(Amit Shah is a Massachusetts-based digital and print entrepreneur, co-founder of Green Comma, and an observer of microfinance possibilities and solutions. In a previous postfor PhilanTopic, he wrote about literacy for a new generation.)
In September, I attended what was billed as North America's largest microfinance conference, the Toronto International Microfinance Summit (TIMS), at the Allstream Centre in Toronto. In addition to the conference, TIMS also held a fundraising gala, with proceeds going to support domestic and international microfinance projects and an educational scholarship.
The inspiration of the Rotarian Action Group for Microcredit(RAGM) and Rotary International's District 7070 Microfinance Committee, the event is run entirely by volunteers. And for the second year, the MasterCard Foundation provided financial assistance for the first hundred college and university students who registered to attend the conference.
The theme of this year's event was "From Microcredit to Financial Inclusion: Making a Difference in our World," and the conference program featured more than forty presenters from thirty organizations.
Of course, the origins of microfinance are familiar to many. In 1974, in the midst of a terrible famine in Bangladesh, Bangladeshi economist and Fulbright Scholar Muhammad Yunus made a $27 loan to a 42-year-old woman who made cane chairs; she had borrowed the money originally from a local usurer at an astonishingly exorbitant rate. The loan was repaid in full -- and the seed for what eventually became Grameen Bank, a "bank for the poor," was planted.
Today, Grameen is known and admired around the world, and Yunus and his revolutionary idea have been recognized with the Nobel Prize Peace Prize. More importantly, Grameen has lent some $5.7 billion to more than six million Bangladeshis, and his idea has spread around the world.
But while terms such as microfinance, microlending, social business, and social entrepreneurship have become part of our 21st-century lexicon, they are frequently misunderstood by people for whom these activities and issues are a central concern. That may be changing, however, as the microfinance conversation increasingly enters the mainstream. (See, for example, this recent Sunday New York Times Magazine profile of Diana Taylor, the high-visibility board chair of Accion, one of the largest MFIs in the world.)
Given the growing interest in the topic, I spent a good deal of my time at TIMS speaking with other participants and presenters about the overarching issues in the social investment sector. Those I spoke with included Thomas Haubenreisser, vice chair, TIMS 2011 Planning Committee and the founder of Invest 4 Impact, an advisory firm committed to the advancement of impact investing; Beck Pryor, project manager, Community Enterprise Solutions; Joyce Kaplan, associate, Solar Ear, which manufactures a low-cost hearing aid charged by solar-powered batteries; Joseph Appalsamy, director, social ventures, Dream Fund Holdings; and Mignonne Spiegelman, associate, WiUS Remittance, Inc.
Their answers to some of my questions follow:
Amit Shah: What are the most challenging issues in the microfinance and social entrepreneurship spaces?
Beck Pryor:In my opinion, the top three challenges in microfinance and social entrepreneurship are scalability, impact measurement, and profitability. The effective scaling of the solutions that are at the forefront of social entrepreneurship is key to global impact, but growth in this sector is very difficult. You are working in a field where money is almost always limited, and for some reason, fierce competition, as opposed to collaboration, is the norm. Instead of organizations with similar goals working together, they fight each other for donors and international attention. So for social entrepreneurs, finding a way to scale -- in part by finding sources of funding that allow growth on a truly impactful level and partnering effectively with those around the world who are working toward the same goals -- is both a challenge and a requirement for success.
Another challenge in social entrepreneurship is impact measurement. Finding quantifiable ways to measure the impact of a model or an activity on a target population is integral to the health and growth of an organization: it allows you to test what is working and what is not, it proves to the community that your work is important, and it attracts the attention of donors/investors. But in this work it is often difficult to measure impact. Take the example of a large microfinance institution. Let's say that in a given week this MFI gives out a hundred loans. Its primary goal is to ensure that these loans are paid back. Can the MFI measure its "success" in number of loans administered? Sure. But what does this really mean? If all one hundred of these loans lead to the creation of successful new businesses, then yes, this has been an impactful endeavor. But what if fifty go to non-income-generating activities, such as taking a sick child to the hospital? What if fifty people have to take out another loan to pay back the first? Is the MFI still successful? For the MFI to really understand its impact, it needs to know how each and every loan it administers is used — in both the short and long term. Perhaps this is feasible, perhaps it is not. But if an organization values its impact, and it should, these are important issues to consider.
The third challenge I see is managing profitability. With the increasing focus on the concept of social business, how do we balance financial and social return? An organization has to be financially viable in order to be sustainable, but a development organization should not be so focused on increasing its financial return that it sacrifices its social impact while doing so. In my opinion, as the sustainability and viability of social entrepreneurship organizations come increasingly under scrutiny, the challenge of profitability and managing this double bottom line will become ever more important.
Thomas Haubenreisser:The challenges in microfinance that are also common in social enterprises to some degree include the following: Shifting the mind-set from "charity" or "not-for-profit" to thinking of business as something that can add value to society and be profitable/self-sustaining without being seen as "usury." Building scale as a path to sustainability is also a critical issue for microfinance and social enterprise start-ups. In microfinance, a significant challenge is to do more with less and become a legitimized financial institution that can offer full financial services that include savings, insurance, and money-transfer services.
