hygiene, communal peace and the environment. MelJol has developed synergy between the savings program and the education program. The education program aims to build awareness about discrimination, encourage creativity and independent thinking. Deepak Patil, MelJol Coordinator, gave us a few examples: “In one of the villages where people earn INR200 (US$4) per day for farming or brick making, gambling was a problem. The children brought this to the attention of the panchayat (a group of village leaders).” Navrat, a 13-year-old boy at the Government Ashram School in Kalambhe, Maharashtra took part in his club’s campaign for cleanliness during the Maharashtra Cleanliness Week by cleaning up the streets with his fellow classmates.

“Providing skills to handle money, building capacities to understand finance, encouraging children to be in driver’s seat, and designing change for themselves are ways which make children true Afaltoons—socially responsible and sensitive human beings.” - Sumitra Ashtikar, Executive Director, MelJol

Building a Network of Responsible Citizens MelJol is working to spread the Aflatoon program to more schools each year by training teachers, and empowering them to train others. The teachers’ training program introduces innovative learning techniques and establishes rapport with the teachers who become ambassadors. The training regimen insures that when one teacher leaves, another can pick up where he/she left off. In the Ulhasrao Bhuir Ashram School, Manjusha Sonavane, a teacher responsible for the MelJol program said, “I am new at this school, and the teacher I have replaced started the MelJol program about four years ago. She taught me how the club, campaign, election and saving schemes work, so I can continue the program. I look forward to attending MelJol’s upcoming annual training.” Replicating the Success of the Program MelJol sowed the seeds of the Aflatoon program in 1998 and following its success and the posi-

tive feedback received by parents, children and teachers, implemented it in a phased manner in districts in Kerala (South India), Rajasthan (West India) and Orissa (East India). Collaboration with local NGOs accompanied by active involvement of education departments and District Institutes of Educational Training has ensured smooth operation at the school level. The successful replication of the banking program throughout other states within India will depend largely on forging the right partnerships with local players who can identify appropriate schools. In the scaling up phase the role of the partner organization evolves. They become resource centers, providing training and expertise to other organizations new to the Aflatoon concept. The MelJol Aflatoon banking program is truly unique, for instead of filling the gap the formal banking systems leave, it creates a parallel where children can learn the basic concept of savings, beginning at an early age, only to become more responsible, more concerned citizens in the future. As Sumitra Ashtikar, Executive Director, MelJol says, “Providing skills to handle money, building capacities to understand finance, encouraging children to be in the driver’s seat, and designing change for themselves are ways which make children true Afaltoons—socially responsible and sensitive human beings.” n - By Jerilene Creado and Vibha Mehta, Associates at Intellecap

Boys dance and sing to the Aflatoon song, a tune that reminds them to save and come to school everyday.

jan/feb 2009

microfinance insights

+ education

Microschools:

Small Investment, Large Returns Illiteracy and poverty together create a vicious cycle that impedes the social and economic growth of a country. Public schools in many developing countries have very low retention rates because the quality of education provided does not match the fee structure, which is often prohibitive for low-income students and their families. This article discusses how “edupreneurs” are taking up the issue by developing “microschools” targeting the BOP.

chievement of universal primary education by the year 2015 is one of the Millennium Development Goals. Despite considerable progress over the past two decades, school attendance in the world’s poorest countries is by no means universal. Makonene Getu, Director of Strategic Alliances, Opportunity International says, “Among the poor, access to education remains elusive. Schools exist, but often the poor cannot afford the transportation, school fees or required supplies to enroll their children.” The education system calls for reform, but looking at the bureaucratic set up and lack of political will, it is difficult to imagine that the quality of education will improve appreciably anytime soon. “Microschools” or “schools for the poor” have emerged as a possible solution. These low cost private schools are run by socially-motivated individuals and serve the education needs of the poor in low-income communities. Prathamesh Naik, Marketing Director, The Indian School Finance Company explains, “There is an enormous gap in the market for affordable private schools. Microschools are affordable, yet provide a quality of education that is perceived to be of a better quality than that provided by government schools.”

Vivian Adamah, an Opportunity International client and an edupreneur.

There are two models on which microschools operate: in the first case an “edupreneur,” an entrepreneur who establishes a small to mediumsized school for the poor in a high-demand area, is provided the required credit by an MFI; in the other model, an MFI might start its own school network and give loans to parents to pay for private education school fees. Dr. James Tooley, Professor of Education Policy at Newcastle University conducted extensive research on “schools for poor” in India, China, Nigeria, Kenya and Ghana from 2001-06, and compared their performance to government schools. He writes, “Contrary to previously held beliefs, schools for the poor are superior to government schools; school teachers are more committed, and education outcomes are better. All this is accomplished for a fraction of the per-pupil cost of government schools. It seems odd to me that people do not recognize the contribution such schools make to education in their areas.” Microschools are less expensive than public schools and offer flexible payment options, leading to reduced drop out rates in tough financial times. Most microschools are located in close proximity to poor households. This

Using Credit to Support Schooling for the Poor After taking the credit market by storm, SKS has announced that it intends to tap the growing market for English-aided education in the India. Gurcharan Das, Chairman of SKS Microfinance, says, “Indians are finding a new model...if government schools fail and teachers don’t show up, entrepreneurs start schools for the poor in the slums and children get educated. I think some real fortunes will be made in education in the years to come, partly because the state has not succeeded.” SKS has an ambitious plan to provide computer-facilitated bilingual schooling to poor children in the rural and semi-urban areas in India. SKS has a relationship with these families and plans to offer education loans as an extension to their credit program. SKS currently operates in 1,400 branches across India and envisions a school for every branch. The microfinance giant will set up the first 20 schools in 2009 with English as the medium of instruction. Photo from: http://videos.opportunity.org/website/press-releases/vivian_story_final.pdf

microfinance insights

jan/feb 2009

makes parents feel secure about sending their daughters to school and also helps them save on transportation costs (in some areas this can be as high as the school fee). Private school finance also increases competition between proprietors and thus improves the incentives to provide children a high-quality education. But more than the tangible benefits, microschools denote value. Naik clarifies, “We have all learnt that at the bottom of the pyramid, something that has a cost attached to it is usually valued more than something that doesn’t.” The private education industry already serves a large percentage of the poor, but requires capital to build better schools at one end and financial support for the families and their children at the other in order to increase enrollment and enhance the quality of education. Driven by this realization and Dr. Tooley’s research, Christopher A. Crane, President and CEO, Opportunity International, launched the “Microschools of Opportunity” program that provides loans to “edupreneurs” in poor areas. By 2007, more than 8,000 children and 200 schools had been impacted by the program. Through a proposed partnership with The Children’s Investment Fund Foundation, Opportunity International will finance 2,700 microschools in Uganda, Malawi, India and Ghana serving over 540,000 impoverished children over the next three years. With a demonstrated advantage over government schools, microschools are the schools of the future. As Dr. Tooley concludes, “Microschools are making a huge contribution by educating some of the poorest children in the society and somewhere they have the potential of breaking the poverty cycle.” n -

- By Vibha Mehta, Associate at Intellecap

financing

Exploring Value Chain Financing Mechanisms While MFIs continue exploring a whole host of “plus” services, agriculture and rural finance has for the most part been on the radar. Financing the rural value chain, however, requires the collaborative effort of all players and the pooling of individual expertise for the collective good, and to ensure that the rural agriculture and small businesses are served as efficiently as possible. In this piece, we take a look at some ways in which MFIs can work towards strengthening the value chain.

