My Congressional Testimony - Fund Research!

Ok, Ok I obviously haven't visited the United States Congress. But I caught myself wondering what I would say if I had paid them a social call a few days when they held hearings on the role of public funds in an increasingly-commercialized global microfinance industry.

Witnesses at the hearing included some of the brightest and most respected names in the microfinance sector, including Elisabeth Rhyne of ACCION, Robert Annibale of CitiBank and Damien von Staffenberg of MicroRate. They presented before House Sub-Committee on International Monetary Policy and Trade, chaired by Democrat Gregory Meeks of Queens, New York (where interestingly, Grameen America opened its inaugural branch). He alludes (in my opinion) to the Spandana study with a statement that, among other things, "conflicting reports of social impact," of microfinance have led him and others on his committee to ask questions about how the industry is evolving. He wanted the hearing to be the first of many that would help tease out the "appropriate role of public and multilateral institutions in laying the foundation to mobilize private capital and the private sector to benefit development."

The witnesses read from prepared statements and advocated that public sector and multilateral money be used to push the frontiers of the sector and to build enabling environments. Obviously, since the session was aimed at the global microfinance sector, they couldn't get too specific in recommendations given the chasmic gaps and differences between countries. In general however, they suggested public funds should go to areas such as credit bureaus, capacity buildings initiatives to help MFIs mature, technology innovations etc. If delivered properly, many of these recommendations are in line with what Professor Jonathan Morduch calls smart subsidies.

One sub-category of a smart subsidy that didn't receive too much attention during the hearings is rigorous research. Of course I'm a little biased, working for a microfinance research firm and all! But I think it is absolutely crucial for public and multilateral funds to support research and evaluation of microfinance products, services and distribution channels. Microfinance institutions are unlikely to dislodge their own funds to fund evaluations, nor are private capital sources. And research shouldn't stop at evaluations, should focus on needs-assessments, interdisciplinary reports that include attention to cultural norms and existing informal/formal mechanisms and products used by the poor.

I'm going to keep my eye on this series of hearings, and am excited at the prospect of more thoughtful deliberation in America's capital! (and for the record, both parties represented on the committee were thoroughly committed to the microfinance sector as well as well-informed on the issues at hand)

Two new sites launched by CDF

India Pollution Map

The Center for Development Finance (CDF) has launched what is probably the country's first online pollution map.

The online map, which can be viewed at www.indiapollutionmap.org, is an innovative web tool to support and strengthen the pollution monitoring regime in India. The map will aim at supporting more meaningful tracking of environmental changes by creating a repository on pollution monitoring.

In the first phase, CDF has developed the map for Tamil Nadu and Maharashtra. The data for the map has been accessed through two main methods – desk research for secondary data, and RTI applications. The map makes existing pollution data more accessible and informative by transforming it into user-friendly visual displays, which link pollution levels and monitoring sites to specific places in the country.

The pollution map is part of CDF's overall efforts to improve the amount, quality and accessibility of data available for policymakers and citizens to debate priorities and understand progress in holistic development.

Transparent Chennai - Visualizing City Planning

CDF has also developed a website to display spatial variations in expenditure, time and nature of public works and its quality, through a combination of re-packaging public data and soliciting citizen-generated data.

Information surrounding municipal public works continues to be inaccessible and limited. The lack of information prevents citizens from examining the planned, new, and existing public works contextually, in relation to broader developmental needs and spending trends in the city, from questioning government policymaking, and from holding the government accountable for its work. When information about government spending has been provided, it has not been provided in a format that is easy for citizens to use or understand.

“Visualizing City Planning,” an interactive map, provides a means of reporting public works that could potentially empower citizens. This map enables users to map existing public works and services, but it goes one step further. As a beginning, this project by maps various large scale transport infrastructure projects in the city of Chennai along with selected demographic layers within ward boundaries as well as a layers showing slum evictions and environmentally sensitive areas. The website can be viewed at www.transparentchennai.com.

BoP Product Design & Testing in Urban Spaces Volume 3: User Test of Prakti Design Biofuel Cook Stove

The following is part of an ongoing blog series from the Rural Market Insight team at the Centre for Development Finance, IFMR.

In this posting, we cover a 6-week long user test of the Leo Double Pot stove from Prakti Design. During this test, we deployed the brand new stove and tracked the subject’s use of the stove twice a week for six weeks. We then followed-up with Prakti Design to compare the insights gained during our urban field test with the insights they have gleaned from extensive user research in rural areas. Below are the main takeaways from the test. (Prakti Design, located in Tamil Nadu, designs innovative commercial and household biofuel cook stoves for use around the world. www.praktidesign.com)

Our Subject: Rani (name changed for confidentiality), age 45, uses an outdoor wood-burning chulha to cook traditional Tamil Nadu cuisine for her and her husband twice a day. She collects fuel wood* for free from discarded packing crates and a nearby waste lumber pile.

