Kiva Glitch

Looks like Kiva is having the flu... or, we all spent so much that all loans have been fulfilled!

Anyways, let's hope they're back soon...

Kiva and longer loan terms

As I have described over and again, my believe is that in order for a micro-entrepreneur to be successful, the business (and thereby inferred--the micro-loan) needs to fulfill several objective and subjective criteria. If they don't, then the loan is not for me to invest-- it doesn't mean that I don't believe that the person won't pay back the money, but more that the loan won't have the impact on the business that will allow it to thrive, and thereby allow the entrepreneur to get ahead.
One of the criteria that I apply is based on the "general" loan-amount to repayment period. This was based on the following thoughts:

• The loan amount is in general directly related to the amount of extra revenue a business can make. Too much money can be risky, while too little money won't make enough of an impact. Generally, I am looking for a loan that will allow the entrepreneur to increase revenue at least by a factor of 2-3x the loan amount over the repayment period .
  
• Generally, I'd want revenue to be such that it will allow the borrower to repay about $100 per month in principal.
  

As a result, I was looking for $500-$1000 loans that could be paid back in about 6-12 months. I didn't want to be too rigid in applying the principles, but rather reject those loans that would be well outside these bounds.

And then I ran into a problem. As I didn't have any loans in Nicaragua, I was looking to add one. However, the loans available there, all through Prisma Microfinance, have a payback period that is about double of what I would expect.

So I emailed Kendall Mau, Prisma's CEO. And he was more than happy to converse with me on the topic. Here is an extract of his take on this:

Ramón: "The main reason for my concern is the ability for a small amount to really make a difference for a borrower. I assume that, due to Kiva rules, a micro-entrepreneur can only have 1 loan at a time. If a loan (for example) allows the borrower to sustainably increase revenue 3x the loan amount, the growth of the business is limited by 3x$nnn over the loan period. Alternatives would be to loan more over the same period (risky) or pay back quicker. Then, the borrower could qualify for another loan, which would allow them more growth in a shorter period."

Kendall: "I had this same thought, but my borrowers told me my theoretical thinking was not correct. If you make them payback faster, you are taking away the capital that they need to buy the materials and grow the business. This is why I see so many competitors out there giving really short loans, asking for payment every week or even days. The poor borrower isn't even putting the materials into use to produce the necessary income. If you're already having to payback substantials parts of the principal of the loan, you've stripped away the whole purpose of the loan. This is why we choose to give them longer paybacks to earn enough money to get ahead.

"I'm also an international consultant in the field. I was doing a project in Azerbaijan last year. They couldn't figure out why the borrowers were not improving financially. I looked at their loan fund and found that they were requiring such short payback periods that the poor borrowers didn't even have time to get the money working. Once we adjusted the payback periods, the borrowers were able to realize more revenue."

Well, let's say this. For me, now two of my 11 loans are through Prisma: one in Honduras, and one in Nicaragua. If Kendall can base his entire MFI's business on this principle and still make a social impact, I can support him in that with a few loans.

Soon to be Republica Bolivariana de Ecuador?

One of the advantages of investing into a local opportunity through Kiva is, that you, consciously or subconsciously, keep better track of what is going on in those countries in which you invested. And therefore, when things are happening in Ecuador, it jumps to the attention as more than half of my Kiva loans are in this country.

What happened?
Late last year, Ecuador elected a new president, Rafael Correa, who closely aligned himself with president Hugo Chávez Frias from the Republica Bolivariana de Venezuela (a.k.a. Venezuela), and with president Evo Morales from Bolivia. That fact alone is scary, as both Mr. Chávez and Mr. Morales have made it clear that they see a solution to poverty not in stimulating and formalizing production by the poor and creating opportunities for them to help themselves, but through mass nationalizations of the exploitation of natural resources, redistribution of wealth and other "give-aways". This will certainly help the poor a little bit in the short term, but will leave them without a way to fence for themselves, without an international market that can help them grow, and without a stable, self-sustaining economy in the medium and long term.

