Recently in Microfinance Category

Juhudi Kilimo

Two key questions about microfinane and then an amazing model for extending credit to poor, rural African farmers:  

1. Does microfinance reduce poverty?

A recent CGAP study reviewed the evidence from field experiments.  Recently published randomized control studies of microcredit variously found: 
  • business creation as well as increases in non-business (i.e., "consumption") spending (India); 
  • improvements for farmers but not others; and business owners increasing savings but non-owners increasing only their consumption (Morocco); 
  • increases in income and food consumption in general (South Africa); 
  • a decrease in business activity and employment (Philippines).

Ambiguity, at least surprise, also surrounds experiments that explore non-credit applications of microfinance, including savings, technical support, and insurance.  For instance, 
  • providing advice to business owners to keep their  personal accounts separate from their business accounts helped them more than when they got more detailed accounting advice;  
  • farmers recognize that droughts are the most significant risk they fact, but they are very reluctant to purchase insurance, even when they receive information explaining how it works and its benefits.

Three other randomized studies focusing on the design of microfinance products showed that 
  • allowing a grace period before a borrower's first loan payment is due helps some but hurts others; 
  • borrowers with individual versus group liability were just as likely to repay;  
  • fingerprinting borrowers caused borrowers with marginal credit worthiness to take smaller loans and be more likely to repay them.

To summarize: we don't know enough to generalize about what works and in what circumstances.  And, although we are far from certain about what design features are likely to "take," design considerations seem to matter.

If the situation is not uncertain enough, let's also ask ...


2. Should microcredit be for business-building loans only?

There is ample reason to believe that the poor need credit to help them through the unpredictable, uneven (and, of course, low-income) financial lives they lead to make their lives manageable.  Still, from the perspective of alleviating poverty, are loans for businesses most important?  The very framing of the question seeks opinions, not facts; and there is no consensus here.

The relatively recent trajectory of extending credit seems to be away from business-only loans, as even Grameen II now permits borrowing for reasons other than starting or expanding a business.  In many respects, this may reflect the reality that, after someone receives a loan, how do you prevent them from doing what they want with it?  

Yet fears about poor people becoming over-indebted remain prevalent and valid.  And the arguments that rising out of poverty comes from building (a business, your home), rather than consuming, has much resonance.  

My microfinance class was lucky enough to hear from Nat Robinson,  CEO of Juhudi Kilimo the past week.  The microfinance organization's lending model is no less a revolution than being able to have a real-time, interactive conversation with Nat, at his office in Kenya, as my class and I did with him over Skype video.  Juhudi's model directly addresses the issues of using microfinance to lift people out of poverty, ensuring that loans go towards business rather than consumption, and preventing over-indebtedness.  All are baked into the design of its microfinance products.

Juhudi Kilimo (Effort in Agriculture, in Swahili) provides loans in the form of durable assets to rural Kenyans.  For instance, smallholder farmers may receive a milk cow, instead of cash.  Farmers can then immediately begin to improve their income.  To make this loan most productive, Juhudi provides technical training and ongoing support.  By making loans in-kind, a struggling farmer has a real asset that can be sold (with Juhudi's help) if he can't repay his loan, and Juhudi also insures the cow against theft or death to provide further protection against over-indebtedness.

Juhudi Kilimo began in 2004 as a non-profit initiative after observing the low productivity of Kenyan farmers.  Five years later, after proving its model, it became a for-profit organization in an effort to serve as many clients as possible.  As it has grown, it has added supporting technology to improve efficiency.  It uses Kenya's wildly popular M-PESA system to collect payments, and is beginning to use an open source application on Android phones to replace  cumbersome, manual record keeping in the field.  

By raising capital, including grants and quasi-equity, within three years, Juhudi Kilimo expects to become sustainable and help lift 100,000 farmers and others with small agri-businesses out of poverty.


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Microfinance, USA: Grameen America

If it's November, then I must be teaching microfinance.