User Perspectives: From our observation, we identified 3 key elements where user perception differed from our assumptions. For Rani, smoke is supposed to be good and not bad, because she views smoke as a repellant for the mosquitoes living in the nearby waste pile. Leftover ash from the cooking is either used for cleaning vessels or just discarded, so unless there is a big pile of ash inside the chulha, preventing the entry for the firewood, there is no incentive to clean it and thereby improve the efficiency of the stove. Rani insists on using more firewood because for her Prakti Leo stove is taller than a traditional chulha and so you need a bigger fire to reach the pot.

Click the image below for better resolution


User Modifications: Through frequent follow-ups, we were able to track the evolution of user modifications. First it started by her saying that she didn’t like the metal ‘pot reducer’ ring (which is used to reduce the flame from reaching the pot in the primary burner and enables some heat transfer for the secondary burner). Next Rani placed 3 stones above primary burner to raise pot and let the fire go around the pot. Finally, she purposefully broke the metal pins off of the exhaust plate, and placed that over the primary burner, resulting in flames exiting the primary burner, but making the secondary burner useless.
Potential reasons for modification could be that the user is used to cooking on a single-burner chulha and didn’t understand the thermodynamics of the stove.

Follow-up with Prakti Design: We presented our findings to the fine folks at Prakti Design and asked them the following questions

• Did the users use too much firewood?
• Did the users not remove the ash?
• Did the users modify the vent over the primary burner?

Although we only tested this stove on one user, we were happy to see that we gained similar user insights during urban testing as they had during their rural tests. In terms of user modification, this was the first time they had seen users placing 3 stones around the primary burner.

Impact on Strategy: Both single and double-burner chulhas are prevalent in rural southern India. This user resisted changing her behavior to cook on a double-burner. All modifications were to make it function like her old single-burner chulha. Perhaps Prakti’s single-burner stove, the Leo Single Pot have been a better fit for this user, and require less behavior modification.
The user also gets nearby fuel-wood for free, cooks outside, thinks that smoke is a good thing, and values traditional stoves at around Rs. 50 ($1USD). Although this user provided great user feedback, she would not be a likely purchaser for this stove.

*Note:
According to NSS data (2004-05), approximately 22% of urban families in Tamil Nadu, India, use firewood as their primary cooking fuel. This fuel is most often used in a traditional single or double-burner chulha (cook stove). In Chennai, urban chulha users commonly collect rectangular scrap wood that is freely available as waste from lumber stores, construction sites and shops throughout the cities. This wood often contains nails and is occasionally treated or painted. Also, as observed elsewhere in India, cooking fires in Chennai are often started by igniting a plastic bag and placing the burning bag on top of the firewood. This method is very effective, and is seen as a less expensive fire starting method compared to the established method of dousing the wood with kerosene. However, the concentrations of airborne chemicals resulting from the indoor combustion of plastics and treated lumber can be especially toxic.

Click on the following links to read the previous postings in this series Background, Volume 1, and Volume 2

This series follows the activities of two researchers as they design, prototype and/or conduct user-testing of new and existing Base-of-Pyramid (BoP) consumer energy products among low-income urban households in Chennai. The theory is that urban spaces can be used to gain relevant design insights and user feedback on rural-targeted BoP products due to its rich diversity and ease for researchers and designers to quickly turn those insights into functional design changes.

Selvan Thandapani and Richard Woodbridge are researchers for the Rural Market Insight team at the Centre for Development Finance, IFMR, located in Chennai, India. http://ifmr.ac.in/cdf/

So, what do they do with the loans..?

I recently attended Participatory Rural Appraisal (PRA) training – organised by Tata Dhan in Madurai. As part of the training, we applied different PRA tools, such as, social mapping, credit saving matrix, well- being ranking, etc to understand the financial practices of the ultra poor in a village near Madurai. While exercising credit-saving matrix, we focused on learning the credit and savings behavior of eight ultra poor rural women who were landless laborers. For this blog, I am considering 5 women who were the members of the same self help group since last 8 years.

Firstly, we focused on learning their savings behavior. Apart from savings with their SHG group, they did not have any other savings. These too were saved because it was compulsory for the SHG members to save Rs. 160 per month. Furthermore, we asked them about their existing loans obtained from various formal and informal financial sources. The following table shows the snapshot of the data collected on their credit behavior.

(names changed)

