Download Taking Tiny Loans to the Next Level (Business Week)

Special Report
Taking Tiny Loans to the Next Level
By Jay Greene, with Jeffrey Gangemi in New York
1857 words
27 November 2006
BusinessWeek
76
Volume 4011
English
(c) 2006 McGraw-Hill, Inc.
An idea, not a person, was the most powerful force in philanthropy in 2006. President Bill Clinton
devoted a big chunk of his annual Clinton Global Initiative to exploring it. The mighty Bill & Melinda
Gates Foundation endorsed it. The choice of the 2006 Nobel Peace Prize winner was a tribute to it.
It was truly the year of microfinance.
The energy, money, and brainpower being devoted to the practice of lending to the world's poor is
unprecedented. "Previously, if we screamed, people didn't listen. Now, if we whisper, the whole
world will hear," says Muhammad Yunus, who shares the Nobel Peace Prize with his Bangladeshbased Grameen Bank (page 82). Yunus pioneered microfinance in the 1970s and continues to
expand its boundaries. But some of the most exciting innovations reshaping the field spring from a
new breed of philanthropists who hail, in large part, from the tech world.
Their approaches to tackling the immense problem of worldwide poverty range from the
conventional, such as funding research, to the controversial, such as advocating a stronger focus on
making profits from lending to the poor. As befits captains of the tech industry, their efforts center
on bringing scale, efficiency, and transparency to a fragmented, often inefficient area.
At the heart of microfinance is microcredit, the practice of offering small, unsecured loans to poor
people not served by banks. The loans, often just $50 to $150, are used to buy everything from
buffaloes that produce milk to sell in markets to mobile phones that villagers can pay to use.
Borrowers are usually women, in part because studies show that women are more likely to use their
earnings to pay for family needs than men. Interest rates, which average a hefty 35%, are still far
below rates charged by local moneylenders. Repayment rates are said to run from 95% to 98%,
though some suspect that figure is overstated.
Proponents say the beauty of microfinance is how a small amount of money can have a ripple effect
on so many lives. In capitalist terms, it's the power of leverage. In human terms, it's the story of
Dorothy Njobvu Kanjautso, a 35-year-old mother of three in Malawi who was widowed eight years
ago. Through Opportunity International, a nonprofit group that received the Gates Foundation's
first-ever microfinance grant in late 2005, she has taken out six loans over the last three years to
build a school with seven teachers and start a separate business selling frozen treats from a cart.
She used her first $70 loan to buy mats and games for the children; subsequent loans let her add a
primary school and expand enrollment.
Being able to employ other people in the community is one way Kanjautso's loans paid off. At home
the loans have improved the nutrition and education of her children. Before their mother's business
took off, Kelvin, 12, Natasha, 11, and Vanessa, 9, ate meat maybe once a month, and meals were
not particularly nutritious. Now they eat meat once a week and have a more balanced diet. They go
to a private school with a 30-to-1 teacher-student ratio, far better than the 70-to-1 ratio in
government schools. Better education and nutrition greatly increase the odds of their being able to
stay above the poverty line.
Almost as important as the Nobel in putting microfinance on the map is its embrace by the tech
elite. Those include Microsoft Corp.'s Gates and his $32 billion foundation, Michael and Susan Dell
and their $1.2 billion foundation, and the $470 million Omidyar Network, created by eBay founder
Pierre Omidyar and his wife Pam. The Omidyars split their money between a $270 million pool for
not-for-profit ventures and a $200 million pool devoted to for-profit investments.
The technology and microfinance worlds converged at a pivotal November, 2004, meeting at the
house of John Doerr, the preeminent Silicon Valley venture capitalist. Doerr, who has pumped close
to $20 million into the sector, invited some of the leading digerati of the day, including Omidyar and
Google Inc. founders Larry Page and Sergey Brin, to brainstorm with Yunus, Grameen Foundation
President Alex Counts, and others. It was a "catalytic event," says Counts. "These are people who
saw technology change the lives of the richest 1 billion people of the world in a relatively short
period of time, and they played a significant role in it. Now, they want to do that with the poor."
The entrepreneurs come equipped with technological expertise, high-level problem-solving skills,
and a finely honed sense of what it takes to get a business up to critical mass. They are invigorated,
not put off, by complex problems. Says Omidyar: "This is just another large-scale systems
challenge."
