Quick update (with video footage!)

I am on a 5 day village visit to the rural villages of Bangladesh (starting tomorrow), north of the capital city of Dhaka. There should be a lot of new content on the blog following the visit. I will have very limited internet access  during this time.

For a lighter moment, check out the video clip below of myself and other Grameen interns negotiating with taxi drivers on a fare to be driven to Gulshan I, another district in Dhaka.

Video of Taxi Fare Negotiation: taxi-negotiation

Also, I want to thank all of you for the kind words regarding the blog. I welcome all comments and suggestions to be sent to my email address at aqv5005@psu.edu.

Regards, Abi

The Rockstars of Microfinance!

Over the years, many big names have emerged as advocates for the expansion of microfinance. Here are just  a fewof them:

Bill Clinton

Former President Bill Clinton

The Clinton Foundation has long touted the benefits of microfinance, working with organizations such as Unitus.com and Kiva.org. As governor of Arkansas, Clinton sought to implement microcredit programs for welfare recipients to improve their economic status.

Bill Gates

Gates, along with wife Melinda, run the largest foundation in the world with an endowment of $35.1 BILLION

The Bill and Melinda Gates Foundation was an early supporter of microfinance. Among its many donations, the organization has granted $5 million to the Financial Access Initiative to assist in microfinance research and another $1.5 million to the Grameen Foundation.

Dr. Muhammad Yunus

2006 Nobel Laureate

Dubbed “the father of microfinance,” Yunus won the 2006 Nobel Peace Prize for his efforts to fight poverty through micro-credit. The Bangladeshi economist began his microfinance efforts by loaning $27 USD to 42 rural villagers in Bangladesh. Dr. Yunus serves as the Managing Director of Grameen Bank.

Microfinance has seen robust growth in the past decade or so. In 1997, microfinance served about 15 million customers, and as of 2007 the industry served 154 million customers, which translates to a compounded annual growth rate of ~26.22%. Not bad, but we can do better. We certainly need these prominent figures to continue their work in promoting the field. Certainly many parts of the world have a plethora of problems-disease, poverty, food crises, poor education systems, and poor sanitation. However, microfinance is the only tool that has the ability to allow the poor to slowly climb the ladder of economic development through the sheer hard work of the poor themselves. In the meantime, NGO’s and governments will have to address the other pressing issues. When borrowers can graduate out of poverty over time,  through microfinance, they will then be self sufficient and can seek out health care services, better sanitation, and other amenities that will ultimately increase their life span, and inmprove their quality of life.

Thoughts and Reflection from my first village visit (with video footage!)

Grameen borrower with her 2 grandchildren

I had the chance to do my first village visit and I don’t think I’m articulate enough to explain in words how moving of an experience it was to be at the Grameen center meeting. During the weekly meeting, the branch manager collects loan installments and does routine checks on Grameen Bank borrowers and their businesses. It was amazing to see a room of 25 women, once poor and destitute, now confident and hopeful for the future. Grameen microloans have given them an opportunity, an empowerment opportunity. These women were courageous and brave, spoke confidently when presented with questions and took great pride and satisfaction in their work. We had the chance to interview multiple borrowers and all of them had similar stories. In the video below, the borrower has been with Grameen Bank for 12 years. She has 2 sons and at first she used to live in a mud house. Through Grameen loans, she has been able to open up 2 businesses that her sons operate for her-one grocery stop and one telephone accessory shop.

Grameen borrower's grocery shop business

The businesses are thriving and she has now built a spacious 6 bedroom home with a television, beautiful furniture, electricity, sanitary latrines, and a purified water system! There were stories of borrowers who had to learn how to sign their names when taking out their first loans twenty years ago, and now, their children are university graduates. This shows the progression of each generation as we move forward. There was a glow in the women borrowers faces, as they beamed with pride and accomplishment as they recollected their life stories and showed off their homes.

