However, surveys show the financial needs of the poor go beyond these services, and the most recent innovation witnessed by the mobile banking world was Kenya’s M-Kesho, which offers microfinance services (micro-savings and micro-loans) through cell phones. Similarly, weather-based micro-insurance is provided to farmers in Kenya. These are all commendable achievements, but branchless banking providers ought to analyze the needs of micro-segments in the society, to maximize the utility of financial services to the masses.

A recent article by Mark Pickens at CGAP shares four exciting innovations in this field that deserve our attention:

• mHealth – Mamakiba is a micro-savings service that helps pregnant women save money to finance the birth of their children.
• Online sales platform – Cellulant builds inter-bank and inter-MNO platforms that help clients buy various items through their mobile phones.
• Personal finance – PesaPal is a startup that collects data on electronic transactions to compile credit ratings, assists individuals in basic financial planning and offers supply chain management for small and medium enterprises.
• Medical smart card – Changamka sells health savings cards that give clients access to basic health services at nearby medical centres. The card can be reloaded through M-Pesa.

All four services are Kenyan, and while they get one excited, the reality is that only one of them has attracted sufficient funding. Without access to adequate capital, mentoring and technology incubators, these useful products may never reach their potential for financial inclusion.

Reference: Pickens, M.. (2010). Where will the next mobile money innovation come from?. Available: http://technology.cgap.org/2010/11/18/where-will-the-next-mobile-money-innovation-come-from/. Last accessed 27th Nov 2010.

One of the reasons attributed to interest rates in microfinance is the high cost of funds – among other sources, microfinance providers may obtain loans from commercial banks, who lend to MFIs at market rates. After this, microfinance institutions need to add a premium to cover their own costs and risks, which means the interest rates paid by micro-entrepreneurs can go pretty high.

This makes business sense because commercial banks charge a premium over ‘their’ cost of funds (public deposits in the form of micro-savings accounts, equity capital, and borrowings from the central bank, if necessary).

Naturally, if interest rates are to be reduced, microfinance institutions must have two options:

• Reduce the premium (also referred to as the ‘spread’) – this is dependent on transport costs, administrative costs, profit, salary expense, risk, etc., which means it can only be reduced if operations become more efficient,
• Reduce the cost of funds – this can be reduced by obtaining subsidized loans (through development agencies), non-interest loans (e.g. through Kiva), and public deposits.

One of the reasons cited by Vikram Akula for the SKS IPO was the inability to access low-cost funds in the form of public deposits, owing to regulatory restrictions. This is indeed a problem for the entire microfinance sector in India, as mentioned by the recent article in Hindustan Times:

“As MFIs, we have always stated that the growth of the base (of customers) will be critical to the reduction of costs. In addition, we can reduce costs if cheaper source of funds are made available to us,” Vijay Mahajan said (President, Microfinance Institutions Network).

By Rosalind Piggot, KF10, Tajikistan

Following the recent New York Times article questioning the interest rates charged in microfinance, I looked back at recent blogs by Kiva Fellows about interest rates and sustainability. In comments on those blogs and on Kiva’s lender team sites, a lot of people were asking: “Do I want to lend via a for-profit institution?” and similar questions.

As a fellow in Tajikistan, I don’t think for-profit status undermines social mission. Why?

1.The other side of borrowing is saving

Lending on Kiva is about enabling people to access credit. But the same entrepreneurs that need credit might also want access to checking and savings accounts.

The problem is that if you are a non-profit microfinance organization in Tajikistan, you cannot offer savings services. Under Tajik regulations, joint stock companies or limited liability companies can be registered as deposit-taking institutions, but not non-profits. Since deposit organizations hold the public’s money, sustainability is necessary so depositors can be sure their savings will be there in the longer term.

As with microfinance generally, there is much debate over the role that micro-savings play in alleviating poverty (you can visit CGAP for case studies). But savings products can help reach out to individuals that do not have the appetite to take on the risk of credit. And, unlike using credit, there is no interest to pay when withdrawing savings to cover costs. In a sense, transitioning to a for-profit in Tajikistan can enable a microfinance institution to serve new, under-served groups and help low income savers access cheaper funds.

2.Where do the profits go?

On average, the Return on Assets of Kiva’s Field Partners is near to nil. Some of Kiva’s Partners do, however, make profits.

In Tajikistan, I was interested to discover that major (if not majority) shareholders of Kiva’s for-profit Partners are actually non-profits that work locally. These non-profits are dedicated to assisting women entrepreneurs or establishing other types of social outreach programs. If Kiva’s for-profit Field Partners distribute profits (currently, any earnings are generally reinvested in the Field Partners’ businesses), the non-profits benefit. In this way, profits stay in the sphere of social outreach.  For me, this makes the distinction between for-profit and non-profit less clear than I imagined.

