Microfinance Focus June 2009 issue

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www.microfinancefocus.com Microfinance Focus [ June 2009 ] 1

Product Line Extension or Expansion Managing the Double Bottom Line Microfinance and Environment Microfinance a responsible business

www.microfinancefocus.com

June 2009

The Missing Middle

An Exclusive Interview Dr. Vikram Akula

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Interview 27.. An Exclusive Interview with Dr. Vikram Akula, Founder and Chair-man, SKS Microfinance

Disclaimer Views expressed in the article/s are author’s own views. It does not necessarily repre-sent those of Microfinance Focus . Microfi-nance Focus does not take any responsibil-ity of correctness of those data. Reproduc-tion in whole or in part without written permission is prohibited .

June 2009 Contents

31… News 33.. Events

Cover Story : The Missing Middle

19...What’s missing in the Middle? Investment in Knowledge Capital! Jerome Peloquin

21...Investment Management: Reducing Investment Risk in the Missing Middle Jerome Peloquin 25 Is microfinance the answer to the missing middle? If not, what is? Peter Burgess

Horizon

14...Role of Microfinance in Environment Protection ? Stewart Craine, Founder, Barefoot Power 16...Microfinance should be done in a business way but it should not be an irresponsible business Mr.S.M.Huzzatul Islam Latifee, MD, Grameen Trust

Editorials

06..Some Open question

08...The missing Middle

Reflection 09...Product Line Extension or Product Line Expansion? Bruce Meraviglia Perspective 11...Managing the Double Bottom Line in Microfinance Dr. Souren Ghosal

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BOARD OF ADVISORS Mrs. Frances Sinha Mr. Sitaram Rao Dr G. Gandhi EDITORIAL BOARD Dr. N Jeyaseelan Dr. Amrit Patel GOVERNING BOARD Mr. Suresh K Krishna , Chairman Mr. Ashish Gupta , Member Mr. M. V. Raman, Member Vikash Kumar , Executive Director

© copyright 2008-09 www.microfinancefocus.com

Our People

Team India Managing Editor Vikash Kumar Head—Knowledge Management Dr. Souren Ghosal Associate Editor Christina Weichselbaumer

Marketing and Outreach Manager Romain Testard

The US Managing Editor—US Jerome Peloquin

Associate Editor Pamela Faulkner Associate –Knowledge Management Raghunand Makonahalli Correspondent : New York Peter Burgess Marketing & Technology Editor Bruce Meraviglia Correspondent : Nairobi [ Africa ] Jastus Suchi Obadiah

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Microfinance Focus Magazine is growing. We have been attracting contributing authors from all facets of the Microfinance sector. In order to underwrite these improvements, it will become nec-essary for us to charge a subscription fee for full articles. We will still offer a free version of the magazine with abstracts f the articles. At any time it will be possible to subscribe and pay the fee to gain access to the full article. Starting with the July issue you will be able to register and pay for a full subscription and the changeover will be complete in our September issue. Please take the time to register today and we will send the free edition to you as it becomes available and as you find articles that interest you and which you would like to receive in its entirety, you will be able to access it via our secure website for a fee. We anticipate that the articles we will have to offer in their full version will be useful and that there will be information contained in them that will help you, our readers, become better at what you do as well as provide information that will help im-prove the microfinance institutions we serve.

Will be In New look and with Improved content

From September 2009

Announcement

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SOME OPEN QUESTIONS Time has come to ponder over some quintessential questions! Microfinance has traversed long and stormy path; and indeed in all fairness no one should doubt in its ability and performance as an effective institution for poverty alleviation. In-deed it is strange that sometime we glorify its success stories and at times we for-get such achievements and highlight its inbuilt weaknesses. In fact we overlook the challenges these institutions have encountered in the past and would be facing even in future also. Some weaknesses might be creeping in slowly in these institutions but these are often overlooked as most of our pioneers and performers are so overwhelmed with their successes that they obviously could not afford to see its emerging nega-tive factors and also its consequent effects. It is true we have already experienced collapse of mushroomed growth of deposit taking NBFCs in last decade; and God forbid we must not see a repetition of such debacle and for that reason we need not be shy to address some weaknesses that are recently observed in these institu-tions. These are therefore frankly raised and discussed over here. ISSUE 1: 7 MFIS, 7 PLEDGES, 7 MEETINGS AND 1 BORROWER …WHEN WILL WE STOP? In the last 15 Years, India has seen unprecended growth in Micro financing, how-ever despite this growth, there is still substantial unmet demand in India. However most of the MFIs are clustered primarily in South India, with two-thirds of all MF clients being in Andhra Pradesh (AP), Tamil Nadu (TN) and Karnataka. There are number of MFIs working in same area and that have obviously resulted into multi-ple borrowings and over-indebtedness. Our sources say that many MFIs are facing default like on a significant scale in few districts of Karnataka (India). This is an early sign of negative outcome of uncontrolled lending. A discussion or debate might not have an end. Thus I wish to raise a caution to MFIs that if they won’t fine an effective solution, we will not be witnessing a happy situation and unfortu-nately, it will not only adversely affect these institutions but also the poor people. ISSUE 2: DO NOT TELL JUST X % INTEREST RATE. WE KNOW WHAT IT ENTAILS, WHY SHOULD NOT CLIENTS? It is clients’ rights to know what has been offered and its detail in transparent lan-guage to enable them to understand clearly what they are getting and what they are required to give back. It therefore does not make much sense to tell that they are charged some X % of rate of interest; it should be detailed out in simple and comprehensive language so that borrower clearly knows the load of interest he would be required bear.

Vikash Kumar Managing Editor—India Write to the Editor [email protected]

From India Desk Editorial

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MFIs might have additional responsibilities because they are dealing with mostly illiterate or functional literate borrowers. I think it should be the part of their borrowers’ education program which they should provide while inducting clients. The executives get salary and dividend from the interest which poor shell out from their mea-ger income generated from their labor and investment in inputs purchased with the help of loan. It is therefore at least moral responsibility of these institutions to educate and adopt transparent policies that could be under-stood by all irrespective of their education and social level. ISSUE 3: REGULATION: WHY ARE WE WEAK TO CONVEY THE MESSAGE? Unfortunately, Government of India has also failed to develop appropriate regulatory institution to provide suit-able guidelines and oversight for these institutions. In fact they are still struggling to bring legislation for the sec-tor. Despite recognition of good work done by MFIs our government have not initiated supportive policy for these institutions though some good work has been initiated by RBI, NABARD and SIDBI. There are some critical issues like mobilization of deposits, assisting MFIs to source funds at a minimal rate of interest so that MFIs could lower their rate of interest and become more transparent in levying interest rate for loans given to poor. In fact many recent research studies have indicated that poor people also look for safe saving institutions perhaps more than credit institutions. At the same time, are we sure that we as an association of MFIs strong enough to convey the message to the government? Are our National associations are doing their Job effectively? We can’t ignore the power of advocacy...So how we are going to do effectively? Of course as a new industry it would take some time to develop effective voice to stir the policy makers but I also believe proactive measures will help us to ensure we are on right path.