he spate of farmer suicides in the Indian districts of Vidarbha and Wardha in West India, highlighted the fate of many millions of India’s farmers. With increasing input costs, and poor prices for their products, many farmers from India to Brazil are thinking of new alternatives – either to grow their businesses or to become more cost-efficient. Through much of the developing world, agriculture is the mainstay of local industries. However, even for the smallest of farmers, financing production is not always easy. From fertilizers, to machinery, to harvesting, packing and marketing, expenses along the value chain continue to grow, requiring timely and adequate funding for the business owner. Value-chain financing has therefore emerged as a way to finance such expenses. A valuechain is defined as “a sequence of activities that a product passes through, with value added in each stage – from design, to the transforming of inputs, to the financial market.”1 The provision of finance along this chain is referred to as valuechain financing (VCF). Robert Fries and Banu Akin, two international development experts in VCF, identify three major kinds of chain-based financial products: 1) trader credit, 2) contract farming or outgrower schemes, and 3) warehouse receipts. In short, this means that actors along the value chain can, for example, agree with their suppliers to defer their payment dates (for a longer cycle of working capital), work as part of a larger farming group, or use innovative ways to finance their produce. The above three methods are not the only ways to finance rural activity; additional innovations in rural finance are built on the work of a number of players in the field. For example, in India, BASIX has worked closely with PepsiCo India to set up potato contract farming among

“tribals” in Jharkand for the company’s popular Frito Lay brand of chips. BASIX, in the region since 2003, organized the farmers into producer groups of 15-20 in each village. Each farmer was provided with a loan and high quality Generation 3 seeds and were linked with local suppliers for low cost, quality fertilizers and pesticides. BASIX procures the potato and passes it on to PepsiCo. To date more than 3,000 farmers are involved in this program.

“Facilitating smooth interaction on the value chain is not limited to MFIs and loan-granters alone.” Throughout Latin America, Africa and Asia, Root Capital engages with rural cooperatives and grassroots businesses by providing easy credit ranging from US$25,000-750,000, against nothing more than a purchase order as collateral. For example, using a purchase order, a coffee cooperative in South America takes out a loan to meet his monthly demand. When the goods are shipped to the buyer, Root Capital receives payment directly from the buyer, and then remits the amount back to the producer, after deducting the loan principal and interest. Innovative financing such as this, can increasingly benefit players along the value chain, some of whom are sometimes too large for MFIs and too small and risky for banks.

Facilitating smooth interaction on the valuechain is not limited to MFIs and loan-granters alone. TechnoServe, the U.S-based non-profit economic organization that works with entrepreneurs in rural areas, runs successful valuechain interventions across the globe. In Tanzania, where the export of specialty coffee dropped from 17% of global production in the 1970s to 1.7% in 1998,2 TechnoServe stepped in to help farmers get a better deal. By assisting in the work of KILICAFE, a consumer co-operative that sells services to its shareholder-owners, TechnoServe was able to improve the technology used by the producers, and extended their hold of the product within the value-chain so that they would ultimately get the benefit of premium prices. By upping production, TechnoServe ensured that some of the produce was directly exported to buyers such as Starbucks and Unicafe. Value-chain financing has emerged as a useful tool to help farmers and small-scale rural businesses access timely finance, and also give them the opportunity to increase efficiency and grow their businesses. With so much attention in the sector focused on rural populations with limited access to markets, it is easy to see how this can become another product line for MFIs. Because of their networks, and organizational structures, MFIs are in a position to facilitate better opportunities for farmers and small-scale businesses. The potato farmers in Jharkand, and the coffee growers of South America and Tanzania show that this is possible. n - By Ranjit Koshi, Associate at Intellecap

Free trade coffee growers in Nicaragua

1. “Value Chains and their Significance for Addressing the Rural Finance Challenge,” Robert Fries and Banu Akin, microREPORT # 20, December 2004. 2. “Using a value-chaing approach to empowering the rural poor in Kenya, Tanzania and Mozambique.,” Leslie Anne Johnston, TechnoServe Swaziland Director,.

www.microfinanceinsights.com

jan/feb 2009

microfinance insights

point/counterpoint

Should MFIs Introduce a Third Bottom Line? To answer the above question, Microfinance Insights invited two leading experts, independent consultant N. Srinivasan, and energy entrepreneur Stewart Craine, to present their arguments. Below is their debate.

MFIs should Stick to their Knitting:Two Bottom Lines is Enough

irst, let us ask ourselves the meaning and operational implications of multiple bottom lines. Even with a double bottom line, is it acceptable for an MFI to fail at financial sustainability, if it achieves respectable levels of social performance? Which bottom line is the priority? Social or financial? And, how can there rationally be a “bottom line” for social performance and environmental concerns? The expectation that either could be achieved in the same way profits are achieved is simplistic. If MFIs find social performance and environmental risk mitigation more achievable than financial, stakeholders and investors may not continue investing, after all, they are primarily motivated by bottom line number one. Even if investors are happy in the short run with an MFI’s impact, experience shows that over the long run, the MFI might not survive to offer continued service to its clients. The MFI would have run out of cash and the investors out of patience. To achieve the first bottom line of financial sustainability, many Indian MFIs have found it necessary to charge high interest rates compared to what the banks are charging from their clients in a similar position. Of 112 member MFIs of Sa-Dhan,1 48 had more than 20% return on Gross Loan Portfolio (ROGLP); 31 of them had more than 25%. Of those with ROGLP in excess of 20%, 31 were NGOs2 where one would have taken their second bottom line considerations for granted. But, doing business in a way designed to benefit the client while sustaining the MFI’s core financial operations has not been easy for a number of socially-oriented MFIs. The side-byside report of Sa-Dhan for 2007 revealed clearly that Section 25 company MFIs (22 non-profit companies) as a group posted a negative return on their loan portfolio. One would rather make the MFIs focus on their core business of lending and recovering with profits born out of productive and efficient methods before taking on other

considerations. Many profitable, high growth MFIs run a separate token project for targeting poor; but in many cases, it is just a fig-leaf for second bottom line performance. It doesn’t qualify as a piece of their core work, because they find it unfeasible to carry loans to the “real poor” as part of their loan portfolio. When the first bottom line is difficult, and the second is even tougher to achieve, a shift to a third is but a dream. Environmental issues are far beyond the domain competence of many financing institutions, including MFIs. Furthermore, with regards to environmental issues, microfinance clients are more often than not victims of bad policy rather than initiators. Microfinance clients have no locus of control over environment degradation or mitigation measures.

“…by creating a multiple bottom line wish list, we are taking MFIs away from their primary focus and main goal of financially empowering the poor. MFIs should stick to their knitting.” When pushed, MFIs may try to integrate environmental concerns into their business, but when they do, they will face rising costs. The cost of building staff capacity and developing an understanding of the issues and products available could be stiff and will not easily be loaded into loans. MFIs may justify their failure to meet all or any of these bottom lines by citing the impossibility of doing so much at a time—and how can we blame them? Environmental concerns are matters best handled by the state, civil society and CBOs. Even the best financial institutions (not MFIs), those with strong financials, have not been successfully persuaded by either the state or the voluntary sector on the third bottom line. But, if anyone within the financial sector is to take it on, the

1. Sa-Dhan is an Indian association that supports member MFIs and works to advance community development through finance institutions. 2. Non-governmental organizations

microfinance insights

jan/feb 2009

large financial institutions and high street banks are the best bet. Because they deal with almost all projects that carry significant risks to the environment, they could enforce environmental considerations on their clients in a concerted manner and significantly mitigate adverse impact. Microfinance clients with a very small adverse ecological footprint are not a priority in arresting environmental degradation and it should certainly not be done through MFIs. MFIs do not have the expertise to facilitate the clients with suitable alternatives. The costs of making them competent in an entirely different domain would not be commensurate with the benefits. At best MFIs could be made to be sensitive to environmental concerns and internalize them as part of their business processes. In an ideal world, MFIs could do a little bit of everything. But right now, by creating a multiple bottom line wish list, we are taking MFIs away from their primary focus and main goal of financially empowering the poor. MFIs should stick to their knitting. They should carry out financial intermediation in the most efficient and productive manner, which would go a long way in meeting the requirements of the second bottom line.

