¡Perú! ¡Perú! ¡Perú!

Finally, Perú is on Kiva. There are now two MFIs active, that Kiva has had discussions with for a while: Finca Perú and Prisma Microfinanzas. They are active in the Ayacucho and greater Puno/Juliaca regions, respectively. All very exciting.

Let me add a quote from a posting I did on KivaFriends. It shows why it is important to support micro-entrepreneurs in the mountainous regions of Perú, especially in Ayacucho:

Ayacucho is a poor area, in the Peruvian Sierra (or Mountains). In the 1970s, a university professor called Abimael Guzman, who had until then be a member of the Peruvian Communist Party, split off from that movement and formed the Maoist leaning "Partido Comunista Peruano - Sendero Luminoso", widely known in the west as the Shining Path. Much is known about what followed: the Shining Path recruited (often by force) many foot soldiers, who often committed horrible crimes against humanity. To quote Theodore Dalrymple "The worst brutality I ever saw was that committed by Sendero Luminoso (Shining Path) in Peru, in the days when it seemed possible that it might come to power. If it had, I think its massacres would have dwarfed those of the Khmer Rouge. As a doctor, I am accustomed to unpleasant sights, but nothing prepared me for what I saw in Ayacucho, where Sendero first developed under the sway of a professor of philosophy, Abimael Guzman."

As a result of successful counter-insurgency in the 1990s, many of the Senderistas were captured and got sentenced to prison for various lengths of time. The top guerillas got life in prison (no parole), but many of the lower foot-soldiers got sentences that have made them eligible for parole for the last few years. And, maybe as a result and maybe not, you see in increase in left-wing guerrilla activities in the Ayacucho region. Why? There is not much for these ex-guerrillas to come home to. Poverty hasn't gotten any better in Ayacucho, and the lack of opportunity hasn't gotten much less either. This caused some to see falling back to old habits appears an attractive option.

In addition, a new kind of "nationalist" oriented socialism has emerged: that of Ollanta Humala and his Etno-Cacerist party. It's militarism / socialism combined with indigenous rights/obliteration of the ruling mestizo class, nationalism, close-border protectionism that culminates in an intense hatred against Chile for the loss of territory in a war in the 1800s. Note that Chile is one of the largest foreign investors in Perú, and the economic consequences of Chilean investors retreating from Perú would be huge. BTW-- Hugo Chavez, Venezuela's president, supported Humala's campaign for president in 2006. Humala narrowly lost in the second round against the current president, Allan Garcia. If he would have won, we wouldn't be doing loans to Perú right now...

What can we do? A lot! Microfinancing does a number of things for the people of Ayacucho:

• it shows them that there is a way that capitalism works for them; it creates believe in the "system".
• it creates opportunity to escape poverty, keep busy, and get ahead, which takes away any reason to sympathize with any left-over extremists
• it creates safeguards to ensure that Sendero Lumino - style rebellions won't have a chance of resurging

Therefore, I think it's really important to actively support those loans from Perú, especially from Ayacucho, but also from other mountainous regions like Puno/Juliaca, Cuzco, etc. It's not that poverty is so much worse than in other places in the world, but the stakes of continuing this poverty could be so much higher than in other places in the world...

To remind us what terrorism in Perú does to people, please see this YouTube video: it contains scenes from a bombing of a residential building where my inlaws now own property. (They did not on this dreadful day in July 1992.)

Interest for Kiva Lenders -- why maybe yes, and why maybe not

A topic on Kivafriends that doesn't want to die (which shows its importance), is whether to offer interest rates to lenders or not. And it's a topic that I can't stop pondering about-- I've often said that I support it, but that I prefer the "feel-good" interest-free loans that I give now.

So yet another brain-dump, this time looking at the players in the Kiva value chain and the influence of interest on them.