This reminds me of a Henry David Thoreau quote, “I know of no more encouraging fact then the unquestionable ability of man to elevate his life by conscious endeavor.” I believe even more strongly in these lines as I saw women, who once had nothing, rise to a level where they are above poverty and self-sufficient. People always assume that the poor are incompetent and lack necessary skills to be valuable members in community-this is blatantly false. All the poor need is a small boost; they have the necessary skills and motivation to take it from there. These women talk about their businesses in detail and it easy to notice their innate intelligence as they explain their business strategies and what they’ve done to improve sales, reduce costs, etc. Sure, they don’t have degrees or MBA’s but what they do have is extraordinary entrepreneurial capacity and a hunger and determination to improve their situation. They just need that first boost, and microfinance can be that very first boost they desperately need. Want to provide that boost? Remember that you can, through websites such as kiva.org and Microplace.

Check out the video footage of a center meeting: 1st-field-visit

How to get involved in Microfinance…from the comfort of your desk!

Make a difference today! Read how...

By now, I hope you have had the chance to read the three part introductory series on microfinance. As you can see, microfinance is one of the most cost-effective and powerful tools in fighting global poverty. Want to get involved in the field of microfinance? Now you can, with  Kiva.org and Microplace!

Kiva.org is a non-profit facility that connects everyday people to aspiring micro entrepreneurs across the world who seek loans. You can directly lend as little as $25 to a Nigerian cattle herder or a Nicaraguan grocery store owner who seeks small loans to start or expand their business. The website allows you browse various entrepreneurs and search for loans requested based on location of entrepreneur, size of loan, payment period, and type of business. Each loan request has a page detailing the necessity for the loan, how the loan will help their business, a picture of the borrower, and statistics on the MFI that the borrower belongs to. In just three years, Kiva.org has had 340,000 LENDERS in 135 countries who have LOANED $45 MILLION DOLLARS! When your loan is paid back, you can redeem your money or reinvest your capital. This website is safe, secure, and reliable and has received lots of attention from the national media.  Make a big difference today with a small loan! All it takes is $25 loan to change a life.

Currently, I finance 4 entrepreneurs on Kiva.org. I receive regular updates from the borrowers who provide a status on how their businesses are going and when they make installments on the outstanding loan. Check out my loan portfolio at the following link: http://www.kiva.org/lender/abishek4795.

It's fast and simple! Open an account today and be a microlender!

There is a second website that allows you to invest in microfinance- with a little twist. Microplace, is a wholly owned subsidiary that Pierre Omidyar and the folks at Ebay purchased in 2006. So, what’s the twist? Kiva.org utilizes a peer to peer zero interest lending model (you lend directly to an entrepreneur in a developing country), whereas, on Microplace you are purchasing securitized microfinance loans. Essentially, a microfinance institution issues debt securities that you can invest in. They take the capital that you loan, solicit borrowers and disburse the loan and collect payments. Once, the loan is paid off, the MFI will return the loan PLUS INTEREST to the loaner! Microplace is a registered broker dealer and offers a platform enabling social investing while receiving a decent return (1.5%-4%).

Microplace is an Ebay owned company

Deutsche Bank reports that the microfinance industry needs over $250 BILLION to get the necessary capital to the working poor who need it. To date, only about $30 billion has been funded.

My friends, there is a huge void to fill. Rather than donating money to charity, make a social investment in the poor. This money can be recycled again and again, and have a huge social impact in the end.  This is an investment in the poor, not a charity. You are giving a hand up to the world’s poor, not a hand out. Let’s deliver that knock out punch to poverty. Poverty is not created the poor. The poor are not lazy; they are not stupid. Poor people are endowed with the same amazing talents, energy and creativity that all of us have. I’ve seen this time and time again as I visit each village. Poverty is created by the structures of society and the governing policies. With the support of microfinance, the poor have consistently shown they can change their own lives given the opportunities we have.

Earn interst on your loans at Microplace!

Start today by joining kiva.org or Microplace- it’s fast, easy, and impactful. Be a leader and make a difference today.