N. Srinivasan is a Freelance consultant, and author of India’s State of the Sector Report on Microfinance 2008. He can be contacted at shrin54@yahoo.co.in.

point/counterpoint

MFIs Should Lead the Way to the Triple Bottom Line

nvironmental impact and corporate contributions to global climate change, a massive community cost that individual companies and shareholders refuse to pay for, have long been kept off corporate financial reports. However, such issues are not trivial; paying heed to environmental impact will reshape business and economics as we know it, just as microfinance has reshaped the finance sector. Hence, it is quite likely that, while it may not happen tomorrow, some form of triple bottom line (TBL) actions and reporting, particularly in relation to carbon emissions, will be forced on all of us. Do the giants of the financial sector give guidance on TBL reporting trends and leadership? MFIs have never taken their lead from such entities, so why start now? As energy and water issues increase, the poor will be the first to suffer and the least able to adapt. Will corporations leap to their aid when environmental shocks hit the poor? It has taken 30 years to spur them to supply financial services to help alleviate poverty, so it is likely that solutions to environmental problems for the poor, or leadership in that area, will not come from corporations, but from innovative social enterprises. MFIs should integrate a TBL if it contributes positively to their core mission and their stake-

holders—and it would be a tough argument to suggest that environmental sustainability has little to do with poverty alleviation. If minimizing environmental impact is to become part of life and business, and it is accepted that these issues are linked to microfinance’s core mission of poverty reduction, what action should be taken? According to CGAP,1 microfinance today is, “quite simply, retail banking for the poor,” including credit, savings, insurance and money transfers. Sometimes non-financial businesses also offer these critical services, such as supplier credit. Non-financial services are also being provided by some MFIs outside the financial sector, such as solar energy loans. Grameen Bank in Bangladesh is a classic example, with ventures in energy (Grameen Shakti), ICT (Grameen Phone), food and many other sectors. Large MFIs can create new entities for each sector, but for smaller MFIs, in-house units would be more appropriate. The World Resources Institute (WRI) estimates the bottom of the pyramid (BOP) market to be US$5,000bn a year, with energy the second largest BOP market (US$433bn). How can MFIs match their core mission to environmentally sustainable energy? Look at how energy is used by the poor now. We estimate that 30% of microfinance clients do not have access to electricity. Most are using kerosene lamps for lighting, and suffering respiratory diseases from biomass cook-stoves. At least 1.6 billion people globally (30-40% in India) lack electricity, spending US$0.50 a week per household on kerosene lamps, totaling US$10bn a year for about 300 million households. Social enterprises, not giants, can deliver environmental services to the poor, and MFIs can generate improved core business results from such policies and activities. MFIs already have the infrastructure; they just need to fit these new activities and services into their existing framework: 6-24 month loans at 20-40% interest rates. Think about this case study: the poor spend

Stewart Craine in an owner of Barefoot Power, a social entrepreneurial business that designs and manufactures technology products specifically for poor people that have the potential to reduce poverty in developing countries. Craine can be reached at stewartc@barefootpower.com. www.microfinanceinsights.com

US$25/year on kerosene lighting, so a solution needs to cost less than US$50. To date, the World Bank promotes 10-50Watt solar home systems costing US$150-1000. However, any normal market where the poor buy batteries is already filled with white LED torches. Solar and nonsolar LED products retail for US$5-50. This fits MFI requirements for end-customer financing, and in some markets, these products can sell for cash. MFI finance can then move upstream to where it belongs, with the micro entrepreneur. An entrepreneur can sell 1-2 lamps per day. Within 10 years, it would require only 50,000100,000 micro energy entrepreneurs to eliminate all kerosene lamps, which could find a shelf in the Museum of Poverty, a relic of the past. This is within the resources of the microfinance industry, and attracts new revenue like carbon credit income. With good marketing, clean energy loans will attract new clients for end-customer financing of larger systems (or steal competitors’ clients in saturated markets). New customers become repeat customers as energy demand grows, and the core business is strengthened. MFIs may get involved in the manufacturing, distribution, or just finance of these products, but the end results are: • the environmental impact of clients is reduced • micro environmental enterprises are created • more efficient energy services delivered to the poor To begin thinking about how to meet the triple bottom line needs of customers, MFIs can explore two simple questions: “How much does a micro-environmental-service cost?” and “Are there any innovations that can help change this?” MFIs may not immediately have the answers to these questions at hand, but they can be answered quickly and often at no cost by a growing group of non-financial social enterprises. n

1. Consultative Group to Assist the Poor, a branch of the World Bank

jan/feb 2009

microfinance insights

Congratulations!

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global viewpoints

Microfinance Insights conducts an online survey for every issue in order to gather insights from practitioners and stakeholders around the world. Every person who completes the survey receives a complimentary issue and has the opportunity to win a prize, and be recognized in a future issue of Microfinance Insights. Congratulations to our most recent lucky draw winners! Two people won Amazon.com gift certificates worth US$25. Find the highlights of our current survey “Microfinance Plus”: Product Development, Implementation and Partnerships, by turning to page 54 in this issue. Fadri Effendy Microfinance Innovation Center for Resources and Alternatives INDONESIA Kifodu Benjamin Nwabudike African Community Development Initiative NIGERIA Would you like to share your perspective by participating in upcoming surveys? Write to us at publications@intellecap.net to be included on our mailing list. *Now, you can purchase a subscription to Microfinance Insights on Amazon.com.

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Present a roundtable on Exploring the Contours of Risk in Indian Microfinance and Moving Towards Strategic Responses Thursday, Jan 15, 2009 Taj Lands End, Mumbai, India For more information and to view the live webcast of the event, log on to www.intellecap.net Participation by invitation only

Inverting the Pyramid 2008 Indian Microfinance: Scaling Against the Odds Inverting the Pyramid, an annual publication by Intellecap, provides insights on the microfinance industry in India. With growth rates of over 80 percent and a miniscule market penetration of less than 10 percent, the sector is constantly witnessing the entry of many more actors seeking business and investment opportunities with ambitions and business plans that surpass historical benchmarks.

Inside Inverting the Pyramid 2008: • Key trends that defined Indian microfinance in 2007-2008 • Demand and supply statistics • Growth and financial performance (sample of 70 top MFIs) • Estimated capital requirements and key trends for 2008-2013 • Financing and business environment opportunities • Priorities for future growth, value and sustainability

2007 and 2008 saw Indian microfinance emerging as a valued asset class with over 40 investors eyeing the market and changing promoter profiles, leading to unparalleled valuations. With turbulent financial markets and shifting priorities, what will the future unfold for this industry?

Read Inverting the Pyramid –Indian Microfinance: Scaling Against the Odds to find out more!