Vikash

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The Missing Middle The Missing Middle describes to the lack of funding for small to medium sized enter-prise, (SME) who have progressed to the limits of MFI lending. (around 1,500 USD). It is the absence of funding options for small growing businesses at the bottom of the financial services pyramid. Traditional venture capital firms are interested in much larger investment of ten to twenty million dollars and have largely ignored this poten-tial market. The missing middle as defined by ANDE (Aspen Network of Developmental Entrepre-neurs) is between 50,000 and 2 Million USD. ANDE was formed by the Aspen Institute to provide a venue and platform for NGO’s and others who wish to provide investment and knowledge capital to both SME’s and SGB’s. The small business is the very heart of any healthy economy. Most new jobs come from the small business sector. If the small growing business, (SBG) is the incubator of the merchant class, it is also the nurs-ery of a necessary and vital commercial sector. Where the micro enterprise provides sustenance and security to the family, the SGB provides opportunity for jobs and lays the foundation for prosperity and community economic development. As the Microfi-nance sector matures and seeks larger and potentially more lucrative financial mar-kets, the SGB is seen as a possible area of expansion. Already, some socially responsi-ble investors like Willie Foot’s Root Capital are moving into the Missing Middle with significant success. After all, the greatest potential for growth is always at the bottom of any market. It is important to note however that the traditional business model of the MFI may not be appropriate for the financial needs of the SGB. Where weekly installment lending may be adequate for the small family run sustenance business, a growing enterprise has capital and cash flow needs that the MFI model does not meet. The business of providing financial services to the SGB is a different business model and will require a different financing strategy to be successful. What new skills and business methods will be required? A key activity will be in supporting SGB management introducing technology to enable growth and monitor performance of the SGB. Key skills currently not in the SME reper-toire like intensive BDS (business development services) and value chain management will be needed. The MFI loan officers will need to be retrained to reflect the more so-phisticated needs of the SGB. Finally, in some places MFI profitability has actually suppressed SME investment, inves-tors preferring the relatively safe and profitable lending to the larger but somewhat more risky venture investments. Still, as economies develop the need for investment grows and opportunity abounds, great opportunity exists at the bottom of the market. We believe this is just the beginning of a new era in Microfinance and a new era in global economic development.

Jerome Peloquin Managing Editor- US Write to the Editor [email protected]

From The US Desk Editorial

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T he theme for this month’s issue is the “missing middle,” which is a reference to the gap be-tween the upper level of an MFI’s lending limit, and the beginning of established levels of venture capital. Unfortunately for most small businesses in the developing world, the levels of venture capital that are available exceed what they can either qualify to receive, or effec-

tively use if it were provided to them; in a growing business, oftentimes too much success (or, in this case, venture capital) can be as deadly as too little success. This, then, is the basis for both this month’s column as well as the theme for the magazine. That some small businesses have the potential to grow is inevitable when compared to the larger num-ber of small businesses that are funded by the typical MFI. That these businesses will eventually require more capital than the MFI’s loan limits will support is also inescapable. As such, two prob-lems must be resolved by the MFI and the growing business: (1) Will the MFI necessarily lose a valuable client because it cannot change its business model in a way that acknowledges the success of its best customers?; and, (2) Must a growing business choose to limits its potential in order to be able to live within the funding that its MFI is willing to provide? Since very, very few small businesses have the potential, in terms of management capability and revenue potential, to qualify for traditional venture capital investments that may start at US$50,000, or higher, in their country, this is a significant problem. The businesses cannot acquire the capital they need to support their growth, and the traditional MFI’s have not shown a willing-ness to support these types of customers. In the domain of Marketing, this presents a set of op-portunities.

Reflection: Marketing

Bruce Meraviglia , Technology & Marketing Editor [ Microfinance Focus ]

Product Line Extension or

Product Line Expansion?

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Since marketing is often tasked with creating new options for the organization it serves, I would like to discuss two classic strategies from the arena of Product Marketing. The first is the concept of the Product Line Extension, and the second is the concept of the Product Line Ex-pansion. In a product line extension, an or-ganization will expand its offering by the intro-duction of a product (or service) that provides a new functionality or capability while remain-ing consistent with the existing products that are offered. The organization can forecast the degree of success of this new product among its existing customers based upon their busi-ness requirements, the willingness to buy the existing products, and the capabilities the new product offers them. In the context of the MFI, this might be a line of credit, in the form of a revolving loan, that would be greater than the traditional loans offered by the institution, and that can be accessed as needed by the growing business rather than being taken all at once. The benefit of this type of a product is that the MFI will still view it as a loan, although not one that has a regular, defined payment each week. The benefit to customer is that the busi-ness need not take on the burden (or risk) of borrowing more capital than it needs at given point of time, while having the flexibility of bor-rowing against a larger loan value than previ-ously offered, as needed. By extending its of-fering with this new type of loan product, the MFI retains consistency with its existing loan products, the customer understands the nature of this new type of loan, and the potential size and profitability of the market for this new type of loan can be forecasted by the MFI. An alternative approach would be to create a product line expansion through the introduction of a new type of product that expands the po-tential class of customers who may be served by the MFI, that is not required to be consistent with the existing products offered, and yet does not commit the MFI to the cost and risk of look-ing outside of its existing market. Such a fi-nancial product might be a longer term loan, perhaps one with a period of two years, with the payment deferred until the end (a balloon payment of the principal and interest), and at a larger amount than the traditional loan that is repaid weekly.

This type of loan product would differ from the existing loan products in that there would not be a consistent, regular payment, and would be a hybrid between the classical loan (in that it would still have to be repaid) while offering the value of an investment (without the MFI incur-ring the risk of ownership in the customer’s business). Such a product would create a new class of customers for the MFI, at a reasonable risk and cost, while allowing it to stay within the industry that it understands. The two examples above are fairly basic solu-tions to a problem that exists, that are easily implemented, and would be understood by both the MFI and the customer. Whether MFIs im-plement these two solutions, or choose to cre-ate others, they must find a way to continue to serve their best customers as they grow (and prosper), or permanently lose the most profit-able customers in whom they have invested time and effort. In order to solve this problem, the marketing department, which has a pri-mary task of creating opportunities to support the growth of the MFI through the identification of new classes of customers and creating prod-uct ideas that will satisfy them, must take the lead, or be relegated to a secondary role as others within the MFI demonstrate the type creativity and innovation that should be Mar-keting’s purview. I look forward to reading your thoughts and ideas, on our blog, as to how you, the reader, might create a product for your, or any, MFI that would allow them to continue to serve their best customers as they grow their busi-nesses. ***************

Reflection: Product line...

Bruce is an expert and commentator on both tech-nology and marketing. He is former Marketing Di-rector for several high Tec start ups. Currently He associated with Microfinance Focus as an “Technology & Marketing Editor” . You can reached to him at [email protected]

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M icro financing institutions have emerged as a successful delivery model to garner savings of

poor of course in a limited manner and to fund rural and urban poor to pursue any economic activities to enable them to earn their livelihood. It has been reported to have an average annual growth of 30% and have covered about 68 million people. (Vide STATE OF THE MICRO CREDIT SUMMIT CAMPAIGN REPORT –2003 and subsequent re-ports of CGAP). So much so good but an in depth analysis would reveal that yet these institutions have to go miles to achieve its ultimate objective of alleviation of poverty of poor and not just remain as an institution to fund immedi-ate trading or farming needs of these people. Some of the constraints in attaining the above objective that these institutions face as has been pointed out in vari-ous research studies (vide Presentations of CGAP & World Bank data) could be summed up as follows: 1. Inadequacy of donor funds particularly when com-

pared to its insatiable demand; in fact one research study has revealed that on an average annual cash flow esti-mated for this sector is at least $5 billion but in fact donor funding is even below $1 billion; 2. Insufficient flow of funds from the private sectors as most of them consider such investment is risky if not ranked as unsafe; 3. Inadequate state support as most of the state funds are routed through political institutions for obvious rea-sons; Above all these institutions source funds from commercial banks at high cost. It is obvious therefore most of these institutions lend money at high rate of interest and despite this their margin as reported by most of them remain low and therefore they have very poor leverage to maneuver pricing of their products and services to suit the needs of poor, poorer and poorest. Hence the question of alleviation poverty rele-gates to background and only continuity and sustainability