There are a lot of exciting new posts in the pipeline in the coming days for blogabiv.com! Stay tuned for a comparison on Kiva and Microplace, , pictures and video clips from village visits that I made during the week, the concept of 21^st century social businesses, and more!

An Introduction to Microfinance, Part 3

FAQ’s, con’t

Does microfinance work?

Empirical/econometric evidence suggests that the poor participating in microfinance programs who had access to financial services were able to improve their well-being both at the individual and household level MORE than those who did not have access to financial services.

a.       Bangladesh Rural Advancement Committee (BRAC) clients increased household expenditures by 28% and assets by 112%

b.      After more than 8 years of borrowing, ~60% of Grameen borrower households had crossed the poverty line as opposed to 18% of non borrower households

c.       Empirical Evidence shows that poor households with access to financial services are more likely to send their children to school and for a longer period of time.

• In Bangladesh, almost all girls in Grameen households had some schooling, compared to 60% of girls in non-client households. 81% percent of boys in Grameen households received schooling versus only 54% in non client households.

d.      Most microfinance clients are women, and this tends to have an empowering effect on poor women, leading them to be more confident and assertive. The status of women both in the household and the community has improved as they play a big role in the economic decision making of the family.

e.      Microfinance has been shown to reduce infant and childhood mortality, and improve maternal health. The poor face many risks, with hunger and illness being the most lethal.

Increased earnings, savings, and insurance facilitated through microfinance programs allow for clients to seek out health care services. Many MFI’s already offer health care programs, and basic training programs (commonly known as microfinance plus).

The Virtuous Cycle of MF

*Over 90% of microfinance clients are females, this makes them more important figures in their family as they play a key role in economic decision making  and income generating.

By now, you should have a strong grasp of the concept. Next post? The rockstars of Microfinance! Stay tuned!

An Introduction to Microfinance, Part 2

FAQ’s, continued

Why can’t the poor just go to a commercial bank?

Commercial Bank lending is predicated on collateral and how much you are worth. The more you have, the more you get.

Imagine this scenario: you do not have money to open to savings account, you don’t have any collateral to secure a loan, you have no credit history, you do not have a job, and you are illiterate. Now, trying getting a loan from a commercial bank. Good luck. This is the plight of the world’s poor and why microfinance plays such a huge role in alleviating poverty.

Why don’t banks accommodate poor people?

Banks see the poor as high risk because they have no credit and no jobs. Also, microfinance is an expensive undertaking. A banker can make a lot more on a 500k USD home loan compared to a $250 loan to a poor farmer. This effort is not fruitful to many major banks, so they avoid the poor and deem them as “unbankable”. To access financial services, as mentioned earlier, the poor engage in risky informal transactions and seek out moneylenders (people in their villages who will lend them money), who grant usurious loans, with interest rates in excess of 1000% per annum.

What is an MFI? Why do they charge such high interest rates?

A microfinance institution (MFI) is an organization that provide microfinance services to the poor. MFI’s can take shape in many forms: for profit, non profit, a non-governmental organization, a big commercial bank, or a credit union. All MFI’s have the same mission in providing financial services to the poor, but may vary in mission, methodology, or ownership/legal structure.

MFI’s charge high interest rates because it is important that their operations are financially sustainable, so they have to cover all costs. This will ensure the permanence and expansion of the field. Overhead costs for MFI’s are naturally large; issuing ten thousand loans with principal of $100 USD is a lot more time consuming and labor intensive than issuing one loan for $1M USD. (total loan amounts are the same)

There are 3 types of costs a MFI has to cover: the cost of capital, the cost of default, and administrative costs. Assume the cost of capital to the MFI is 12% (it costs the MFI 12% per year to receive capital from investors), and experiences 2% default on money lent, and costs $25 dollars to process the loan. For a $100 loan, the interest rates would be (12%*100)+(2%*100)+25= $39, which translates to a 39% interest rate. For the MFI to break even on a loan of $500 with the same characteristics, the interest rate would be (60+10+25)= $95/$500= 19%.