Joseph Appalsamy:With millions of microcredit deals by thousands of MFIs taking place, it's time for the MFI industry to convene around such issues as establishing standards, adopting best practices, and enforcing a code of conduct like that of most professional industries. Microfinance is too important an innovation and yet too fragile a mechanism to be left to the mercy of government regulators. A starting point in consensus building would be to agree about what constitutes social performance. A free and easily adoptable framework available to MFIs and donors by the Social Performance Task Force is a good place to start.
Another question is "What's next?" for the borrower who has repaid her loan and moved up a notch on Maslow's hierarchy of needs. Such a person would need bank and financial services that before she never had a need of. She would need more "options," such as expanding her business, hiring workers, franchising, even becoming an exporter herself. As all first-year business students are taught, 80 percent of your business will eventually come from 20 percent of your clients. MFIs should not create a no-next-level or closed-second-floor scenario for their enterprising clients. MFIs then need to deliver financial literacy, personal and professional skill development to make the entrepreneur successful.
And, finally, the MFI industry, needs to look at the "cost of money" to make more funding available through venture philanthropy and the emerging field of impact investing.
AS: What panel discussion really got your attention?
Thomas Haubenreisser:If I had to choose, "Financial Access Through Mobile Banking and Technology" would be the one, since it clearly demonstrated the potential of technology to help lift people out of poverty. The fact that 90 percent of poor people in developing countries don't have access to financial services, while many have access to mobile phones, presents a unique opportunity for microfinance institutions to increase the value they offer the poor. The session did an amazing job of sharing the vision of the Bill and Melinda Gates Foundation in this regard, while also demonstrating what is actually happening at FINCA in Uganda, where they have introduced mobile technology as part of their service platform.
Beck Pryor: The panel that was the most enlightening for me was "Investment Funds That Have Impact." Referencing my third point above, an interesting aspect of the panel was how the different funds handled financial return. Oikocredit, for example, caps its financial return to investors at 2 percent, meaning that any return on investment (ROI) above 2 percent goes back into the organization. Sarona Asset Management, on the other hand, aims at a much higher financial ROI of upwards of 8 percent to 10 percent.
The logical follow-up here is, again, much to the third challenge I mentioned above: How do you balance financial and social return on investment (SROI)? At the Social Good Summit in New York this week, Muhammad Yunus stated that any MFI looking to generate revenues of more than 15 percent above costs is not in fact microfinance, as he defines it, and should call its model something different. Obviously there is space enough for the Oikocredits and the Grameens and the Saronas of the world to fulfill different goals and create different types of impact, but a discussion of the different approaches to this issue would be quite interesting.
Joyce Kaplan:I attended "Local Microfinance: Learn the Process and Meet the Clients," where the panelists were entrepreneur clients, a volunteer mentor, and an executive from Toronto-based Access Community Capital Fund. It was enlightening to realize there is a need right here in Toronto. It was really interesting to see how the policies and processes of the fund were applied to building real-life businesses from scratch, business that might not otherwise have had a chance.
Joseph Appalsamy: I found "Social Enterprises: Transforming Lives by Linking Markets" to be the most enlightening, engaging, and even frightening. One panelist was just starting out, another had built a modest business that created jobs, and the third -- well, let's just say it knocked my shoes off with the level of social impact and market sophistication required to sustain it.
What I saw was the past, present, and future of social investment -- a metamorphosis that affects all of us involved. I learned about the essential role the donor-based MFI played in the larval stage, where the need, survival, is purely personal; the role of an expanded-service hybrid MFI facilitating the transformation from newly minted borrower to seasoned entrepreneur; and, lastly, the role investors can play now that blended-value returns are possible.
AS: What issues and challenges require further exploration?
Beck Pryor: As impact investing becomes an increasingly larger and more global field, I think there are a number of different approaches necessary to create an engaging discussion surrounding the sector. I would like to see a focus on investors and investees from a financial perspective: Who is interested in funding social businesses? What sort of returns are they expecting, and how do they expect them to be achieved? What do investment funds mean to social businesses? What social businesses are looking for investments, and what types of returns do they believe they can provide? Why become a social business instead of an NGO? I would love to see those questions covered in another conference setting featuring projects that are operating in the impact investor and impact investee space.
Thomas Haubenreisser:I would welcome greater focus on evolving areas such as insurance and payments, to show how microfinance is actually evolving. Controversial areas that are rarely talked about include, for example, the role of charity/NGOs in the sector and when do they transition from nonprofit to for-profit? Interest rates also are controversial, and we need to get better transparency and understanding of the whole risk-reward, cost-profit picture of microfinance organizations.
In my next two posts, I will focus on the needs-analysis process and development and delivery mechanisms in the microfinance space, as well as the always-critical sustainability plans for specific projects with a demonstrated track record of success.
In the meantime, feel free to share your own thoughts about pressing issues and challenges in the microfinance and social investment spaces. Here are a few that were surfaced at the conference: Is there a crisis of identity in the MFI sector? Have the scandalous lending practices of profit-seeking MFIs in Andhra Pradesh(in India) accelerated the need for self-regulation in the microfinance space? Are notions like "museum of poverty" a pipe dream without proven sustainable financial models? And how does Kiva, the wildly popular person-to-person online microlending powerhouse, impact economic behavior in a region? Is it a form of unregulated philanthropy?
-- Amit Shah