For the last several years, as fall starts giving way to winter, I start to wind down my teaching  about social enterprise and "wind up" my teaching of microfinance.

The past week, my class focused on microfinance in the United States. Microfinance is a considerably more developed activity overseas than here. 

In the US, the FDIC estimates that about $320 billion flows through alternative financial services every year, likely more.  This band of payday lenders, pawnshops, check cashing services and other providers offer financial services helps the poor participate in the financial system, but at far too high a cost.  (Example: pawning may have interests up to 300% APR, payday loans may carry an APR of 400%.) All told, 10 percent of all Americans may be unbanked, and 40 million households may be under-banked.  $8 billion of too-high fees are collected from the poor so that they can conduct their financial lives.  

If there is so much money to be made, shouldn't others -- others with more respectable motives -- be entering the game?  Yes, and they are:  New not-quite-banks like Kiva.org and Wal-Mart are starting to cater to the US poor's financial needs.  And so is Grameen America

I saw the film "To Catch a Dollar" when it played in theaters briefly last spring.  What follows is what I wrote then.  I remain hopeful that Grameen can serve the poor of the United States, just as they do in Bangladesh.

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I just returned from watching the film "To Catch a Dollar: Muhammad Yunus Banks on America."  Yunus founded Grameen Bank in Bangladesh, which disburses $1 billion in loans annually to poor women in the developing world, without ever asking for collateral, and achieves a repayment rate of nearly 100%.

Grameen America, launched in 2008, is not a bank but it makes loans ranging in size from $500 to $3,000 to women living in poverty in the United States.  Whereas a bank can take deposits from its customers to lend out to others, Grameen America relies on contributions and long-term loans for its source of funds.

The movie tells the story of several extremely hard-working women in Queens, New York, who need to "catch a dollar."  This is the phrase Yunus uses to explain the plight of the poor who seem trapped in a cycle of poverty.  

Either they can't find a job.  Or their wages, minus their expenses for childcare, carfare, and all the other, unrelenting financial requirements that still accompany a low wage job, are entirely consumed by rent and food -- if they even cover that.  Or they get locked into a permanent cycle of indebtedness:  They get a loan at an incredibly high interest rate, can only afford to pay the monthly interest, and thus their loan balances never drop by even a penny:  a loan shark's dream -- a paying customer for life.

If they could "catch a dollar" -- meaning they could obtain money that they could use in productive ways -- they could use it to build their lives.  This is where Grameen America helps a baker buy a power mixer; a cook obtain financing to open her own restaurant; a hair stylist to buy her own "chair" in a salon so that she is now running her own business (and selling shoes on the side).

Grameen America, like Grameen Bank, turns the idea of lending upside down.  Yunus explains:  The more money you have, the easier it is to get a loan.  Banking should give priority to those who have the least money, or none at all.  Grameen America is reaching out to the 40 million un-(der)banked Americans so they can "catch a dollar" to better their lives.  

When people told Yunus that his ideas about making small loans to the poor in Bangladesh were foolish, he simply shrugged and made them anyway.  When they said that the same ideas that worked in the developing world couldn't work in the United States, he shrugged again.  

Grameen America is founded on the same principles that Grameen Bank used to start Grameen in Bangladesh, the core of which is the "self help group." Five women band together into self-selected groups.  In this group setting, each member applies for a loan (which must be used to start or expand a business), receives money from Grameen America, makes weekly payments on her outstanding balance, and shows receipts and other documentation demonstrating how her business is doing.  

All business plans must be approved by the group, and if any member fails to make her required weekly payment, the whole group suffers because Grameen America will refuse to make any other woman in the group another loan, no matter how successful her business or her repayment history.  This creates powerful social pressure to repay, even in the absence of any kind of collateral. The group also serves as a source of encouragement and helps members support each other's efforts. 