So…

As mentioned in Dennis’ recent blog, I agree that social investors are critical to determining microfinance’s future. Kiva screens its Field Partners. Lenders who want to conduct additional research should do so too.  I hope my own research on Tajikistan will be helpful when you decide how to lend, so let me know your thoughts!

If you would like to support entrepreneurs in Tajikistan, you can lend, join the team Supporters of Tajikistan, or learn more about Tajikistan from Kiva Fellow blog posts

Since the 1950s, various governments in India have experimented with a large number of grant and subsidy based poverty alleviation programmes. Studies show that these mandatory and dedicated subsidized financial programmes, implemented through banking institutions, have not been fully successful in meeting their social and economic objectives:

The common features of these programmes were:

1. target orientation
2. based on grant/subsidy,  and
3. credit linkage through commercial banks.

These programmes

1. were often not sustainable
2. perpetuated the dependent status of the beneficiaries
3. depended ultimately on government employees for delivery
4. led to misuse of both credit and subsidy and
5. were treated at best as poverty alleviation interventions.

Banks too never really looked on them as a profitable and commercial activity.

According to a 1995 World Bank estimate, in most developing countries the formal financial system reaches only the top 25% of the economically active population – the bottom 75% have no access to financial services apart from moneylenders -

In India too the formal financial institutions have not been able to reach the poor households, and particularly women, in the unorganized sector. Structural rigidities and overheads lead to high cost of making small loans. Organizational philosophy has not been oriented towards recognizing the poor as credit worthy. The problem has been compounded by low level of influence of the poor, either about their credit worthiness or their demand for savings services. Micro-finance programmes have often been implemented by large banks at government behest. Low levels of recovery have been further eroded due to loan waiver programmes leading to institutional disenchantment with lending to small borrowers.

All this gave rise to the concept of micro-credit for the poorest segment along with a new set of credit delivery techniques. With the support of NGOs an informal sector comprising small Self Help Groups (SHGs) started mobilizing savings of their members and lending these resources among the members on a micro scale. The potential of these SHGs to develop as local financial intermediaries to reach the poor has gained recognition due to  their community based participatory approach and sustainability – recovery rates have been significantly higher than those achieved by commercial banks inspite of loans going to poor, unorganized individuals without security or collateral.

Success stories in neighboring countries, like Grameen Bank in Bangladesh, Bank Rakiat in Indonesia, Commercial & Industrial Bank in Philippines, etc., gave further boost to the concept in India in the 1980s.

The Global Summit on Micro Finance held in Washington in Feb ‘97 set a global target of covering 100 million poor families with credit by 2005 - it was expected that 25-30 million of these could be in India alone.

The poor in India define the micro-finance market. The Planning Commission estimate of 1993-94 says 36% of the population or 320 million people live below the poverty line – there would be 140-150 million women alone living below the poverty line. Assuming that only 30% of the country’s poor women are ready to adopt micro-finance as a method of poverty alleviation, it is estimated that 40-45 million poor women would need credit.

As against this, it is estimated that all agencies in India engaged in the provision of micro-finance services, would have together covered barely 1 million poor people by the close of 1998-99.

The most prominent national level micro-finance apex organization providing micro-finance services for women in India is the National Credit Fund for Women or the Rashtriya Mahila Kosh (RMK).

CONCEPT AND FEATURES OF MICRO-FINANCE

Micro-finance, as is being practiced by the National Credit Fund for Women or the Rashtriya Mahila Kosh (RMK), could be defined as a set of services comprising the following activities:

 India needs a solid Micro-finance structure at the bottom of the Pyramid to build a strong Nation….What say??????

I would have to disagree with David & Basti.

MFIs do not want to provide savings products for many different reasons, but most of all because it is less profitable. The ROI on savings is far lower than that for MFIs, and so MFIs avoid providing savings alternatives. (Compartamos, for example, one of the financially most successful MFIs – think $467M IPO – has had savings pilots for years they have not launched)

The real challenge behind this, as Holden correctly points out, is that the priorities of the ‘financial services for the poor’ sector is skewed too far toward monetary return on investment and not enough toward social returns on investment. This creates entities that look good financially but are not delivering as much social return.

I am also in the process of reading Portfolios of the Poor and studies like these clearly articulate the needs of the poor, and savings is a need that is not receiving enough attention. This is partially because of regulatory hurdles, which are quickly being changed here in Africa, but it is mostly because of skewed priorities: financial over social returns.

Cell phone technology promises to reduce the costs of servicing even the poorest and least-densely populated regions to the point where it will become a more viable social enterprise with better financial ROI. In the meantime, however, I think we all need to re-adjust our priorities and focus more on Social returns. With additional funding and focus, savings can and will be realized for the bottom billions.