Although these rates may seem high, they are FAR LESS than what the poor would pay to an informal money lender. These loan sharks in the village would lend to the poor at exorbitant rates (>1000%) and then force them to sell their goods to them at a price arbitrarily decided by them.

The good news is that MFI’s are reducing operating costs as they enhance efficiency through technology. According to CGAP, the average interest rate on a microfinance loan in 2006 was 28%.

When is microfinance not appropriate?

In order for microfinance to be financially sustainable, borrowers obviously must be able to repay their loans. This means that the poor must be able to generate rates of return on their capital that is higher than the interest rate on their loan. Populations with high incidences of disease, geographically dispersed/nomadic populations areas with a, dependence on a single economic activity, and the presence of hyperinflation may not be suitable conditions for microfinance. However, there are alternative solutions that NGO’S and governments can take to fight poverty including grants, infrastructure investment, employment programs, and literacy classes.

Can microfinance be profitable?

When done correctly, absolutely. For example, ever since inception in 1983, Grameen Bank in Bangladesh has turned in a profit every year except 1983, 1991, 1992. History has shown that repayment rates for all MFI’s hovers above 90% (much higher than Western banking with collateral, complex contracts, lawyers, financial planners, etc.) and average rates of return are higher for MFI’s than many commercial banks in developed economies.

Is microfinance the solution to poverty?

No, microfinance is ONE OF MANY POWERFUL TOOLS that can be used to eradicate poverty.  Microfinance should be carefully evaluated against the alternatives when choosing the most appropriate intervention tool.

Part 3 of this lengthy series will be released tomorrow. As mentioned, please feel free to  contact me if you have any questions.

An Introduction to Microfinance, Part 1

The best way to introduce microfinance in a simple way is through a series of questions and answers. Below are frequently asked questions regarding microfinance:

What is microfinance?

Microfinance is the extension of basic financial services such as loans, savings, money transfer services, and insurance to the poor. The term “microfinance” is used to differentiate from the services your local bank may provide. Microloans generally range from $50 USD to $350 USD, hence the term “micro”.

A Wide Range of Microfinance Services

Who are the clients (borrowers) of microfinance?

Microfinance clients are the poor, and are often classified based on their poverty level-vulnerable non-poor, upper poor, poor, and very poor. Microfinance clients are a diverse group of people, and therefore, require a wide range of products. Women make up the majority of microfinance clientele, as research as indicated that women borrowers are much more likely to repay their outstanding loans. A microfinance client can be anyone from a Bolivian farmer to a Nigerian food store owner. These clients operate small businesses (microenterprises) such as small retail kiosks, sewing workshops, carpentry shops, and small farms.

How does access to financial services help the poor?

To answer this question, think about yourself. If you were deemed “unviable” for the banking sector or “non credit-worthy” how would this change your situation? Would you be able to attend college? Buy a home? Start a business? The “credit crunch” that all our financial pundits refer to has caused many developed Western economies and their respective economies to shrink (as measured by GDP) significantly. (US GDP down more than 6% last quarter). Why is this? Part of the reason, is certainly the tightening credit markets. The availability of credit is an underlying fundamental and lifeline of all developed economies. With tightened credits, businesses in the US have been unable to increase capital expenditures and therefore have had to contract operations. Because credit is less readily available, consumers have been unable to purchase “big ticket” items such as homes and cars, which has lowered their consumption patterns. This example illustrates how just “tightened” credit markets affect us in the developed world. Now imagine our world’s poor, who literally have NO credit available to them. How do they access capital to grow their business? How do they graduate out of poverty.

It may seem as if the poor don’t require financial services, but they already engage in informal financial transactions. Poor people save all the time- they may not put cash aside in their 1.5% interest bearing account, however, they invest in assets such as gold, jewelry, domestic animals , and other liquid assets. They may also set aside rice from their most recent harvest to sell at a later date. Often times, the poor also participate in informal savings groups. Informal financial transactions are very risky and have severe limitations. The prevalence of fraud and mismanagement in these transactions is high.