	Radha	Sita	Meera	Shanthi	Sangeetha
Cumulative Savings through SHG	19,000	19,000	19,000	19,000	19,000
Savings past year	1,920	1,920	1,920	1,920	1,920
Any other form of savings	NONE	NONE	NONE	NONE	NONE
Loan at 10% flat	40,000 (House renovation and education)	10,000 (Social obligation- marriage)	20,000 (Social obligation- marriage)	8000 (From 4 sources for social obligation )	10,0000 (Health expenses)
Loan at 5% flat		3,000 (Social obligation -marriage)	10,000 (Social obligations – child’s marriage)
Loan at 3% flat	12,000 (Son’s education)			30,000 (Leasing land)	8,000 (House renovation)
Against jewelry from the banks	30,000 (Son’s education)		15,000 (Social obligation- child’s marriage)	12,000 (Education)
SHG loans (18% reducing)	27,000 (Son’s education)	30,000 (Social obligation- Marriage)	25,000 (Social Obligation – Child’s marriage)	30,000 (Social obligation)	30,000 (Social obligation- dowry)
Weekly payment loans	7,000 (From 3 different sources for daily consumption)	6,000 (From 2 different sources for daily consumption)	6,000 (From 3 diff sources for daily consumption)	6, 000 ( From 3 diff sources for daily consumption)	6,000 ( From 3 diff sources for daily consumption)
Against jewelry from moneylender	15,000 (Son’s education)		20,000 (Social obligation- child’s marriage)		5,000 (Social obligation)
TOTAL LOAN	Rs. 1,31,000 (More than 90% loan spent on son's education)	Rs. 49,000 (100% loan spent on social obligation)	Rs. 96,000 (100% loan spent on social obligation)	Rs. 86,000 (~52% loan spent on social obligation)	Rs. 69,000 ( ~ 59% spent on social obligation)

Even though, data that we have collected is from a small group and does not offer much insights- it is clear from this exercise that these landless poor laborers who did not have any steady income generating jobs spent most of their loans to fulfill social obligations. As it was an unproductive loan, they could not repay and kept paying interests and further took loans from other sources to repay these loans among other reasons- pushing them towards excessive debt and poverty.

Those of us involved in development sector today should seriously work towards promoting financial awareness and spreading financial literacy to the poor and enable them to manage their finances effectively and efficiently. The poor need to understand their own finances and the consequences of poor money management which lead to disproportionate debt, excessive poverty and many times, even worse- suicide!

Moneylending: Friend or Foe of Microfinance?

An ongoing study conducted by Innovations for Poverty Action (IPA) and the Center for Microfinance (CMF) seeks to gain a better understanding of moneylending in India. This study occurred as part of IPA’s project to illuminate the business practices of informal lenders and the relationship of these lenders to their institutional counterparts across five different countries: India, Ghana, the Phillipines, Mexico and Columbia. The study in India was conducted in the Fall of 2009, and, through 48 moneylender interviews and 44 borrower interviews, reveals the prevalence of high-interest informal loans. While informal lenders are notorious for these high-interest rates, little attention is paid to the important role that these lenders play in the financial lives of many of their borrowers. The duality that exists between usury and relief renders the moneylender a complex agent in the world of low-income financial services and hinders any clear-cut solutions to the problems they pose.

Can Moneylending be Regulated?

A crux in the debate over the treatment of moneylenders hinges on the question of whether moneylenders can be harnessed into regulatory control. From the moneylender perspective, the risks involved with registration include income tax liability and interest rate regulation. Despite these risks, there are also benefits associated with registration, including: ability to accept collateral, legal recourse for defaulted borrowers and decreased leverage for officials requesting bribes. Borrowers also stand to benefit from registration: registered moneylenders would be legally required to charge lower rates. While it is likely that registration has a downward effect on interest rates, registered moneylenders might employ similar tactics to registered pawnbrokers in charging interest beyond the monthly rate allowed by law.

Beyond Registration: Moneylenders as agents of MFIs?

Beyond regulation/registration, which would exert this downward effect on rates and introduce a large taxable income, there are discussions of directly incorporating moneylenders into the business practices of formal institutions, including MFIs. (For example, Sharma & Chamala in Economic & Political Weekly, 2003). After speaking with moneylenders and borrowers alike, I feel that considering such linkages yields compelling and thought-provoking solutions to the usurious, and sometimes abusive, threats posed by the moneylender. Moreover, these linkages might benefit borrowers by ensuring continuous access to credit as sources of institutional credit grow to fill the vacuum currently filled by informal lenders. Until microfinance organizations and other loan-giving institutions are able to reach adequate scale, it is important to enable moneylenders to maintain their business operations as they represent a significant source of credit for many underserved populations.

What are the advantages of incorporating moneylenders into MFIs?

Incorporating moneylenders as agents of microfinance institutions would present a low cost opportunity for microfinance institutions to achieve scale. The overlap between moneylender and MFI clients presents a jumping off point for the merits of such linkages: moneylenders possess valuable community contacts among the demographic that MFIs target, including the lower-income populations that MFIs struggle to reach. The feasibility of this linked moneylender model is supported by the dual lending structure favored by several SHG leaders interviewed in this study, who provided both SHG-funded and privately-funded (moneylender) loans depending on the availability of SHG capital and the needs of their borrowers/SHG members. Under this model, borrowers were not driven away from MFIs in the face of urgent capital needs, as many other borrowers reported they were, but instead, encouraged to stay within the low-interest realm of their SHGs in the case of emergency. Moreover, the comfort of most borrowers interviewed taking moneylender and MFI loans simultaneously corroborates the feasibility of such linkages.

