Saving for a Home: When Commitment is Too Much and Too Little (Part 1)

Few objects signal middle class like housing. More than a car, more than clothing or other life accoutrements, there’s nothing like owning a modest home to send the message that the family has achieved this near-universal dream. . . .

In wealthier countries, the issue of housing is largely seen through the lens of ownership – families who own their homes are likely to see their assets grow far more than families who rent, even if their incomes are identical. Home ownership (or lack thereof) is the reason why the wealth gap is so much greater than the income gap. . . .

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Saving Chiapas, Saving Ourselves: How to avoid a repayment crisis in Mexico

My last two posts on the potential repayment crisis in Chiapas described the high risk of a crisis in Chiapas, Mexico, and its potentially devastating consequences to the microfinance sector around the world. But here is the good news: thus far there is no crisis, and one could still be avoided.  . . .

I have argued before that development finance institutions and other funders could leverage Smart Certification to enforce client protection practices and thus reduce the risk of the kind of over-lending that's happening in Chiapas. However, that prescription alone would not work in Mexico, mainly because a large number of Mexican MFIs are independent of foreign funding, and there are many other lenders active in the same space, including consumer finance companies and large retailers that provide credit. . . .

The answer to avoiding a repayment crisis in Mexico will thus require government action . . .  . . .

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Worse than AP: The Damage of a Repayment Crisis in Chiapas

A month ago I wrote a post singling out the Mexican state of Chiapas as a potential site of a coming repayment crisis. No, this is not a follow-up announcing that it has begun, nor am I rooting for one to start. In my next post, I will review the options that the Mexican microfinance sector has to avoid it, and what the global microfinance community can do to help. But for now, let’s dig a bit deeper into what a Chiapas crisis might mean, and why I continue to focus on Mexico, as opposed to the broader issue of excessive credit and over-indebtedness. . . .

Let’s be blunt: not all countries are created equal. Some remember my warning three years ago about the danger of a credit crisis in Andhra Pradesh. Back then I compared a possible crisis in India to the crisis in Bolivia a decade before: "India is no Bolivia – if the bubble bursts there, the entire global microfinance sector will find itself reeling." Well, Mexico is no India . . .  . . .

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What's Next: Another Repayment Crisis?

It's been over two years since the start of the great India insolvency.  Four years since the Bosnia blight and No Pago Nicaragua.  And nearly six years since the Morocco microfinance meltdown.  . . .

At this point, it's reasonable to say that the first global crisis in microfinance has passed.  Life is on the mend.  . . .

In a recent email, Alok Prasad, head of the Microfinance Institutions Network in India (MFIN) described its most recent quarterly report as "green shoots in evidence."  The numbers certainly bear him out. Elsewhere, investors speak of tightening their exposure to countries with overheating markets, pay attention to issues of overindebtedness, and are wary of the sort of runaway growth that was being posted by Indian MFIs back in 2008-10. . . .

Development of sector-level infrastructure is likewise moving apace, with ever increasing credit bureau coverage of microfinance clients and increasing implementation of client protection practices . . .  . . .

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From Responsible Lending to Responsible Profit

If there’s one issue that’s most difficult for microfinance practitioners to explain to the lay public, it’s high interest rates.  As Elisabeth Rhyne describes it, at some point the numbers get so high that people become outraged and stop listening altogether.  Most recently, the issue was put back in the public eye through Hugh Sinclair’s Confessions of a Microfinance Heretic and the media coverage it has spurred.  . . .

With few exceptions, his critique that microfinance investors are investing in MFIs charging exhorbitant interest rates has gone largely unanswered. That’s not a tenable position for the long-term.  For a socially responsible fund, the case ought to be simple – if you have investments that you’d rather not have to publicly support and explain, then either those investments don't belong in your portfolio or you should learn how to explain those investments . . .  . . .

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Can borrowers be trusted to reschedule their own loans?

I have written before how tiny Zidisha Microfinance is challenging long-held assumptions by leveraging internet social media and mobile payments like M-PESA to lend to clients without the help of loan officers or local staff.  Since then, Zidisha has grown from tiny to small, with a portfolio now at $200,000, over 430 active borrowers, and  1400+ lenders. Its operations remain solid, with PAR30 at a respectable 6.6%1 (check out its stats for more). . . .

I've been advising Zidisha since before its launch in 2010, and with that had the opportunity to watch the evolution of the platform's innovations. One feature, introduced in August 2011, allows borrowers to request to reschedule their loans, regardless of whether they are delinquent or not.  Zidisha's online borrower portal provides two rescheduling options:  adding a grace period of up to 2 months, but leaving the repayment amounts unchanged, or re-amortizing the loan over a longer period (up to 24 months) to lower the payment amount (Figure 1). The interest rate of the loan is applied over the longer period and repayment schedule is recalculated accordingly. Aside from these rules enforced through the website, there is no involvement or approval on the part of Zidisha – once a borrower submits the online request, his new repayment schedule becomes effective immediately . . .  . . .

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What's wrong and what's right about consumer finance?

It’s the microfinance bête noire. The great unspeakable. The furtive shadow slinking down the narrow alleys of poverty. Yes, the consumer loan. Has microfinance really come to this, we ask? Helping the poor buy a TV? Charging 40% interest for the couch to go in front of that TV? And what about family celebrations, festivals, dowries? Is that really what microcredit is for? . . .

Consumption lending has been creeping out from the shadows for some time, but mostly for “good” consumption like school fees, urgent medical care, or basic needs like food during those difficult periods when income is scarce. Still, for many of us the TV-on-credit notion that represents what is so easy to think of as “bad” consumption remains too painful an idea to swallow. . . .

