What kinds of lessons can providers of microfinance services in the U.S. learn from microfinance practices overseas? Three experts from the microfinance industry addressed that question during a panel discussion at the eighth annual Penn Microfinance Conference, whose theme was “Microfinance: Beyond Its Roots.” In addition, keynote speaker Elizabeth Rhyne, managing director of the Center for Financial Inclusion, discussed how the microfinance industry is moving beyond its reliance on lending into multiple new directions, including innovations in the health care sector.
The three panel experts were Julie Siwicki, a research associate at the Financial Access Initiative and a research associate at U.S. Financial Diaries; Vanessa Carter, executive director of Lend for America, and Alexandra Fiorillo, principal at GRID Impact.
Siwicki began the discussion with an overview of U.S. Financial Diaries, a research project tracking more than 200 low- and moderate-income households across the U.S. and collecting highly detailed data about their financial activity. The project is a joint effort of New York University’s Financial Access Initiative, the Center for Financial Services Innovation and Bankable Frontier Associates. According to Siwicki, her organization interviews the households every two weeks to see what their expenses are and what kinds of loans and credit they are using. Her research team has begun to analyze the data and has published some preliminary findings. (Additional results will be posted as they become available on the web site www.usfinancialdiaries.org.)
One of the project’s key findings is that there is a lot of overlap between the microfinance needs of businesses and individual households. For example, Siwicki discussed the case of the Garzas, a young California family whose lifestyle exemplifies a set of common challenges. Their income is difficult to predict. The husband has a job, but the family also depends on food stamps, she noted. “What contributes to [their income] volatility is that the wife is self-employed — she takes orders from customers and orders products [on their behalf]. [Her work] is very sporadic, and she never knows how much she will make in a month,” Siwicki said.
How do families like the Garzas deal with these challenges? “By borrowing, using credit, savings, insurance — all of these things are highly connected,” Siwicki noted. The Garzas also use informal networks. “Both the husband and wife are part of rotating savings groups — a system where people come together every two weeks, and everyone brings in ‘X’ [amount of] dollars. They contribute to the pot — and they rotate around until every member has received the pot. This is an informal way of borrowing and saving at the same time.” When it comes to microfinance, Siwicki said, “it is very important to think outside of the borrowing box.” In addition, for low-income people in such communities, “a ton of money is coming in from family and friends, and we tried to quantify all that in our research.”
Beyond this array of informal tools, the Garzas also use formal financial tools, she added. They have four credit cards, which they juggle to make ends meet. Even among many low-income people in the U.S., “credit cards are very accessible…. Credit in the U.S. is prevalent, and it is culturally accepted…. It is necessary in a lot of ways. To buy a house, own a car or to get a job, you need a good [credit] score.” Unlike the case in many developing economies, “credit is widely available in the U.S., even if it is [only] available from a payday lender or a pawn shop.”
However, credit can be both an opportunity and a risk for low-income families, Siwicki noted. “It is necessary to open doors, but it can also be a barrier. You can dig yourself into a lot of debt, and that keeps you from moving up financially…. [In the U.S.], we need to [create] tools” that address these very specific needs and risks, Siwicki said.
Vanessa Carter, executive director of San Francisco, Calif.-based Lend for America, addressed the issue of bankability, linking it to the opportunities and challenges of providing credit to low-income communities. “As microfinance providers in the U.S., one of our key goals is to help people become bankable — to help them access mainstream financial services,” said Carter, whose organization empowers student leaders to build their communities through the creation of campus microfinance institutions (MFIs).
“Credit is widely available, but it is not always good — or affordable — credit. That’s a problem that prevents people from getting out of the cycle of poverty and prevents them from achieving economic opportunity. We microfinance providers in the U.S. think of our clients [as being] on this long-term asset-building path, and we are hopefully a stop on that path. We are helping them to move forward and build stronger businesses so they can achieve a better life for themselves.” The fundamental way to achieve that goal is to build credit, she noted.
When it comes to microfinance, “it is very important to think outside of the borrowing box.” — Julie Siwicki
A key difference between microfinance abroad and microfinance in the U.S. is the role of FICO scores, Carter continued. “People will say that the best way to help people is to pay down debt, but [in the U.S.] it is important for people to have some kind of active line of credit in order to have a FICO score. It gives you access to less expensive loans. Research shows that a person will save more than $250,000 during their lifetime if they have a better credit score. As much as credit is available in the U.S., there are an estimated 40 million people [in the U.S.] who have bad or low credit. So it is a hugely prevalent problem.”
What role can microfinance play in addressing this challenge? “The most important thing with FICO is to have on-time, positive lines of credit — something active on your credit report,” Carter noted. It wasn’t until 2006 that microfinance institutions were able to send their loan service data to the credit bureaus in the U.S. “And now, [microfinance clients] are able to get credit for their payments. That is an improvement.” A few microfinance institutions have innovated around this process, added Carter, by providing “credit-builder” loans that serve not just business owners but consumers as well.