Grameen America insists on the same financial discipline required by Grameen Bank in Bangladesh.  Customers must first take five classes in financial literacy and open a savings account before they receive a loan.  Typically, 2% of the initial loan principle is paid back each week, ensuring a declining balance and repayment of the loan within a year.  Borrowers also pay interest (at an annual rate of 7.5%) and make small savings deposits every week. 

Vidar Jorgensen, President of Grameen America, and Premal Shah, President of Kiva.org, explained in the panel that accompanied the video:  The poor are disadvantaged by the financial system in so many ways.  If they're on welfare, they can't receive a bank loan. And even if that weren't a restriction, they have no credit history and have FICO scores so low that no bank would make them a loan. With slightly higher scores, they may become eligible, but they will receive the worst interest rates the bank offers.  On top of all this, low FICO scores create a serious impediment to renting a place to live and getting a job.  Being poor keeps you poor. 

Which, again, is why Grameen America hopes to let its clients catch a dollar.  By making business loans and providing business support, it increases its clients' incomes.  By insisting on savings and consistent, on-time repayment of loans, it helps clients establish respectable credit histories.  Favorable credit histories can lead to larger loans (possibly by banks), better opportunities to rent, and possibly the opportunity to get a job that one would otherwise have never been considered for.

Grameen America uses a "bottom up" approach that relies on empowering individuals to enable them to lift themselves, and their fellow group members, out of poverty.   It is now hoping that individuals take up the mantle of leadership and support for its efforts.  Tell others what Grameen America is doing.  

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Grameen America currently operates in Queens (New York), Brooklyn, Manhattan, Omaha, Indianapolis and, most recently, the Bronx.

To learn more, get involved or contribute, see their website which includes multimedia information.

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Who's going to save the world -- Wal-Mart or the social entrepreneur toiling away with little fanfare?

Let's consider:

Wal-Mart, the world's largest company, sells slightly more than $400 billion a year.  The poorest two-thirds of the planet -- people living $4 a day or less -- spend about ten times that amount.

Each year, Wal-Mart serves 100-200 million customers.  At most, that's less than 3% of the world's population.

Wal-Mart's recent shift from focusing exclusively on everyday low prices to finding profit in acting in pro-social ways has been commendable.  It has committed to creating zero waste and obtaining all its energy from renewable sources.  It announced this week that it will open 300 stores to bring fresh food to inner-city "food deserts" in the next five years (on top of the more than 200 it already operates).  It has entered the low-income banking business in Latin America and, in the U.S., where it can't officially run a bank, it works through partners to offer unbanked Americans low-cost money orders, check cashing, and overseas remittances.

Despite Wal-Mart's heft and new found focus on creating business opportunities from addressing societal ills, it can't meet many of the most basic requirements of the needy. 

In the developing world, access to clean water is arguably the most fundamental need of the poor.  Protection against preventable diseases, including malaria and diarrhea, is close behind.  These are beyond the ambit of Wal-Mart's merchandising. 

Even Hindustan Unilever, with its more targeted efforts to address the needs of the poor, has been unable to respond effectively enough to these needs.  With revenue one percent of Wal-Mart's, Hindustan Unilever does reach deep into Indian rural life through efforts such as its Project Shakti, which creates door-to-door selling opportunities for poor, rural women. (Have you heard of Avon Ladies?)  It recently announced an altruistic effort to study the under-supply of water, and has made previous efforts to help renovate village ponds, manage watersheds, and promote improved water harvesting.  Despite these efforts, clean water remains in short supply, with more than 750,000 deaths occurring each year in India alone from water contamination.   

In the United States, basic needs are under-served, too.  Despite (or motivating) Wal-Mart's food efforts, food deserts exists throughout the country.  (See the USDA's interactive map.)  The consequences?  Poor people eating less nutritious, usually fattening food, or inconvenient and costly (in time and money) travel to obtain food of higher quality.  Likely, too: a higher incidence of serious illnesses and premature death.