But how to draw the line? If not the TV, then what about a microwave? A motorbike? Plumbing in the home? . . .

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Part 2: High yield loans: the lynchpin of deposit-driven microfinance

Part 1 ("The Economics of Microsavings") of this brief exploration into the economics of savings-driven microfinance looked at the role of microsavings at microfinance institutions. In one large study, poor borrowers, despite accounting for 75% of active accounts, only contributed 3% of total deposits mobilized, mainly because they maintain low balances. However, poor savings clients carry out frequent transactions, for which they have well-demonstrated willingness to pay relatively large fees. These and other fees can be a major source of revenue on its own. However, many savings clients are also borrowers, and it is through the combination of fees, high yield microcredit loans, and other services (insurance, transfers, etc.) that microsavings clients can be truly profitable. . . .

That raises a question: if small savers are indeed profitable without providing significant funding, then where does the funding of deposit-driven MFIs come from?  . . .

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The Economics of Microsavings

I have a confession to make. When I began composing this blog, I approached it with a fairly simple hypothesis:  Microfinance institutions (MFIs) that engage in large-scale deposit taking must likewise grow their loan portfolios. After all, deposits are a source of funding with high operational cost that must be appropriately offset by growing revenue, and only microfinance portfolios provide yields high enough to achieve that. And because many poor families have a higher demand for savings services than for credit, the resulting over-liquidity could push MFIs into unsustainable portfolio growth, eventually leading to the very credit bubbles that microsavings advocates are trying to avoid. . . .

It seems a reasonable enough hypothesis, and sufficiently controversial to be interesting. Trouble is, it’s not true. Reality turns out to be more complicated. In this two-part blog series, I will explore the underlying economics behind microsavings . . .  . . .

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Freedom to Default: dealing with overindebtedness when all else fails

If there’s one microfinance word that rose above all others in 2011, it’s overindebtedness. As of the time of writing, it racks up the highest count on CGAP blog’s tag cloud (not counting generic terms like “microfinance”).  It seems fitting, then, to start 2012 with a blog post on this very subject.  . . .

When we talk about overindebtedness, it usually comes for the perspective of the industry’s responsibility, whether the MFI, funders, or regulators. Prevention of overindebtedness came up as the most widely evaluated client protection principle in the Smart Campaign’s survey of social rating agencies and microfinance investors.   . . .

This is, of course, all right and proper. It is the industry’s job to practice responsible lending, and avoiding overindebting clients deserves a place at the top of that agenda. But no matter the level of diligence on the part of lenders and financial education provided to clients, some borrowers will still become overindebted – be it because of bad business decisions, destabilizing macroeconomic shifts, or simply a string of bad luck. So what becomes of clients that, despite best efforts, still become overindebted?   . . .

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Rethinking Multiple Borrowing

Some time ago, I had a conversation with a microfinance investor. What is the greatest challenge facing the sector? – I asked. His answer: multiple borrowing – multiple borrowing was getting people into too much debt; multiple borrowing was transforming micro-enterprise lending into consumer finance; and multiple borrowing was rewriting the traditional relationship between MFIs and their clients.   . . .

Of course, multiple lending is present in all of these cases. But thinking about multiple borrowing along these lines misunderstands the basic situation. Multiple borrowing isn’t a reflection of some recent or extreme developments to be ascribed to runaway growth, greed, or willing ignorance. Nor is it some foreign element to be excised from microfinance.  No, multiple borrowing is an intrinsic part of the practice, one that has been with us for years. Nor, despite press articles to the contrary, is it a result of heavy market penetration, or even saturation.  . . .

This is a realization I came upon during a recent trip to Haiti . . .  . . .

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Financial Inclusion and the Morality of Thrift

Expansion of financial inclusion through savings has grown immensely as a focal point in microfinance policy and leadership circles over the past couple of years.  Recent market crises where overindebtedness played a major role have only increased the urgency of this objective.   . . .

The focus isn’t unwarranted.  As Tim Ogden points out in an earlier post, the upside of asset accumulation is obvious, while there’s no comparable risk of over-saving as there is with over-indebtedness.   . . .

Much research has been done to examine the savings practices of the world’s poor, with the implicit objective of developing better savings services.  Some of the most enlightening findings come from Portfolios of the Poor, and from Stuart Rutherford’s work with SafeSave in Bangladesh.  One interesting finding from this line of research suggests that expanding financial inclusion through savings doesn’t end with offering opportunities to save, but also requires creating obligations to save . . .  . . .

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Microfinance without the MFI? Zidisha tests the boundaries of microlending methodology

What does a microlending operation look like? Well, it may be a bank or an NGO (and many others in between), it probably has some branches, branch managers, loan officers. The funding of the MFI may come from deposits or from debt, whether from a local or foreign institution, including from online platforms such as Kiva. There may be variations on these themes, but that pretty much describes microlending as we know it. . . .

What if you took all that away – the branches, the loan officers, the institutional funders? Could the lending still work? Well, one model is that of Zidisha, an online lending platform that connects lenders in (mostly) developed countries with borrowers in developing ones. And, unlike Kiva, the connections are real – borrowers create their own online profiles, post their own loan applications, and make their own repayments. They also post their own comments, as do the lenders.  There is no local MFI intermediary – it is literally the first true person-to-person (P2P) microfinance lending platform in the world (Disclosure: I am lender on Zidisha, and have been informally advising the organization for several years). . . .

Naturally, getting there has required a lot of innovation and experimentation . . .  . . .

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