If you are interested-- get a cup of coffee. This post promises to become a long one :)

Before we start... since I do volunteer work for Kiva, I feel the need to give you this disclaimer:

I do NOT have inside information that gives me more insight in Kiva's finances, objectives, dreams, etc. anymore than any of you have. Some figures are projections that I make based on some research outside of Kiva (e.g., the 500 million microlenders that I mention). I definitely didn't discuss these numbers with Kiva, I have no clue if Kiva agrees and, although I would love for Kiva to comment on this in a public forum, there is no way I represent Kiva's or their employees' point of view. In short: this is my opinion and mine alone, my precious!

Let's take an analytical look at the players that are involved in Kiva's value chain (and this is extendable to other, commercial P2P microfinance value propositions):

The entrepreneur-borrowers

• Generally poor to very poor
• Microfinance is the one single shot that allows them to make steps towards better prosperity
• Generally entrepreneurial, since that is the most common way of earning an income when the formal economy lets them down
• The problem is not that they have to pay interest, but that the informal "village" lender's rates are exorbitant and the collection methods inhumane
• Actually, repayment and paying interest gives a commercial character to the loan, a trust that is being extended, with a higher expectation of creating results than a interest-free loan or a gift.
• As a result, the "moral hazard" should decrease and the probability that the money is used to increase the borrower's wellbeing is increased

The MFIs

• There are small and large MFIs, for-profit and not-for-profit. Kiva works with all categories
• Generally, smaller MFIs can better address a local need or an underserved area than a larger MFI. Their policies can be more flexible
• Sustainability is very important. If the MFI is not self-sustainable, it cannot provide the service that allows the poor to better their living standards
• Loans come first, education is second. As Mohammed Yunus already concluded, the poor already have the basic skills that is needed to provide a craft or service. What they lack is the means to make it possible. In second instance, the MFI can offer business education to enable the entrepreneur to keep on growing.
• Only part of the loan money of an MFI comes from Kiva. It would be a bad decision for long-term sustainability to be dependent on a single source of funding
• Generally, MFIs don't offer cheaper loans to those entrepreneurs that get their money through Kiva. The money that is saved, is invested in expanding the reach and programs of the MFI, or generally to create more sustainability so they can keep on serving the poor
• Making a profit is NOT bad for the MFI. A reasonable profit (not: highway robbery over the back of the poor) will allow MFIs to be organized for efficiency.
• Competition among the MFIs in a region is not bad. This will ensure that the interest rates stay reasonable.
• Large, commercial MFIs profit the same way from Kiva as small, start-up MFIs.
• Generally the need for microloans on a worldwide basis is about 10x the current availability of these loans.

Kiva

• Kiva takes money from individual lenders and provides this to MFI, to be credited to a specific entrepreneur.
• Kiva does not derive their income from direct interest over the loan money charged to the lender or MFI
• Kiva's main form of income is currently through grants, charity, and voluntary lender contribution. This is a rather uncertain income stream.
• Kiva's current contribution may be large ($6M in less than a year), however in the large scale of things, it's still only a drop in the bucket. Micro-summit Campaign data from 2006 shows that there are 500 million potential micro-entrepreneurs in the world, that are currently server by 3,300 MFIs.
• In order for Kiva to make a real difference, it needs to grow drastically
• Currently, Kiva seems (Ramón projection) to be more restrained on the loan offering than on the money offering: it's a buyer's market.
• In order to grow to the size that Kiva will be a real world power against poverty, it will need to take on many more MFIs and loans. This will mean that it will need to linearly grow its infrastructure (and therefore, costs) with the amount of money disbursed
• When Kiva grows to the point that it is this world power against poverty, it will need much more funding for loans than is available now. If they want to reach, say, 10% of the market, and each person wants to borrow $500 (less than current Kiva average), they'd need $25 billion.
• If the average Kiva lender puts in (complete guesstimate) $100 total, this means we need 250,000,000 lenders. That's $100 by 83% of all the US population, including children. That seems unfeasible.
• Therefore, to be a powerhouse against poverty, Kiva needs to find another way of funding these loans. Ideas: grants to Kiva that are used for actual loans (and not for operational expenses), or enabling commercial investors (banks, investment community, individual investors) to participate in a for-profit way.
• Some of the additional benefits of Kiva would be eroded by this: although they probably will be able to compete easily with commercial microfund investment portfolios and mutual funds, some of the benefits for the MFI would decrease: the access to "free" money, where the lack of interest rate allows the MFi to become more stable or offer additional services.