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events

Events: Nairobi, Bali and Mumbai Microfinance Insights has identified the need for frequent interaction between key microfinance stakeholders through events focused on issues relevant to the sector. The magazine regularly hosts events and participates in relevant conferences around the world. In the last six months, we have held events focused on technology for financial inclusion, microinsurance, African microfinance development and more. Below, we highlight a few of the events we have hosted recently. If you are interested in viewing our 2009 event calendar, or partnering with Microfinance Insights for an upcoming event, please contact the editor at Lindsay@mfinsights.com Microfinance in Africa: What Works? Nairobi, Kenya

On November 20, Microfinance Insights celebrated the launch of our Africa issue by hosting a panel discussion, “Microfinance in Africa: What Works? The Future of Entrepreneurship, Technology and Regulation.” The Lead Sponsor of the event was Craft Silicon, a leading global technology provider for banks and MFIs. Associate Sponsors included Unitus, the international NGO that advances solutions to eradicate poverty, and Blue Financial, the South Africa-based microfinance institution. Microfinance Gateway supported as a media partner. The discussion brought the “Africa issue” to life by convening several of the commentators and interviewees for a live discussion. Over 80 people attended. Key discussion points are included below. The Players The panelists included Ms. Ingrid Munro, the Founder of Jamii Bora, Mr. Kamal Budhabhatti, Founder-CEO of Craft Silicon both based in Kenya; Mr. Morne Reinders, Group Investor Manager of Blue Financial from South Africa; and Ms. Pauline Nsa, Managing Director of First Bank of Nigeria, Microfinance Bank. The discussion was moderated by Mr. Vineet Rai, Managing Partner, Aavishkaar Goodwell Microfinance Development Co. What makes Africa tick? Africa—a continent of 53 countries, 300 million people in need of financial assistance, and over 20 large MFIs—is a promising microfinance market. In recent years, the continent has seen its share of deals, the pioneering use of technology and the launch of diverse financial products. The panel sought to explore what works in microfinance in Africa; how this market differs from others; and what makes the African market tick? Mr. Rai opened the discussion by inviting the

microfinance insights

Panelists at the Microfinance in Africa: What Works? event. From left to right, Mrs. Pauline Nsa, Mr. Morne Reiners, Mr. Vineet Rai, Mrs. Ingrid Munro, and Mr. Kamal Budhabhatti.

panelists to share their thoughts on what Africa has to offer. Mrs. Munro, Founder of Jamii Bora, a Nairobi-based MFI, highlighted that Africa’s high levels of poverty combined with a spirit for entrepreneurship make it a potentially huge market for microfinance. Citing the example of the people’s resilience, Munro spoke of how more than half of Jamii Bora’s borrowers lost everything in the tragic post-election violence last year. Despite their losses, members quickly got back up on their feet – largely because of their prior experience with the market. Munro also cited two significant traits of microfinance in Kenya: first, the range of types of MFIs, from commercial banks to small NGO-MFIs, and second, the different levels of poverty present, which creates opportunity for different products, programs and services. Reinders from Blue Financial, which currently operates in twelve countries across Africa and caters to the income group between commercial banks and regular MFIs, echoed the need for product development, particularly for housing microfinance and microinsurance. Reinders stressed that, “Microfinance is the story

jan/feb 2009

of Africa gone right, and there is a lot of potential to offer.” To Regulate or Not to Regulate, that is the Question Kenya, a leading Eastern Africa microfinance market, recently enacted microfinance legislation. In recent years, the country was plagued by pyramid savings schemes that took advantage of many people, and sowed the seeds of mistrust about MFIs. Naturally, this has lead to tighter legislation. However, as Munro pointed out, the country is an example of how governments can constructively engage with players before passing legislation. During the drafting of the law, Munro hosted three Central Bank officials at Jamii Bora, as did two other MFIs. The time spent on the ground, has lead to an atmosphere of learning, something that Ms. Nsa hopes will happen in Nigeria, where legislation is now in place. In that country, the policy is still evolving, with regionspecific licenses and high capital adequacy requirements. While these are not hampering the course of microfinance in the sector, Nsa adds, “It is a learning process in Nigeria.”

events Technology as an Enabler How much does technology impact operations on the ground? What does it take to build a technology platform that is used by every section of the industry? Product diversification was the solution put forth by Kamal Budhabhatti, whose company was founded in Kenya, but services MFIs in several parts of the world. Today, Craft Silicon works with an MFI that has less than 2,000 clients, and at the same time serves organizations that have more than a million. The answer to dealing with differing client needs, Budhabhatti says, is to have separate versions of the same software. For example, their trademark software Bankers Realm has three versions – Lite, Micro Finance Officer, and Bankers Realm. net – each designed to meet the specific needs of the MFI. The Financial Crisis and Microfinance Lastly, the discussion touched upon the financial crisis and how that has impacted operations in Africa. Blue Financial spoke of their challenges in the growing credit crunch, especially as a non-deposit taking organization, specifically when it comes to raising funds. However, Reinders pointed out that development finance institutions (DFIs) are looking at the market “with slightly different eyes” as compared to those in private equity. They have greater access to funds, and their focus for the moment seems to be on frontier markets. Overall, the discussion surrounding microfinance in Africa highlighted a few outstanding factors. First, Africa has huge potential, and its people are not only entrepreneurial, but also resilient. Second, favorable regulation, particularly in East Africa, can facilitate industry growth. Third, technology aided by favorable regulation opens up the possibilities for the masses. At a time when the rest of the world might be reluctant to invest in Africa, the world of microfinance looks to it with great expectations. (The video recording will soon be available on our website, www.microfinanceinsights.com)

Indian Microfinance: What Works? Mumbai, India

The role of microinsurance is commonly less understood than microfinance mainly due to its late emergence relative to the idea of providing financial services to the bottom of the pyramid. In order to build knowledge and facilitate crosslearning in the nascent microinsurance sector, www.microfinanceinsights.com

Microfinance Insights conceptualized a platform where experts from the Indian microinsurance sector could come together to discuss the growing role of innovation and technology, and the evolving regulatory environment. In September, Microfinance Insights convened a one-day panel event in partnership with IFMR Foundation and the Center for Insurance and Risk Management (CIRM) that brought together policy makers, microinsurance providers/ intermediaries, community-based insurance providers, and technology enablers. Structured into three panels, the Indian Microinsurance Event aimed to produce rich insights from these inter-related themes in microinsurance design and delivery: technology, regulation and product trends. Microinsurance refers to insurance products for low-income individuals not served by typical insurance schemes. Currently, only two percent of the global microinsurance market has been tapped. Unfortunately, dissemination and product education are difficult—many poor people do not see a need for insurance, or trust the companies that offer it. Microfinance institutions can serve as a distributor, educator and advisor to potential microinsurance customers. In the context of rural financial inclusion, the microinsurance sector is vital, as financial inclusion aims to provide savings, credit, remittance and insurance services to the weaker and vulnerable sections of the country at affordable cost. India represents one of the largest untapped microinsurance markets. According to a UNDP Report, about 90% of the Indian population— some 950 million people—are not covered by insurance and signify an untapped market of nearly US$2bn. Additionally, a survey conducted among 248 urban and rural below poverty line families by SKS in India before it began offering health insurance showed that 67% of the respondents had used private medical facilities. On average, they spent INR 2,340 (US$48) per family per year on consultation, diagnosis, treatment and transportation. Some 45% of the families surveyed borrowed money to meet health emergencies. Nearly 94% of the families had borrowed less than INR 5,000 (US$102) and only 3% had health insurance coverage. India’s apex development bank NABARD (National Bank for Agriculture and Rural Development) sponsored the event, as did FINO, a leading microfinance technology provider,

Financial Information Network & Operations (FINO) and the Life Insurance Corporation of India (LIC). Media Partner Microfinance Gateway promoted the event. (The webcast of the event can be viewed online at www.microfinanceinsights.com.)