Beyond increasing the reach and reliability of microfinance loans, the moneylender-as-microfinance-agent model might also enable MFIs to diversify the loan products offered without compromising their regular cash flows. While valuable to the business model and profitability of MFIs, the rigid repayment schedule was commonly cited as a shortcoming of microfinance loans among borrowers. In contrast, these same borrowers cited the flexible repayment schedule allowed by informal lenders as one of the advantages of moneylenders. Through moneylender-MFI linkages, moneylenders could potentially perform a bundling function and collect payments from borrowers on a different schedule than the rigid schedule required by microfinance organizations and submit these payments to MFIs according to the original repayment schedule, thus allowing MFIs to manage regular cash flows.

What Obstacles exist?

From the MFI perspective, these linkages become especially promising in areas where there is less microfinance penetration, such as Ahmedabad. However, it is in these low penetration areas that moneylenders might be most resistant to these linkages. An appealing commission structure would be instrumental to incentivize moneylenders to participate as agents. Although the downward pressure on interest rates would be a deterrent, moneylenders might place a premium on the higher rate of (timely) return enjoyed by MFIs. Based on moneylender interviews and direct observation of moneylender practices, it is evident that delinquent payments are a constant cause of concern and drain of resources. Collection of these delinquent payments consumes a significant amount of time for almost all lenders and the missed payments present a significant opportunity cost to lenders who are limited by capital constraints.

Considering these linkages, the question becomes how to incorporate moneylenders into MFI structures and not how to eradicate moneylending practices. While obviously many questions remain, such as whether linked moneylenders would be allowed to provide independent loans, one thing is for certain, more expansive notions on how to deal with moneylenders would be beneficial to MFIs and borrowers alike. Linkages between moneylenders and MFIs present one possible solution to ameliorate the financial services available to low-income borrowers, yet sociological questions determine the potential for implementation. Is the social stigma of moneylenders too formidable? Would informal lenders ever trust MFIs enough to enter into business partnerships?

Overcoming challenges of securitisation

This post is on behalf of Hari Nathan and Kshama Fernandes of IFMR Capital

Aparna Dalal recently wrote a blog post about IFMR Capital's securitization of microfinance loans. She raises some very insightful questions about securitization and her concerns are well noted. We would like to take the chance to reply to some of these concerns.

Concern 1: Securitization leads to a separation between originator, servicer and risk-bearing agent which can lead to a degradation lending standards.

This is a real concern as this is widely recognized as one of the principal causes for the financial crisis. We have tried to address this point within the structure in the following ways:

• Each MFI (the originators and servicers) have put up a First Loss Default Guarantee (FLDG) in the form of a cash collateral, which in this case forms about 13.8% of their total expected cash flows. Any losses due to default or prepayment are borne, first, by the originators/servicers themselves.
• IFMR Capital is acting both as the structure as well the investor in the subordinated strip. As a result, any losses above and beyond the FLDG will be borne by IFMR Capital.
• CRISIL, the rating agency in this transaction, has its reputation as a top class rating agency on the line (as it does with any other rating). Their name appears in the press-release and also appears in the press coverage from various financial news institutions. Additionally, over the last few years, they have been very conservative in their rating, requiring extremely large cash collaterals as compared to the historical default rates observed in this asset class(between 1% and 2%).

As a result, all the parties to the transaction have "skin in the game" and stand to lose either money or reputation in the event of large defaults. We believe this will act as incentive to keep lending standards high and prevent predatory lending.

Concern 2: Diversification doesn't help in the case of economy wide problems.

It is certainly true that diversification doesn't help in situations where the entire economy is affected. However, given the short tenure of these loans it would require a sudden large shock to the economy to lead to high defaults. Additionally, as far as we know, there is a very low correlation between the performance of the economy at large and the repayment rates of these low-income individuals, especially for those in rural areas (although there is relatively little data available for this sector). Finally, given the large FLDG (13.8% of total cash flows) and size of the subordinated strip (25.4% of total cash flows) it will require an enormous change in repayment rates before the IRR of the senior tranche is affected.

First multi originator securitisation in microfinance

The following post is on behalf of IFMR Capital



In a first transaction of its kind, IFMR Capital concluded a multi-originator securitisation of micro-loans originated by four microfinance institutions in India. The Rs. 308 million ($ 6.5 million) transaction is backed by around 42,000 micro-loans originated by Asirvad Microfinance Pvt Ltd, Sahayata Microfinance Pvt Ltd, Satin Creditcare Network Ltd, and Sonata Finance Pvt Ltd.

IFMR Capital was the structurer, arranger and an investor in the subordinated strip of the transaction. Using the multi-originator securitization structure, IFMR Capital has been able to help a number of MFIs access mainstream capital markets. Given the size of the institution and the limited availability of unencumbered portfolios, accessing capital markets on their own is an unviable option for most small and medium MFIs. By pooling together the loan portfolios of these high-quality MFIs, IFMR Capital has demonstrated that these MFIs can access funding at a much lower cost than their average cost of funds. This is the first multi-originator securitization of micro-loans in the world.

Photos (Above & Below): At the signing of multi originator transaction in Mumbai between the MFIs, investor and the trusteeship company.