Perspective

Managing the

Double Bottom Line in Microfinance

Dr. Sourendra Nath Ghosal , Head (Knowledge Management) , Microfinance Focus

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remain as primary or rather sole objective of these institu-tions. In fact social mission is dumped for obvious reasons by most of these institutions. Furthermore some smart management take advantage of poor people dependence and ignorance of financial natty gritty and impose other charges along with structuring interest rate on flat basis or at monthly rate to hide the higher load of interest they charge on these helpless poor. It is therefore imperative to help them to source low cost funds to empower them to strategize their business with social mission of alleviation of poverty and also to pursue commercial viability for attaining sustainability which is indeed equally important. This fine tuning is feasible when mindset of state agencies and donor institutions could be changed so that they not only think these institutions are less risky as well more effective both in achieving social and commercial missions. In this regard it is worthwhile to mention that of late so-cially responsible funding agencies are growing in number and coming forward to fund this sector in a big way. In fact it has been reported that these agencies have already in-vested in these institutions about $ 2.4 billion and it is growing on an average rate of 15% annually. This is obvi-ously a very healthy trend as it would empower MFIs to lend at a lower rate and thus help enhancing the margin of borrowers and help alleviation of their poverty. This trend is perhaps the outcome of heavy loss suffered recently by financial institutions because of their investments in exotic products and also because over the years MFIs maintained a very low level of non-performing assets as compared to other financial institutions including commercial banks. MFIs are therefore becoming more and more visible as safe haven for investments and this has augmented their power to raise funds at competitive rates and thus empowered them to adopt social mission without hampering their com-mercial objective. In other words this helped them to fine tuning their strategy to achieve both commercial viability and fulfilling social responsibility. However to sustain this trend it would be necessary for MFIs to focus on social benefits with commercial viability. In fact most of the donor institutions have started looking for investment opportunities that would have visible social impact along with healthy financial returns. This indeed is a very healthy trend and therefore it has become imperative for MFIs to tune their business strategy to achieve this ob-jective. This would be feasible only when these institutions adopt best technology and management practices so that they could provide value added services to become visible as socially responsible and economically viable institution. It would therefore be necessary to make these institutions

competitive in pricing and serving by inducting better gov-ernance and best available technology; as well as becoming comparatively less risky for funding agencies by augment-ing human value assets instead of physical assets. This way only these institutions could transform themselves as so-cially responsible and economically viable institutions and thus fulfilling the ultimate objective for which these institu-tions have been floated. However it has to be borne in mind that mere transforma-tion as visualized would not be enough as there is need to publicize such transformation in comprehensible language and through acknowledged scientific assessments. This would require in the very first place appropriate tools and benchmarks to gauge and report financial and social contri-butions that these institutions are making over the years. Furthermore it would be necessary to reframe these tools and methodologies in simple and transparent language so that common people also could comprehend the assess-ments made with the help of such tools and methodolo-gies. Only then it would be possible to draw the attention of all type of donors, investors and savers. It is however unfortunate that till date not much attention has been given to this. It has happened despite the realiza-tion that giving publicity to attainment of better level of financial and social results would have provided competi-tive advantage to these institutions to source fund at much more competitive cost and benefits. This has happened largely due to almost no attention has been given to de-velop appropriate methodology to document their social economic attainments. In fact to achieve this it would be necessary to develop standard metrics to help data aggre-gation, and to build models and benchmarks for focusing comparative competitive strength of these institutions in achieving social visions and commercial missions. Further-more as emphasized earlier these tools should be compre-hensible to common people and have visible transparency as people operating in financial markets have recently suf-fered heavy jolts due to the introduction of exotic products and services that are not easily understood even by knowl-edgeable financial operators except a few who have been specially trained for this purpose. This obviously not a very easy task and would perhaps need considerable research and perseverance to develop appropriate metrics to measure particularly social achieve-ments of MFIs. To measure social performance it would be imperative to develop metrics to: 1. Quantify social benefits accruing from management delivery processes and practices; 2. Quantify progress in social benefits accrued to borrow-

Perspective : Managing the double bottom line...

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ers particularly and also the improvement of their social status by availing and utilizing such loans from these insti-tutions; Monetizing impacts of social activities and developing benchmarks to enable comparative evaluation of these benefits. It is true that at present hardly any methodology has been developed to assess the performance of social responsibil-ity assigned to these institutions. However in recent years some research studies have highlighted the concept of SO-CIALLY RESPONSIBLE INVESTMENT (SRI) as gradually it has been realized that there is need to look for socially moti-vated value driven investment as ultimately such invest-ments become not only rewarding but also less risk prone if not totally risk free. It is interesting to note that it em-phasizes both social and commercial benefits and com-mends to fund institutions that earn adequate profit and provide maximum supportive services to disadvantaged people to maximize their earnings from their business and or farming to help them to achieve better social and eco-nomic ranking in the society. However beside the need to develop appropriate metrics to gauge the social and economic performance of these institutions and publicize the same in comprehensible lan-guage with adequate transparency to help these institu-tions to become attractive to donors and affluent inves-tors; there is also need to change the mindset of politicians and bureaucrats so that they also adopt these institutions for delivery of all their financial aids under poverty allevia-tion programs and also employment generating programs they have been launching from time to time through politi-cal institutions and administrative institutions. In India time and again it has been repeatedly acknowledged- even at Prime Minister level- that these political and administrative institutions have miserably failed to deliver such funds to those for whom such funds have been earmarked. This has been happening as these institutions have no or vague ac-countability beside utter lack of transparency. It is therefore imperative first of all to develop appropriate metrics to measure the performance of MFIs both in social and economic activities and thereafter to give adequate publicity of their transparency and their social and eco-nomic performances with the help of acknowledged and respected metrics and tools evolved for this purpose so that donors, investors and state agencies develop ade-quate confidence in these institutions and do not hesitate to put their funds both idle and earmarked for specified social and economic benefits for inclusive growth. Present gap in demand and supply is very wide as has been pointed out by CGAP that at present only 10% potential demands of MFIs are met by donor institutions. However it is good

to note the emerging change as it is visible now that the concept of SOCIALLY RESPONSIBLE INVESTMENT gaining more and more attention after this devastates global eco-nomic turmoil. This trend could be further strengthened if an appropriate regulatory authority is created both at global and national level. This would enhance confidence of both investors and borrowers as it would provide suitable oversight machinery for these institutions and enhance its managerial compe-tence and governance quality besides developing risk measuring tools and risk provision methodology to en-hance confidence of both private and state funding agen-cies. In fact commercial banks could become partner of these institutions if such oversight machinery is created. At present India very much need institutions to fund training and grooming young entrepreneurs to take advantage of demographic dividend. MFIs can cover their social mission by offering such training and grooming facilities and there-after fund these enterprises to achieve their commercial objective. This is the most opportune time for MFIs to transform themselves as real partners of poor and disad-vantaged people of the society by helping them to become employable and entrepreneur to undertake their business or farming with confidence as they would have always in the back of their mind that they may be disadvantaged but not left out as some one is always ready to extend their helping hands whenever they experience any distress both in economic and social field. In this partnership with com-mercial banks on risk sharing basis would be wonderful combination to fight poverty and help poor and ill edu-cated youth to become either employable or to become an entrepreneur to run their business with confidence and comforting support of fund and management by MFIs backed and partnered by commercial banks. *********************

Perspective : Managing the double bottom line...

About the Author: Dr. Sourendra Nath Ghosal holds a PhD in Finance and holds Master degrees in both commerce and Econom-ics. He has experience taught for 18 years in colleges and university of Jodhpur Rajasthan; Worked as princi-pal cooperative training college for about 2 years at kalyani w. b. He worked with United Bank of India FOR 22 years and retired AS G.M. credit. He has also au-thored several books and Papers published in several national and International journals & newspaper. You may reached him at [email protected]

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I n 2006, a Noble Peace Prize was given for the poverty-alleviating impacts of microfinance. In 2007, a Nobel

Peace Prized was given for environmental impacts of clean en-ergy. There is no clearer indication that these are major chal-lenges of our era, yet the overlap of microfinance and the envi-ronment has barely reached the tiniest fraction of its potential. This is good news for environmental agencies who are trying to reach the poor with clean, efficient services, as well as for micro-finance, which is looking for new avenues for growth in some-times locally saturated markets.