Microfinance Plus: Using Microfinance Networks and Partnerships to Innovate at the BOP Bali, Indonesia In July, the Asia Pacific Microcredit Summit 2008 convened in Bali, Indonesia, drawing over 900 practitioners and stakeholders from around the world. Microfinance Insights hosted an Associated Session which focused on microfinance plus partnerships, with a specific look at organizations that are coming together to deliver green energy products and services to microfinance customers. We structured the event as a knowledge and network builder to prepare for this very issue. Accordingly, we gathered some of the foremost experts in the field of green microfinance, including Ms. Kathleen Robbins, Director of Clean Energy, Green Microfinance, US (see her article in this issue); Mr. Abdul Hai Khan, General Manager, Grameen Trust, India; and Mr. Chitta Ranjan Chaki, Deputy General Manager, Grameen Shakti, Bangladesh. Ms. Manju Mary George, Vice President, Intellecap, India joined to talk about her experience facilitating microfinance partnerships. She also previewed a research project underway on water and microfinance (see the article in this issue). Ms. Lindsay Clinton, Managing Editor, moderated. The panelists helped address many of the questions we had: How can we use the microfinance model and microfinance networks to bring clean water and sanitation tools to lower-income populations? How can developing countries help guide the rest of the world in terms of environmental innovation? How can renewable energy technologies be linked with income-generating activities? Is there a future for microfinance and carbon trading? The panelists helped our team gain a greater understanding of the issues. We would like to thank our Microfinance Plus panelists once more for helping us to frame and build this issue of the magazine. n

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resources

Recommended Readings Microfinance Plus – Impact of the ‘plus’ on Customers’ Income in Rural India B. Augsburg, 2008

Microfinance for Water, Sanitation and Hygiene: An Introduction C. Fonseca et al., 2007

The impact of microfinance on incomes of rural livelihoods has assumed a lot of importance lately. While most studies indicate that the effect is positive, they fail to take into account the fact that microfinance encompasses more than credit services. Some of these features include the provision of training, establishment of market linkages, and the introduction of new insurance products and saving options. This paper is based on a study of services offered by BASIX India, a large microfinance and livelihoods organization. The author assesses the effect of some of these services (e.g. a choice to purchase agricultural and business development products for dairy farmers) on income. The study reveals that although these services have a negative (though insignificant) impact on the customer’s income levels, they have a positive impact on the overall health of livestock, therefore reducing livelihood risks. The paper emphasizes the importance of reducing these risks in order to sustain livelihoods of the poor, particularly engaged in dairy activities where profit margins are very low.

For a long time, water and sanitation have been severely neglected in microfinance. But, there is a growing realization in the microfinance community about the role micro loans can play in households and communities in accessing water and sanitation services. The author argues that for this mechanism to work efficiently, a willingness to pay has to be demonstrated by people in the community. MFIs also need to forge partnerships with local NGOs and municipalities to provide water supplies and build sanitation structures.

Enhancing the Impact of Microfinance: Client Demand for Health Protection Services on Three Continents M. Metcalfe & M. Sinclair, 2008 This paper is based on the market research that Freedom from Hunger (FFH), and five microfinance institutions, conducted in 2006 to understand the impact of health on poor livelihoods and their ability to repay loans. It also examines the need for health financing in Bolivia, Benin, Burkina Faso, India and the Philippines. The results reinforce the need for appropriate health services for microfinance clients all across the world, and highlight the importance of services like health education, training programs and health finance. FFH studied the local health needs, demands, available services and MFI capacities, and introduced five innovative health protection packages that are not only relevant, but also sustainable and scalable/replicable.

Microfinance Programs and Better Health (Prospects for Sub-Saharan Africa) P. M. Pronyk et al., 2007 Conditions of extreme poverty, like those characteristic of sub-Saharan Africa, create traps that limit access to services and constrain gains in employment, income, food, education and health. Despite this understanding, studies on these inter-linkages and how to overcome these challenges remain obscure. This paper examines the impact microfinance can have on reducing poverty, while addressing other problems (like those related to health) simultaneously. Eradication of poverty and hunger, increasing access to education, improving lives of women, and promoting gender equity are only some of the mechanisms through which microfinance interventions can have maximum impact on health. The author also identifies challenges that South African MFIs face in integrating such services within their framework and identifies means to overcome them.

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Microfinance for Renewable Energy: Financing the ‘former poor’ S. Srinivasan, 2007 More recently, MFIs have realized that poor people who lack access to financial services also need a range of services and products besides basic credit support. Energy is one field, especially in rural areas where microfinance has not reached sufficiently. In remote areas, since people do not have adequate financial means to afford renewable energy technology, microfinance institutions can come forward to provide improved energy services. This paper suggests that the provision of energy would lead not only to social but also economic improvement by productivity and profitability of enterprises and therefore lead to MFI sustainability.

Energy Lending: Microfinance and Access to Modern, Alternative Energies J. Bedson, 2007 Even as MFIs across the world are struggling to meet the huge demand for financial services, there is an unfulfilled demand for safe and cheap sources of energy in developing countries. The remoteness of rural locations makes energy supply via a centralized grid system difficult, leaving people to rely on expensive substitutes like kerosene and diesel. The paper suggests that the provision of loans on a large scale would require partnerships between MFIs and energy suppliers, but convincing funders and partners about the benefits of alternative sources of energy remains a challenge. Microfranchising can serve as a solution to the rural penetration of energy supplies. The paper concludes that for energy lending to assume mainstream importance within the microfinance industry, low cost value adding technologies must be identified and implemented. Gaps within the financial models that map energy needs should be identified and corrected.

resources

Mark your Calendar January PONDICHERRY, India

International Conference on Microfinance* 21st – 23rd January, 2009 The second edition of the annual conference hosted by the University of Pondicherry, International Conference on Microfinance will explore the status of microfinance in India, regulation for MFIs and technology and microfinance among other topics. Sponsor: NABARD and the Department of Commerce, University of Pondicherry Website: http://www.pondiuni.edu.in/icomfi2009/

BERLIN, Germany

Implementing the EU-Microcredit Initiative – What we can learn from developing and transforming countries? 26th – 27th January, 2009 The event will bring together partner members of the EU microcredit initiative to discuss the state of the initiative and to draw from partner experiences in South and Eastern Europe. The discussion will focus on the role of micro-credit as a meaningful instrument of business development in the EU. Sponsor: European Commission – European Social Fund Website: http://www.chabal.eu/64.html

NEW YORK, USA

3rd Annual Microfinance East: The Investment Opportunity* 29th – 30th January, 2009 Tailored for both purely commercial and social investors, this conference is designed to help you to recognize the potential of microfinance institutions and microfinance investment vehicles to generate profits while alleviating poverty. Sponsor: Financial Research Associates Website: http://www.frallc.com/conference.aspx?ccode=B679

February KATHMANDU, Nepal

Microfinance Management in Development Programs 2nd – 6th February, 2009 The objective of this training is to equip participants with the skills to manage the microfinance program initiated by different development and promoting agencies in a systematic and sustainable way. Sponsor: Center for Microfinance, Nepal Website: http://www.cmfnepal.org/?pg=tr_detl4

and impact at this AMC-organized event. Other topics on the agenda include the global credit crisis and microfinance as an asset class, transformation of NGOs to MFIs, and performance and risk management. Sponsor: AMC International Website:http://www.amc-intsa.com/index.php?option=com_attend_events&task=view&id=22&Itemid=32

March BLACKPOOL, UK

I6th Annual International Conference on Women’s Enterprise Development 4th – 5th March, 2009 The two-day event, with the theme “Risk and Reward” will focus on how to ensure women entrepreneurs have the right support structure to weather the economic turbulence. Themes include transition from welfare benefits, social enterprise, women’s enterprise and innovation. Sponsor: Northwest Regional Development Agency (NWDA) Website: http://www.prowess.org.uk/conference/Researchstrand2009. htm

BRUSSELS, Belgium

Mobile Payments and Commerce* 17th – 18th March 2009 The event is designed for top executives from both the mobile finance industry and commerce industry to formulate the mobile payments, banking and commercial strategy for the future. Topics include business strategies for the sector, cross-border remittance growth, advanced payment services for retail innovation, mobile marketing and coupon transactions. Sponsor: Informa Telecoms and Media Website: www.mpaymentsconference.com

VIENNA, Austria

2nd Annual Microfinance Forum* 19th – 20th March, 2009 The second iteration of Uniglobal Research’s microfinance conference will focus on a number of issue areas - including the global trends and imbalances and microfinance, successful business models in low income markets, common standards for the microfinance industry, retail microfinance, mobile banking and more. Sponsor: Uniglobal Research Website: https://www.uniglobalresearch.eu/en/event/2009-66

JOHANNESBURG, South Africa

Micro-Finance Summit 2009* 23rd – 25th February, 2009 Regional and international stakeholders in microfinance will come together to discuss issues related to financial inclusion, innovation * Indicates a Microfinance Insights recommended event www.microfinanceinsights.com

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trends

Microfinance Market Indicators Statistics and indicators related to health, water, energy and other ‘’plus’’ activities across the world, selected and compiled by the editorial team. Almost 1 in 4 Humans Without Access to Electricity2

PPP in US$

Per Capita Total Expenditure on Health (PPP)1

The world’s total per capita expenditure on health, adjusted for Purchasing Power Parity (PPP), has grown by 36% between 2000-05, whereas the low income strata and lower middle income strata have grown by 50% and 61%, respectively.