IFMR Capital Mosec I, the multi-originator Special Purpose Vehicle, has issued two tranches of securities: a 77 percent senior-rated tranche with an expected maturity of 6 months, and a 23 percent subordinated strip with an expected maturity of 11 months. CRISIL assigned the highest short term rating of P1+ (so) to the senior tranche, which was subscribed to a Bank. The closing of this transaction has resulted in the emergence of a new pricing benchmark in the less than 6-month maturity asset class.

As per the waterfall mechanism in the structure, the senior tranche will be fully paid out before the subordinated strip begins to receive cash flows. The IFMR Capital Mosec I securitization has an average credit enhancement of 13 percent in the form of cash collateral provided by the four MFIs. The senior tranche has additional credit enhancement provided by the junior strip which has been subscribed to by IFMR Capital. The originators will continue to service the underlying loans. The structure has been designed to align the interests of the originator and structurer with the interests of investors.

This is a landmark transaction in the microfinance sector because it is for the first time that small MFIs have been able to access the capital markets. The purchase of the P1+ rated senior tranche by the treasury department of a bank demonstrates that microfinance can form a mainstream asset class that can be benchmarked to comparable assets like P1+ rated commercial paper, and not just be relegated to the priority sector portfolio of banks. Apart from opening the sector to a new class of investors, the use of securitisation would ensure round the year funding to MFIs at a lower cost of funds. This would eventually result in a lower cost of borrowing to the end customer.

Official Press Release

Press Coverage

Reuters
Forbes
Hoovers
Market Watch
Yahoo
Earth Times
Euro Investor
MSN

What is microfinance's role after a crisis?

Like everyone else, I've been glued to the television this past week where images of the devastation and horror in Haiti flash constantly. Even just this morning a powerful aftershock rumbled the capital of Port-au-Prince, a 6.1 magnitude, which thankfully wreaked little additional damage (what was left to damage?). Aid continues to pour in, though it seems as if the Mississippi River were being squeezed into a narrow rivulet, given the extensive damage to the country's infrastructure and ability to absorb assistance. This horrendous situation has gotten me thinking about the role of financial services and microfinance in a post-crisis environment, both in Haiti and beyond.

For a number of reasons, microfinance in Haiti had a presence prior to the earthquake and providers included FINCA International, Fonkoze and ACCION. According to Mix Market there were about 150,000 borrowers in Haiti and over 190,000 depositors (for a population around 10 million). How will these microfinance institutions function now? From my (limited) experience, I wonder about a number of potential dynamics.

Existing NGOs and microfinance institutions on the ground will likely be a channel for both subsidized and non-subsidized capital in the coming weeks and months. For example, after the tsunami in Sri Lanka in 2004, the existing non-governmental and governmental infrastructure were leveraged for short-term relief. This will likely create new programs and projects for the institutions, as well as a complete reorientation of country-goals for the short-run. I imagine a large percentage of the capital given to the organizations at first will be subsidized, meaning that they expect it to be given out as grants or cash-transfers with no expectation of repayment.

How will the microfinance institutions juggle and juxtapose their existing credit programs with these new grant-programs? When is it appropriate to persist in recovering loans? Additionally, a flock of other organizations, some microfinance-oriented and others not, are arriving in Haiti right now. Many of these will give directly to the people, with no expectation of repayment, for both productive and non-productive purposes. How long these newcomers will stay and how intensely they will improve the local economy is hard to answer. However, research by seasoned development practitioners shows that in the well-intentioned maelstorm of post-crisis recovery, assistance sometimes props up activities that distort the local economy and are un-viable in the long-run. Practitioners face the ethically charged question of when asset-transfer/subsidized aid should be transitioned into un-subsidized financial services. Of course, immediate assistance should not be post-poned because of these concerns, I simply raise them as they have circulated among the development community. And, because the microfinance sector in Haiti will be faced with these issues immediately. A few years ago I participated in a working group organized by the SEEP Network to create Minimum Standards for Economic Recovery after a Crisis. A group of 35 practitioners from 25 development organizations, including donors/practitioners/banks, worked through many of these thorny questions and created standards and practical guidelines based on decades of practice in post-conflict and post-disaster relief. A common thread running through the standards is a call for coordination, transparency and communication between the myriad of actors involved.

Finally, the issues raised questions for me in the Indian context, where crises both man-made and natural, are all-too-common. What really confuses me is how to define a crisis; for example flooding occurs every year in pockets of the sub-continent and always causes fatalities (Orissa was recently the victim of floods). Or what about in parts of the Northeast that have been chronically rife with security issues, or districts that are recovering from communal riots? What kinds of financial services are appropriate in these areas and who should coordinate the efforts?

Association of MFIs

Microfinance sector in India is now laden with issues of multiple lending, multiple borrowing, or irresponsible lending/borrowing. This is what most conferences and recent state of sector report is discussing. There are also arguments and discussion about irrational behavior shown by borrowers while some agencies talk about overzealous approach of MFIs in disbursing loans. This is the present state of MF sector in India. Many fear of a bubble. However, I support Nachiket Mor, who recently said, “The sector is moving forward because there are good MFIs, having sound operations and there are good clients” at the CAB conference organized by CMF in Pune. The future will be much disciplined sector with regulations and clear operational policies of MFIs. Read some related discussions here, here and here.