There are a host of environmental services that could be consid-ered - new farming techniques that reduce fertilizer use or more efficiently use water, clean water, more efficient cook-stoves that reduce biomass consumption and indoor air pollution, even better human waste disposal can create organic fertilizers or

About the Author Stewart is a founder of Barefoot Power and is the regional manager for Asia and the Pacific. He has a background in civil and electrical engineering and has worked as a renewable energy specialist consultant for over 6 years. Stewart spent 3 years design-ing and constructing micro-hydro power stations in Nepal and has worked exten-sively in Papua New Guinea and Fiji. Stew-art has a Bachelor of Civil Engineering and Mathematics and a Masters in Electrical Engineering. You can reach him via email at [email protected]

Horizon

Role of Microfinance

in Environment

Protection

Stewart Craine, Founder-Barefoot Power

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generate electricity. However, some key charac-teristics of microfinance enable analysis of which services are most suited - many green busi-nesses require 3-10 year investments by the end user or the service retailer, whereas micro-finance loans are generally 1 or 2 years. Also, some technologies like improved or solar cook-stoves need to be refined to fit local cultural conditions, whereas simple technologies like LED lighting to displace kerosene lamps is universally applicable. Some technologies, like wind farms, hydropower and biomass gasification, do not scale down well to the micro/individual size, hence these technologies require community/village level participation and/or group lending of $5,000-$50,000 or more. In contrast, solar power scales down to individual ownership much better and hence are more suited individual $50-$500 loans that are typical in microfi-nance. Simple checks on payback period and capital intensity for the customer or retailer and cultural adaptation requirements can help iden-tify which environmental services are the easiest fit with microfinance.

Lighting, one of first uses of electricity by the poor, is an example which fits this category. The poor often spend $0.30-$2 per week, or $20-$100 per year, on kerosene for lamps and dis-posable batteries for torches and radios. For 300 million households that lack electricity world-wide, this expenditure totals around $5-20 bil-lion/year, and hence a significant growth oppor-tunity for the microfinance industry. White LED lamps and 1-5W solar panels have helped re-duce the cost of affordable lighting for the poor to $10-$100, allowing both end customer micro-finance loans for the larger systems, and cash sales of smaller systems which infers business loans for micro retailers of micro renewable en-ergy. Each lamp eliminates about 1 liter per week of kerosene, or 50 L per year, reducing CO2 gas emissions by around 0.1 tonne/year. This pollution reduction can, if verifiably ac-counted, generate additional income for MFIs and their technology partners via the creation of carbon credit certificates. These certificates are sold to polluting companies, often in Western

countries, for around $10/tonne. Hence a $10-20 lamp can create $1/year of additional carbon credit income.

MFIs have a variety of ways to participate. The lightest way is to treat environmental loans like any enterprise loan, and once the loan is given for the business idea, is with most existing mi-crofinance loans, the entrepreneur goes to an-other shop to buy the products for the business - in other words, physical distribution of the technologies, and follow-up service, occurs com-pletely outside the MFIs branch offices. How-ever, the MFI could agree to handle the product themselves as retailers, so that instead of a cash loan being handed over, the actual pre-packed business products are instead. The tech-nical partner would still remain responsible for manufacture, international shipping and na-tional/regional distribution. In very few cases, MFIs may be interested to get involved in manu-facture and national-level distribution as well - Grameen Shakti, for example, manufacturers their own solar control equipment and lights, then distributes them via their offices around the country. There are advantages and disad-vantages to both models, and the initial chosen model may even change over time, as experi-ence grows.

Sustainable energy and other environmentally beneficial products and services are as critical to a peaceful world as the elimination of poverty and provision of financial services to all. There are alternatives to burning fossil fuels on our way to better living standards, as there are al-ternatives to provide banking services to the remotest corners of the planet. Developing countries have an opportunity to leapfrog old models to new sustainable models, and demon-strate that economic growth need not always come at the cost of environmental degradation. It is in all our interest to find these solutions, so that our children can inherit an earth at as ecol-ogically and culturally rich and diverse as it has been, but hopefully far less financially polarized than it is now.

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Horizon: Role of Microfinance in Environment ...

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Professor H.I.Latifee is the Manag-ing Director of Grameen Trust, the international arm of Grameen Bank, which has set up more than 144 rep-lication programs in 38 countries. Before joining Grameen Trust in 1994, he was teaching as a Professor of Economics in the University of Chittagong.

Editorial Note: This is a summary of his presentation during recently held SA-Dhan National Conference 2009 in New Delhi Microfinance has become a worldwide movement. It is high time for us to re-visit and review what we do, why we do and how we do it. It is true that we want to serve the poor through microfinance but are we always doing it or able to do it the way it should be done that is the question we need to ask our-selves. We know that microfinance over the years has expanded significantly in terms of outreach and global coverage. Funding sources and instruments have been diversified. There has been a gradual shift towards commercialization and the commercial funding. The number of MFI has increased globally and there is hardly any country in the world where there is no microfinance pro-gram at all given the trend an experience in commercialization of microfinance we are sometimes confused about the goal of microfinance operation. Is it to maximize profit or to maximize social benefit? Is it to do business or to help the poor overcome poverty? We believe that mi-crofinance should be done in a business way but it should not be an irresponsi-ble business. Reaching to poor especially to women is our immediate and non negotiable goal and operating on a sustainability basis is our directional goal. As microfinance program are supposed to be poverty focused, any strategy for rapid expansion of microfinance excluding the poorest cannot be justified. We

Horizon

Mr.S.M.Huzzatul Islam Latifee

Microfinance should be done in a business way but it should not be an

irresponsible business.

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need an inclusive financial system. It is observed that different microfinance programmes offer different products including loans, savings, insurance and other services at different prices and follow different policy base either on serious analysis and examination or there any such exercise. How this can be rationalized and what can be done to create an environment for healthy competition and transparent operation is matter of serious concern. A competitive spirit should prevail not to earn maxi-mum profit but to provide financial services to the poor at an affordable cost. Competition in providing better services, offering lower prices working as pro-fessionals and not as trouble shooting, reducing risk and remaining innovative is always welcome. But competition, poor governance, overlapping unethical conduct of business, lack of transparency and irra-tional pricing is not at all desirable. If, through micro financing, people are found to be better off and em-powered not only economically but socially then there is no reason why microfinance should not be given necessary support to play its poverty fighting role. If microfinance program are financially self suffi-cient and are in a position to provide financial ser-vices to the target population on a sustainable basis, if the client arrive to earn more and enjoy better stan-dard of living, to send their children to school, can take care of their health problems, then microfinance institution can be considered to be doing a good jus-tice. According to a recent UN survey, the world faces mul-tiple layers of crisis ranging from financial breakdown, food and fuel price instability and climate change. The gains that have been made in the region in terms of

development so far can be lost very easily due to this. Investments in job opportunities must, therefore be given priority. That given the opportunity, microfi-nance can play very important role in creating job opportunities for the jobless, for the poor in general can be learnt from the experience of East Asian finan-cial crisis that hit in late 1990s. Consider the example of Grameen Bank, a Nobel Peace Prize winning insti-tution which is serving the poorest women and at the same time operating on a sustainable basis. The bank owned by the poor members and run by a profes-sional management. It has a highly transparent sys-tem. The five star system as mentioned by Prof. Yunus has reflected its commitment to achieve both financial and social goals. The five stars are green, blue, violet, brown and red. These are provided to branches and staff for 100% achievement of special tasks. The green star is for 100% repayment rate, blue star is for earning profit, the violet is for self sustaining financ-ing, the brown is for all children are in school and the red is for all members of the branch are moved out of poverty. Can Grameen be highly successful in attain-ing double bottom line goals in a very competitive environment where in addition to thousands of small and medium size MFIs, giant competitors like BRAC, ASA are also operating? Any MFI in India and else-where can reach this level provided it remains com-mitted, provided it remains competitive, provided it remains innovative and then there is whole new envi-ronment for them. ********************

Horizon: Microfinance as a responsible business

“A competitive spirit should prevail not to earn maximum profit but to provide financial services to the poor at an af-fordable cost. But poor governance, overlapping unethical conduct of business, lack of transparency and irrational pric-ing is not at all desirable.”