South Asia Sub-Saharan East Asia Other Africa

Access to Improved Drinking-Water Source1 No. of Days it Takes to Start a Business

% of Population

Access to Improved Sanitation1

% of Population

Cost to Start a Business (% Gross National Income per Capita)3

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trends

Microfinance Market Indicators Statistics and indicators related to health, water, energy and other ‘’plus’’ activities across the world, selected and compiled by the editorial team. Projected Consumption of Renewable Energy divided by Total Energy Consumption4

Unequal Carbon Footprints: Shares of emissions & population5 CO2 emissions % share

World population % share

87.0

79.4

71.8

64.2

56.6 All developing countries 49.0

56.6

41.4 High-income OECD 33.8

41.4

26.2

18.6

11.0

49.0

33.8

CO2 emissions refer to energy-related emissions. Emissions from deforestation are not included.

Facts & Figures

Graph is Not to Scale As demonstrated by the marked gap in regions on this graph above, Central & South America has the highest projected percentage of renewable energy use and has a 2.1% annual growth of renewable energy consumption over time. As shown in the chart below, the OECD (30 countries commited to democracy and market economy) and Africa are expected to gradually increase their usage of renewable energy at a growth of 1.8% and 2.7%, respectively. Eastern Europe & Central Asia and Asia remain relatively steady compared to their total energy consumption. Asia’s total energy consumption growth is 0.4% more than its renewable energy consumption. Renewable energy will contribute a small percentage to the Middle East’s total energy consumption, however its expected growth in renewable energy usage is among the highest at 2.4% Average Annual Percentage Change in (20052030):

Eastern Europe and Central Asia

Asia

Middle East

Africa

Central and South America

OECD Countries

Total Primary Energy Consumption

1.2

3.2

1.9

2.0

0.7

Renewable Energy Consumption

1.1

2.8

2.4

2.7

2.1

1.8

1.8 billion People are expected to suffer from fresh water scarcity by 2025, mostly in Asia and Africa.6 1.1 billion People in developing countries have inadequate access to water.7 2.6 billion People in developing countries lack access to basic sanitation.7 180 million People are affected by food shortages and malnutrition and it is estimated to affect 600 million people by 2080.6 5.3 billion People are without access to any social security coverage.6 1.6 billion People are without access to modern energy.2 1.4 billion Slum dwellers are estimated by 2020.8 78 million People in the 100 poorest countries have some microinsurance coverage.9 23 Countries out of the 100 poorest do not have any evidence of microinsurance activity.9 For the 1.9 billion children from the developing world, there are:10 • 640 million without adequate shelter (1 in 3) • 400 million with no access to safe water (1 in 5) • 270 million with no access to health services (1 in 7) 2.5 billion People in developing countries rely on biomass (fuelwood, charcoal and animal dung)—to meet their energy needs for cooking.11 Over 80% Of the population in Sub-Saharan Africa depends on traditional biomass for cooking, as do over half of the populations of India and China.11 US$50 billion Is the expected worth of the carbon credit market by 2050.12

Sources 1. Adapted from: World Health Organization. World Health Statistics 2008. http://www.who.int/whosis/whostat/EN_WHS08_Full.pdf 2. Adapted from: United Nations. The Millennium Development Goals Report 2007. http://www.un.org/millenniumgoals/pdf/mdg2007.pdf 3. Adapted from: The World Bank. Doing Business 2008. September 2007. 4. Adapted from: Energy Information Administration. International Energy Outlook 2008. June 2008. 5. UNDP. Human Development Reports. http://hdr.undp.org/external/flash/shares/ 6. International Labour Organization. “Green Jobs: Unite to Combat Climate Change.” September 2008. 7. UNDP. Human Development Report 2006. “Beyond scarcity: Power, poverty and the global water crisis.” http://hdr.undp.org/en/media/HDR06-complete.pdf 8. Lopez, Eduardo and Rasna Warah. “Urban and Slum Trends in the 21st Century.” UN Chronical Online Edition 9. Micro Insurance Center. “The Landscape of Microinsurance in the World’s 100 Poorest Countries,” 2007. 10. UNICEF. State of the Worlds Children 2005. http://www.unicef.org/sowc99/index.html 11. Global Issues. http://www.globalissues.org/article/26/poverty-facts-and-stats#src14 12. Financial Times http://www.ft.com/cms/s/2/282b278c-f4db-11db-b748-000b5df10621.htm

www.microfinanceinsights.com

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survey

Microfinance Plus - Product Development, Implementation and Partnerships From education to housing to insurance, microfinance plus services are becoming increasingly popular for MFIs to better accommodate their customers. For this issue, Microfinance Insights conducted a survey of nearly 200 microfinance practitioners from 56 countries worldwide. This survey asked MFIs to share their perspectives on a wide range of issues related to the provision of “plus” services, including details about product development, implementation and partnerships. We have gathered some of the most compelling highlights from our survey on these pages. For example, the largest motivating factor for an MFI to provide additional services is to improve outreach and social impact. We also found that while 82% of MFIs think there should be an equal risk sharing mechanism in a partnership model, on the ground operational support is one of the least critical roles of a partner. The most preferred partners are multilateral/ bilateral agencies and the least preferred partners are banks. The complete Microfinance Plus Survey Report will be sent to subscribers and available online at www.microfinanceinsights.com

Survey Sample Overview Type of Organizations

Area of Operation

Partnerships for “Plus” Services

% of MFI respondents

What is the Right Stage in the Life Cycle of an MFI to Enter into “Plus” Partnerships?

% of MFI respondents

Expected Value Addition from Partners

Commer- Consult- MFIs NBFC/ NGO cial ing NBFI banks organizations

Some MFIs suggested that another possible value addition could be impact assessment

MFIs’ Preferred Partners

Perceptions about MFI Partners • 54% of MFIs work with external partners to provide “plus” services

Government agencies

• 82% of MFIs believe that in a partnership, there should be an equal risk sharing mechanism

Corporate agencies

• The most important elements for a successful “plus” program are identifying the right partner and aligning goals/outcomes of the partnership

Banks

• Most MFIs feel that the most critical roles of partners are helping with business/product development and providing financial support • Most MFIs feel that the least critical roles of partners are underwriting risks and providing on the ground operational support

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Least preferred partners Most preferred partners

Bilateral/Multilateral organizations Commercial Consulting MFIs Banks organizations

NBFC/ NGOs NBFI

survey

Microfinance Plus - Product Development, Implementation and Partnerships Developing “Plus” Services What are the Most Important Factors Determining an MFI’s “Plus” Services?