Nor is the financial services picture rosy for the U.S. poor.  The FDIC estimates that over one-fourth of all households, accounting for 60 million adults, are unbanked or underbanked.  For blacks and Hispanics, the proportion is approximately 50 percent.  The alternative financial services that these un- and underbanked use -- non-bank money orders and check cashing, payday loans, pawn shops, and others -- are necessary, but costly, ways to live without formal banking.

So, where do social entrepreneurs come in?

Social entrepreneurs provide services where companies are absent, where they don't sell the right products, or where they sell products that are simply too expensive.

Social entrepreneurs (or non-profits) together with companies form a co-adaptive ecosystem.  What companies leave unattended -- in their "background" -- creates the foreground environment for social enterprises, shaping their opportunities .  In turn, social enterprises can serve as a type of free, and early, testing ground for companies.  The success of non-profit microfinance institutions in providing banking services for the poor, for instance, caught the notice of larger, for-profit banks, spurring their entry into the same market.

As
social entrepreneurs prove successful in reaching their constituents, for-profit companies take notice.  And, as companies change their focus, they affect social entrepreneurs.  This interplay has led nonprofit microfinance institutions to serve poorer, more rural customers as larger, for-profit providers use capital markets to offer more, and larger, loans to wealthier segments of the poor.

Today, we are seeing examples overseas of early-market activity among social enterprises in the field of water:  Naandi (water purification and delivery), Wello (water transport and business opportunity), and Sarvajal (a filtration and franchising model). 

In the U.S., healthful food is offered to the poor through a variety different kinds of social enterprises.  D.C. Central is a community kitchen that not only "recovers" and delivers good food headed for waste, but trains low-income individuals for jobs in the food services industry.   Peaches and Greens, a mobile produce market, makes scheduled delivery stops and home-deliveries in inner-city Detroit three seasons a year.  And even urban farming is proving viable, as organizations such as Growing Power, headquartered in Milwaukee, are proving. 

It waits to be seen whether such efforts in water and healthful food will one day be viewed as attractive opportunities for many large companies.

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So, who's going to save the world -- mega-corporations like Wal-Mart with their size, reach, and efficiency; or social entrepreneurs, who can attack deeply entrenched problems without a slavish focus on bottom-line results?

My answer: both -- by acting and adapting in response to each other even as they continue to do what they do best.

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Be Encouraged

It's easy to be discouraged, even cynical, these days. 

We're inching towards defaulting on our national debt.  China is worried we're acting like a third world country playing financial chicken. 

As our government sputters over issues of consequence, the House did just muster the "courage" to pass one bill to prevent the Environmental Protection Agency from enforcing the Clean Water Act and another to prevent the Energy Department from enforcing higher energy standards for light bulbs.

(Why was I surprised that I saw a car on the highway today with a bumper sticker that read, "I support global warming"?)

We are starting to get used to our middle of the international pack stature in education.  U.S. 15 year-olds scored below the developed world (OECD) average on mathematical literacy (and well behind China and Singapore).  In science literacy we did better: about average. (Want your kid to be better in math?  You could send them to Korea, Finland, Iceland, Slovenia, or the Slovak Republic.)

Other statistics reveal that health care in Cuba is better than ...

... no:  Let's look at why we should be hopeful!

I'm writing a book to support social entrepreneurship.  Tentatively titled What I Wish I Knew Then: Becoming a Social Entrepreneur, the book  uncovers and addresses the questions and issues holding back early stage social social entrepreneurs.

In the course of researching the book, I've been talking to social entrepreneurs from around the world (including my co-author, Cynthia Koenig, founder of Wello), who are working on problems spanning the spectrum of societal ills.  Here are very brief profiles of two of them.

Derek Stafford never intended to start a social enterprise.  He started two.  Stafford is a political scientist with expertise in the mathematical properties of social networks (stuff like how many links to Kevin Bacon, which truly is important in studying power and influence).  La Unión, Honduras, provided the perfect spot for his research, its geographical isolation and rich tapestry of personal connections creating a social network with just the properties he wished to explore.