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The Missing Middle What’s missing in the Middle? Investment in Knowl-

edge Capital! Investment Management: Reducing Investment Risk in

the Missing Middle Is microfinance the answer to the missing middle? If

not, what is?

Cover Story

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H enry Ford may have been a terrible human be-ing, but he was a marketing visionary. When he

realized the production potential of the automobile, he also quickly realized that capacity might readily outstrip demand. There were simply not enough consumers who could afford a private automobile to keep the new industry growing at the rate he hoped for. So he came up with a unique solution: use the power of the factory to create a consuming class. So the blue collar workers who labored in the Ford factories made enough money to become car buy-ers, and then the pressure was on the other employers to pay a competitive wage, and then the private car became an absolute necessity of life…..and the rest is history. Henry Ford did not love his fellow man – trust me on this! He did not see the unwashed masses in Detroit – the immi-grants, the uneducated, the have-nots – as a vast pool of potential friends and equals. But he saw the bigger pic-ture, and projected a future that would benefit him as a result of bringing more fairness to the marketplace. Most of the readers of this publication come from the op-posite end of the philosophical, or ethical, spectrum. But there is a lesson for us in this story of Henry Ford, that old reprobate. When we look at the situation of the poor in the communities where we work, when we see the barriers they face to advancement and acceptance into the strata of their societies where there is opportunity, we see that so much that holds them back is a lack of vision on the part of the most powerful within their communities. The poor are certainly not valued – that fact is obvious at a glance. But the poor, if they had the opportunity to participate more fully in the formal economy, would not only improve their own lives, they would bring virtually unlimited benefit to those who already have prosperity and power. Here is

the challenge – to expand the vision of the wealthy and powerful, and to make them see that their self-interest lies in spreading the opportunity. This is not charity; this is not even good governance; this is good business. In developed countries I think we tend to see the poor and underprivileged as net drains on resources. Not necessarily a fair assessment, but, given the social services and other public spending, and their level of positive contribution to the formal economy, there is some truth to it. Where the poor are a much larger percentage of the population, their marginalization has a larger proportional impact on the greater economy. The untapped potential for market growth, consumer base, tax revenues – this has a huge negative effect on the ability of those countries to become fully-participating members of the global economy. So we keep throwing money at their chronic and acute problems in the form of disaster relief, humanitarian aid, and endless top-down international programs. There must be a better way to help these countries to be self-sufficient, and to acquire the means to help their own least-fortunate citi-zens. In the United States, we recognize that the greatest growth in the economy comes from small business. I wish I could say that that knowledge leads to effective government planning and assistance to small business – we have a patchwork of good resources through the federal Small Business Administration and regional and local programs, an ineffective delivery system for those resources, and no coordinated implementation or planning. But in some sense we know what needs to be done and what could be done – and support for small business is widely accepted as worthwhile. We have internalized the understanding of the marketplace that Henry Ford had. Small business is the greatest engine for jobs creation; salaried workers have money to spend and pay taxes; confident, secure, consum-

What’s Missing in the Middle?

Investment in Knowledge Capital!

-Jerome Peloquin, Managing Editor (US), MF FOCUS

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ers drive business prosperity. The prosperity of the developed world grew organically, in a generally upward trajectory since the Industrial Revolu-tion. We can’t wait 500 years for that in the next world, and hopefully don’t have the same amoral pragmatism. So how can we apply the lessons we’ve learned about organi-cally-grown economic development, ensure the strength that grass-roots evolution brings, avoid imposing inappro-priate cultural norms, and still achieve the objective of en-couraging community economic development that will democratize opportunity and alleviate poverty in large numbers? At MicroVenture Support we believe we have the system that will nurture small business in a culturally appropriate way, and will also develop a professional class of in-country small business development consultants who will be able to disperse our methods for rapid deployment. We believe that, in any market, the 80/20 rule applies to business management training. Train the entrepreneurs in the basic skills – market analysis, financial management, cash projections, product development, inventory manage-ment, marketing, etc. – and the entrepreneurs with these skills will build businesses that will create jobs and expand markets. This is the bedrock of the middle class, and this is where market growth and stability are created. Everyone is talking about the “missing middle” in funding for small business. How to capitalize small business is a thorny problem. We certainly recognize that there’s a huge gap between the lending capacity of the microfinance

sector and investment funding for small businesses with growth potential. And just as in micro-lending, investment at this level requires much more support than in conven-tional venture capital. But the benefits of developing this sector are enormous, and their potential for impact on their economies is as well. So it’s vitally important to de-velop systems for investment and, more importantly, de-veloping management capacity, so that a growing, thriving, local economy is encouraged. What is required to develop a supportive environment for small business? Once the entrepreneur has acquired the tools for business success, how does (s)he overcome the barriers to full participation in the formal economy? How can regional and national government come to value her? When will the local bank solicit his trade? We encounter many leaders of MFIs with big hearts who came from the ruling classes. But how to gain support from the larger power structure? I believe the key is to convince them that there are great advantages to them in the prosperity of all. Take a lesson from Henry Ford. A stable, growing, econ-omy is in the selfish best interests of all of us. Read more at: HYPERLINK "http://www.microventuresupport.org" www.microventuresupport.org where you can access our position paper, A Transformative Model for Socially Re-sponsible Investing.

Cover Story : What is missing in the middle ...

Read all the Past issues Visit www.microfinancefocus.com

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Investment Management

Reducing Investment

Risk in the Missing Middle

Cover Story

Jerome Peloquin, Managing Editor _US

How socially responsible investors can increase profits and expand social mission by going down mar-ket at the bottom of the financial services pyramid. Reducing risk and The key to increasing the suc-cessful investments in your portfolio lies in managing micro enterprise investment at the bottom of the financial services pyramid, management of the investment through close monitoring of the business and its managers is the principal job of the portfolio manager. ...Next Page

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When traditional VC’s (Venture Capital) investors make a first round investment in a company, in most cases they have conducted an extensive financial and market analysis but, more important is an exhaustive evaluation of the prospective venture management. As any VC will tell you, there are the three most important factors in any Venture investment: management, management, and management. The abili-ties, dedication, and commitment of the venture partner’s management is the single most important element in the decision process. In developed countries where venture investments are usu-ally around ten to twenty million dollars, the venture man-agement is usually university educated with MBA’s and often possess additional technical degrees. Most managers will also have significant business management experience as well. As socially responsible investors move down market to pro-vide investment at the bottom of the financial services pyra-mid in developing countries, investments are much smaller (between fifty thousand and two million USD) The venture partner managers are much less likely to have the knowledge

and skill of their western counterparts and significant aug-mentation of the incumbent management team is often re-quired. This usually takes the form of, so called Technical Assistance. Experts in a variety of fields like value chain man-agement, operations, finance, and engineering are retained by the investor to support and help train the current man-agement team. We believe in a much more concentrated partner development model.

The further down market one invests the more risk is as-sumed. Given that management of each individual invest-ment is key to success of the portfolio, we have developed a rational process for assuring the success of investment at, or near the bottom of the financial services pyramid. It is called the Portfolio Operating Management System. (see graphics at left) We employ a four staged, gated business develop-ment process. Our goal is to provide options (jobs) and to enable empowerment and prosperity through community economic development by supporting micro enterprises and SGB’s at the bottom of the pyramid.