% of MFI respondents

“Plus” Product Offerings by Type of Organization

r’s opinion A few MFIs also mentioned regulatory framework as an important factor

Com- Consult- MFIs NBFC/ NGOs mercial ing NBFI Banks organizations Other services may include project advisory and livelihoods support services

Negative Consequences of Offering “Plus” Services

% of MFI respondents

No. of MFI respondents

MFI Motivation for Offering “Plus” Services

Inadequate Risk of en- Moving away Fall in overall implementa- tering into from core operational tion bad partfinancial efficiency nerships services d

• According to MFIs, the top three “plus” services that clients require are: • Education assistance • Agricultural financing • Financial literacy • According to MFIs the most suitable areas for product diversification are: • Livelihoods • Insurance • Education • 64% of MFIs regard “plus” services as sustainable with initial funding

www.microfinanceinsights.com

MFI Adaptation Needed After Introducing “Plus” Services

% of MFI respondents

• 79% of MFIs offer “plus” services to existing as well as new clients

Do MFIs Undertake Assessment Studies Prior to Product Diversification?

% of MFI respondents

What Clients Want

The assessment tests may include research, feasibility studies, focus groups, surveys with stakeholders, Participatory Rural Appraisal (PRA) activities and regular feedback reviews

Staff training Client interac- Upgrading recruiting tion/education MIS Another adaptation to introducing “plus” services cited by MFIs is a change in strategy

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microfinance insights

books

Looking at the BoP from a People-Centered Approach Prabhu Kandachar, Department Chair of Design Engineering at Delft University of Technology in the Netherlands, and Minna Halme, an Associate Professor at Helsinki School of Economics have released a new book that challenges us to think of poor people in a new way, beyond the consumer- or producer-based approach. Sustainability Challenges and Solutions is a fascinating compilation of academic essays that focus on a bottom-up, human centered approach to discovering the real needs of the poor. The authors ask, are the existing methodologies for reaching the poor adequate, and can we use technology and business to stimulate economic growth without straining the ecosystem?

he turn of the millennium exposed the reality that most conventional approaches to alleviating poverty would not help in achieving the goals we set. The need for developing innovative solutions to target pervasive poverty is more evident than ever. C.K. Prahalad and Stuart L. Hart, the authors of Fortune at the Bottom of the Pyramid, have argued for a market-based and entrepreneurial approach to tapping the largely unexplored bottom of the Pyramid (BoP) market.This book, Sustainability Challenges and Solutions, presents views on which bottom-up innovations can support BoP initiatives, what bottlenecks can be identified while using the bottom up approach to address poverty, and what measures need to be taken to ensure that local BoP enterprises are able to sustain themselves. The book begins by developing the concept of what it means to be poor. In the chapters that follow, the authors highlight the need for a market-based approach to doing business at the BoP. The creation of a favorable environment for market-based BoP initiatives, instead of being left to multi-national companies (MNCs) alone, should be through collaborative action among various development actors. The poor should be looked at from a “human-centered” approach. The meat of the book delves into the functioning of 10 small and medium enterprises through case studies from Asia, Africa and South America. Each of these enterprises is subject to a specific challenge and is in a unique position owing to its resources, location and physical environment. For the power sector, for instance, the structure of the dealer network can be quite crucial to sustainable energy services delivery. K. M. Arkesteijn and A. E. Maasakant of Free Energy Europe and P. Steemers of Umeme Jua,

a Dutch-Tanzanian joint venture, examine such a distribution network for a solar product they developed together—a 14 watt system sufficient to power two lights and charge a phone. Umeme Jua sold more than 5,500 small solar domestic systems in a period of three years and the sales through this network are increasing at a rate of 40%. A relevant product design targeted at middle income groups and SMEs ensured smooth service delivery of the product.

“The creation of a favorable environment for market-based BoP initiatives...should be through collaborative action among various development actors. The poor should be looked at from a “human-centered” approach.” The book points to the short-sightedness of most top-down top-down poverty alleviation approaches. It reflects on Stuart Hart and Ted London’s1 idea that “the successful pursuit of base-of-the-pyramid markets appears to require firms to build, consolidate and leverage learning from the bottom up.” Aline Kramer and Frank-Martin Belz of Technische Universitat Munchen, Germany support this ethos in their essay, explaining that successful BoP ventures require integration of and interaction with BoP consumers during the innovation process. The latter half of the book presents case studies—including electricity and clean energy initiatives—that look at the capabilities of and opportunities and challenges for MNCs venturing into BoP business development. One example of a successful public-private partnership is Tetra Pak’s launch of the Nasarawa State School Feeding Program (SFP) in Nigeria. Tetra Pak, a multinational food processing and packaging

1. Ted London is a leading expert on the role and impact of market-based strategies on poverty alleviation. He is a Senior Research Fellow at the William Davidson Institute (WDI) and on the faculty at the University of Michigan’s Ross School of Business

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company, forged a unique collaborative effort with the World Bank Institute (WBI), with support from the Global Alliance for Improved Nutrition (GAIN). Together the partnership enabled Tetra Pak to collaborate with the governor of Nasarawa State to set up a program to supply children with nutrition supplements. The initiative kick-started local industry (thus relieving poverty) while improving child nutrition. The book makes special note of the importance of including environmental and ecological sustainability within the larger framework of “development at the BoP” and analyzes the extent to which market instruments and governance structure can function as effective safeguards for environmental sustainability. The authors acknowledge that despite the professed goal of BoP projects to reduce poverty, the ability of these initiatives to precipitate the well-being or happiness of those targeted is still open to question. While their potential to contribute to human development is well understood, BoP product innovations, like any other product category, suffer from pitfalls. The book serves as a good starting point for further debate on the effectiveness and drawbacks of business at the base of the pyramid. n - By Vibha Mehta, Associate, Intellecap

Ordering Information Sustainability Challenges and Solutions at the Base of the Pyramid: Business, Technology and the Edited By: Prabhu Kandachar and Minna Halme Published by: Green Leaf Publishing, September 2008 532 pages ISBN: 978-1-906093-11-2 (Hardback) Price: £50.00

books

Realizing the Potential of Microfranchises to Alleviate Poverty Book Excerpt: Ending Global Poverty: The MicroFranchise Solution Microfranchises are small businesses that can be easily replicated by following proven marketing and operational concepts, with the overall objective of achieving economic development. Kirk Magleby, the founder of Nuvek, a technology firm that specializes in designing and managing computer systems and networks, is the author of Ending Global Poverty: The Microfranchise Solution. Drawing from examples that look at successful and failed franchising models, Magelby examines the potential of microfranchises to alleviate global poverty. In this excerpt, he argues against a cookie-cutter approach to establishing microfranchises in developing countries, and presents his perspective on what the future holds for the “microfranchising industry.” …It is time to unleash the power of the franchise business model to unlock some of the latent potential for sustainable development that lies dormant throughout the developing world.

icrofranchises can be very small operations. The 56 Health Stores operated by Scott Hillstrom’s Healthstore Foundation (formerly SHEF and CFW) in Kenya are one example…Tiny equipment businesses rent bicycles and wheelbarrows. Muhammad Yunus’ Microfranchised Grameen village phone ladies in Bangladesh have a very small business footprint. Direct distribution models like Unilever’s kiosk-based Shakti Amma dealers in India and Brazil’s nearly ubiquitous Avon ladies generally employ a single person. In most cases, though, that single person earns much more and has more security than she would have on her own without the nurturing support of the large enterprise around her. Most Microfranchises will be created in the developing world rather than exported from industrialized nations. A great deal of creative social entrepreneurship will be required. The unit economic numbers are simply too small to allow systems to be merely adapted from developed countries. McDonalds has suspended operations in most of Bolivia and KFC can’t compete with the indigenous Pollo Campero franchise in Guatemala and El Salvador. In less developed countries, small really can be beautiful as long as there is growth. In Bolivia for example, per capita income is about $2,500 per year so a Microfranchise that allowed its owner to take home $250 per month would give that enterpriser an income above the national average. The Microfranchise Development Initiative, MFDI, of the Brigham Young University Center for Economic Self-Reliance defines a “Microfranchise” as a franchised business concept that is available to and within reach of people at www.microfinanceinsights.com

the base of the income pyramid in a developing country. It is understood that most potential Microfranchisees will require financing to pay their franchise fee and other start-up costs. The cost threshold for a business to qualify as a Microfranchise could be as high as $25,000 in countries like Mexico or Brazil where annual per capita GDP adjusted for purchasing power parity ranges from $8,000 to $9,500. That same acquisition threshold may be as low as $3,000 in a nation like Kenya where annual per capita GDP adjusted for PPP is only $1,000.

