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Article by By Katie Leonberger '08, cofounder of Microlumbia, the student-run microfinance investment fund.
On Friday April 20, Professor Suresh Sundaresan hosted a research microfinance symposium sponsored by the Social Enterprise Program. Participants included practitioners, scholars and graduate students who actively engaged in panel discussions and presentations as well as lively impromptu discussions over lunch and coffee throughout the day. The mood was light but the focus was clear: share as much as you can about your experience in microfinance with those around you, as everyone in attendance had something unique to share.
Professor Ray Horton, Director of the Social Enterprise Program, started off the day with a welcome and overview. After explaining the strength of Columbia's Social Enterprise Program, he proposed a goal for the event: that the symposium, at least in a small way, contribute to making the world a better place and contribute to a better understanding of this field in the future. Presentations and discussions that followed seemed to be in hot pursuit of that goal.
Morning sessions included Columbia Business School Professor Patrick Bolton presenting an "Overview of Credit Markets for the Poor" and NYU Professor Jonathan Murdoch presenting "The Next Billion Microfinance Customers." While Professor Bolton focused mostly on credit markets for the poor in the developed world, much of what he said can be extended to the developing world as well: he defined a "better" future world that offers equality of investment opportunities ex-ante yet produces an unequal allocation of capital ex-post (as the allocation is based on talent, work, and return). Further, given that shortcomings in today's capital markets are likely due to credit rationing, microfinance can offer one solution to this problem since it reduces imperfect information while improving client repayment through group monitoring incentives and staged financing. Of course, the real question is how microfinance can be scaled in order to have a large impact; there is no clear answer on that yet. Further, it is important to remember that microfinance is not a panacea for all poor people, as not every individual wants or has the capability to be an entrepreneur. At some point, larger enterprises still need to be funded in order to provide jobs for those who are less entrepreneurial; larger enterprises are also more conducive to technology transfer, which many believe to be the ultimate driver of development and poverty alleviation.
In his presentation, Professor Murdoch emphasized the fact that at its base, microcredit is about trying to reduce poverty. Offering credit to the working poor is important because the marginal return (as measured in output) of an increase in capital is higher for poor entrepreneurs than it is for rich entrepreneurs. Therefore, an effective way of increasing a poor entrepreneur's income is by offering access to credit that will allow the entrepreneur to increase his or her capital. Along these lines, household savings is another key way for the poor to grow their resources and ultimately increase their capital, and yet savings constraints are a big issue for those living in poverty. Notably, given current constraints for credit and savings in underdeveloped markets, the poor access credit from both formal and informal sources (i.e., a regulated banks and local money lenders) and they do not differentiate between household and business expenses. As a result, the majority of loan use (for both formal and informal loans), is for consumption rather than investment. However, this does not help increase overall output for a community. As a result of these points, Murdoch concluded that microcredit needs to be reassessed with respect to these current microenterprise realities in order to be most effective in reducing poverty.
After a short coffee break, a practitioner panel discussion was held on "Risk Assessment and Management with Capital Markets" and included panelists Brad Swanson, Partner at Developing World Markets, Ray Rahman and Saif Shah Mohammed, cofounders of MF Analytics, and Damian von Stauffenberg, founder and Principal of MicroRate. Professor Chris Mayer moderated the session, which began with each panelist giving a brief summary of their views on the topic and ended with a lively Q&A session.
- Mr. Swanson emphasized that microfinance is on its way to becoming an asset class, as shown by his company's experience in securitizing loans to microfinance institutions (MFIs) and managing socially positive assets in the developing world.
- Mr. Rahman and Mr. Mohammed discussed MF Analytics work in helping BRAC, a microfinance institution in Bangladesh, originate a microcredit-backed security to conduct the world's first-ever microcredit securitization. In doing this, MF Analytics helped clean BRAC's unreliable data and update its limited MIS reporting, analyzed the risk profile of the microfinance portfolio (which included a large volume of loans spread out all over Bangladesh's rural areas), and created an optimization module to eliminate prepayment risk and enhance the securitization. MF Analytics' efforts allowed BRAC to save around 200 bps on the deal compared to other funding schemes and it gave BRAC an AAA rating for its bond, access to a larger volume of funds, a better understanding of its own loan products, a diversified investor base, and a replicable structure that eliminated all operational and financial hurdles.
- Mr. Von Stauffenberg talked about the recent rapid growth of MFIs and the related growth of Microfinance Investment Vehicles (MIVs), such as Calvert and Blue Orchard, which are helping to fund MFIs. However, this trend coincides with a decrease in traditional sources of funding for MFIs, which in the past came from international financial institutions such as the World Bank. Mr. Von Stauffenberg was clear to emphasize that while this transition from philanthropic investors to for-profit capital markets is rare, it is crucial to the future of microfinance since donor money will eventually dry up – yet for-profit investment in MFIs is fraught with danger because investors could realize the risk of investing in unstable countries. That said, he also pointed out that MIV returns are still lower than market returns, most likely due to the fact that country risk is not being given the reward it should receive.
Following the practitioner panel, a buffet lunch was served and conference attendees and participants chatted with each other, exchanged business cards, and traded ideas on microfinance. Mini Roy, a Managing Director at Citigroup Global Markets, led a short discussion on Citi's experience in microfinance and the challenges of working with credit markets for the poor. After starting its Microfinance Group in 2005, Citigroup aimed to make money by lending to MFIs of any type (e.g., banks, NGOs, public and private institutions). Although the bank is still "finding [its] feet" as Roy puts it, Citigroup has concluded that it can achieve increased scale by working with the microfinance sector. It plans to do so by focusing on the entire microenterprise level – including private bank clients, remittances, and credit and noncredit products – using local currency and local law within the microfinance market. Roy also stated that Citigroup is still trying to determine which MFIs and models work the best as well as which work best in the context of Citi's business, since Citi is motivated by profit first and foremost and has a clear goal of growing its client base. In order to do this, the bank has earmarked $100 million to lend in developing countries, focused on giving $1 to 5 million loans in local currency. These loans will typically be made to top-end MFIs that will help Citigroup maintain its minimum portfolio rating while reaching out to a new lower income client base. Citi has made seven such loans since December 2006 and is currently looking for regional diversification in this area.
Beatriz Armendariz, a professor at Harvard University, then presented her preliminary work on gender empowerment through microfinance. While standard development theory dictates that giving loans to women has a higher payoff for household well-being than does lending to men, Proessor Armendariz challenges this generally accepted conclusion. Her research – which is currently underway – asks whether lending to women might also negatively affect them by increasing a woman's workload and stress as she handles both business and household chores, and/or by bringing increased violence by men against their entrepreneurial wives. Thus Armendariz is currently administering a survey to investigate the impact on health, education, etc., when men are brought into traditional women-only microfinance groups. As her research is still in progress, the results are yet unknown.
Finally, following Professor Armendariz' discussion, Columbia Business School's own Professor Suresh Sundaresan presented his latest paper entitled "Defaults and borrowing rates in micro-loans: some evidence, and the role of contract design and competition" in which he investigates the likelihood of default given monitoring levels, loan maturity, and probability of punishment for missed payments, among other things.
Then after another coffee break, the symposium ended with a practitioner panel discussion on "Risk Sharing with Banks, Regulatory Challenges, and Technology in Lending" that was moderated by Professor Sundaresan. Panelists included Richard Rosenberg of the World Bank's CGAP, Bindu Ananth of ICICI Bank, and Anand Shrivastav of Suvidha.