Adapting Foreign Innovations
According to Alexandra Fiorillo, principal of GRID Impact, a New York-based global research, innovation and design firm, the microfinance sector in the U.S. is generally viewed as “lackluster” compared to its counterparts overseas when it comes to innovation. “This is largely due to the fact that we have some strong and robust regulations in the U.S…. But in a lot of developing countries, those regulations are not as robust. Supervision techniques are not as strong as they are in the U.S. or U.K. and other developed markets.”
Fiorillo views this lack of regulation as a double-edged sword. “On the one hand, we are so lucky that we have strong policies that protect people and institutions in the U.S. On the other hand, there is a lot of chatter that says that [these regulations tend] to stymie and stifle the innovation.”
Recently, a large U.S. microfinance institution asked Fiorillo’s research group “to help them innovate a new loan product targeted at individuals who never had a financial product in their lives — individuals who had [FICO] scores lower than 450 or who didn’t have any credit score at all…. They asked: ‘What do we need to know, when designing this product, to insure the best possible financial outcomes for our institution and for our borrowers? How should we be talking to our clients? What things should we do to minimize our risk and the potential volatility of our portfolio, even though we really want to reach these low-income individuals?’
“Our client was really interested … [in learning about] what innovations [overseas] institutions were building into their loan portfolios, and seeing which of those … designs … can be imported into the U.S.,” Fiorillo continued. “[Microfinance] is one of the few areas where a lot of innovations are happening overseas — and institutions [here] are looking overseas…. There is a lot of work that we can do in the U.S. to improve formal financial services for the poor. A lot more research needs to be done in the U.S. to even understand how low-income people here manage their household incomes.”
From ‘Flawed Premises’ to New Products
Traditionally, the primary tool of the microfinance industry has been the microcredit loan, given to low-income entrepreneurs who use it to start family-run businesses. Recently, however, the industry has struck out in multiple new directions, according to Elizabeth Rhyne, a keynote speaker at the conference.
Rhyne, managing director of the Center for Financial Inclusion, which she described as an “action-oriented think tank,” was formerly senior vice-president of Accion, a non-profit organization that supports microfinance institutions in their efforts to provide financial services to low-income groups. At Accion, she helped develop new financial products in Africa, India and elsewhere.
“We microfinance providers in the U.S. think of our clients [as being] on this long-term asset-building path, and we are hopefully a stop on that path.” –Vanessa Carter
Microcredit loans for the smallest of businesses, Rhyne told the audience, “have established a very strong, sturdy basis for the future [based on] the idea that low-income people are contributors to their own development, that [they] can pay back their loans, [and that they] can be good credit risks.” It is also possible, Rhyne added, “to build a successful business giving loans to low-income people.” Once that is realized, then “you need to learn a lot about how to build a financial institution that must be very efficient and oriented toward [low-income people’s] needs.”
The microfinance sector has established the concept of the microfinance institution as one that delivers credit to low-income borrowers, yet can acquire a license as a formal financial institution, Rhyne noted. Indeed, some 200 million people around the world borrow from microfinance institutions — “200 million people who were, in all likelihood, not eligible for any sort of formal credit before microfinance started.”
For all that, Rhyne added, “things have gotten more complicated because we have discovered that some of the basic premises of microfinance that we took for granted were flawed or incomplete. I was a big proponent of microfinance for many years, and I accepted all these premises — and now when I look back, I think it should have been obvious that there were some problems.”
What premises turned out to be flawed? Number one is that “credit is not the only important financial need that people have. This seems clear and obvious” now, Rhyne said, but it was not so in the early days, when the industry focused on the benefits of microcredits to low-income populations. “People also need savings as a way to build assets; savings is the flip side of credit. If you have more savings, you need less credit. And if you have more savings, you can qualify for more credit.”
Beyond this growing awareness of savings, the industry realized the importance of enabling the poor to make financial payments, said Rhyne. “Making payments — moving money around from place to place — seems trivial to us” in the U.S., a society that has developed an infrastructure for making such payments. But it is important to recall that “if you operate completely in cash, there are many problems associated with that — not to mention that you are a walking crime magnet if you carrying wads of cash” around on your person. Even in the U.S., this is still a problem for those who have no bank accounts of their own.
Insurance products are another area where microfinance institutions have moved beyond their initial roots. “Vulnerability is one of the characteristics of poverty,” Rhyne said. “So mitigating the downside by providing low-income people with insurance is a major financial tool.”
In recent years, there has also been a growing awareness among microfinance institutions that “credit is not as transformative as everyone assumed,” noted Rhyne. “Although there are certain people who will be able to use microfinance to transform and build their businesses, that is not [the case with] the majority of the people who receive a loan. Most are going to use it to smooth out their consumption…. It will not be taking their business to a new level, in part because a lot of them don’t want to do that [and also because] a lot of them face other barriers.”
