Navigating the Evolution of Microfinance: One Tool to Address Global Poverty
Written by Maria Otero
June 23, 2007
Thank you for your invitation. It is so very exciting and such an honor to be here. This event marks a significant moment in the history of UCC -its 50th Birthday Bash - and I am so privileged to be part of it. UCC is a church that is guided by a social justice ethic that is rooted in moral clarity. It believes that the gospel is preached even more by doing than by proclaiming, and I greatly admire that. And I also know why this place is particularly filled up right now - I also am looking forward to the speaker that follows me, as all of you are; When I learned that I would be speaking before Mr. Obama, at first I got very nervous - how intimidating - and then I thought, actually, this is great - the pressure is off for me!! It's wonderful to have such a big audience, but I would be here, too, to get a good seat to hear Barak Obama.
This afternoon I want to talk to you about microfinance, one tool to addressing global poverty, which is showing great promise. Microfinance - making capital available to the poor so they can finance their tiny businesses - combines the social change orientation of the not-for-profit sector with the economic power of the private sector and creates a dynamic, self-sustaining model that can reach millions of poor households. This model has been developed over the last 30 years by several pioneer organizations, including the one I lead, ACCION International. I want to speak to the issues this model raises for us, as social entrepreneurs, as we put the words "profit" and "poor" in the same sentence, and as we bring private banks and large companies to partner with us, a non-profit. And finally, I want to share with you my experience as a minority woman playing a leadership role in this effort to address poverty.
The director of ACCION's partner organization in Nicaragua, talks about what access to credit means for the poor.
(Audience sees a video with an interview with a man named Victor.)
Victor's words should be put in the context of the world we live in, when half the population lives on less than $2 a day, where poverty is a constant companion to men, women and children from Mumbai, India, Kampala, Uganda, to my own city of birth, La Paz, Bolivia, to cities and towns in this country. As intractable and relentless as poverty is, especially in light of governments and systems that do not address this issue squarely, I want to explore with you the intersection of two worlds that have seldom been linked, especially to address poverty: business and social development. Today, this intersection resides at the core of microfinance, which seeks to help people lift themselves out of poverty.
As I've said, microfinance refers to the provision of financial services - credit and savings - to the poor who rely on their tiny business for income but who are not considered bankable because they lack collateral and are considered high risk by any self respecting bank. They rely on micro lenders who hand over loans on the 5/6 rule: I give you 5 in the a.m., and you pay me 6 in the p.m.
On my last trip to Africa, I met Sophia, a widow in Arusha, Tanzania. When her husband died 12 years ago, she was determined to provide a better life for herself and her children. Surviving as best as she could, she started a business selling rice. Sophia has little education. With a first loan of $50 she purchased two 100-kilo bags of rice, repackaged them and sold them to small retailers in the market. This is how she began a business that today, many small loans later, has grown to employ several people and sells significant quantities of rice, ground nuts and beans.
Sophia runs her business out of her house, on a dusty run-down street, to which she has added a couple of small rooms. There is an inner courtyard where an elderly woman, sitting on a bamboo rug, cleans the rice by passing it through a homemade tin strainer, and where Sophia's 85-year old mother sits in the sun. The 100-kilo bags of cleaned rice are stacked floor to ceiling in Sophia's dirt floor living room and one other room. They are carefully weighed on an old scale and divided up into smaller bags. Two young men, also employed by Sophia, load up the bags on to rickety hand-pulled wooden wagons and deliver them throughout Arusha. Sophia is proud of her business, of what she has accomplished, but her eyes really shine when she talks about her two daughters - who are at the university.
At first sight, taken by itself, this is a humble story of little interest to a passerby. However, played out over and over again in markets, slums, barrios, villages around the world, this is a compelling and inspiring story of resolute perseverance; of the power of the human spirit; of the dignity needed to overcome the enduring grasp of poverty. But for us in microfinance, and for me personally, it is also about the lead character in our story. Sophia is the lead character in our story, and represents some of the leading characters in my life's journey.
The lesson we all draw from Sophia's story is that very good things happen when small amounts of capital are placed in the hands of hardworking poor people.
The dream we draw from Sophia's story is that we can create systemic change around the world, one in which we would rebuild the exclusive financial systems and banking systems that have for decades benefited and protected the wealthy, so that they serve the impoverished majorities, help lift them out of poverty, help them use capital to build their own wealth and make them full participants in their country's social and economic development.
That is the dream. I want to tell you how we started pursuing this dream, from the eyes of ACCION International.