It is clear that the poor require financial services to run their businesses, build assets, smooth consumption, protect from catastrophic events, and ultimately shield themselves from poverty. Microfinance has the ability to:

• Increase household income-reliable sources of credit allow for planning and growing business activities, which allow clients to save, manage cash flows, and reduce the need to sell assets during distressed times.
• Increase asset building- Due to increased income, and the ability to save and take on credit, clients consequently can acquire land, build proper homes, purchase animals, and invest more into their businesses.
• Reduce Vulnerability- The mindset of the poor changes with the presence of microfinance from one of meeting the needs of every day survival to planning for the future. Increased earnings lead to better nutrition, better living conditions, which subsequently results in lower incidence of illness. Increased earnings and microinsurance allow poor clients to seek out medical services rather than waiting until their health seriously deteriorates.
• Microfinance creates the POSSIBILITY of improving the economic conditions for the poor. Debt is certainly a huge burden, and cases of over-indebtedness do occur, which ultimately make the poor WORSE off. Thus, microcredit lenders must be judicious and prudent when issuing credit.

Stay tuned for Part 2 of the introductory series on Microfinance.

Greetings from Dhaka! (with video footage!)

I arrived in Dhaka City on Friday, had an excellent journey with Qatar Airlines, with a stopover in Doha. I spent the last couple days visitng the city and recovering from jet lag. I began the internship today and I am very excited to get started. The humidity and population density are the two most striking things to me upon landing in Dhaka. Check out the short clip below to see more. Stay tuned for the introductory series on microfinance, which should be published in the next hour or so.

Check out video footage of Dhaka:

Dhaka City 0252

Welcome to blogabiv.com!

There are reportedly over 50 million blogs in the United States alone, and the fact that you are taking the time out to read mine means a lot to me! I hope you will find the material on this blog both thought provoking and insightful. I encourage all of you to provide any comments or feedback that you may have.

Before I begin, I would like to thank a few people. First and foremost, I would like to thank my truly exceptional parents, Kala and Krishna Viswanathan!

My Parents!

They have offered me immense moral and financial support throughout my life, for which I am very grateful for! They have single handedly made this trip possible for me, so thank you for all your efforts and I hope you enjoy the blog!

Next, I want to thank a good buddy of mine, Jim Regan for his help in setting up this blog for me. Jimmy is the co-founder and owner of Bullish Bankers, a premier financial blog website offering investing ideas, stock market news, outlook, and analysis. The website has seen incredible growth in the past year, so be sure to check out some of the great content Jimmy and his staff of writers are putting out daily at www.bullishbankers.com!

Now, for those of you who are unaware, I will be spending my summer in Dhaka, Bangladesh interning at Grameen Bank, the winner of the 2006 Nobel Prize! Grameen has long considered the leader and pioneer in the field of microfinance, with over 7.84 Million Borrowers as of April 2009. Grameen has disbursed over $7.97 Billion USD in microloans since inception, with a 98% recovery rate. For those of you who may be unfamiliar with the concept of microfinance, there will be an introductory series on microfinance, Grameen Bank, and the country of Bangladesh that will commence tomorrow. If you should have any questions following that, please feel free to comment on the post or contact me directly.

As far as what the blog entails going forward, frankly, I’m not completely sure myself. For those of you who know me, I hope this provides an opportunity for you to read about some of my summer experiences. For others, I hope this blog is eye opening to you and provides you with exposure to microfinance and its empowering effect it has on the world’s poor. My summer internship includes time at the Dhaka headquarters as well as field visits to the rural villages where Grameen borrowers live and work. My goal is to get as many photographs, videos, and interviews as possible on the blog for your viewing.

Thanks for visiting blogabiv.com, and be sure to check out the three-part introductory series that begins tomorrow!!