ONCE illustrated with pictures of happy village women engaged in lending circles, and celebrated as an ideal charitable activity that helps people earn their way out of poverty, in recent years microcredit has become increasingly controversial. Critics have argued that giving poor people a small affordable loan is not in fact an effective way to help them escape from poverty. And the growth in loan volume has been driven lately by a bunch of for-profit microlenders who their critics say have motives that are anything but charitable.
The most successful of these for-profit lenders is a case in point. After Banco Compartamos, a Mexican microcredit bank, had an initial public offering of its shares in 2007, it was publicly chastised by Muhammad Yunus, who had won the Nobel Peace Prize for his role in developing the non-profit microcredit industry. “Their priorities are screwed up,” Mr Yunus said in an interview. Compartamos made its profit by charging its poor customers annual interest rates on their loans of around 100%. “Microcredit was created to fight the money lender, not to become the money lender,” noted Mr Yunus.
Compartamos, whose founders believe they are helping the poor, responded to these criticisms by inviting three economists, Dean Karlan, Manuela Angelucci and Jonathan Zinman, to examine the evidence. They devised two randomised control tests to find out the impact of Compartamos’s lending practices. The results were published on May 14th.
A first study looked at whether Compartamos really needs to charge 100% a year. The bank argued that this rate was necessary to cover costs and make enough profit to stay in business over the long run. The study found that demand for microcredit is more price elastic than had been thought. Cut the annual interest rate by 10 percentage points and more people will take out a loan whilst existing borrowers will increase the size of their loans. The effect of this extra demand equalled the cost of lowering the interest rate, so by cutting rates Compartamos could earn just as much profit while providing better service to more people. Apparently, it is now considering doing so.
The second study examined what happened over the three years after Compartamos began lending to groups of between 12 and 50 women in the state of Sonora, just south of the border with Arizona. It found that borrowers were able to grow their businesses faster and managed their financial risks better (in particular by avoiding having to sell assets on the cheap to get through tough times). They were also less likely to feel depressed, and more likely to trust others.
The study found no clear evidence that microcredit helped people escape poverty by raising their income, however. But it also did not find any evidence that taking out a loan with an interest rate of 100% a year actually made borrowers worse off on average (although women who had not borrowed before lost ground on average, a finding that has prompted Compartamos to offer first time borrowers financial education). Either three years is too short a period to measure the poverty easing effects of microcredit, or it is a much less powerful anti-poverty tool than some of its boosters have claimed.
Perhaps the clearest impact of microlending in the study was its impact on the power of women in the home. Female borrowers gained control over a significantly larger number of household decisions. What did their husbands think of this? The study reports that these more empowered female borrowers did not experience any increase in domestic conflict. Overall, then, the studies show that microcredit, even the for-profit kind, typically benefits borrowers in a variety of ways, even if it does not lift them immediately out of poverty.
The Migrant Cash Lifeline
By MARIE ARANA
Published: May 15, 2013 66 Comments
Every month, Tanita Alfaro, a diminutive night-shift office cleaner in Rockville, Md., puts aside $150 to send to her parents in an impoverished village near the Salvadoran city of San Miguel. Her husband walked 1,700 miles from their war-torn land to the United States-Mexico border 25 years ago and, several years later, she followed.
Ms. Alfaro apportions the money “right away, payday, before I buy so much as a stick of gum” — before she manages the budget that feeds their three young children. For her parents, it is a lifeline. “Between my brothers and me — all of us here, working hard — we keep them alive,” she told me. “We pay our parents’ rent, food, medicines. Everything.”
It’s a scenario immigrants know well. Last year, according to the World Bank, migrants sent $401 billion to their families in developing countries. That’s eight times the United States’ budget for foreign aid, including military and economic assistance. It’s roughly equivalent to the gross domestic product of Austria or South Africa. By 2015, the number could rise to $515 billion.
For India or China, which together receive nearly a third of the remittances, the cash flows have a negligible impact on their burgeoning economies.
But for Latin America and the Caribbean, immigrant largess means $62 billion a year the region wouldn’t otherwise have, a bulwark against poverty. It suggests, rightly or wrongly, that emigrating — for all its risks — might be the best thing the poor can do for their countries.