Stafford and team did extensive research on the ground, mapping relationships among people who had long histories with others in the community, even if they typically only knew them by their first names.  To compensate them for their time, Stafford wanted to provide something of value to La Unión -- but what?

The region produces outstanding coffee, but most residents, working for much wealthier coffee growers, earn subsistence incomes.  Stafford launched Unión MicroFinanza to provide microloans (in the form of fertilizers and coffee inputs) to small farmers, extended them credit, and purchased their coffee through his second social enterprise Microloan Coffee.  He also banded farmers together into a coop and encouraged them to use the coop's market power to improve their bargaining power with him.   He is looking at the role of crop insurance and price guarantees to further support small coffee farmers in La Unión.

Maria Springer's route to social entrepreneurship was also serendipitous, but perhaps less surprising.  She was about to join the Peace Corps after receiving a bachelor's degree in Political Science and International Relations when she received a phone call from her cousin asking if she'd like to be part of a local solution to local problems in Kenya.  The call changed her life.

At the age of 22 she founded Kito International along with Wiclif Otieno.  The organization trains Kenyan "street youth" and employs them as as salespeople through Kito's companion organization iSmart.  The street youth, who formerly endured all the hardships that confront the homeless everywhere, now earn steady salaries. 

Through its deeds and relationship building, iSmart has gained the support of suppliers who provide products such as solar lights and LED lamps on credit.  The Kito-trained sales force provides "last mile" sales and distribution, benefiting themselves, suppliers, and the slum residents who can't easily obtain the kinds of beneficial products that the former street youth sell.

Derek and Maria both excelled in school, have palpable drive and energy, and have countless opportunities they could pursue.  And they are working to make a true difference in the lives of those who are eking out a living.  Their work reflects the their humanity, commitment, and integrity.

There are more Dereks and Marias today than ever before.  Perhaps all the things that make it tough to get a foothold in today's ultra-competitive job market are tipping people (and not just young people) towards social entrepreneurship. 

But I think it's more than that.  In a world where traveling and living internationally are more and more common; where communicating with one (or thousands!) of people is just as easy if they are half-way around the world or next door; and where there is more opportunity than ever to receive support for an idea that can change the world -- in that world, our world, we are seeing an awakening to a life of purpose. 

That world is a world that should encourage us all.

Postscript:  As this blog entry marinated in my drafts folder, Google just announced the winners of its first ever science fair.  The winner, a 17 year old girl, discovered how a cellular energy protein might help a cancer drug become more effective.  The winners in the 15-16 and 13-14 age groups, also girls, studied the effects of air quality on lungs and how to control the carcinogens produced by grilling meat, respectively.

(This entry was inspired by Jonathan Lewis’ blog entry on the Huffington Post and Social Edge, where I have cross-posted these thoughts.

Science seeks the truth but frequently does not arrive there, at least at first.  The consequences can be mistaken beliefs and misguided practices that become so entrenched that they are almost regarded as laws of nature.  The practical effects of science-gone-wrong can range from bad medicine to bad policy to microfinance dollars misdirected.

Jonah Lehrer, writing in The New Yorker last December (yes, I recognize that is not a peer-reviewed journal), cites some of the problems of science, and I borrow heavily from his piece. Scientific journals - not just People magazine - like exciting stories. This biases them towards publishing surprising findings with statistically significant positive results. One study showed that in 97% of all published studies authors found the result they had hypothesized - an outcome attributable both to authors’ and journals’ preference for publishing only positive (not “null”) results. This creates a skew away from objectivity. John Ioannidis, of Stanford, examined the 49 most cited articles in three major medical journals. Most of these studies were widely heralded randomized control studies. Forty-five showed positive results.