The Kiva lenders

• Current profile: western, middle to upper-middle-class, socially engaged, looking for emotional returns only
• Most have more than a single loan (is that true? or do I just see the most vocal tip of the iceberg?)
• Currently, they make up a small percentage of potential lenders that fall into this category. (There is still a lot of marketing to be done...)
• They make up even a smaller percentage of the capital pool that would be available if we would also consider "commercial" individual lenders

So-- as you can see, I have intermingled lots of facts with some opinionated conjecture. I really want YOU to take your own conclusion about this.

I will go on lending as I do currently, but the hard question I have to ask myself is this one:
If Kiva would offer a 3% interest rate on my loans, would I continue to budget myself and loan for free as I am doing now, or would I -at once- put a substantial part of my savings against it? Really-- if my return is similar to the one at my savings account, what do I have to lose?

As the above is clearly my own opinion and thoughts, and I in no way hold a "lease on the truth" (Dutch expression), I welcome discussion and dissent. Who dares?

Where the streets have no names and the poor have no chance

It's been a while. Work has been busy (my company was just bought by our largest competitor), and although I've been able to contribute various posts to KivaFriends, I haven't been as active as I'd want to.

Reading through Kendall's reports on the state of his MFI in Nicaragua, I was reminiscing about old times.

I lived from January 1994 to August 1995 in Managua, Nicaragua. I came there as a student, did a graduation project designing and installing a remote wireless fumerola measurement station, that measured the temperature of smoke coming out of Nicaragua's most famous volcano, the Momotombo. After that, I worked for about a year at Siemens' Nicaraguan field office, as a project engineer for most of the "Planta Externa": everything from fiber optics transmission lines to wired local loop. Anyways, you can read that in my LinkedIn profile if you are really interested.

Nicaragua was an interesting country. Doña Violeta de Chamorro was in power, and Arnoldo Alemán was still the very popular mayor of Managua. Poverty was extremely widespread. And the population was very much polarized: you were either a Sandi, or against them. There was no golden path through the middle. Subsequent years have both show a slight increase of GDP (which is now slightly above Honduras), and unfortunately also an increase of corruption by officials. In all reality-- it was more of the same: Somoza's control over the complete economy by force, subsequently replaced by the Sandinista's "piñata" (redistribution of nationalized property to the personal possession of the top Sandinistas); Doña Violeta's government was accused of corruption (but may have been the least corrupt of them all), and once Arnoldo Alemán became president, he turned corruption allegedly into wholesale robbery.

The per-capita GDP in Nicaragua has stayed stably low from the years the Sandinista's left office, in the $3,000 to $3,500 range or $250-$300 per month. That this number doesn't mean too much (except that it's shamefully low), becomes evident if one considers that the gap between rich and poor is the 5th worse in the world. That means that tons of people live on much less, while the lucky few are rich beyond imagination. On average, you'll get to an income of $250 a month. As an aside-- click on that picture on the left. It was made with with GapMinder, a really fantastic tool that brings poverty into perspective.

Interestingly, although the Sandinistas messed up in many things, Nicaragua did get quite a good educational system. If we disregard some of the extreme poverty issues (like-- kids that need to go out on the street to beg for money won't get time to study, because this will take away necessary family income), primary and secondary is free while tertiary education is very affordable, even for local standards. Although rural access to health care is limited due to low popular density, free or cheap clinics are available in most urban areas. Arnoldo Alemán did shore up the road infrastructure, and cellphone coverage was good even when I was there in the mid-nineties.

This shows that even if many of the conditions are there to make things happen, it's really good governance that is a prerequisite to enable economic growth from the ground up. If that is missing and all is stacked for the rich and against the poor, not much will help. Even microfinance of poor micro-entrepreneurs won't be able to break the glass ceiling in the crawlspace of economic misery.

