Development

The Next Big Thing in Microfinance: Savings

Jamie Zimmerman — Wed, 06 Aug 2008 16:18:00 -0400

Last month, I argued that USAID inaptly named a three-day virtual conference on savings as "The Forgotten Half of Microfinance." Instead, I posited:

"As someone working on asset building and financial inclusion for the poor (and/or their cross-fertilization in the development field), I would contend that the hosts got it wrong when chose the title for this event. Indeed, "savings" is not "forgotten" at all. Though perhaps traditionally underemphasized, I would argue that, on the contrary, savings is the in fact the "next big thing" in financial interventions."

Looks like I got this one right.

Probably to the surprise of the organizers, the USAID/Microlinks Speaker's Corner on savings was overwhelmingly active, with 324 participants from 53 countries. For those who didn't attend this virtual, email-based conversation, you missed out on the experience of 72 full hours of non-stop emails (we're talking hundreds) from both the novice and the seasoned, from non-profit, public and private sectors, all eager share their many ideas and experiences and learn from others how to expand opportunities for savings for the poor, marginalized and excluded around the globe. It was an inspiring and educational experience. You can access the entire forum at www.microlinks.org/sc/savings. Or you can download the compilation document, which contains all postings from the forum. Its 200 pages long.

Not only is savings indeed not forgotten, but a recent article in the Wall Street Journal confirms my contention this is in fact "the next big thing." On July 31, the WSJ published Robert A Guth's piece, "Giving a lot for savings a little," which announced the Bill and Melinda Gates Foundation intention to "donate hundreds of millions over the next few years to programs to spur savings in poor countries." In the article, Bob Christen, Director of the Financial Services for the Poor division of the Foundation, says the foundation intends to invest heavily to get savings back on the world agenda. So, if it's not already there (as I claimed it to be), then it will be soon-and in a big way.

The Global Assets Project is working inform this new movement towards savings and financial inclusion by promoting savings products, policies and programs that facilitate asset building and wealth creation for these populations. Indeed, the WSJ article was printed one day after the Global Asset Project's launch of its newest report: Global Savings, Assets and Financial Inclusion: Lessons, Challenges and Directions. The report addresses emerging global trends, opportunities and collaborations across the fields of asset building, microfinance, policy and financial education. It describes lessons, challenges and opportunities for thinking about how the poor, in developed and developing countries, can build their assets and wealth. Finally, it includes possible next steps that the diverse range of actors working within these fields should take to move this emerging body of work forward.

As this next big thing grows ever bigger, my hope is that the insights, challenges and recommendations in this report can help inform those policymakers, funders and practitioners in the drivers seat.

Savings as a Financial Intervention: USAID online conference July 8 - 10

Jamie Zimmerman — Mon, 07 Jul 2008 16:37:00 -0400

This week USAID's knowledge sharing website, Microlinks.org and MicroSave are hosting a three-day interactive, web-based discussion on "Savings: the Forgotten Half of Financial Interventions." This discussion is open to the public and a worthwhile seminar for anyone in the global savings and asset development community (see a summary of topics and facilitators below). To begin my participation in this discussion, I would like to contribute not by posing a question to the hosts, but by sharing with them a simple observation: As someone working on asset building and financial inclusion for the poor (and/or their cross-fertilization in the development field), I would contend that the hosts got it wrong when chose the title for this event. Indeed, "savings" is not "forgotten" at all. Though perhaps traditionally underemphasized, I would argue that, on the contrary, savings is the in fact the "next big thing" in financial interventions.

Savings has been re-emerging as a major theme in microfinance for some time now, and was the main theme of a major symposium the Global Assets Project hosted over a year ago in Singapore. Nevertheless, I agree that we still have much to learn and do in the field of savings for the poor and lower income populations around the world, and look forward to learning from the facilitated dialogue and global experience-sharing this seminar makes possible.

Here's more information on the speaker's corner (from the microlinks website):

Introduction to this discussion:

The rapid growth of the microfinance sector in the past couple of decades signifies its success in terms of outreach and sustainability. Although the sector continues to be primarily supply-driven, changes are underway and service providers have started to acknowledge that the low income are not a homogenous group, but a group that, like any other group, requires a wide range of financial services and has evolving demands.

While the demand for services is changing, on the supply side most of the financial interventions have been credit-led. Savings remains neglected and is probably talked about only when policy or regulatory issues are discussed. This is unfortunate as researchers globally have revealed repeatedly that the low income not only have the capacity to save, but that they save significant amounts (in cash or kind), and also that they lose a lot of these savings either to fraudulent institutions or by theft or natural disasters. In addition, the use of informal savings mechanism is high among low income people.