The first step that Mr. Correa is taking, comes right from the script of Mr. Chávez: dissolving parliament, and writing out a referendum to form a Constitutional Assembly in charge of rewriting the constitution. This constitution can then be taken as a guideline to take away any incentive the middle class could have to succeed, just like was done in Venezuela.

There is one interesting difference between Venezuela and Ecuador: a few years ago, Ecuador changed their coin unit to be the US Dollar. Although this doesn't mean that Ecuador therefore couldn't restrict foreign imports or dollar-flight, it possibly could dampen inflation a bit, since there is no way for the government to control the actual exchange rate. Inflation will be noticed by higher prices (due to scarcity because of import restrictions), without an accompanying increase of salaries: it's not the economy that grows, it's the articles that become less available. As a result, the poor will get poorer and the rich... well... I doubt that they will wait to take their assets out until Mr. Correa stops them.

There is another fundamental difference between Ecuador and Venezuela: Mr. Chávez can actually afford to be the way he is. As a major oil exporter of the world, the oil dollars that he receives, offset his spending spree up to a point where he feels comfortable giving away oil to the needier around him: Cuba, Haiti, Nicaragua, and... the poor in New York State and Massachusetts in the US! Ecuador, although not as needy as Bolivia, simply can't afford such a splurge.

That is was time to upset the corrupt power-balance of old in Ecuador, that's something to which many people can agree. However, to replace it by something that has proven to be disastrous time and again, simply hurts.

There is a thin silver lining around the cloud: When Mr. Correa's experiment goes awry, the Ecuadoreans have been know to quickly (and sometimes violently) replace their president: the country counted 8 presidents in the last 10 years...

See here and here and here for some related BBCNews stories.

Opportunities for Kiva in Perú

As I must have told all of the 3 people that read this blog on an (ir)regular basis, for the last few months I have been trying to get something going between Kiva and Peruvian MFIs. My report on what I did while I was out there last month, has been long overdue. Well, I'll stop procrastinating: here ya go!

Sometime in late December 2006 (or was it early January), I had the bright idea that I should try to combine my family visit trip to Perú with an attempt to investigate the opportunities to connect any of the existing Perúvian MFIs with Kiva. Since I have absolutely no insight in the fascinating world of international financing (oh wait... I'm a Kiva investor! I am an International Financier!), it took quite some thinking to figure out how to approach this. Well-- business development is business development, whatever you do! So you start talking to the people that do have contacts.
I emailed the MFI officer that had originated several of the loans that I subscribed to in Ecuador, Ing. Luis Crespo of Mifex. He put me in contact with a colleague of his, who has spent many years in microfinancing, a gentleman by the name of Vicente Avalos. We exchanged emails, and we agreed to meet in Lima on Friday Feb. 9, 2007.

We met that afternoon at the San Isidro (Lima) office of his employer, SwissContact, a Swiss NGO that provides technical assistance to microfinance institutes, for about 2.5 hours. I presented him with an extensive slide deck with Kiva's value proposition, which MFI's would be most helped by it, and how to join.

• SwissContact (or Mr. Avalos, I am not sure) is currently providing technical assistance to 3 MFIs throughout Perú: in Cuzco, Ayacucho, and Puno.
• Generally, these are well-established MFIs; one of them is even listed at MixMarket.Org.
• They have well-established procedures, including underwriting procedures. Changing the way they do business will be a hard sell, even if they could save ~7-10% in loan costs.
• They currently are funded through private funds, governmental funds, and Worldbank/IMF loans.
• The average microloan bears an interest of about 17% annual; this is very low compared to alternative loans that are provided to these businesses: an informal lender charges between 5-15% per month! For comparison, current mortgage rates for primary residence mortgages in USD are around 10% annual.
  