ACCION began making micro loans in 1973, in Recife, Brazil to people who were migrating from the rural areas seeking a better life. Poor people from rural areas arrived into the sprawling cities with no education, no skills, no connections, no job, no support system, no anything. They were squatters on vacant land, and built shacks made out of tin and cardboard. They sought to survive by being small traders, or starting little businesses - everything from banging old metal into pots and pans, fashioning furniture from wood or metal, making shoes, cooking food and selling it.
By the 1980s ACCION had launched micro lending in several countries in Latin America with a vision that has remained its focus: to create self-sustaining microfinance institutions that reach the poor and cover their costs. There were three key breakthroughs in these pioneer years:
1. We developed a way of lending that used character as collateral, disbursed loans quickly, charged interest rates to cover the costs of the lending operations and created incentives to pay back. The demand was enormous and in a short time tens of thousands of poor people previously without access to capital received loans. They paid back their loans with amazing diligence, and soon these microfinance organizations began covering their costs with income from interest.
2. By 1990, the best microfinance institutions in ACCION's network had become sustainable - they didn't need donations to cover their operating costs, but they needed more funds to grow their lending and to reach more people. The only way to overcome this huge funding bottleneck was to turn these institutions into licensed, chartered, commercial banks, because as banks they:
- were supervised by regulators, and therefore, they could capture deposits, and savings of the poor;
- could borrow from the capital markets in their countries and internationally;
- earn a return and attract investors who believed in the social mission of these banks and who would ensure this mission was retained.
Socially responsible investment - the UCC intentionally invests its own pension fund.
Using the model of a bank, we could bridge the huge divide between the capital markets and the financial needs of the poor - use one, where vast funding exists - to serve the other, where a vast demand exists. There were plenty of nay-sayers. They said you can't have banks for the poor - the poor don't pay back; they don't know how to use the money. We proved them wrong.
And so ACCION, with other pioneers, in 1992 created BancoSol, the first ever commercial bank serving the poor. It was a revolutionary idea, and it turned banking on its head. At that time, Bolivia's whole banking system served the business needs of the wealthy. Here was a country with eight million people, and the banks had a total of 140,000 clients -less than 2 per cent of the population.
BancoSoI burst into this exclusive banking system with 45,000 clients, most of them indigenous women who would never have been allowed to enter the front door of a bank. The founding of BancoSol brought together those two worlds that had always existed separately: the world of global finance and the world of global poverty.
3. BancoSol's access to the capital markets, those of Bolivia and of the world, provided the financing it needed to grow to reach many, many people. By capturing deposits - the poor also saved money, the poor needed a place to save, and no bank would open itself up to let a poor person save if that person is saving 25 cents at a time. So the poor really have to rely on putting their money under a mattress or putting it into a cow or a pig - that gave them more resources to lend.
With that market, BancoSoI eliminated the greatest bottleneck microfinance faced: loan capital to keep growing. And it linked the Quechua-speaking woman selling onions in a local market to the capital markets of the world! It was the very guarantee that she would pay her loan that allowed BancoSoI to borrow from the capital markets.
ACCION has used this model in the rest of Latin America, in Peru, Colombia, Ecuador, Mexico, Nicaragua, and most recently in Uganda and other African countries. These banks are growing, are strong financial institutions and are profitable, some of them registering very strong returns on equity. Our partner in Nicaragua is transforming from a nonprofit to a financial institution with social goals.
Over the last decade, ACCION, the non-profit, had continued to provide training, to develop new products, to innovate, to work to change policy and regulatory systems to open space for the creation of microfinance banks. It uses grant funds to do these things which are not commercially viable. At the same time, ACCION's Network - which now extends to 24 countries in Latin America, Africa and India - has used this commercial model to lend 12 billion dollars to five million people. Those loans average $600, and 97 percent of those loans have been repaid - something most banks in this country would covet.
But more important than the numbers are the 20 to 25 million family members whose lives have been significantly improved by these loans. Increased access helps them see themselves differently within their communities and societies; their children have better education and health care. In short, they have gained more control over their lives. They have cIaimed the dignity that God intended for every child born on this earth to enjoy; dignity crippled by poverty.
This is social justice at its core. It is also at the core of ACCION's mission. And what breaks the mold is that we are using sound business principles, strong management practices, and partnerships with the private sector to accomplish our goal of building social good. When we partner with a commercial bank, we use their huge branch infrastructure, their capital, their technology, their know-how, to reach poor households. In Haiti we are working with the largest bank in the country, which with ACCION's help, now makes loans as small as $80 to very poor Haitians.