STAGE ONE: INTAKE

We identify prospective partners though a cooperative agreement with a social mission driven MFI. Since we are seeking SGB prospects we will be looking at the top of our MFI partner’s lending limits. Our accelerated business development and investment program (shown here) can only accommodate a limited number of participants, so we only need a few each quarter. Stage One starts with a short list of recommended businesses. Each candidate is then vetted through a combined interview and business assessment process. The Intake can take up to thirty days to complete. In cases where this is essentially a new, or start up business, the time could easily double. It is important to note that we seek to create prosperity at the community level. We do not plan to create millionaires of individual owners. Our bias is towards cooperatives, employee owned businesses, and other non-predatory business models.

Cover Story : Investment Management ...

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STAGE TWO: EVALUATION Once accepted into the program, a small investment is made in the partner. If an agreement for financing cannot be reached the funds become an MFI loan and are repaid in a similar manner as other such loans. The purpose of this “small” investment is to enable us to gain experience in the day-to-day management of our prospective partner and to assess their capabilities and markets. We also begin negotiations on a financing agreement. If we find unacceptable difficulties, or if we are unable to secure a satisfactory operat-ing agreement, the small investment is converted to an MFI loan and we seek another partner to replace our candidate. There are several key issues that we see as essential to investment success at the bottom of the pyramid. One is the training of indigenous trainers. The trainers and mentors must not be expatriates but be from the same population as our partners. Success will require rapid deployment of this model over a wide area. This will surely require trained and competent in-country staff.

STAGE THREE: DEVELOPMENT Once the operating agreement is signed, we make a commitment to the success of our partner and the serious business of accelerated development and investment begins. Management training and strategic planning are the first steps in the development process. The creation of business process models for all key operations, the establishment of financial systems and controls, and the building of a scaleable value chain along with workforce development follow. Investment is tied to achievement of both developmental and business goals by operating management. This is a labor intensive experience and may take between six and eighteen months to complete depending upon the abili-ties of the partner’s existing management and our ability to transfer skills and technology effectively.


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It is our expectation that a micro enterprise or SGB will grow approximately one thousand percent while working through our accelerated operating management development sys-tem. It is estimated that our investment will be recouped from growth of the partners business and achieved through a long term loan, quasi equity, or simple acquisition of our po-sition by in independent investor. We have placed a full copy of the expanded venture manage-ment model online. If you want PDF copy of the expanded model for this process, and/or if you want to ask questions of the author and developer on how to implement this risk and

portfolio management strategy in your organization, go online to www.microfinancefocus.com and go to our blog on Portfolio Management.` ***************

STAGE FOUR: OPTIMIZATION The purpose of this stage is to position the partner for transition to the formal economy (through linking to the commercial banking sector) or, for further up market investment by a large socially responsible investor (SRI) We see ourselves as “deal flow,” for the micro venture capital market. This stage is about setting growth goals and improving business performance to achieve sufficient size and capacity to reach the next level of business. It is our expectation that a micro enterprise or SGB will grow approximately one thousand percent while working through our accelerated operating management development system. It is estimated that our investment will be recouped from growth of the partners business and achieved through a long term loan, quasi equity, or simple acquisition of our position by in independent investor.

Download : http://www.microventuresupport.com/MVS_PositionPaper.pdf


Jerome Peloquin is Managing Editor, US for Microfinance Focus Magazine and Vice President, Global Development for Micro Venture Support in which capacity he is writing this article. Mr. Peloquin is also a former Contributing Editor for the Micro Capital Monitor and a consultant for The Grameen foundation USA. He is an organizational psychologist, author, lecturer and thought leader in the Microfinance sector.

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The missing middle is in the conversation again ... maybe because the microfinance in-dustry is heading towards the SME segment of the market that needs financial services and is not getting services ... but maybe simply be-cause MFIs think that bigger loans will earn them more profit and improve their financial performance. What is the missing middle? A small business can be started using the resources of family and friends. While big business can be ex-panded using all sorts of financing instru-ments ... stock, bonds, bank lines of credit, leasing, etc., a small business that want to ex-pand to be a big business is faced with a terri-ble problem ... virtually no financial services that are serving this critical part of the econ-omy. This missing middle problem is not new ... a commission in the United Kingdom in the 1930s, headed by Harold MacMillan, who later became the Prime Minister, identified this prob-

lem and it became known as the MacMillan Gap. The problem has never been successfully addressed ... though there have been attempts. In the USA the Small Business Administration (SBA) is an initiative that has this as part of its mandate ... but has only had modest impact. The concern for the microfinance industry is that the perceived advantage of bigger loans to improve financial performance is a mirage. It needs to be recognized that loans to SMEs, while they are obviously bigger than typical mi-crofinance loans, are also, less obviously, very different. MFIs that migrate into the SME funding busi-ness without understanding the differences are likely to be surprised. The SME segment of the market needs a source of funding because of the missing middle, but it is not just money that is needed ... it is money on the right terms, and access to services to help the SME to make the best use of the money. The microfinance industry has had several dec-ades to fine tune how it lends to micro-

Cover Story

Is microfinance the answer to the missing

middle? If not, what is?

Peter Burgess , New York Bureau Chief –Microfinance Focus

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entrepreneurs and gets repaid with almost no losses. Close contact between a loan officer and the client has been a key to the success, to-gether with peer pressure from groups associ-ated with a group member and their loan. The risk of default in this business model is low based on the record of repayment over the past many years. This approach for microcredit but is not going to be effective for SME lending. SME lending needs to be on terms that suit. Typically this will be financing for a much longer period, usu-ally with some period of grace. The risk is higher ... the reward potential is higher ... and the time period is very much longer. In other words ... this is a totally different sort of financ-ing. Furthermore, this is not merely “bigger micro-enterprise” ... rather it is a big step from very informal business to the start of business that is formal and organized. There are needs for the SME owner to learn new skills as the access to financing gives opportunities for growth. Growth may be moving the small enterprise from staff comprised of just family to non-family employees and all the challenges of su-pervising staff. Maybe the business is going to be more complex ... with more customers, more suppliers, more facilities and equipment, more working capital and more problems. Maybe it is time for the planning to go from in-formal to formal ... with some budgets and planning. Because lending to SMEs to solve the problem of the missing middle is so very different from lending to micro-enterprise in the microcredit mode ... the microfinance model cannot be the answer. What is the answer? What an SME owner might want and what might be possible are usually not at all close. People with money for financing did not get into that position by being nice but by doing busi-ness in ways that created wealth and produced the money. Someone providing financing wants to control the risk ... and that usually means controlling the business. This is a major change for a small business owner, and one that few are able to

handle successfully. A small business owner who does not understand this is heading into trouble. It is a cliché ... but the best time to get financ-ing is when you don't need it. Then the nego-tiation about risk sharing and ownership shar-ing can be done without excessive urgency ahead of a crisis deadline. But the small business owner is really in an im-possible position. The person with the financing has experience and the small business owner does not. In this situation the small business owner is unlikely to win ... and usually does not. There is a role here for a reputable consul-tancy or business incubation service. The role is (1) to serve as a mediator and organizer of fi-nancing so that there is balance between the interests of the business owner and the source of finance; and, (2) to coach the business owner through the essential changes that are needed for successful growth. This seems to be a fairly obvious idea ... but it is not at all easy to implement. The end to end value chain is very positive. Small business plus business incubation plus financing resulting in a successful growing business is a good formula. But this hangs up at the beginning of the proc-ess and in the steps along the way. The small business plus the business incubation has value, but itself needs funding ... and if this is inadequately funded, then the financing source is again in the driver's seat and the outcome of any negotiation will favor the financing. There are signs that there is investment being mobilized to finance the SME sector ... but the focus has been on the larger entities in the sec-tor with track record. The financing is perhaps in the $500,000 size rather than $50,000 or $5,000. Only a small bit of the missing middle or gap is being addressed. It is more than 70 years since the MacMillan Gap was identified ... it remains a difficult prob-lem.