• We jointly identified three ways to get Kiva involved in Perú:
• Get an existing, well-established MFI to sign up with Kiva. This would be the slowest of all three possibilities according to Mr. Avalos (at least 6 months-- Hora Peruana?). However, this is the one that Kiva strongly prefers, as it will entail a smooth application process and a running start of the cooperation.
• Get an existing Kiva partner, like Mifex, to expand into Perú. Both Mr. Avalos and Kiva realized that this will be hard: The only real candidate would be Mifex, and their operations are currently limited to Guayaquil, Ecuador. They are already one of the smaller and younger MFIs that Kiva deals with; in short, Kiva wasn't thrilled about the idea, Mr. Avalos wasn't thrilled, and -without asking them- Mifex themselves probably wouldn't be thrilled either.
• Start a new, Kiva-only funded MFI. This would be the easiest and best solution according to Mr. Avalos, who said that he would be able to jump-start this with a number of well-experienced MFI executives. This should cover those regions that are currently under-served by the existing MFIs. He sees this as the quickest path to get Kiva involved in Perú. However, Kiva is currently not able to accept this, for a number of reasons: lack of time and resources to mentor such a new MFI, lack of possibilities to do the necessary due diligence on the operation from the US, etc. Both Ben Elberger and Chelsa Bocci of Kiva told me in no unclear terms: "not now, maybe in a few years or so"

In conclusion, Kiva urged me to tell Vicente Avalos that the easiest way to get an MFI signed up for Kiva is: have them submit an application form. In my latest email to him (a week or so ago), I urged him to actively present the opportunities that are created by Kiva to the MFIs he's working with. The ball is now in his court and I think that, unless he runs with it, this is about as far as it can go. Let's hope he is listening to his president.

National Tardiness Campaign: will it work?

Recently, Perú's president Alan Garcia launched a campaign called "La Hora Sin Demora"(time without delay) against a perceived endemic national (or even transnational) problem: tardiness. Although campaigns like this appear to be popular in Perú, I doubt that ringing a bell at Lima's Plaza de Armas. Begging the Peruvian populus to be on-time ("Hora Inglesa", English Time instead of "Hora Peruana", Peruvian Time which always has a lag of a few hours), will make the country do things any faster or punctual.

Actually, my opinion is that things have progressively gotten better over the last few years. Punctuality is one thing, reliability of business deals and appointments in another. We have visited Perú almost yearly over the last ten years, and lately (hah-no pun intended) things have become more reliable. You can agree on the plumber to visit your residence tomorrow morning, and there's now a reasonable chance that he'll actually show up. You can ask Telefónica for a phone connection, and they'll keep their appointments about as good as Verizon would here in the Northeastern US.

Interestingly, and disappointingly, getting one or more MFI's signed up with Kiva appears not to be part of this deal. With some difficulty, last month I managed to meet a representative of a Swiss NGO that does "technical assistance" to MFIs in Lima. We discussed the possibilities and the advantages of any MFI to get funded by Kiva, and he appeared all enthusiastic about the possibilities. I even followed-up with Kiva, who because they're working at or over capacity signing up new MFIs, really couldn't give any personalized assistance. Unfortunately, things are moving at the speed of "mañana", which means that my estimate is, that my efforts won't have any results until 2008 or so. Simply disappointing.

I hope that president Alan Garcia's campaign will also penetrate in the slow-moving world of Microfinance Banking.

What convinced me to make my latest Kiva.Org loan

I just invested my bimonthly installment of $25 into a cattle and rice farm called Hacienda la Maria, owned by Ivan Romero in Ecuador. What made this one stand apart from all others?

First, I should say that I am overinvested in Ecuador. Initially, I thought about investing in a pulpería in Honduras, mainly because I'd want to invest more in that country. However that one didn't really pass my loose "due diligence" standards: 12-16 months repayment period for a $750 loan means to me that the revenue generated from the venture isn't enough to make a real difference. If you can't pay back a $750 at a rate of $100-$150 per month, then you should think of ways to make more money of a business, or loan more money to drastically expand what you are doing.