Like tech, microfinance makes a lot more financial sense when it achieves scale. Selling a little bit of
software on thin margins isn't much of a business. But sell boatloads and you just might become Bill
Gates. Similarly, lenders can't maximize impact if they operate with only a few hundred or thousand
borrowers. So the new forces in microfinance want to bring more scale to the industry. There's a
long way to go, but the effort is making progress. The Microcredit Summit Campaign, launched in
1997 to "reach 100 million of the world's poorest families...with credit for self-employment and
other financial and business services by the year 2005," didn't reach that goal, but it should hit the
mark by yearend. Its new goal is to reach a total of 175 million of the world's poorest families by
2015.
The most provocative argument about how microlenders can achieve scale comes from Omidyar. He
maintains that there is no way philanthropy alone can deliver loans to the world's poor. "To scale
[up], to get to 500 million people, I believe, is going to come from the for-profit side, because there
isn't enough nonprofit capital to get there," he says. One tack: Omidyar Network's lead investment
in the for-profit Unitus Equity Fund, an $8.5 million microfinance venture investor. The fund invests
in microfinance institutions in Asia and Latin America with the aim of helping them grow and
become more efficient.
Microfinance operations must streamline if they want to reach the maximum number of people. To
facilitate that goal, this October the Gates Foundation gave $1.5 million to Unitus, the same
Redmond (Wash.) organization that launched the equity fund. Unitus also works to help midsize
microfinance institutions in India, Latin America, and other developing regions grow into more
efficient operations that can pass savings along in lower interest rates for borrowers.
Unitus used the Gates money to hire four consultants from the for-profit banking world to figure out
ways to improve cost structures. Since some 70% of all microfinance institutions have fewer than
2,500 borrowers, "they're stuck small," says Unitus Chairman Mike Murray, a former Microsoft and
Apple Computer Inc. exec who has committed more than $10 million of his own money to the
cause.
The Gates Foundation's efforts, which range from funding a trans-African network of commercial
banks for the poor to a plan to bring credit unions to the poorest regions of the developing world,
also support technologies that push beyond what is common in the West. In a region where banking
services are often nonexistent, it has helped fund one of the more innovative approaches. A $2.2
million grant to Opportunity International in late 2005 included funds to help hand out biometric
smart cards to clients of the group's microfinance institution in Malawi. The cards work much like
atm cards except they use fingerprint-reading technology. That's important because most clients
don't have official identification documents since they don't drive and don't travel outside the
country. When Malawi entrepreneur Kanjautso uses the ATM, she says she feels like one of the
wealthy travelers that she associates with ATMs: "I look like a foreigner. I'm so proud of it." Now,
Gates and others are trying to expand the use of mobile atms--armored machines on the back of
Jeeps--to bring money to villages on a scheduled basis.
The Dells' foundation is also expanding the definition of microfinance, moving it from the rural areas
where the practice got its start into India's most impoverished cities. It works with two institutions
that focus on bringing financial services to urban slums in cities including Mumbai and Bangalore.
Toward that end, in May the Dell Foundation bought a 14% stake in Bangalore-based for-profit
Ujjivan Financial Services. The year-old organization gives loans to the unemployed as well as to
women who are employed, typically at local garment factories, who use the money to cover
emergency family needs or to start a business. For the Dells, the Ujjivan investment is just a start;
the foundation hopes to help launch 20 microfinance institutions to focus on the urban poor within
five years.
Along with reaching new borrowers, microfinance will need to achieve a far greater level of
standardization to attract more investment. Most lenders use homegrown programs to keep tabs on
everything from loan repayments to their ability to lift the living standards of their borrowers.
Omidyar has given a $1.4 million grant for the creation of software that helps microfinance
institutions collect comparable data from borrowers. On Nov. 13, Seattle-based Grameen
Technology Center launched a new software application called Mifos, a program designed to
standardize the way repayment data, as well as information on how clients' lives improve as a result
of getting loans, are collected. Grameen will give the software away in the hopes that it will become
widely used.
Omidyar is also focused on collecting better data on microfinance institutions. Over the past two
years he has put $1.5 million into Microfinance Information eXchange, or mix Market, a nonprofit
Web-based platform that collects financial data for more than 800 microfinance institutions. The
idea: Standardize financial reporting and provide benchmarks so investors can make informed
decisions about where to put their microfinance dollars.
In the wake of the Nobel and the buzz generated by having America's tech elite targeting
microfinance, a site like mix Market may be ideally positioned. It's the kind of venture that can help
move microfinance from being admired primarily as a good idea to a practice that becomes
accepted as a good business. With microfinance, to use Yunus' words, "under the spotlight of the
world," efforts like Omidyar's and his peers may enable it to rise to the challenge.