Finally, an anecdote. Kendall Mau talked in yet another one of his great blog entries about the lack of verifiable addresses in Central America. This is especially true in Managua. I remember that the travel agency I used in Managua was at "Donde fue el Hospital 'El Retiro", 2 cuadras al lago, 1 cuadra al arriba, portón verde". (That's from the spot where the "Retiro" hospital used to be, 2 blocks towards the lake, 1 block "up" (east), green gate). This was in the mid-90s, and it still appears to be the case. What made it even more interesting was that the Hospital 'El Retiro' was completely destroyed in the 1972 earthquake, and as a reference had been completely disappeared for many, many years.

If you had to do much through the mail, your best bet was a PO Box at Managua's central Telcor post office, which was an old, stately building in the old downtown, which somehow miraculously survived the famous quake.

During the Sandinista era, the rock group U2 performed a concert in Managua. It was their inspiration for the song "Where the streets have no names".

Finally... Bolivia!

Ciriaca Colque is her name. She runs a milk transport business that brings milk from the farms in the Altiplano of La Paz to the local Pil Andina diary factory, in El Alto, Bolivia. El Alto literally means "The Height", and high it is: 4150 meters (13,615 feet). This is where the international airport of La Paz is located. If you're gasping for air to jump on such an opportunity: slow down, take a breath. A nice warm cup of Mate de Coca will help you adjust to the lack of air.

El Alto can be a bit volatile, politically speaking. Since it is an important part of Bolivia's transportation network, it was often a flashpoint between past business-oriented governments and left-wing indigenous organizations. Violent protests occured, and El Alto played an important role in the Bolivian Gas War, which ended when the current president Evo Morales came to power.

I invested my biweekly contribution in her business. Want to contribute too?, or maybe help someone other entrepreneur in need?

Sra. Ciriaca, ¿kunjamaskatasa? ¡Le deseamos mucho exito en su negocio! ¡Yuspagara, Jakisiñkama!
(OK--- take a guess what it said, what language (I'll give you Spanish as one of them) and post your response in the comments...)

Paying interest to Kiva lenders

Disclaimer / Challenge: please note that the blog post you're reading is based on my personal insights and logic I think is true. As I have no economics or financial background at all, I would be thrilled to be proved wrong. Please let me know if you don't agree with my logic or assumptions, or if you think there is more to the story than the side I present here. This is an important topic that goes to the core of "why Kiva". Please post comments, or email me if you want to keep it private.

There is a long, ongoing discussion at Kivafriends about Kiva paying (or not paying) interest to lenders. I've given my opinion on this topic already in the past (specifically in the Kivafriends thread that I linked to above), but here's some more in-depth thought:

I think that parts of Premal's interview with the PBS series Frontline/World give some specific clues about why Kiva is considering giving interest to lenders.

Let me start to repeat myself: personally, I am not at all interested in getting interest for my current loans. But, truth being truth: this attitude does tremendously restrict the amount of money I am willing to invest in Kiva loans. In this interview, Premal specifically said:

And in truth, there's a lot more money in the investment capital pool than in the donation capital pool.

This kind-a says it all. Currently, there is no need for Kiva to give interest to lenders. Giving no interest keeps the cost of money to the MFI low. If Kiva would give interest to compete with money market accounts, it'd be somewhere around 5-7%: 3-5% of actual interest, and another 2-3% to cover the risk of loan default. If you'd put in a large sum of money spread out over many loans, the lender would need 5-7% of interest per loan to get an actual return of 3-5%, which is in line with current US money market accounts. The argument here would be that it would be a pure financial return and no emotional return.

I don't think that charging that much interest would be feasible. It would immediately kill Kiva's value proposition to the MFIs, because now the cost of money to the MFI quickly approaches the commercial loans that are already available to them.

In all reality, the current "no interest"financial return should long-term be somewhere around -2 to -3% (which is the expectable long-term default rate), maybe even a little bit lower-- what happens if the lender or the MFI cannot pay back because of exchange rate problems? The MFI is specifically supposed to cover this, but this could easily put loans in default in countries where for some reason the currency exchange rate goes haywire. The probability of loans default because of change in macro-economic circumstances would need to be added to the expected default rate.