These positive biases can set off scientific feeding frenzies to find more and more nuance related to new, hot scientific “findings.” Alas, these, too, tend to reinforce questionable results, for identical reasons. Statistical analyses suggest that the results of small follow-up studies, rather than reporting results that are randomly distributed around a true mean as statistics tell us they should be, overwhelmingly tend to report results that are more positive. Even authors who produce highly original scientific claims find that they cannot easily find a publication outlet for their own subsequent studies that weaken or contradict them.

How can these biases be so prevalent? For one, science is less objective than we may believe. As an example: Does acupuncture work? Over a thirty year period, forty-seven studies in Japan and China showed that it did — every time. During the same period, studies in the West showed positive effects of acupuncture only half the time. Why? Because our expectations shape our perceptions. And this phenomenon holds in medicine, genetics, psychology, and presumably every other field of study. So why not microfinance studies?

One way these insidious influences creep in to influence scientific outcomes is through measurement errors. Even in randomized control trials, frequently considered the gold standard in mircofinance, there still may be the need to measure subjective “outcomes” like “made a good business investment,” or “benefited from training.” Evaluators may see what they want. Another problem is experiments that are simply not well designed.

As a practical matter, perhaps the biggest risk of making key go/no-go decisions on the basis of scientific evidence alone is that mistakes are rarely noticed, and more rarely undone. Of the 49 studies Ioannidis looked at (remember, these were the most cited in medicine), only thirty-four were replicated, and of those, two-fifths were contradicted or showed markedly smaller effects. Worse, he looked at nearly 450 claims about the effects of various genes on disease. Of these, only one was consistently replicable - less than ¼ percent of the sample

Unfortunately, these results often become scientific lore, difficult or impossible to dislodge and continuing to influence clinical practice even after they have been disproven or weakened.

Add to this problems with methodology. David Roodman reported that the Journal of Money, Credit and Banking found, upon trying to replicate the results it had published, that errors were commonplace, even if they didn’t always materially affect an article’s ultimate findings. The context for Roodman’s report is itself a rather testy, public debate about math and causality that he and Jonathan Murdoch found themselves in with Pitt and Khandker when they tried to replicate the latter’s microfinance results using the same data and methods.

What is the sum of all these observations: 1. The endeavor of doing science and publishing scientific results is fraught with mistakes and biases, despite all efforts to avoid them. 2. Mistaken ideas get extended, developed, and can take on the status of scientific fact. 3. Policy decisions flow from these results (which can lead to bad medicine or bad microfinance). 4. Mistakes are much less rarely undone than we’d hope once they achieve such status.

Given this situation, can we afford to place all our eggs in the basket of scientific experiment? Isn’t it wise to listen to voices of the field, even if we know they might be shading the truth to bring benefits to themselves?

I’m no science-basher. I am a scientist. But the lives of desperately poor people are at stake. If we continue to provide support for methods of microfinance that aren’t completely effective, our losses will be modest compared to discontinuing support for ideas that are helping the poor lead more productive lives, with more dignity, even if science tells us they shouldn’t be.

Funding poor students could be the next big thing in microcredit and other innovative forms of microfinance that are so new that they don’t even have names.

Microcredit is put to many productive uses: as a cushion against the financial ups and downs of poor people whose lives are so uncertain and so fragile, as support for helping them launch or expand small micro-businesses, and to pay for unexpected “life events” such as funerals or weddings.  None of these is a proven way out of poverty, whereas offering someone the opportunity to receive a college education or training as a skilled tradesman is a much surer path to a brighter financial future.

More than 850 million people worldwide lack basic education.[i] Of these, approximately 40 percent are out-of-school children and youth while the rest are illiterate adults.  Many factors account for this including direct costs from school fees, tuition, books and uniforms, etc; opportunity costs from families forgoing the income their children would earn if they were working instead of being in school; and gender discrimination and other cultural norms.