Is self regulation an important issue? Is choosing rational clients an issue? Well, we do not know. There are not many evidences but few sporadic cases. But then the concentration of MFIs is still not as high in many other parts of country. So I would say of course self regulation in MFIs will lead to screening-in of rational clients. Thus, one small step can solve two big problems stated above. And as a sector we know this is coming. It will be there – self regulation to achieve higher microfinance penetration! Formation of Microfinance India Network and its emphasis on self regulation perhaps is an evidence. Self regulation is also important in the light of government regulation aka "The microfinance bill", which was a hot topic some score months back; will again awake soon, NABARD will get busier. More NBFC MFIs may lead RBI to make some special rules for such MFIs.

Recently I came across about a non-registered association of MFIs working in West Bengal. Though not aware of many details, I understood the association works on the field level issues faced by operations team. I believe this is something interesting. Nobody (except the bunch involved in policy making) knows what government regulations are in offing. While Alpha and MFIN may impose some bindings, we do not know how well this formal institution will work? May be an informal institution is more effective. May be this kind of association not only solves and prevents issues like in Kolar and Kanpur but also builds a collective local strength. It may add to the power of Alpha or may be an alternative to such institution. We should further explore how this association came into existence? What was the thinking process of MFI CEOs - Were there incidences that resulted in this or it was sheer leadership? What is the operational paradigm? Are there any operational issues? How is it helping the sector in West Bengal, is it scalable?

Aren’t these some issues that we would like to know? Answers will help us in building any other formal or informal association. It thus helps the sector and microfinance clients.

PS - Vijay Mahajan is Chairman, Microfinance India Network and Basix, Nachiket Mor is President ICICI Foundation. Alpha and MFIN is discussed in two articles referred above.

Get by with a little help from your peers

Can your peers help you save more? For members of the informal sector, who don't have the benefit of direct deposit or formalized commitment mechanisms, peers may help.

I just finished reading the working paper, "Peers as a Savings Commitment Device: Evidence from a Field Experiment among Low-Income Micro-Entrepreneurs in Chile." It discusses results from a randomized field experiment that tests whether peers can act as a commitment device to help microfinance clients save more. The sample population for this experiment is a group of low-income entrepreneurs who are already clients of Fondo Esperanza (FE), a microfinance institution in Chile. Up until the study, FE only offered credit to its clients, per Chilean regulatory requirements.

The research team and FE connected with a local bank and then offered 196 groups of FE, roughly 2700 clients, a no frills savings account via FE at the bank. The research team randomly sub-divided the 196 groups into three categories. The first group received the option to open a no frills savings account, with a 0.3% real interest rate (average for Chile) (control group); the second received the option to open a no frills savings account with an accountability structure where peers monitor and act as a commitment device. Specifically the members, "have the option to publicly announce to the group their savings goal for the coming credit cycle (approximately 3 month), and their corresponding weekly savings goal. Subsequently, in each group meeting it will be discussed who complied with their own savings goal and who did not. Those who complied are asked to show a deposit slip to prove it and receive a sticker in a booklet. Those who collect enough stickers receive a diploma as a non-monetary award," (treatment #2). A third group of clients is offered the option to open a no frills savings account but the real interest rate is significantly higher than the normal account, 5.0% compared to 0.3% real interest rate (treatment #2). This second treatment was introduced to understand the effect of interest rate differentials, and to compare that impact with the impact of a peer commitment device.

The results (calculated via Intention to Treat), demonstrated that members of the peer-based commitment treatment make about three times more deposits and had an average account balance that was 65% higher than those in the control group. The effects were particularly profound for group members who has assessed themselves as better-than-average at reaching their goals; this group's average monthly balance was 2.9 times higher in the peer treatment than with a regular savings account.

As written by the authors, "These findings indicate that peer groups may be an important mechanism to help people overcome self-control problems, particularly in areas where formal commitment devices are not available, and that individuals benefit most from joining commitment-groups where their peers are slightly less apt than themselves at reaching the shared self-control objective."

They found that for the 5% real interest rate treatment group, the average account balance was 48% higher than those in the control group, but the difference was not statistically significant. They extrapolated from the findings of treatments #1 and #1 to state that the peer commitment device was equivalent to a 6.5% increase in interest rate.

I thought about this paper and its implications for the microfinance sector in India, where microfinance institutions do not typically offer savings. The self help group bank linkage programme, however might be a more relevant receptacle of learnings from this study, as savings precede borrowing. To my knowledge most SHGs have a prescribed amount that members must save in the initial months but after their first loan, it becomes a bit more arbitrary. I wonder how the dynamics of peer-commitment factor since they had had to save publicly at first.