Remittances account for at least one-fifth of Haiti’s economy. In Honduras, El Salvador and Guatemala — the largest sources of undocumented migrants in the United States, apart from Mexico — officials know that, without that financial windfall, they’d lose as much as 19 percent of their national income. With it, their governments can boost their credit ratings and borrow more. The $23 billion a year that Mexicans send home from the United States may amount to only 2 percent of Mexico’s gross domestic product, but it has pulled whole villages out of poverty.
As colossal an economic engine as $401 billion represents, its true impact is probably even larger. What of the funds that are never counted: stealth dollars that bypass the system entirely? Unlike Ms. Alfaro, I don’t send remittances through an international bank. The money I’ve sent for years to support an elderly aunt in my native city of Lima, Peru, is delivered by family members, in dollars. The Peruvian currency I mail to a 15-year-old girl I know in an Andean town near the border with Bolivia is tucked into packages containing shoes, clothes and school supplies. Remarkably, not one package has ever been stolen.
The money sent home from Maryland by Clara Gonzalez, a native of Venezuela, is paid in cash to a friend in Miami whose sister owns a beauty parlor in Caracas. The friend buys wholesale cosmetics in Miami and ships them to Venezuela. Bolivares, in return, appear magically on the doorstep of Ms. Gonzalez’s shambling old family house in La Guaira. Economic relief flows in such novel ways.
But there is exploitation, too. Every Friday, lines of immigrants coil out the doors of Western Union, MoneyGram and other transfer services, which often charge exorbitant fees. Last year, the Justice Department reported that, between 2003 and 2009, rogue agents at MoneyGram tricked regular customers, including many migrant workers, into wiring them money, by posing as family members. The scheme robbed them of more than $100 million.
There’s also the question of economic volatility. During the 2007-9 downturn, many migrants in the United States — gardeners, busboys, construction workers, maids — were the first to be let go. They were barely able to subsist, much less send money home. Ms. Alfaro’s husband, then working in a convenience store, was laid off. The family’s sudden impoverishment was felt keenly in a little village in El Salvador. Much the same is happening today to Latin Americans in Spain. Which raises the question, are remittances little more than Band-Aids? Or can they help build a foundation for lasting economic development?
The World Bank is bullish, especially in view of immigration reforms being debated in Congress. Over time, the bank says, legalizing 11 million unauthorized workers could have a huge positive economic impact on Latin America.
“It’s all about the interconnection between countries,” says Tamar Jacoby, director ofImmigrationWorks USA, an alliance of businesses that support an immigration overhaul. “The outside knows us better than we know them. It’s so asymmetrical.”
Certainly, the Salvadorans Ms. Alfaro grew up with see us Americans more clearly than we see them. The hemispheric lens is already pointed in both directions, even when we aren’t looking.
Marie Arana, a biographer of Simón Bolívar and a senior adviser to the librarian of Congress, is a guest columnist.
Editor’s Note: Michael Schlein brings more than 25 years of experience in international banking, management, and public service to his role as president and chief executive officer of Accion. Previously he served in senior executive roles at Citibank and the US Securities and Exchange Commission.
Modern financial markets exclude billions of the world’s poor. That’s a failure of those markets—and a failure of imagination. A more financially inclusive world would give billions of people living in poverty access to a full range of important financial services, yielding a high rate of return by economic, social, and societal measures. The challenge is how to achieve this in a responsible, sustainable way that provides the greatest number of people with the financial tools they need to improve their lives in the shortest amount of time.
That is precisely the mission of Accion, a global nonprofit dedicated to creating a financially inclusive world. We operate in poor communities throughout Latin America, Africa, India, and China and see firsthand how these services help transform lives, create opportunities, and build stronger, more resilient communities.
As nonprofits, Accion and our peers can take chances that the private sector cannot. Over our 50-year history, we have helped build 64 microfinance institutions in 32 countries that today serve millions. In the last few years alone, we have supported institutions in rural communities such as the Amazon and Inner Mongolia and expanded the array of financial services for the poor beyond credit to savings, insurance, and payments.
One point is clear: philanthropy, though critically important, is insufficient to achieve full financial inclusion. We need to harness the capital markets and create institutions that deliver both social and financial returns. Though we are a nonprofit, we work to build sustainable, scalable, for-profit companies dedicated to serving the financial needs of society’s most vulnerable members: those living in poverty.