Among those with a high school education, only 24 percent worldwide go on to receive a college degree or specialized technical training.  This statistic drastically exaggerates the picture in the developing world where, for example, the figure is as low as 10.5 percent in India and just 7.5 percent in China. Lack of funding is often the underlying reason. For instance, if India is to achieve the worldwide average, more than 35 million Indian students will require funds.  

Poor families understand that their children’s education can result in increasing their lifetime earnings and help their entire families escape poverty.  Often as little as $100 to $500 can fund a year of education in a developing country,[ii] an expense most families still cannot afford. Loans for education are typically nonexistent, and when they do exist families fear being crippled by indebtedness from high interest rates. Yet there is compelling evidence from conditional cash transfer programs (where financial benefits are tied to school attendance) to indicate that properly structured incentives can dramatically improve school enrollment, attendance, and achievement[iii].

New models for funding education for poor children are being tried throughout the world.  Below are two examples which together suggest the range of variations being explored.  One is a nonprofit, the other a for-profit; one raises small amounts of money from desktop lenders, the other seeks institutional funds; one makes loans, the other equity investments.  

Vittana

Vittana, a Seattle-based nonprofit organization founded in 2008, raises loans for students in Mongolia, Nicaragua, Paraguay, Peru, and Vietnam[iv] through online, peer-to-peer lending. Peer-to-peer (person-to-person) lending allows individuals, mostly from wealthy countries, to identify college students to whom they would like to make a loan and then effortlessly arrange a transfer of funds.

Lenders give Vitttana $25 or more to fund a particular student.  Once the total from all donations for that student are sufficient to cover his or her educational expenses (average: $655), the funds are released.  Vittana sends money to microfinance institutions in the countries it funds which give the money to funded students.

Though Vittana is just a few years old, it has received more than a half million dollars from lenders in 30 countries, and it is growing at over 30% a month.[v]  What accounts for its success to date?       

  • Vittana targets high-achieving students.  Vittana’s microfinance partners screen loan applicants on the basis of students’ academic records.       

  • The screening makes sure the student loan is for enrollment in a program where the prospects for employment after gradation are good.       

  • Vittana reduces the risk of making loans to students who never complete their education by only funding those in a twelve month or shorter vocational program or who are in their last twelve months of college. Students with more than twelve months of school remaining are less likely to complete their education.       

  • Vittana highlights “high-achieving, deserving” students on its website in the hope that visitors might be inspired to help out.[vi]  Its search engine allows a lender in Lima, Ohio, to find someone and easily invest in someone they want to support in Lima, Peru. This peer-to-peer model might reach millions (billions?) of potential small- scale lenders interested in supporting students in the developing world.       

  • Vittana seeks to mitigate risk from students not repaying their loans in several ways:  by making loans to the children of microloan borrowers with good credit backgrounds; by having students’ mothers or other close relatives co-sign for the loan; and by instituting a year long interest-only “grace” period after the student graduates from his or her program.

By funding only the “last mile” of students’ education and identifying candidates whose employment prospects are bright, Vittana achieves a 95% loan repayment rate.  Its graduates make, on average, two to three times their previous incomes.

Finding successful and efficient MFIs is crucial for Vittana to gain scale and fine-tune the loan product to specific regional circumstances. MFIs are fully responsible for marketing the loan, finding suitable borrowers and managing the customer relationship. Moreover, Vittana  conducts random audits of their partners to ensure that individual lenders’ money is well spent.[vii]

To cover the costs of developing and administering their student loan programs, Vittana’s microfinance partners charge students minimal interest, typically 10-15 percent per year. They receive no funding from Vittana, and every dollar that Vittana sends from lenders goes towards students’ education.  Neither Vittana nor the initial peer lender charges interest, and peer lenders are repaid when students repay their loans.