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Cover Story : Is microfinance the answer to the missing middle?

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Interview

Photo : Microfinance Focus

An Exclusive Interview with Dr. Vikram Akula

Founder and Chairman, SKS Microfinance

See more interviews at : www.microfinancefocus.com

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MF FOCUS: How do different technologies you use such as wireless POS, smart cards, and mobile bank-ing decrease transaction costs? Dr. Akula: Certainly one of the major problems in mi-crofinance is high transaction costs, because in doing millions of tiny loans there are high transaction costs. Things like technology, particularly mobile banking, help crush the costs in two ways. One is the data that’s transferred doesn’t need to be done manually; so you can avoid manual pass-codes, manual ledgers, etc. to get a digital movement of data. This is much more efficient, more accurate; it avoids error, and reduces the scope for fraud. So you get a lot of effi-ciency in terms of data transfer. Then, if you use mo-bile banking to also do cash movements, if you use it as a cash substitute to either transfer a loan or make a payment, you eliminate all the problems and diffi-culties of dealing with large amounts of cash. MF FOCUS: What specifics of SKS’s Ultra Poor Pro-gram help you reach the ultra poor?

Dr. Akula: When you are doing microfinance it works very well for those who are economically active; someone who has no assets, a landless laborer, or someone with some assets, one buffalo or a small home-based flour mill for example, you can use that working capital to expand their income opportunities. A segment, however, that has difficulty doing that is the ultra-poor. Here I mean the elderly, widows with a large number of children, disabled people- people who are so destitute that if you give them a loan it will actually make them worse off. What we have done at SKS is instead of force fitting them into a loan program, we realized that they need something dif-ferent, a broader set of activities that help them move to the next level of livelihood. So we started an ultra poor program that is done through our non-profit to give ultra poor people the tools they need to get out of poverty. MF FOCUS: Do you think MFIs in India should adapt the Grameen II model, which is being used in Bangla-desh, or stick to the Grameen I model?

Interview: A n Exclusive Interview with Dr. Vikram Akula

An Introduction Vikram Akula was named by TIME Magazine as one of the “People Who Shape Our World” in 2006, the annual list of the world’s 100 most influential people. A former management con-sultant with McKinsey & Company, he has over a decade of work and research experience in microfinance. He was a Fulbright Scholar in India, during which he coordinated an action-research project on providing micro-credit to farmers. He was also researcher with the World watch Institute, where he wrote articles focused on poverty and development, and has worked as a community organizer with the Deccan De-velopment Society in India. He holds a B.A. from Tufts, an M.A. from Yale, and has a Ph.D. from the University of Chicago. His Ph.D. dis-sertation focused on the impact of microfi-nance. He has received several awards for his work with SKS, including the Echoing Green Public Service Entrepreneur Fellowship, Ernst & Young’s Entrepreneur of the Year Award in the Startup category (2006), and the Social Entrepreneur of the Year Award (2006) from the Schwab and Khemka Foundations. Vikram has also been profiled in numerous publica-tions, including the front page of the Wall Street Journal.

Dr. Vikram Akula gave an exclusive interview to the “MICROFINANCE FOCUS – a global magazine on micro finance and sustainable development During “Samvad: a dialogue on microfinance” conference organized by Grameen Koota at Bangalore. Here are the excerpts from the interview:

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Dr. Akula: I think the Grameen II model works when you have a very long history and have established a long credit culture. I think India is premature to do that, I think there is still merits in using the group model, because we need to first continue to still lay cultural ground. It takes time before we can do some-thing so individualized, which is what the Grameen II model is really about. MF FOCUS: Would you explain the key elements be-hind why SKS is one of the world’s fastest growing MFIs? Dr. Akula: There are three things that have driven our abilities. The first is that we use models that allow us to access commercial capital to overcome the prob-lem of funding constraints. Today we don’t have a funding constraint, we are able to leverage equity and can go to any bank in India and get as much money as we need. The second thing we have done is drawn on the best practices in the business world in terms of capacity; we’ve looked at Starbucks, Coke and other companies to understand how they have scaled very rapidly and then applied those principles to microfi-nance content. High levels of standardization and automation have given us the ability to scale very rap-idly. Third, using technology so that all of our branches across the country are automated helps us reduce costs. MF FOCUS: Amidst the current financial crisis, how does SKS maintain its high growth rate? Dr. Akula: We have actually continued 100% growth, so even amidst the crisis we are actually doing quite well. This is largely because the underlying businesses of the poor are largely insulated from what’s happen-ing elsewhere with the financial crisis. The informal

sector by definition is not tied into the formal sector, so there we see underlying businesses continue to be vibrant. Partly due to the regulations of banks that require them to lend some amounts to private sec-tors, banks still have to lend to us. Today we are in a position where underlying businesses are doing well and banks continue to fund us. MF FOCUS: How do the practices of social perform-ance management and transparency affect the fi-nancial sustainability of SKS? Dr. Akula: I wouldn’t say it affects our financial sus-tainability, because it is part of what we do. In order to provide good customer service, we’ve got to do it in a financially transparent way. In terms of financial transparency, financial literacy and treating our cus-tomers well, we see that in part and partial to being a good business. To create long-term shareholder value you want to treat your customers well so they will be loyal to you and then stay with you. We don’t see the two as a conflict at all, but in fact see one as a prereq-uisite for the other; unless you treat your customers well you won’t develop long-term sustainability. MF FOCUS: How do you compete against competi-tors who don’t practice transparency? Borrowers are quite savvy; we underestimate their abilities. Borrowers realize whether they are being taken advantage of, and though maybe not in the first loan cycle, they eventually will, which helps us. MF FOCUS: Do you consider multiple borrowing to be a threat? If so, how do SKS and the microfinance industry as a whole deal with it? Dr. Akula: Multiple borrowing I don’t think is a prob-lem as long as we are meeting the need of the bor-rower and not exceeding the need of the borrower. The real problem is over indebtedness versus multiple borrowing. You can have three or four MFIs give a loan to a borrower and meet her need. What we need to do is not say that multiple borrowing is bad, but ask how we understand multiple borrowing so that we are not over-indebting a client. This will in-volve loan officers spending more time understanding what other loans are being taken and then adjusting accordingly.

Interview: A n Exclusive Interview with Dr. Vikram Akula

“Social performance manage-ment and transparency doesn’t affect our financial sustainability, because it is part of what we do”

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MF FOCUS: What is the potential of micro-insurance in India? Does SKS provide micro-insurance? If so, what are the features of micro-insurance? What are the challenges in providing this service? Dr. Akula: Micro-insurance is an extremely important area, and in some ways even more important than lending. This is because the poor live with tremen-dous risk- drought, crop failure, any kind of external shock puts them into a worse spot so insurance is sig-nificant. At SKS we offer a credit life insurance policy, retail insurance (often called home life insurance), health insurance and are continuing to expand the basket of insurance products. In terms of challenges, difficulties lie in how to explain the ins and outs of insurance policy (preexisting conditions, exclusions,

etc.) in a way that makes sense to our clients. MF FOCUS: What is your message for young social entrepreneurs who wish to get into the industry? Dr. Akula: It is a perfect time to get into this industry, because it is a thriving industry and has huge social benefit. If I were a young person, this is absolutely the place, the sector where I would want to be right now. I encourage young people to spend as much time in the field as possible, the more time you spend in the field the more you will understand how this business works and how poor people live. *********************

Next Exclusive Interview With Mr. Alex Counts , President –Grameen Foundation

...Do not want to miss...subscribe July 2009 Issue

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G rama Vidiyal raises over USD 4million of equity capital, the first equity in-vestment in India in 2009