Further complicating this unbalance between the demand for savings options and service offerings from the supply side is the access to secured services in remote areas, difficult terrains or areas vulnerable to some risk, for example, flood prone areas. Absence of formal savings services results in "financial exclusion" of the larger population.

Join the dialogue:

Hosted by Madhurantika Moulick of MicroSave, this Speaker's Corner aims to bring into focus the various issues related to savings - the forgotten half of the financial interventions - by looking at the demand and supply side of savings, and bringing special attention to savings options in hard to reach areas.

Each day, participants are invited to share their own experiences, questions and comments in the discussion forum:

Day 1 (July 8) - Demand for Savings Needs of Low Income People. What are the needs? Are those needs diverse or homogeneous? Can affordable products be designed that can meet client needs?
Guest facilitator: Lisa Parrott and Sukhwinder Arora.
Day 2 (July 9) - The Suppliers's Perspective on Savings. Why are savings not promoted? Is it due to legal restrictions only, or are other factors in play? What challenges are service providers facing and what opportunities or solutions exist?
Guest facilitators: N. Srinivasan, Renée Chao-Béroff, and Mary Miller.
Day 3 (July 10) - Savings Options in Difficult Areas. What exactly are the challenges in reaching out to rural and remote areas with effective savings services? How have others overcome these challenges, and is technology the answer?
Guest facilitators: Hans Dieter Seibel, Hugh Allen, and Kimberley Wilson.

The New Colonialists

Benjamin Katcher — Thu, 26 Jun 2008 14:56:00 -0400

New America Senior Fellows Parag Khanna, Maria Kupcu, and Michael Cohen's article, "The New Colonialists," appears alongside the Failed States Index in the current issue of Foreign Policy Magazine.

The authors suggest that in many states - not only those traditionally considered "failed" -- "a hodgepodge of international charities, aid agencies, philanthropists, and foreign advisers" are increasingly carrying out traditional government functions. Increasingly, people in developing countries depend upon internationally-financed organizations for basic services such as health care and education that their governments cannot provide.

While these groups undoubtedly address urgent development challenges, their presence begs the question of whether the states in which they operate will ever develop the capacity to provide basic services for their populations. And, if not, what does that mean for state sovereignty in the 21st century?

While the authors do not view this phenomenon as purely benign or malign, they do call for a new system of global governance that holds the new colonialists accountable to the citizens of countries in which they operate.

Preying on the Poor or Filling a Niche? Lessons from Payday Lending on Profits in Microfinance

Jamie Zimmerman — Thu, 22 May 2008 20:49:00 -0400

The international microfinance movement - cheered and arguably hyped for its ability to alleviate poverty through access to microcredit - originated based on a social mission to provide financial services such as small loans to the poor and underserved. However, the recent explosion of profit-seeking providers (in some instances, non-profit MFIs going public, such as the now-infamous Compartamos IPO, in other cases, a surge in predatory micro-lenders) has been met with a mix of applause, skepticism and in some cases, disgust. Now, some microfinance leaders are speaking out about the risks industry faces if it loses sight of its social mission, fearing the likelihood of an influx of profit-seeking actors offering credit products that are actually more welfare-harming than welfare-enhancing. My question is: Has anyone else noticed some eerie similarities between these debates over profits from microcredit and the debates within the US over payday lenders?

First, the crux of the current debate in microfinance is over what we could call "ethical" interest rates and hence profits for micro-credit institutions. Mohammad Yunus, winner of the Nobel Peace Prize for his poverty alleviating microcredit model, has "blasted" Mexican MFI Compartamos for charging effective interest rates over 100%. And in a recent Economist article, Poor People, Rich Returns, microfinance expert Chuck Waterfield argues that these rates "little different than what illegal loan sharks demand, and it is deliberately making it difficult for poor borrowers to understand how much they are paying for their loans." Sound familiar? Opponents of payday lending in the United States have argued for years that those who take out such loans typically do not understand them, will unlikely repay within the typical two week repayment deadline, and end up in a debt-trap that pulls them deeper into financial despair and poverty. And to be sure, in the US annual interest rates on some loans (such as those recently "banned" in Ohio) have reached beyond 300% (three times the arguably unjust rates charged by Compartamos). One difference though is that so far the vast majority of the microfinance industry operates under a system that incentives instead of discourages high repayment rates on loans.

Also, there is the common fear of uncontrollable industry growth rates. Today there are thousands more payday lenders and check cashers than there are McDonald's in the US. Similarly we've seen growth in microfinance institutions within just a handful of years from just a few hundred to close to four thousand, according to the microcredit summit report. Some say the increase in predatory "loan sharking" in the US is a product of a breakdown of Federal Usury laws since the 1970s. In microfinance, leaders argue not a breakdown of laws but an explosion of practice where such regulations and protections simply don't yet exist.