So Kiva is looking for the "golden path" between financial and emotional return. Giving a few percents of "positive" interest won't create a real financial return for investors that is comparible with what they would get in the market, where a diversified short-term investment yields around 4% ($10K MMA account or CD, source: bankrate.com on April 24, 2007). They will -best case- break even on their loan if Kiva gives 2-3% interest, as is my understanding of the current state of things.

In summary:

• Kiva should only give interest if the market-need for money (i.e., the amount of micro-loans to be raised) is so large that loans can't be fulfilled with the current set of charitable lenders
• In order to compete with commercial loans, Kiva would need to give around 7% interest to lenders: ~4% real interest, and ~3% to cover for losses because of expected default. This would put the loans in range of similar investments.
• Charging 7% interest kills Kiva's value proposition to the MFIs.
• Kiva could consider giving a little bit of interest (say, 2%) to lenders.

Would the latter work?
Unfortunately, in my opinion, I don't think so:

• Giving 2% interest to lenders won't attract the huge amount of commercial investments that would be needed to exponentially grow Kiva.
  
• As for the marketing (PR) effect of this, I think it will be PR-neutral: it will attract some new lenders, but it will equally put off lenders that invest in Kiva loans because of charitable reasons: they will feel a reduction in emotional return, which is their main reason of investing.
  
• In reality, all it will do is make the loans a few percent more expensive for the MFIs, and thereby reducing the social impact that this has on the poor, Third World micro-entrepreneur. And this social impact is what makes Kiva so great compared to other lenders out there.
• In conclusion, the choice would be to make a small impact on a very large set of poor, Third World micro-entrepreneurs or to make a large impact on a few. My personal choice is the latter.
  

Which brings me back to the (now updated) original position: I don't want interest for my Kiva loans. But if I'd want interest, it would be too high for Kiva or the Third World borrower to afford.

All Kiva investments on one Google Map!

Following Pondering Pig's example, I created a My Google Map (or a Google My-Map or whatever) for my investments. Here it is.

Some other users Kiva Maps:

• Christopher from London
• Fred from Texas
• Pomerleau Family's map
• Pondering Pig's map (which we already mentioned, but it never hurts...)
• Julia's map
  

If you have a Kiva Loans map, let me know and I will add them to the collection. You can also post them at this thread at KivaFriends.Org.

Poverty: why bothering is good for us

This post is in direct response to Richard Kent's encouragements to keep on investing in Kiva, in a thread at the Kivaloans Yahoogroup mailing list. Richard is the Ugandan CEO/D for Children Care Ministries, a religious based charity in Uganda.

My reply got a little long, therefore I post it here rather than sending it to the list.
--------------------

Hi Richard,

thanks for your remarks on poverty. I think that's why we're all here at Kiva, to reduce poverty in a way that makes sense.
As someone that lives on the other side of the equation, it is hard to see billions of dollars and euros wasted in the developing countries to bad governance and and overall development aid attitude that used to be like giving fish to the people, instead of showing them how to fish themselves. I lived in Nicaragua in the 1990s, and I saw that many development projects weren't used at all to their potential: For rural developments, money would be spent without measurable improvement at the end of the projects, an expensive ferry project was successfully delivered and operated for about a year before it fell apart due to no maintenance, and projects to build schools weren't completed because the parents didn't want to cooperate. Overall, not good.

After a while, you ask yourself, why even bother?

Well, Westerners, we should. In this age of globalization, the economic empowerment of the poor in the developing world is not only good for the poor, but is essential for our own continued well-being. We need everyone to be prosperous enough to effectively produce whatever we need, and we need them to be able to buy whatever we produce. That won't happen if more than half of the population is too poor to feed and educate their children. And I don't even want to start about moral obligations, the nowadays always present homeland security arguments, etc.