Tamil Nadu, India-based microfinance institution suc-cessfully completes second round of equity infusion from MicroVest, Unitus Equity Fund I (UEFI) and Amar Foundation. Tamil Nadu, India June 16, 2009 Grama Vidiyal Microfinance Private Ltd (GVMFL) is pleased to announce the successful completion of the second round of equity infusion of USD 4.25 million. GVMFL provides financial services to 400,000 microfinance cli-ents and has a loan portfolio of over USD 40 million. The new capital will be utilized to support the com-pany's major expansion plans over the next twelve months and meet the enhanced capital adequacy norms set by the Reserve Bank of India. “During these economic times, we are very pleased to receive the unwavering support of our existing investors, Unitus Equity Fund (managed by Elevar Equity Advisors) and Amar Foundation, and our new investor, MicroVest,” said S. Devaraj, Founder & CMD of GVMFL. “From the very beginning, MicroVest’s team members have been extremely knowledgeable and consultative on issues surrounding our business. Their international network and outstanding reputation in the field of microfinance will be of great value to us as we expand our services and outreach." “We are ex-tremely pleased with our investment in such a re-nowned company as GVMFL,” said Gil Crawford, CEO of MicroVest. “This is our first investment in India so choosing the right company to mark our foray into the Indian market was critical. Their management team is exceptional and we look forward to supporting them in future endeavors.” The investment in GVMFL came from MicroVest II, MicroVest’s newly launched equity fund, which invests with Tier I microfinance institutions. MicroVest II investors include large institutional and

private investors. “This successful capital raise is a re-flection of the GVFML’s’s superb results and market leadership in Tamil Nadu.,” said Chris Brookfield, Man-aging Director of Elevar Equity Advisors (which man-ages the Unitus Equity Fund -I & Unitus Equity Fund - II), the management company of the UEFI and a board member of GVMFL. “GVFML has successfully employed the resources of commercial capital to advance its goal to provide opportunities for the poor. We are delighted to be a long term investor in their efforts. " This equity raise is the first in India in 2009. It comes at a time dur-ing very difficult market conditions. Unitus Capital (UC) acted as financial advisor to GV during the equity raise. Eric Savage, Managing Director of UC, commented, “These are very challenging times for MFIs raising capi-tal and having a financial advisor can add a lot of value. We are very satisfied at being able to help GV raise eq-uity under tough market conditions – investor confi-dence is low and valuations are on the decline. How-ever it is still possible to find the right investor at a good price and MicroVest’s investment in GV is testa-ment to this fact.” News Source: Unitus

F irst Recipients of New Social Performance Reporting Award MIX congratulates the first recipients of

the new Social Performance Reporting Award, sponsored by CGAP, the Michael & Susan Dell Foundation, and Ford Foundation, using data sup-plied by MIX. Asasah from Pakistan received the Silver Award; AMK in Cambodia, Finca Peru, and Prisma Peru re-ceived the Gold Award. The MFIs were presented their certificates at the annual Social Performance Task Force meeting in Madrid, Spain earlier this month. The award is designed to promote greater transparency in MFIs’ social performance

News & Events

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and to encourage MFIs to report on the newly established social performance indicators. The award recognizes transparency in social perform-ance reporting, not social performance achieve-ments. Performance indicators, such as return on assets, portfolio at risk, or operating efficiency, will not be considered. All regulated and non-regulated financial institutions and NGOs that offer microfinance services are encouraged to participate. Source: The MIX Click here for more information about the Social Performance Reporting Award.

S MART partners with PlaNet Finance and MicroCred to roll-out microfinance pro-gram

Leading wireless services provider, Smart Com-munications, Inc. (SMART) has partnered with international non-government organization, PlaNet Finance and its investment affiliate, Mi-croCred to develop a mobile-based microfinance solution to benefit the unbanked sector of the Philippines. The collaboration, dubbed as the Banking the Unbanked (BTU) Project, will utilize SMART’s award-winning Smart Money platform to deliver relevant and affordable mobile-based financial solutions to members of the low income market, who otherwise have little or no access to formal banking services. Source : The Mix For more information, Click

F ancy fish, females and micro-finance Tilapia is a tasty, fast-growing fish that does very well in Guyana’s tropical climate. And, if you can deal with the start-up costs, farming tilapia can

be a lucrative business. And it’s a particularly attractive idea if you live in Guyana’s Trafalgar region, a particularly poor coastal area of the country. Here, there are no

social safety nets, employment is scarce and conventional agriculture is difficult because of regular flooding. That's why a local women’s group – the Trafalgar/Union Community Devel-opment Committee (TUCDC) – decided they wanted to build their own tilapia business, any way they could. And also why DFID has stepped in to help. The lack of other options made this a simple business decision for the single-minded women of TUCDC, which is a collective focused on gener-ating income, building livelihoods and reducing poverty. Secretary and spokeswoman Lloyda An-gus said: "The lack of employment in this area is really hard. In other areas, such as sugar-growing areas, the women can get involved in the process. But there’s nothing here. Men from here will go into the interior for mining and such-like, but you wouldn’t find the ladies going there…" Source: DFID

H SBC Amanah to pilot a Islamic micro-finance scheme in Pakistan.

As per this partnership, HSBC Amanah will be providing funding towards Islamic Relief’s micro-finance projects in Rawalpindi, Pakistan. HSBC Amanah will also assist Islamic Relief as required in developing the Shariah structure for financing models and contracts and providing Islamic fi-nance training to Islamic Relief staff. Islamic Re-lief will, in turn, manage microfinance projects, identify and screen beneficiaries, set out eligibil-ity criteria, encourage entrepreneurs to come forward with lucrative business ideas for invest-ment and provide financial and social reports to HSBC Amanah. Source: HSBC Amanah

News

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First European Research Conference on Microfinance: Call for Papers 02 Jun 2009 - 04 Jun 2009, Belgium Sponsored by: European Microfinance Platform (e-MFP), Centre for European Research in Micro-finance Event type: Conference Microfinance: The Investment Opportu-nity for Pensions, Endowments, Founda-tions and Social Investors 13 Jul 2009 - 14 Jul 2009, United States Sponsored by: Financial Research Associates Event type: Conference Pacific Microfinance Week 2009 13 Jul 2009 - 17 Jul 2009, Fiji Sponsored by: Microfinance Pasifika Network Event type: Conference Microfinance and its Growth in Europe: Consequences, Challenges, Opportunities 04 Jun 2009 - 05 Jun 2009, Italy Sponsored by: European Microfinance Network Event type: Conference Microfinance West 2.0: The Social and Commercial Investor's Summit 13 Jul 2009 - 14 Jul 2009, United States Sponsored by: Financial Research Associates Event type: Conference Microfinance 2.0 15 Jun 2009 - 17 Jun 2009, United States Sponsored by: International Quality and Produc-tivity Centre, Silicon Valley Microfinance Network

Event type: Conference 4th African Microfinance Conference: Af-fordable Access to Finance for Low-income African Entrepreneurs 07 Jul 2009 - 10 Jul 2009, Burkina Faso Sponsored by: APIM BF Event type: Conference

Investments in Microfinance 07 Jul 2009 - 09 Jul 2009, United Kingdom Sponsored by: Hanson Wade Event type: Conference Mobile Banking and Financial Services Africa 20 Jul 2009 - 22 Jul 2009, South Africa Sponsored by: Belgacom, Smart X Event type: Conference 2009 World Credit Union Conference 26 Jul 2009 - 29 Jul 2009, Spain Sponsored by: World Council of Credit Unions Event type: Conference 6th Insurance Linked Securities Summit 15 Jul 2009 - 17 Jul 2009, United Kingdom Sponsored by: Coventry, Credit Suisse Event type: Conference 20th Skoch Summit on Financial Leader-ship 16 Jul 2009 - 18 Jul 2009, India Sponsored by: Skoch Consultancy Services Pvt Ltd. Event type: Conference

Upcoming Events

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Microfinance Focus June 2009 issue

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