Vittana recently made a 2010 Clinton Global Initiative commitment, Vittana/Africa: Bringing Student Loans to Africa.  Vittana, in partnership with leading microfinance institutions, will fund African students’ post-secondary education, aiming  to fund the last of mile of the education of 10,000 students by 2015. Students will gain employable skills in fields including nursing, law enforcement, and IT.[viii]  

Lumni

Lumni is an international company that helps finance the college education of poor students.  Operating in Chile, Columbia, Mexico, and the United States, Lumni creates and manages social- investment funds that allow low-income students to pay for college and its funders to receive financial (and societal) returns.

Lumni attracts capital from foundations, funding agencies including the Inter-American Development Bank, and wealthy individuals. It uses this money to fund a portion of a student’s college tuition and fees, but not all.  In exchange, each student commits to pay a fixed percentage of his or her income for 120 months after graduation. The percentage varies from student to student based upon a number of factors including the student’s grades, job, the amount of funding received from Lumni, and the amount of funding from other sources.

The Lumni model shifts risks from students to investors.  Students earning more money after they graduate repay more every month (remember: repayment is based on a fixed percentage applied to a student’s income), and loan repayment amounts will rise, too, as a student earns more over time.  A typical situation is a student who receives $16,000 over four years from Lumni and repays at 4-8 percent of his or her income after graduation.  This is approximately equal to repayment of the principal at an 8.5 percent annual interest rate.  The student’s obligation is complete at the end of 120 months, even if his or her total repayment is less than the amount s/he received.  Lumni also allows students to work in activities like the Peace Corps without worrying about repayment. Under this design, students face little risk of overly burdensome debt payments, providing peace of mind for debt-averse populations that are most in need of funding.

Investors are repaid, with interest, which essentially makes their financing of students’ education an equity investment: The more students earn after graduation, the greater the investors’ financial return.

For its part, Lumni offers career coaching, networking, and technical support to students after graduation.  Lumni receives a fee for raising and managing the fund.

Lumni has raised and obtained commitments of more than $15 million from more than 100 investors. Lumni has financed nearly 2,000 students to date, nearly all from low or very low-income backgrounds where funding recipients are the first family members to attend college.[ix] In addition to the dual financial and social return from their investment, contributors are helping prove an efficient, sustainable new system for giving students access to college without the burden of a traditional student loan.[x]  

Parvati Patil, a Masters in Public Policy graduate from the University of Michigan, brought these ideas to my attention and did the initial research for this paper.  She and I both contributed to this post.  Her blog is available at http://tenmarks.wordpress.com/

REFERENCES
[i] UNESCO, Education For All Global Monitoring Report, 2009 http://www.unesco.org/new/en/education/themes/leading-the- international-agenda/efareport/reports/2009-governance/ (accessed on December 11, 2010)
[ii] John Hatch, Expanding Microcredit Services to Young Adults: Research Findings, Rationale, Blind Spots, and Recommendations, 2004
[iii] Alain de Janvry and Elisabeth Sadoulet, Conditional Cash Transfer Programs: Are They Really Magic Bullets?, 2004 http://are.berkeley.edu/~sadoulet/papers/ARE- CCTPrograms.pdf (accessed on December 11, 2010)
[iv] FAQ Vittana, http://www.vittana.org/faq (accessed on December 8, 2010)
[v] Making the Grade, Economist, http://www.economist.com/node/16996791 (accessed on December 8, 2010)
[vi] Huffington Post http://www.huffingtonpost.com/2009/10/29/huffpost-game- changers- whn337128.html?slidenumber=G6ny07MYCRM%3D&slideshow#s lide_image (accessed on December 8, 2010)
[vii] Next Billion, http://www.nextbillion.net/blog/2009/11/20/vittana- student-loans-and-a-new-generation-of-microfinance (accessed on December 12, 2010)
[viii] Organizational Partners http://www.vittana.org/partners (accessed on December 11, 2010)
[ix] About Us, Lumni http://lumni.net/forpotentialinvestors/ (accessed on December 8, 2010)
[x] Lumni, http://lumni.net/forpotentialinvestors/ (accessed on December 8, 2010)

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