In my opinion, the road to success doesn't lead to socialism as some of the socialist-leaning Latin American countries are now proposing. The reason for that is, that too much collectivism will stifle the individual drive to success, and therefore not give the individual the incentive to get ahead in life. Things don't come free in life, you got to invest, take risks, and learn from failures. While it's good to have a government that makes sure nobody falls through the cracks, you shouldn't have to rely on anybody to help you get beyond the mere basics of survival. Don't understand me wrong-- I'm not against collective bargaining or trade unions. Actually, collective bargaining is a sound economic principle: it's the reason of existence of the United States, the European Union, and on a much smaller scale, it's exactly why things bought wholesale are much cheaper than buying small quantities at the local corner store. It's a principle the staunchest capitalists use all the time.

I think that the development of the poorest should be based on specific short-term, medium-term, and long term goals, such as:

• Short term: Micro-finance those people that have businesses and business ideas that have to potential to increase their income substantially. This will have all the well-known effects on those that receive micro-financing, but it also has the good side-effect of showing those on the side-lines what can be done, how it can be done, and enticing them to "work smarter" instead of just working harder... Kiva can play a good role in this.
  
• Medium/long term: This is where NGOs and Governments can have a big impact. A number of issues would need to be addressed, and most of them are interrelated:
• Infrastructure. In order for people to do business, we need roads, telecommunications, etc. With good communication and transport, the cost of doing business will go down and the geographical reach will increase. This means more opportunities at a lower cost. It will also allow people to increase their standard of living by being able to live in a place that is good to live in.
• Education: This is really important and interrelated with the infrastructure goals. A higher educated workforce is more prosperous. Higher educated people have a better chance at earning more money. This is true everywhere: in the western world as well as in developing countries. And it cannot be reached without having a good infrastructure in place, both to get students to schools, to get good teachers to teach, and to be able to build a good school curriculum.
• Health: Health and access to health care is very important because it will allow people to stay in the workforce and increase their economic abilities. This means that we need accessible clinics and good hospital care that allows those with sick family members to stay economically active. The economic opportunity cost caused by illness is disproportionally large in poor communities.
• Legal framework: A good legal framework and good working legal system is a cornerstone of success for all businesses. In that sense, I am a believer in the work the ILD and Hernando de Soto is doing. Giving title to property, and being able to enforce titles, contracts, and other business instruments will allow a business to effectively use the capital that is "hidden" in their business equity. Land with title is worth more than land without, a contract that is enforcible will be more reliable and therefore worth more.
  

Enough for one post... feel free to leave relevant comments!

Go see Kendall Mau's blog!

For those of you that haven't visited Kendall Mau's blog in a while, or that haven't visited his blog at all, please do so. He recently added a WEALTH of information about the inner workings and considerations of the MFI he runs in Honduras and Nicaragua, Prisma Microfinance. There are interest rate tables, a discussion on large loans vs. smaller loans, flat rate interest vs. simple interest, some interesting background on who their target customers are, etc.

Really, really, interesting! Thanks, Kendall, very much appreciated!

Small loan to Dunia Herrera in Choluteca, Honduras

Since it's a new month, I just entered by bimonthly loan, my loan number 12. This one is to Dunia Herrera, why sells cloth in Choluteca, Honduras. Choluteca, in addition to having a cool name, looks on Google Maps just like the place I'd like to spend some time on vacation, with nice, palm-tree lined roads, grid-square neighborhoods, arable land along the river, and about half an hour's drive to the ocean. Looking at some of the pictures at Flickr.Org, the place looks reasonably clean, colonial, very much like an old, provincial town that you come across in so many Latin American countries.

Although this helped, the reason I invested in Dunia's business, is because I wanted to see how I'd fare with a small, reasonably short-term loan. All Dunia's been asking for is $225, which is probably the equivalent to about 2 months salaries. She'll pay this back in about 6-8 months, which comes down to about $40 per month, including interest. Assuming that her investment is "sustainable", which is, that she is able to increase her income on a continuous basis by at least the amount of loan payback, she's adding at least $40 to the family income per month. For many people in Latin America, this is a substantial increase of their monthly income.

She got my vote, and, as usual, I vote with my feet... eh... wallet. Her loan is now fully funded. Mucha suerte, espero que el préstamo hará una diferencia.

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.

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.