Much of this is fairly intuitive to microfinance practitioners, who in effect leverage peer-commitment that is more formal than this experiment, for group repayment and group liability. Some research has shown that group repayment meetings, even when the loans are individual, still produces high repayment through peer-commitment and monitoring.

How do you think microfinance practitioners could leverage this research to improve practice?

BoP Product Design & Testing in Urban Spaces Volume 2: User Feedback and Insights

The following is part of an ongoing blog series from the Rural Market Insight team at the Centre for Development Finance, IFMR.

One month and 5 household visits later, the Rs. 100 ($2USD) regulator prototype is still strong and functional with some minor wear and tear. One of the biggest unknowns in user testing is whether or not the family will use the product given to them. The answer, in this case, was a definite 'Yes'. The family has used it for every cooked meal (twice a day for approximately 2 hours/meal since it was deployed).

The family’s overall response to the regulator has been very positive, which also explains their willingness to continue using it. The family freely commented that the stove did not produce as much smoke as before, and that it was easier to light. They also pointed out that the wall behind the stove has remained cleaner than it typically does between cleanings (as gauged by the number of soot-covered cobwebs visible on the wall).

For the full photo-story in a better resolution, click the image below…


Although these sound like glowing reviews, it is important for designers to remember that, when conducting user-testing, the results are inevitably biased to some degree or other. Sometimes people tell you what they think you want to hear. Sometimes the very act of participating in a product test makes the user perceive their environment differently. Without conducting rigorous scientific testing using air quality monitors to verify the perceptions, the next step must be to test the product with a larger sample of users.

Behavior Modification: Changing the way the user cooks
If the goal is to lower barriers to adopting cleaner biofuel stove technology, companies have to be very careful not to force the users to radically change the way they cook. In Southern India, it is common for families to let the firewood ash build-up within the stove for a few days before removing it. However, when cooking with a regulator, this user habit greatly reduces the efficiency as air is unable to feed the fire from underneath. In order for our regulator to work properly, the users have to modify their behavior and remove the ash from the stove every time they want to cook. It took our test family approximately 2 weeks to break this habit, but only after we gave them instructions on the importance of removing the ash.

The only inconvenience the family voiced about the regulator was that, because it took up some space in their chulha, it limited the amount of wood they usually placed in the stove at any one time. As inconveniences go, this isn’t necessarily a negative one, but it does come dangerously close to interfering with their traditional cooking methods.

Urban testing
In tying-back to our theory that urban households can provide relevant design insights on rural-focused BoP products, this family was more than helpful. They were actively engaged in the user test and gave us insights into their cooking practices, including fuel usage and views on indoor smoke. Although they didn’t volunteer any design modifications of the regulator, they allowed us free access to monitor their use of the product. The overall conclusion so far is that this urban family, who cooks traditional Southern Indian cuisine on a wood-burning stove, provided enough relevant feedback for us to consider some slight design changes to future iterations of the regulator.

Coming soon! While we continue with this regulator project, we have also begun urban testing on the new D.light Kiran solar lantern, and have just finished a 6-week test of Prakti Design’s Leo Double-Pot stove. Stay tuned for new posts.

Click on these links read more about this Urban Spaces series and the prelude to this post, Background, Prototyping #1.

This series follows the activities of two researchers as they design, prototype and/or conduct user-testing of new and existing Base-of-Pyramid (BoP) consumer energy products among low-income urban households in Chennai. The theory is that urban spaces can be used to gain relevant design insights and user feedback on rural-targeted BoP products due to its rich diversity and ease for researchers and designers to quickly turn those insights into functional design changes.

Selvan Thandapani and Richard Woodbridge are researchers for the Rural Market Insight team at the Centre for Development Finance, IFMR, located in Chennai, India. http://www.ifmr-cdf.in/

Reframing the Debate on Impact - Upcoming CMF Conference

As has been discussed on this blog, the groundbreaking results of the Centre for Micro Finance's impact evaluations have been bandied about with little consideration for nuance. Some results have been overblown or exaggerated to match the hype that originally heralded microfinance. While this might be good publicity for our work, can't help but feel that the debate on impact and how to measure impact has been snatched away.

Being part of the apparatus that produced these studies, I want to reclaim and jump back into the debate! Part of this reclamation will hopefully be a conference that the Centre for Micro Finance is hosting in conjunction with the College of Agricultural Banking (CAB) on January 8/9th in Pune. This conference, titled "Microfinance: Translating Research into Practice," will feature renowned development economists and CMF research partners Prof. Abhijit Banerjee (MIT), Prof. Rohini Pande (Harvard) and Prof Jonathan Morduch (NYU). The conference will feature results from the much-cited CMF-JPAL study on the impact of Spandana's expansion into the slums of Hyderabad. Dr. Nachiket Mor and Ms. Bindu Ananth will also partake and we expect the discussion to be heated, to accurately reflect the implications of our work for the sector and to discuss how best to continue the debate on impact.

If you can't make the conference, take a look at this guest Kristof op-ed written by Esther Duflo, Abhijit Banerjee and Dean Karlan on microfinance.