So I was hesitant at first to invest another loan in Ecuador. Don't understand me wrong: my initial doubts were solely based on diversification. I think that Mifex is a FANTASTIC MFI, and I have built up a relationship via email with one of their principal loan officers and executives, Luis Crespo.

What pulled me over the brink was the expansiveness of the description. Simply great! There was a section on the geographical and safety risks, the background on why the associations were formed and how they would help guaranteeing repayment and reduce risks, as well as the simple opportunity description. Another factor was, that this business *can* repay $1200 in 7-11 months, and therefore his revenue (increase) will be well in proportions to the loan.

Are there other people putting in these criteria? I heard a rumor about a discussion on this at Pondering Pig's blog, I will have to check that out.

(off topic) Reading up on Perú

As should be well-known by now, I'm turning a bit into a Perú-o-phile or whatever you want to call it. As a result, I have been reading books about this country, both fiction and non-fiction. There is one writer you really cannot get around: Mario Vargas Llosa (often abbreviated as MVLL). He's both a good writer and a good (ex-)politician, and both in his fiction and non-fiction books he paints a picture about Perú that shows the spirit of the era, region, or events through his eyes. Although there is no such thing as a "monopoly on truth", his impression is often representative of the mood of the era, even if one doesn't always agree with his point of view or desired outcome.

Through him, and a well-known Peruvian economist by the name of Hernando de Soto, I am discovering a few things about Perú and myself. Most importantly, I have discovered that though I have a passion for trying to solve poverty and social issues, I am not a socialist in any sense of the word. I don't believe in redistribution of wealth because this will make the average wealth go down instead of up. I believe in creating opportunities and circumstances in which people can take advantage of opportunities. I fundamentally believe in a person's ability to fence for him/herself and to get ahead when the circumstances allow. But I also believe that creating these circumstances and taking care of those who do fall through the cracks is not a socialist activity; au contraire, it's enabling an economy to grow from the bottom up and prosper. And I believe that it is in the direct interest of the "rich" part of the population to make this happen: by stimulating the economy to grow from the bottom up, it creates a wide populus of consumers that allow overall economic growth.

To give you my recent booklist, read over the last 6 months:

• (finished) MVLL, A Fish in the Water (in English). MVLL's memoir about his youth and about his unsuccessful run for the Peruvian presidency in 1990. Highly recommended.
• (finished) MVLL, La Tia Julia Y El Escribidor (in Spanish). A half fiction, half truth novel about MVLL's relationship with "Aunt Julia" and his interactions with a colleague scriptwriter named Pedro Camacho at Radio Central in Lima, where MVLL worked in the 1950. Highly recommended
• (finished) MVLL, La Fiesta del Chivo (in Spanish). A novel around the assassination of the Dominican dictator Trujillo. Highly recommended.
• (finished) MVLL, Travesuras de una niña mala (in Spanish). A novel about a Peruvian guy that lives in Paris and his on/off obsessive relationship with his first love. I was a little disappointed by it because of its repetitive flow that made it ever more predictable what was going to happen next. Of course, this was intentional by MVLL to show the bourgeois character of the main personality, but still...
• (halfway through) MVLL, Lituma en los Andes (in Spanish). A story about a police lieutenant and his sidekick, investigating the disappearance of three workers from a mining operation in the Andes. Gives a good insight about life in the Andes in the 1980s, with lots of Shining Path terrorism going around, however staying lighthearted. Until now-- highly recommended
• (halfway through) Hernando de Soto, El Otro Sendero (in Spanish). A non-fiction, economic work on how the Peruvian informal economy worked in the 1980s, and how diminishing "red tape" and formalization of property and business by providing titles can help the poor break the vicious cycle of poverty. Hard to read for someone who is not an economist and speaks Spanish as fifth language, but extremely interesting. Note that although some of the ideas and truths he describes are controversial, but his research into "how did it happen" is fascinating. Until now, highly recommended.
• (still to read) MVLL, La ciudad y los perros (in Spanish). A fictive story about life in the Leoncio Prado Military Acadamy, a military highschool in Lima that MVLL attended for a year in the 1950s.
  