Today, traditional lending institutions largely ignore the poor. And some nonprofit organizations discount the for-profit motives of the private sector, seeing them as exploitative and off-mission. Neither view is accurate. In fact, for-profit microfinance is sustainable, scalable, and socially progressive—complementing nonprofit services and creating an entire industry of institutions that can compete for clients, expand access, and accelerate innovation.
Twenty years ago, Accion helped create Bolivia’s BancoSol, which today is one of the world’s best-known microfinance institutions. Its creation as a commercial institution dedicated solely to serving the poor was controversial, unprecedented—and a rousing triumph. As the world’s first for-profit bank dedicated to serving the poor, BancoSol tapped the debt and equity markets, attracting both foreign investment and expertise. It focused on strong management and operations, better governance, innovation, and improved responsiveness to clients. To date, BancoSol has loaned more than $2 billion to more than 1.5 million clients. It has a 90 percent client-retention rate and a 99 percent repayment rate. Its success has spurred competition and innovation in what is now one of the most robust microfinance markets in the world.
Accion also helped build Peru’s Mibanco, which launched in 1998. Today Mibanco has more than 400,000 active borrowers and more than 100 locations throughout the country. Mexico’s Compartamos Banco, in which Accion was a major founding investor, is equally impressive. Its operations grew so quickly and efficiently that, in 2007, it launched an initial public offering with a monumental response. Thousands of other microfinance institutions were inspired by Compartamos’ success, which in turn creates more competition and better services for the poor.
Accion is proud to have helped launch and grow these pioneering institutions, which are models for the world and whose collective outreach has brought financial services to millions who would otherwise be left out.
For-profit microfinance is also promising for investors. Take Accion Investments in Microfinance (AIM), a for-profit equity fund created in 2003 to provide capital to microfinance institutions (MFIs) working in challenging markets where such funding was typically unavailable. AIM was designed as a “double bottom line” equity fund, one that measured success in both profitability and social impact.
Over the past decade, AIM has produced annual returns of nearly 16 percent, making it one of the most successful microfinance equity funds ever. In the process, it helped build some of the strongest MFIs in the world, including BancoSol, Mibanco, and the Accion Microfinance Bank—the leading microfinance bank in Nigeria. Before AIM’s investments, those institutions collectively served a total of 386,000 borrowers and 245,000 depositors. Today, they reach almost 1 million borrowers and 1.2 million depositors who might otherwise have no access to financial services.
The future of financial inclusion goes beyond traditional microfinance. We also embrace venture capital and technical assistance for start-ups, with bold, disruptive business models aimed at helping those living in poverty. For example, Accion is investing in companies such as DemystData, which leverages big data—huge sources of information that can be analyzed to help financial institutions broaden their outreach to poorer clients. Others, like Tiaxa, use mobile technology to make small “nano” loans over the phone, which can help reach people living in remote communities. Still others are pushing the boundaries of inclusion, offering financial products such as life insurance to South Africans living with HIV/AIDS—an idea that was unthinkable just a few years ago.
Although it is still too early to determine the impact of these brand-new companies, they have the potential to have a significant impact on the lives of our clients. We need to invest in more fast-moving, innovative ideas like these. Although the financial-inclusion movement is rapidly evolving, it remains young and has much to learn. Growing pains are normal, but they must be addressed head on to strengthen the industry and inspire the next generation of institutions that will create greater opportunities for the poor.
Accion’s Center for Financial Inclusion is a good start. It brings together industry players to tackle common challenges and create the conditions to achieve full financial inclusion on a global scale. For example, the center’s Smart Campaign promotes the protection of clients through greater transparency, prevention from overindebtedness, and the provision of means to address concerns. In just three years, its client-protection principles have been endorsed by more than 1,000 microfinance institutions in 130 countries representing more than 60 million clients.
By building competitive, commercially viable financial institutions that provide a healthy return on capital and by taking bold risks and investing in innovative ways to expand financial services to the poor, Accion and our partners are spurring new opportunities and sustainable progress throughout the developing world, and helping to bring billions more into the global economy. That is how change happens!
This article is part of “The Art and Science of Delivery,” an anthology of essays published by McKinsey & Company in honor of the 10th Anniversary of the Skoll World Forum. It is the most recent installment of McKinsey’s ongoing series, Voices on Society, which convenes leading thinkers on social topics. (Copyright (c) 2013 McKinsey & Company. All rights reserved. Reprinted by permission)