Then there are even similarities on the flip-side of this debate. Some argue that clients of both U.S. payday lenders and MFIs are consciously and willingly entering into these arrangements. They counter that the high interest rates are more a reflection of limited supply meeting great demand. Indeed, Compartamos is reaching vast, unmet demand for microcredit in Mexico (60 thousands to 900,000 loans in eight years), and US payday lenders operate where historically banks couldn't be bothered to. This is a valid argument, but does not take into account the information asymmetries, lack of disclosure or understanding of such products that might lead some to make "less rational" decisions than they otherwise might. Finally, both in the US and abroad, it's argued that if you take away the very limited financing options available to these individuals (an unregulated MFI in a remote area or a check casher in an impoverished neighborhood, let's say), then these clients will turn to even more risky and potentially dangerous options.

Finally, there are also similarities in efforts to expose and address such. Groups like Self-Help (and the subsequent, policy-focused Center for Responsible Lending) have been working to expose and eliminate welfare-harming lending practices in the US for over a decade. They have argued for interest rate caps, increased transparency and more and better financial services options for targeted communities. While such efforts are relatively new within microfinance, recently leaders within the microfinance movement have addressed concerns over lack of transparency, indebtedness of clients and extraordinary profits of micro-lenders "in advance of adequate competition" that seem to mirror those expressed by CRL and others. See the Poncantico Declaration signed just one month ago by a high level group of MF leaders. One difference is the call from the Declaration for a code of conduct and ethics to guide microfinance practices around the world, though this is a reflection of the fact that microcredit abroad was born out of a social mission. On the other hand, payday lending in the US was born solely out of a desire to fill an extremely lucrative market niche within disadvantaged and underserved areas.

To be clear, I'm not anti-profit and I do believe in the power of creative capitalism. However, I also believe that the trends in microfinance and their similarities to pay day lenders in the US possibly foreshadow the very real problems that will arise if creative capitalism to help the poor escape poverty succumbs to creative capitalism to maximize profits above all else.

Development Measures Flood Local Ballots in California

Joe Mathews — Sat, 05 Apr 2008 12:57:00 -0400

There is a flood of new ballot measures on local development headed for municipal ballots in California. News of four such measures is below. I'll be moderating a Zocalo LA panel on this phenomenon on May 27 at 7 p.m. at the Autry Museum in Griffith Park in Los Angeles.

Voters in LA county will decide whether to charge themselves a global warming fee.

The Conejo Valley teachers union sides with Home Depot, and opposes a ballot initiative backed by a local chain of hardware stores that would limit big box development in Thousand Oaks.

A classic Santa Monica battle over a proposed ballot measure that would limit the size and imprint of commercial development.

Here's a report on a new local ballot initiative filed in an attempt to limit growth in Grass Valley. (That's in Nevada County, northern California).

And a bonus item from Arizona, cultural colony of California: Paradise Valley can't approve a Ritz without a referendum.

Utah Won't Let Voters Decide Land Use Questions

Joe Mathews — Tue, 18 Mar 2008 13:04:00 -0400

In its first week, this blog has focused on the soaring number of land use questions that end up on the ballot as initiatives in local elections. California has been the center of this trend, but other Western states are experiencing the same thing.

Utah legislators have decided to slow down the train. They've passed a bill, now signed into law by the governor, that would make it all but impossible to submit initiatives or referneda on land use questions to local voters. The governor has signed it. And the Salt Lake Tribune is angry about it. This won't be the last you hear about this law. Look for court challenges -- and for the national property rights movement and direct democracy advocates to make a cause of reversing this.

St. Patrick's Day Round Up

Joe Mathews — Mon, 17 Mar 2008 13:09:00 -0400

Lots of items this morning

INITIATIVE SPONSOR TO GAYS: 'JUST SHUT UP': One of the two Oregon legislators sponsoring a ballot initiative that would allows employers to discriminate on the basis of sexual orientation shares "my advice to the gay community". That advice? "Shut up, just don't talk about it." He nows says that he was sharing advice he used at his own business, which produces hazelnuts.

RIGHT TO WORK EQUALS NIXON: An interesting Huffington Post item recalls then Vice President Nixon's backing of ballot initiatives to establish "right to work" laws, overturning "closed shop" rules that required workers to join unions as a condition of employment. A battle is brewing now in Colorado over a similar measure. (Click read more to see more items)

BUT YOU CAN STILL GET A GOOD STEAK THERE: Kansas City votes April 8 on a local ballot initiative that will strengthen its relatively weak anti-smoking law. The city council there is trying to beat the initiative by adding its own tweaks to the law.

MORE BLOOD: Dan Weintraub takes a look at the possibilty of California adding a severance tax. Republicans have blocked it in the Assembly, but I suspect this is an idea that may reach the ballot in California before too long. It's already headed to the ballot in Arkansas.

