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The first signs of spring?

1 Apr

Over the past few months we have been approaching MFI in several countries – Kenya, Nigeria, Sierra Leone, Sri Lanka, Pakistan, Indonesia, Philippines and Cambodia. While most of the MFIs in India get their loan funds from local banks, in these countries there seems to be very little funding from local banks.

Even in cases where banks fund MFIs, the loan is backed by an international guarantee and in many cases it is a 100% guarantee. In a few countries we found local development wholesale funds that lend to MFIs without a guarantee.

We have started the process of evaluating some of these organizations and we are glad to announce that we are making steady progress with one organization in Sri Lanka. This will be the first loan for the organization from a Bank. We hope to have more news to share soon.

In India, the regulator (Reserve Bank of India – RBI) is likely to implement some of the recommendations of the Malegam committee. These regulations will be applicable for the large Non Banking Finance Company (NBFC) MFIs that were already being regulated by the RBI.A microfinance bill to cover all categories of MFIs will also be drafted over the next few weeks and it will be eventually presented to the Indian Parliament around July 2011. The uncertainty and dramatic slow-down in bank funding is likely to continue till the regulations are fully crystallized.

All these tell us that governments and regulators in countries have a very important role to play in making sure that microcredit is suitably supported and properly regulated. In India, there needs to be appropriate and comprehensive regulations backed by timely action against any errant organizations so that microcredit is safely and consistently delivered to clients.

In many other countries regulators need to find ways for MFIs to mobilize a reasonable amount of funds from local banks and/or the savings of microfinance clients so that adequate funds are available for the larger future needs. Further mobilizing local funds will also reduce foreign aid dependence, make local economies self sufficient and also make MFIs and their clients insulated from currency devaluations and international financial shocks. Our guarantees will make a positive contribution here in the years to come.

Meanwhile, we continue to look forward to an early spring.

Starting a virtuous circle with loan guarantees

24 Aug

We initiated repayments on loan guarantees this weekend and have returned nearly $20,000 in repayments to individual loan guarantors. This is a major milestone for us.

During repayments the amount of guarantee that is returned is proportional to the percentage repaid on the loan tranche from the bank to the microfinance institution. Thus in case of the earliest loans of June 2009 the repayment is around 40% of the guarantee amount, while for the latter loans in May/June 2010 the lowest repayment is around 9%. Loans in the intermediate period will have repayments between 9% and 40%.

To many individual loan guarantors, the repayments are a validation of the guarantee model. There is also a validation of the guarantee model at the human impact level that I am most delighted to share.

A year back at the peak of the financial crisis Ajiwika, our first microfinance partner was finding it very difficult to raise funds from banks. Based on United Prosperity’s guarantee support a large Indian bank agreed to lend a little over $200,000 over a course of a year to Ajiwika. Since then the total guarantees we have raised are a little over $100,000 making around $180,000 in loans helping more than 900 families directly. With the guarantee support, Ajiwika built a relationship with this bank and their credit history with the local banking system. Further since a large bank was lending to Ajiwika, other banks looked at them a lot more favorably. This expanded the circle of trust and since then seven other banks have approved $3.1 million in loans to Ajiwika that can be disbursed to around 17,000 entrepreneurs. Additionally Ajiwika, has also been able to reduce its cost of borrowing from banks and has reduced the interest rate it charges from its borrowers.

This is just a glimpse of the ‘Virtuous Circle’ that all of us have together started helping so many entrepreneurs and their families many of them known to us through their stories on the UnitedProsperity.org website and many more whose stories of courage and fortitude are similar.

Thank you for all starting the ‘Virtuous Circle’ making a difference to the lives of so many people.

Helping Microcredit Programs Succeed

13 Nov

 

 

Continued from ‘The First Break-through’.

 

 

By February, we had gathered additional momentum. Chiradeep Vittal joined the team and soon after Amar Singh, Ramkumar, Ramya and Vinay started building the system at a fast pace. We would have quick two week development iterations followed by testing done by Suriya Prabha and Supraja.  

 

There was a ton of legal work to be done and we initially had a very hard time getting any law firms to help us. But after a little bit of struggle, things fell into place – Hanson Bridgett, UC Berkeley and O’Melveney and Myers started helping us with the legal work.

 

Meanwhile Natasha Ramarathnam joined us in India and we started talking to various Microfinance institutions (MFIs) who may need guarantees and also to the large banks who lend to these MFIs.

 

As we started talking to MFIs and MFI networks, we were soon struck by the enormity of demand and the amount of ground we had to cover. Rajkamal Mukherjee, a microfinance veteran and VP at Accessdev (a Microfinance network working with emerging MFIs in India), wrote to us:

The AmFA partnership presently has 110 partners aggregating to outreach of 2.4 million clients and gross loan portfolio of over a USD 250 million. These institutions represent a major chunk of the 40-50% annual growth segment in the sector. Our assessment of the immediate demand for additional credit among the AmFA partners is of USD 600 million.”