The so-called debt trap is one more component of microfinance that has often been overlooked in the earlier enthusiasm about the movement’s transformative benefits. “This is the kind of problem that microfinance [practitioners] wanted to solve because they recognized that in formal credit, a lot of [difficulties] arise when people get stuck in debt,” Rhyne stated. “Microfinance is a kinder, gentler form of that, but still a certain percentage of people will get into trouble.”
The ‘Incentive Mismatch’
In addition, the microfinance sector must admit to “an incentive mismatch,” she noted. “The incentive of every microfinance institution is to lend more. If the way you make money is by lending, then you want to lend more. There is a mismatch between, ‘We want to help people,’ and, ‘We want to lend more.’ It is hard for a lender to know that ‘These are the people who need money and who should get it; and those are the people who should not [get it]. This is an ongoing issue. As a result, there has been a series of crises about over-indebtedness. We need to be more careful about giving debt. We need to protect our clients better. And we need to supply a range of products and services that go beyond the original microfinance credit. This has been a challenge for the microfinance industry.”
The sector is addressing this challenge through the Microfinance CEO Working Group, a collaborative effort of several leading international organizations that promote microfinance around the world. The Microfinance CEO Working Group brings together the heads of eight international microfinance organizations: Accion, FINCA International, Freedom from Hunger, Grameen Foundation USA, Opportunity International, Pro Mujer, VisionFund International and Women’s World Banking.
Health care is perhaps the most developed sector for such microfinance innovations because “health care emergencies are a huge reason” that people get into trouble repaying their loans. –Elizabeth Rhyne
These institutions are leading the development of new kinds of products and services that, while based on the fundamental roots of the microfinance tree, branch out into many new directions to serve low-income individuals and communities. Beyond more conventional products in savings, credit, payments and insurance, their offerings also address needs in such areas as housing, energy, agriculture and small enterprise.
With so many experiments and new programs to consider, Rhyne concluded her keynote by highlighting the innovations in just one sector — the health care industry. Health care is perhaps the most developed sector for such microfinance innovations because “health care emergencies are a huge reason” that people get into trouble repaying their loans, so microfinance institutions are acutely aware of health care risks for low-income families.
Some leading microfinance institutions and their innovative health care-related programs:
— Women’s World Banking, a global non-profit focused on giving more low-income women access to essential financial tools and resources, launched a product in Jordan in 2010 that covers hospital fees for stays, and even covers some of the lost income people have when they need to go to a hospital.
— Pro Mujer, which provides women in Latin America with small business loans, education and housing loans, savings accounts and life insurance, is also hiring some nurses and doctors who operate clinics out of Pro Mujer’s offices. In some cases, when Pro Mujer clients come to its microfinance locations, they also have access to health care services, largely focused on maternal and reproductive health. Because chronic diseases — such as diabetes and heart disease — are becoming more common in the region — services for treating them have been bolstered at these clinics.
— Grameen Foundation, a U.S.-based foundation, has begun to exploit mobile phones as means to connect directly with low-income people. In health care, they have a mobile application called MOTECH, which enables communications between low-income patients and their caregivers. In one notable example, HIV-positive patients in India are supposed to take their medicine every day, Rhyne said. “One of the big issues with this kind of medication is that if people take their medicine every day, its effectiveness is great; but people don’t always take it every day. So MOTECH sends an automated message every morning at the same time to the patient: ‘Hello, did you take your medicine today? Press one for yes, press two for no.’ If they press one, that’s great. But if they press two, MOTECH sends them another message a half hour later, ‘Now, did you take your medicine?’ Press one for yes, two for no.'”
— Accion International Venture Lab, an investment fund, provides “seed capital and support to innovative financial-inclusion start-ups, fostering experimentation and promoting business models that improve financial access for people living in poverty worldwide,” according to the organization. Rhyne highlighted Venture Lab’s investment in MeraDoctor, an India-based mobile phone service that enables low-income subscribers to communicate with doctors — 24 hours a day, seven days a week — simply by using their mobile phone. Among other benefits, the doctors can then write prescriptions, provide medical counseling, correct misdiagnoses and answer other personalized questions. MeraDoctor also provides its users with health insurance, making it “a wholly new delivery system for health care,” said Rhyne.
— Opportunity International, which created a micro-insurance company called MicroEnsure, several years ago, has moved into the health insurance business in Africa and Asia. MicroEnsure now provides low-income people with insurance against flooding, drought, hospitalization and death. In Ghana, MicroEnsure provides both health and life insurance to customers of AirTel, a major provider of mobile telephony. AirTel customers can get a small health and life coverage free as part of their subscriptions, offered in conjunction with a local insurance company.