For more information about the event please contact deepti.kc@ifmr.ac.in amulyakrishna.champatiray@ifmr.ac.in

Are Infrastructure Projects for the Poor Bankable?

Recently, I came across a quite successful infrastructure development model in rural Orissa. Gram Vikas, a popular NGO operating in Orissa, has quite successfully designed an integrated infrastructure development model for poor, which comprises low cost housing-piped water supply-improved sanitation and smokeless cooking stoves- virtually providing almost all basic infrastructure a rural household needs. Under this model, each family gets a two room pucca house with a front varandah, a small kitchen with a smokeless chulha apparatus, and a good quality bathroom-toilet at the backyard. Every household have three water taps to which water is piped 24 hours in a day. For water supply, a common village water tower is built to which water is pumped from a bore-well (using pump) or perennial spring (through gravity flow). Drainage systems are built to avoid accumulation of waste water, and even banana and papaya plants are raised near soak pits to ensure that pits do not get waterlogged.

Provision of such facilities is certainly a dream in India, where only 18% villages have access to tap water (another 55% villages drinking water is accessed from common hand pumps) and only 19% villages have access to improved sanitation facilities. Similarly only 30% villages in India have any drainage system, mainly open drainages.

So how Gram Vikas manages to build such infrastructure for the poor and what are the sources of finance? I believe, its’ success goes to working out a model where infrastructure built through finance raised from banks was well supported by infrastructure built with subsidized public programs and managed by well-organized community institutions. Out of the total Rs.46, 500 (about US$1000) needed for construction of a house; Rs. 31,000 was availed from Housing Development Finance Corporation (HDFC) as credit. Building the toilet and bathroom cost Rs. 8000, in which about 50% was subsidized through external grants and government programs. The Village level water tank was built by availing funds from a government scheme, named Swajaldhara. The rest amount for building of house and bathroom-toilet was contributed by the families themselves either as money, or construction materials and/or labour days.

Gram Vikas has been able to do this intervention at a fairly wide scale; in 200 villages involving almost every household. What is remarkable is that the villages and households participating in this activity are probably amongst the most deprived people in the country, mostly tribals-many of whom used to live over mountains doing shifting cultivation not long ago. The success of the program can be attributed to the process adopted by Gram Vikas, which involve the village heavily at every aspect of decision making and program management. Before initiating building of the infrastructure, each family is required to raise an initial deposit of Rs. 3,000 to Rs. 5,000 to show their intent to avail the financial support. In addition, each family needs to contribute Rs. 1,000 to a village corpus fund to be placed as a fixed deposit and the interest to be used in future.

The question is, can such simple models which have been very successful in isolation be adopted in the larger framework of public policy aimed at providing infrastructure to the poor in rural India. India, for instance, have been implementing massive subsidized programs for housing, drinking water supply, sanitation. Can such programs be brought under one umbrella and banks be motivated to provide credit for infrastructure development?

BoP Product Design & Testing in Urban Spaces Volume 1: From Idea to Prototype in 90 Minutes

The following is part of an ongoing blog series from the Rural Market Insight team at the Centre for Development Finance, IFMR.

Say you have a new design insight for a BoP consumer product. How long might it take to prototype your idea and deploy it for testing? This week we learned how quickly design insights can become tested prototypes in India’s urban spaces. Our product testers were an urban low-income household in Chennai, India with no electricity, cooking on a traditional double-burner cook stove (chulha) and using 10-12 liters of kerosene per month.

For the full photo-story in a better resolution, including the timeline and cost, click the image below…

To read more about the background to this Urban Spaces series, click here.

This series follows the activities of two researchers as they design, prototype and/or conduct user-testing of new and existing Base-of-Pyramid (BoP) consumer energy products among low-income urban households in Chennai. The theory is that urban spaces can be used to gain relevant design insights and user feedback on rural-targeted BoP products due to its rich diversity and ease for researchers and designers to quickly turn those insights into functional design changes.

Selvan Thandapani and Richard Woodbridge are researchers for the Rural Market Insight team at the Centre for Development Finance, IFMR, located in Chennai, India. http://www.ifmr-cdf.in/

Rural India photography - can the poor benefit by being paid for the free service?

Recently at a conference, my colleague Bree Bacon and i were flipping through the 'Beyond Profit' magazine and came across pictures of the rural poor in every other page - the woman in a sari by the cookstove, the children playing by the river or with rubber tyres, the gleeful school-kids, the men in the farms...It struck me at that point that if photography in the corporate sector can be a commercial venture with numerous ad agencies and publishing firms making money and having to pay for 'models' to sell a product - Couldn't the same concept be translated to the rural 'poor'? Could numerous snaps of women and kids in villages which are used lavishly in development blogs, sites and magazines actually generate some revenue for those who are photographed?

This could take the form of a platform where such photographs are collated and people have to pay to use them. The proceeds would naturally go to the 'poor' who actually are the faces of the photographs. I am still thinking of a feasible business model for this concept but would welcome any thoughts/suggestions and ideas.