• (still to read) MVLL, La Historia de Mayta (in Spanish). The story of a Peruvian revolutionary and his failed uprising in the 1950s.

Poverty and how (not) to solve it.

Our trip to Perú made painfully clear what I already knew, but it is always good to put things to the front of the mind.

Many times, developing countries are defined by their gap between rich and poor. While this gap is real and existent, it's by no means black or white. There are (many) poor people, there is quite a substantial middle class, and there are the few and rich as well.

I like to make a distinction between "poor" and "very poor". I see many less affluent (say: poor) people that struggle to make ends meet. Generally, they are employed, or they run their own micro-business and they are the prime targets for micro-finance institutes. They need business education at least as much as they need loans to allow their business to grow. Most micro-finance institutes provide both to them.

And then there are the "very poor". These are the young men in their late teens and early twenties, who sell merchandise at traffic lights, rove the streets to shine shoes, the young women that work as maids for short term engagements in the houses of the middle class for less than $100 per month. They often live in cramped housing with whole families, in shantytowns or old, dusty, dirty neighborhoods without much prospects of advancements. Their shared income feeds the family. Their life-expectancy is well below the local average due to their squalid circumstances and bad access to health care. And when you leave the city for the countryside, their situation even worsens due to the lack of development of the rural communities, and therefore the lack of even the few opportunities that the city offers them.
Micro-finance won't help them get ahead. And it's difficult to understand what would.

During our stay in our nice, upper-middle-class apartment in Miraflores, one of the richer districts of Lima, my in-laws employed two maids; one supposedly to help them with the apartment and with cleaning out another unit that they wanted to rent out, and one to help take care of our daughter. One of them, in her early twenties, had a baby of herself, and lived with her mother, two sisters, and two children in a single room in Callao, a trip of about 90 minutes each way in public transportation. The other one, originally from Cajamarca (a town in the north), had come to Lima and lived with an aunt. Although she was in her late teens, she couldn't read or write. Before coming to work, she cooked for her aunt, and after getting home in the evening, she does the housekeeping.

What can be done to help this underclass? Education is one thing, but how to entice them to finish primary, secondary education or even go to college if this both costs money and takes away their opportunity to earn the money needed to survive?

Primary and secondary education are already free or close to free, with some costs involved for school uniforms, books, and supplies. Universities have competitive entrance exams, and although not free, they are very affordable by US standards or even Western European standards. But that's not enough.

In order to break the "cycle of poverty", action needs to be undertaken that allows this underclass at least to do the following:

• Attend school while still be able to survive
• Decrease teen pregnancy, which will enhance the ability of youth to fence for themselves
• Make healthcare available for the poorest part of society
• Increase the quality of primary and secondary education, especially in rural environment.
  
• Teach "special skills" that may be valuable for the market place, such as the real command of a second or third language (Spanish and English in addition to Quechua), administrative or computer command skills, basic business administration skills, etc.
• for rural areas, improve the infrastructure (roads, telephone, internet) so doing business becomes attractive, affordable, and sustainable. This will help stem the large trek of people moving from the rural areas to the cities.

This is not something that Microfinance can solve. The last thing these very poor people need is a "sustainability microloan", as this will make things only worse. There are several NGOs out there that do help, with schooling programs, sustainability programs, etc. Although personally, I am not very religious, several church-based organizations are doing a great job by providing results-based scholarships and international exchange programs for high-school students.

What can we do? Really... I don't know :(

Feel free to comment if you think you know the solution.