“Informed people generally will come to realize that large numbers of very small enterprises can be efficiently and profitably run so they create jobs and contribute significantly to national economies.” Future Trends Commercial realities such as market demographics, land values and transportation infrastructure dictate the scale of commerce in any given community. In my city of American Fork, Utah, for example, the local Wal-Mart recently vacated its original store and moved to a Super Center across town, adding 300 new jobs in the process. What had been big box retail is now mega box retail. A similar phenomenon will happen with certain Microfranchise locations under favorable conditions. Some will be “mini franchises,” generating more wealth and creating more jobs than their smaller counterparts. The Microfranchise industry worldwide will trace a trajectory similar to the one that Microfinance has followed

where initially philanthropic support or socially responsible corporations will be needed to create the operating systems, adapt them to local conditions, and implement the pioneering networks. Some franchise organizations will become selfsufficient fairly quickly, while others will be at least partially donor dependent over long periods. Incubators, facilitators, replicators, holding companies and accelerators will arise as the industry matures. Securitization through syndication will attract some interest from mainstream franchise industry players, financial institutions and investors. Some multinationals and large domestic corporations will seize the concept as an opportunity to cost effectively open vast new markets of heretofore underserved consumers. Multinational corporations will forge creative joint ventures with NGOs. Informed people will come to realize that large numbers of very small enterprises can be efficiently and profitably run so they create jobs and contribute significantly to national economies. Microfranchising which has begun as a fledgling social movement will soon go mainstream. n

Ordering Information Ending Global Poverty: The MicroFranchise Solution By: Kirk Magleby (Author), James Michael Pratt (Editor), Evan Frederickson (Illustrator) Published by: PowerThink Publishing; 1st edition (October 1, 2007) Paperback: 228 pages ISBN: 0967776414 ISBN: 978-0967776415 Price: US$19.95

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microfinance insights

last word

Green: The Unofficial Color of the New Millennium

When Al Gore won an Oscar for his movie “An Inconvenient Truth,” few saw it as the beginning of a global movement to battle climate change. Today, the debate has come far, with pundits and the average Joe alike talking about carbon trading, carbon footprints, Kyoto, ozone depletion and everything else in the “green alphabet.” The debate has now extended to microfinance, with MFIs trading their surplus credits, cutting back on their footprints, and promoting the green way of life. Amidst all this talk, it is easy to forget that the BoP needs to be protected against climate change as much as everyone else. Leila Seradj of the New America Foundation tells us what MFIs can do to protect those most likely to be affected by climate change.

ith “green” on everyone’s tongues, it was only a matter of time before the question of environmentally-friendly practices arose in microfinance. Practitioners and microfinance partner groups have focused their efforts on asking questions about the impact of microfinance clients on the natural environment. I, on the other hand, can’t help but wonder if we should be asking what microfinance can do to protect the most vulnerable from environmental woes brought about by climate change. Back in 2001, the United Nation’s Intergovernmental Panel on Climate Change surmised that “the impacts of climate change will fall disproportionately upon developing countries and the poor persons within all countries.” This is already evident in Mauritania (West Africa), where environmental degradation has wiped out livelihoods, livestock, and homes. An October 2008 U.N study reported that the potential annual revenue losses and health care expenses due to land degradation in the country are an estimated US$200m. Further, the report estimated that 14% of the government’s budget—about US$192m—will be consumed by environmental degradation. If we truly care about empowering individuals to be protagonists of their own development, we must be vigilant about the challenges faced by the poor and the devastating impact climate change can have on their livelihoods. Steps have already been taken by actors in the international arena: an Adaptation Fund to help poorer countries cope with the impact of effects of environmental crises was on the agenda at a meeting of 100 environment ministers convened in December 2008 in Poland. Climate change has already had an impact upon land, the value of property in the developing

world, and the ability of low-income individuals to cultivate resources and leverage their assets. When assistance shifts from providing longterm access to sustainable financial services to emergency relief, this only intensifies the problem. Richard Muyungi, the deputydirector for the environment in the office of the Tanzanian vice president, acknowledged that this has already occurred in his country, where drought has had grave effects on the energy sector, health, and food prices. The country has already had to scale down its forecasted economic growth rate for 2008 from 7% to 6%. The need to provide safeguards for livelihoods of those most vulnerable to the effects of climate change is therefore imperative.

“If we truly care about empowering individuals to be protagonists of their own development, we must be vigilant about the challenges faced by the poor and the devastating impact climate change can have on their livelihoods.” If development and climate change are, so intricately linked, how can development programs and assistance be focused to help sustain livelihoods? And what role can microfinance play in order to protect the assets of those who are particularly vulnerable to the effects of climate change? The answers are twofold. First, microfinance needs to facilitate a means of asset protection as well as asset creation. Microfinance has the tools not only to empower low-income individuals, but also to protect them and their assets in times of heightened vulnerability. The adverse affects of climate change on the world’s poorest

1. Intergovernmental Panel on Climate Change. “Climate Change 2001: Synthesis Report. Summary for Policymakers.” 2001. http://www.ipcc.ch/pdf/climate-changes-2001/synthesis-spm/synthesis-spm-en.pdf 2. “Desertification threatens to wipe out livelihoods, communities.” IRIN, December 2, 2008. http://www.irinnews.org/Report. aspx?ReportId=81782 3. “U.N. chief tells world: we need a Green New Deal.” Reuters, December 11, 2008. http://www.reuters.com/article/worldNews/i dUSTRE4B519W20081211?pageNumber=2&virtualBrandChannel=10341 4. Kato, Takatoshi. “Implications of Climate Change for Africa.” Speech made at Fourth Tokyo International Conference on African Development. Yokohama, Japan: May 29, 2008. http://www.imf.org/external/np/speeches/2008/052908a.htm

microfinance insights

jan/feb 2009

suggest that the protection of livelihoods is a particular area where MFIs may have a marked impact. Agriculture, often a primary source of livelihood for those in developing countries, is an area that has keenly felt the consequences of climate change. Emphasizing rural financing is one way of addressing this problem. Likewise, structuring microinsurance products as a vehicle to protect assets—and even create assets if, for example, if they include a savings component— is another means by which MFIs could address the destructive impact of climate change on livelihoods. Perhaps the simplest but most underutilized safeguard is providing those without access to financial services with incentives, and a safe place to save. A rainy day fund takes on a whole new meaning when we talk about climate change. Having the resources to weather certain storms will become vital in increasingly vulnerable communities, and in increasingly environmentally volatile areas. So, where governments and aid agencies cannot provide, MFIs can play a key role in protecting the livelihoods of those adversely affected by climate change. As the recent global financial crisis has demonstrated, foresight and planning are often underutilized qualities that are crucial to minimize the impact of disruptive phenomena that leave many feeling helpless. While the effect of climate change on low-income and vulnerable populations is only beginning to manifest itself, it is imperative that microfinance practitioners take seriously the possibility that this trickle may very well become a flood. n Leila Seradj is Program Assistant at the Global Assets Project, a joint venture between the New America Foundation and the Center for Social Development at Washington University. Leila also writes for the Foundations blog, “The Ladder.” You can read more of her work at www.newamerica.net/blog/ ladder, or email her at seradj@newamerica. net

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