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.