TAXACHUSETTS: A ballot initiative is launched to end the income tax in Massachusetts.

RESURFACING: A veteran of ballot fights surfaces in Utah after a Mormon mission -- and already she's putting together a ballot measure. Elaine Bonavita was a key player in a 1980 tax ballot measure fight in Massachusetts and in an anti-abortion measure in Iowa. Now she's putting together a referendum to block a new coal plant in the town of Salina, where she settled six months ago.

CALIFORNIA LOCAL DEVELOPMENT MEASURES: The onslaught of such initiatives continues. Here's a report on an attempt to limit heights of buildings in Chula Vista (That's near San Diego). And here's more on the anti-growth initiative in Redwood City (northern California, just south of San Francisco).

THURSDAY ROUND-UP: San Francisco Anglophilia, a Student Mistake, and Wolves!

Joe Mathews — Thu, 13 Mar 2008 13:57:00 -0400

QUESTION TIME: Last year, San Francisco voted down a ballot initiative that would have required the mayor to submit to "question time" from the board of supervisors, in the same manner that British prime ministers must take questions in the House of Commons. But the board of supes hasn't given up, inviting Mayor Gavin Newsom to show up and take questions. He is declining these invitations. Newsom, who remains popular despite a public confession of adultery with a top aide's wife, has been deflecting requests for information of all kinds as he explores a race for governor in 2010. (Arnold is termed out, so the seat is open).

ROOKIE MISTAKE: California college students, angry about tuition hikes, have filed an initiative called for a five-year tuition freeze starting in 2009. But don't bet on the measure making the ballot. The group of students behind the measure has announced it is going to use volunteers to gather signatures. What they'll discover is that it is far more costly and time-consuming -- and less effective -- to field teams of volunteers than it is to simply hire paid signature gatherers. The students would find it cheaper -- and would be more likely to gather signatures -- if they devoted themselves to raising money for a paid campaign. Here's a story on the volunteer effort.

SHOOTING WOLVES IN THE LAST FRONTIER: In the northern reaches of our country, wolves have been the target of ballot initiative campaigns, often feeling the same vitriol reserved for immigrants and child molesters in other parts of the country. Alaska is now debating a ballot initiative that would prohibit "aerial wolf control" -- that is, state biologists shooting wolves from the air, a common practice for controlling -- them, except in a "biological emergency." For critics, the thinning of the caribou herd (blamed on wolves attacking caribou calves) constitutes an emergency. Also in Alaska, a public financing plan for state elections makes the ballot. The text of the measure is here. MARYLAND SLOTS: The referendum to raise taxes and permit slot machines survives a Republican court challenge and heads to the November ballot.

IS THIS VOTE NECESSARY? Citizens in a Colorado town that has only 800 voters want to put a referendum on a development question. My question: With so few voters, wouldn't it be simpler, cheaper and more productive to hold a meeting?

MORE CALIFORNIA LOCAL DEVELOPMENT BATTLES: This is an issue we're tracking close: the growing use of municipal and county ballots to decide land use questions that city governments are paid to solve. Here's an initiative to limit developers in San Marcos (in the San Diego area). In Redwood City (in northern California), environmental groups are seeking to qualify an initiative requiring two-thirds voter approval of any future development of city open space. And in Thousand Oaks, where there's already a big June ballot battle between a local hardware store chain and Home Depot, mobile home residents have submitted an initiative that would give them a chance to buy the land under their homes.

Business-on-Business Warfare

Joe Mathews — Mon, 10 Mar 2008 15:27:00 -0400

Now comes news that a second initiative on development in Bayview-Hunters Point has qualified for the city of San Francisco’s June ballot. Check out this story in the Chronicle.

Why should people outside San Francisco care? Because in California and around the country, local ballot measures have become a common instrument of business-on-business warfare. Lennar Corp, a national development company based in Florida, first qualified an initiative that would put in place its Hunters Point development plan, which would include a combination of retail, industrial and residential development along with a new 49ers Stadium. In response, a San Francisco supervisor -- with backing from other developers -- has qualified this second initiative, which would impose a mandate that half of the new homes in the Hunters Point area be sold or rented at below-market rates.

Such battles have come to dominate municipal ballots in California. Look at ballots this June. Wal-Mart takes on local business in Long Beach. A hardware store owner is battling Home Depot in Thousand Oaks. In Anaheim a fight between a developer and Disney produced two ballot measures, though those were recently removed after the developer, facing legal problems and an onslaught from the Mouse, surrendered.

Look for more on the Anaheim fight in a piece I have in April’s edition of Orange Coast magazine. And I’ll be helping put together a panel on how businesses use municipal ballots to fight each other at Zocalo in Los Angeles on May 27. More details to come on each.