 

This bottom up assessment of the demand was quite stunning. One would expect that banks would quickly step in and lend to microfinance institutions adequately at a market determined interest rate. But that clearly does not seem to happen, despite the fact that banks in most developing countries have enough capital to lend. One outcome of this has been that bank lending has been heavily skewed to the larger MFIs while smaller MFIs have struggled to raise adequate bank loans to meet demand.

 

Prof. Mohammad Yunus summarizes the problem beautifully ‘The biggest problem we face in trying to expand the reach of microcredit is not the lack of capacity. Instead, it is the lack of availability of money to help microcredit programs get through their initial years until they reach break-even level.’ He further adds ‘Local banks cannot lend to MFIs because MFIs cannot provide collateral. However, if an international or domestic organization steps forward to act as a guarantor, local banks are happy to provide the money’ (Nobel laureate Mohammad Yunus with Karl Weber, Public affairs books, Creating a world without poverty : Social business and the future of capitalism, page 70, 2007).

 

I would take Prof. Yunus’s argument one step further. To make bank loans available to microcredit programs through their initial years, we need to make guarantees easily available. And to make guarantees easily available we need a scalable way to raise funds from socially responsible investors. I believe that our internet-centric model has the potential to raise socially responsible funds in a scalable manner and make it available to MFIs when they need it the most. Implementing it calls for a lot of hard work from a lot of people. I will write more on that topic in another post.

United Prosperity – The birth of an idea

6 Nov

Let me introduce myself and share with you the story of the birth of United Prosperity. My name is Bhalchander Vishwanath, ‘Bala’ to folks who know me. I came to the US from India 8 years back almost to this day. I worked with MphasiS and subsequently Infosys, building large software systems for financial institutions.

 

On the side, I kept coming up with startup ideas and would spend several months researching them – an innovation and idea management system, a website for comparison shopping of elective medical procedures and many more. I would typically spend 3 to 4 months researching each idea and then evaluate whether I should seriously pursue it further.

 

In 2006, I was working as a consultant with PMI, a Mortgage Insurance Company.  Borrowers who have poor credit scores and cannot put the 20% down payment towards a home  cannot get a mortgage. However, if the borrower or the bank buys mortgage insurance from PMI, the bank will make a loan to the borrower and the borrower can enjoy home ownership. Over the years, Mortgage Insurance or Guarantee as it is called has significantly expanded home ownership in the US.

 

My idea was simple, if guarantees could help people buy homes, why cannot guarantees help poor people get small loans from banks? I had heard a little bit about microfinance and I felt these guarantees could also expand the reach of microfinance. I started reading literature on microfinance and would spend endless hours reading articles and papers I could find on the internet.

 

Sometime in 2006, it was also announced that Prof. Mohammad Yunus, the pioneer of microfinance, had won the Nobel prize and that increased excitement in the field. But I soon realized that I had hit upon a massive roadblock – An organization which plans to offer guarantees needs to have adequate capital. How do I raise the several million dollars to set up a guarantee fund? I was a little disappointed that I had hit this seemingly un-surmountable road block and decided to move on to finding the next idea.

 

The next few months I spent time conceptualizing a website which would measure one’s carbon footprint.  It would be integrated with a recommendation engine which will then suggest upgrades to household appliances, changes in lifestyle etc. By then http://green.yahoo.com was launched. It had similar features though a little more basic than what I had envisaged. There was also another well-funded project on similar lines being done by UC Berkeley. Given these, I was not sure if my idea could compete against these well funded ventures.

 

I came back to the earlier microfinance guarantee idea – it simply would not go away. I continued to read more on guarantees and microfinance and figure out how I could raise funds for the guarantee fund. Sometime in April of 2007, I came across Prosper.com and a few days later Zopa and Kiva. Peer to peer lending fascinated me. Instinctively I realized that this held a clue to solving my problem, but I did not know how. By then I also became familiar with the guarantees offered by Grameen foundation and Accion. I also learned that the smaller Microfinance institutions (MFIs) were not having adequate access to capital and no organization was offering guarantees to smaller MFIs. This was a problem waiting to be solved.

 

But after all this research by June 2007, I was beginning to get a bit impatient. I had no business idea. I responded by setting myself a deadline – I would come up with an idea by July 3, 2007. There was an IIT alumni conference in the valley the following week, and in one of the tracks, VCs would hear and fund idea pitches. I hoped to have an idea by then. The next few weeks I kept thinking on how the peer to peer model could come together with the guarantee model. And finally on July 2nd or 3rd, the whole thing came together: The general public will guarantee loans to entrepreneurs on a website. The guarantee will allow the MFI to borrow from local banks and make loans to the entrepreneurs.

 

The idea made sense to me, but another reality dawned on me. Just taking an idea to a VC will not secure funding. I decided to first get the idea validated. More on that tomorrow.

 

Thanks for reading.