With CEMEX, Mexico's enormous cement company, we are developing loans that allow poor families to build their own houses, one or two rooms at a time. With international insurance companies, we are developing micro-insurance products to help the poor mitigate risk. They have never had such an opportunity before. For us this means creating social good. For the companies, it means new markets and economic value.
Even when ACCION lends in the United States, as we do through ACCION USA, we partner with banks to reach lower income segments, mostly minorities and new immigrants. Low income men and women in Miami, New England, Atlanta and more than 30 other cities in which ACCION USA or ACCION licensees work all lack the credit history or the guarantees required to borrow from a bank.
Like the women in Bolivia before BancoSol, many in this country also remain excluded from accessing capital for their businesses. By making credit available within our own country we are reaching into low income communities, creating opportunity and restoring that sense of hope and dignity that is one of our rights as human beings.
In all cases, these microfinance banks need to be permanent sustainable institutions that are serving the poor, and are not driven by the whims of government agencies or dependant on donors. They cannot fail because of poor management or bad records or poor performance.
Not long ago, I asked our partner in Peru if I could visit some of their longest term clients. One of the loan officers took me to an open marketplace in a pueblo joven - one of the shantytowns that encircle Lima, the capital city. Here I met a group of women, each with a market stand, who had been running their businesses since the late 1970s.
Meeting women like these has affected my own personal story enormously. I too am a minority woman, but I arrived as an immigrant to this country during my adolescence. I have had access to a world class education. I have had endless opportunities to pursue my dreams, to excel. I live in the most affluent country in the world. But what working with women like Delia and Norma remind me of daily is the great adversity most people in the world face. They are a means of grace and God's love for me. And they keep my feet on the ground.
They also remind me that leadership is about examining my own working ethics, my personal beliefs, my value system - what I bring into the workplace and how this aligns with my own faith journey. The UCC has always emphasized the playing out of one's faith in the real world, where the needs are great and where we must strive to create justice and fairness, polite but dangerous. I think this is right on.
I have also learned that it is impossible to be an effective leader without self renewal. We cannot perform if we do not replenish ourselves, physically but more important, spiritually. For me, taking the time for spiritual renewal also means aspiring to be a better leader. Jim Collins, the author of "Built to Last", in examining companies with staying power, points out that the leaders who achieved success and sustained greatness are those who blend the paradoxical combination of deep personal humility and fierce resolve.
I will never forget when I took a delegation of business professors to Guatemala to visit the work of ACCION. We met with Esperanza, a tiny woman of Mayan descent who made shoes in a corner of her one-room house, with the dirt floor. She welcomed us in and proudly showed us her business, which probably produced 20 pairs of shoes a week. After a few minutes, one of the professors asked me to translate, "Can you ask her what her unit cost of production is?" I turned to him and said, "No I can't do that. She will be embarrassed in front of her two daughters because she doesn't know." He insisted persistently, until apologetically I asked: "Dona Esperanza, this professor from the north wants to know if you know if you can tell him what your unit cost of production is." She looked up at him, and said with a strong, assured voice replied, "Of course I know, it is 18 quetzales (Guatemalan currency) a pair, and come and I will show how much it is at each step of production."
Esperanza's words remind me that there is enormous power in each of us to create change, to extend beyond what we ourselves or others may think possible. This woman, with a little capital, was able to do things she never before imagined. Her sense of self-worth, of dignity, of empowerment spilled over into the roles her daughters saw her play, as she juggled running a business and taking care of them, her business and her household. And answering a question from a formidable stranger, which even I thought she couldn't answer! Her sense of humility - God's love expressed through her and her fierce resolve overwhelmed me. They filled me with grace.
To this day, I imagine her mentoring other young women in her community, taking the lead in demanding water and sanitation facilities from the Municipality, and telling her daughters that of course they should go to college, even though she didn't finish the third grade.
If we add the Sophias of Tanzania, the Delias and Normas in Peru, the Esperanzas of Guatemala to the millions of men and women like them around the world, we begin to envision the power of this fierce resolve multiplied. Microfinance captures this fierce resolve, so often underrated.
And the strength of these women makes it crystal clear to me that humility and resolve, coupled with working solutions to global poverty are the ingredients that give us hope and inspire us. Microfinance is one of these tools that taps into the dignity of every person and combines it with a proven approach and it is making a modest dent in the battle against poverty. It is not a panacea, but certainly an approach that is changing the lives of the poor.
I believe that part of our faith journeys includes working to better the lives of those who are less fortunate. We have the opportunity to express our faith by making this world a more just, fairer and more peaceful place. As global citizens of the 21st century, and as people of faith who happen to be highly privileged, this is our work going into the future. Please join me.