I want to begin by saying that it is a great honor to speak with the distinguished former presidents from Latin America. Out of respect for your deep commitment to change and progress in the region, I intend for my remarks to be provocative in order to push us to think and act in new ways.
I want to start by saying that microfinance in Latin America has much to be proud of. But in the Microcredit Summit’s count of the 106 million people with a microloan in 2007 who were very poor when they took their first loan, 97 million were in Asia and a little more than 2 million were in Latin America. Said more fairly, 78 percent of the very poor in Asia have accessed microfinance compared to only 24 percent of the very poor in Latin America.
I know that most of you not only know Muhammad Yunus, but you count him as your friend. You have probably heard his answer to the question asking what his strategy was in creating Grameen Bank. His answer was, [Quote] “I didn’t have a strategy, I just kept doing what was next. But when I look back, my strategy was, whatever banks did, I did the opposite. If banks lent to the rich, I lent to the poor. If banks lent to men, I let to women. If banks made large loans, I made small ones. If banks required collateral, my loans were collateral free. If banks required a lot of paperwork, my loans were illiterate friendly. If you had to go to the bank, my bank went to the village. Yes that was my strategy. Whatever banks did, I did the opposite.” [end of quote]
For most of us that statement brings a smile to our face, recognition of a basic truth about our commercial banking system and its failure to serve the poor. It also reminds us of the fact that microfinance would never have existed if the rules of banking had not been broken. But my challenge to us is this. When we hear those words we’re awakened by them and we’re inspired by them and then we turn to our central bank governors, our superintendants of banks, our finance ministers and ministers of the economy and our aid agency specialists and ask them to build and regulate microfinance in our countries and we cannot figure out why very often it turns out looking so much like mini-commercial banks. Why it still misses the very poor.
Just as Muhammad Yunus had to break the rules of banking there are microfinance leaders today, including Prof. Yunus, who are breaking the rules of microfinance to create new breakthroughs. The Latin America Caribbean Microcredit Summit is June 8-10 in Cartagena, Colombia. We polled microfinance leaders in Latin America asking for their top choices for plenary and workshop topics. By far the biggest vote getter was this session: “Breaking the Rules of Microfinance to End Poverty: Innovations from Around the World.” I was moved by the fact that this was what the microfinance leaders from Latin America wanted most.
One of the innovators these leaders will hear from in Cartagena is Ingrid Munro of Jamii Bora in Kenya. I know that former President Toledo knows Ingrid and her work. Listen to Jamii Bora’s innovation and think about what it could mean for the most intractable problems in Latin America.
Jamii Bora, which means good families, is a Kenyan microfinance institution that has grown from lending money to 50 women beggars ten years ago in one of the worst slums of Nairobi to serving more than 200,000 members today. One of those members is Joyce Wairimu. Wairimu was one of the 50 women beggars who started Jamii Bora with founder Ingrid Munro in 1999. Munro calls her one of the fast climbers out of poverty. How fast? In ten years Wairimu has built six businesses and employs 62 people.
Another of the fast climbers is Wilson Maina. Before Jamii Bora, Maina was a thief, one of the most wanted criminals in Mathare Valley slum. Starting with a loan of $20, Maina has built four businesses and a new life for himself and his family. Along the way, he has convinced hundreds of youth to get out of crime. I promise you, no other microfinance institution in the world gives loans to thieves successfully.
So where does Munro’s capacity to innovate and defy conventional wisdom in the microfinance field come from? It started 20 years ago when she and her husband adopted three street children. It was in the fertile ground of her relationship with the mothers of her sons’ friends in the streets—women who were beggars— that her profound insights would grow. When Munro, a Swedish trained architect and urban planner, retired from the African Housing Fund in 1999, she thought she would also retire from the little group of 50 beggar women with whom she had been working. But when the women pled with her not leave them, Munro agreed to stay and insisted that they must lift themselves out of poverty. For Munro that meant the women had to start developing the discipline of saving on a regular basis.
She had them come every Saturday with about 50 cents in savings. When they deposited their 50 cents she would give each of them two scoops of corn and one scoop of beans for free. She admits now that for those first two months she was tricking them into saving with the lure of free corn and beans. After two months, the bags were empty, but the beggars continued to save and the free corn and beans never returned.
But Munro didn’t stop at providing microcredit to help the poorest slum dwellers. Jamii Bora decided to build a town with decent housing and business space for her entrepreneurs. She said, “Every poor person’s dream is to move out of the slums, not patch up the slums.” On January 30th, that’s exactly what happened when the first 246 families moved out of the slums and into the newly created Kaputiei town with nearly 1,800 families to follow. For the same monthly mortgage they had paid for their one-room shacks, each family now lives in a home with two bedrooms, a bath, a kitchen and a living room. But this is sub-sub-prime lending that works because in order to qualify for a mortgage the residents have to have successfully repaid three micro-business loans.
Another of Munro’s breakthroughs and secrets to success is that all of the Jamii Bora staff are former members, previously destitute themselves.
Proposal I: There should be a Sao Paulo Declaration coming out of this meeting and another at the Ibo-American Summit later this year where the former Presidents and the current Presidents of Latin America commit to having the region lead in successfully reaching and empowering the very poor with microfinance even beggars, thieves, and prostitutes in the worst slums and barrios of the region.
But I warn you, this hasn’t happened thus far because it breaks all the rules. The rules of microfinance say we must only work with the economically active poor. The rules of microfinance say that the very poor cannot benefit from microfinance, they need safety nets first. This declaration is doomed to fail, truly doomed to fail if in implementing it we turn to those who embrace the rules. There must be a commitment to “break the rules of microfinance to end poverty” and we must draw from innovations in Latin America and around the world. There must be study visits to programs working successfully with the ultra poor: Jamii Bora in Kenya and Grameen Bank and BRAC in Bangladesh. There must be competitions to determine which practitioners and which government officials in each country are most serious about reaching the ultra poor and a commitment to send those leaders on the study trips. And I encourage this group of former Presidents here today to also take such a trip along with current presidents. This kind of fundamental change will only happen if you lead the way.
Several months ago I asked microfinance leaders working in Latin America to provide additional policy proposals for me to bring to this meeting today. Let me discuss a few of them and just mention a few others.
Proposals II and II: Create a regulatory framework that 1) allows microfinance institutions to accept and on lend deposits and 2) doesn’t require an ownership structure that pushes the microfinance institutions (MFIs) away from reaching the poor. The push for allowing MFIs to take savings came from ACCION, Deutsche Bank, RAC, COPEME, Global Partnerships and others. This is something that Prof. Yunus has been encouraging for years. Here is what Rick Beckett of Global Partnerships said about both points:
….MFIs need to access saving to serve the needs of borrowers, lower their cost of capital, and remain competitive and sustainable. Many regulatory structures in Latin America presume or require private equity ownership of regulated financial institutions and thereby limit or complicate efforts by a mission driven NGO to become regulated, access savings, and maintain full ownership control without introducing owners into the equation whose motivations are more economic in nature [and less focused on social returns]. In each country, there could be a regulatory classification that encourages non-profit ownership of a regulated entity with full access to savings provided the MFI maintains sound financial ratios and performance [so that deposit holders are protected]…. Moreover, we’d like to see those regulations allow for the MFI to employ a range of business models without restriction (e.g. integrating education and health services at communal banks)…Such a regulatory structure would encourage the development of social enterprise, more akin to what we see in Asia, and encourage the development of a “mixed market” where social and commercial enterprises compete on a more even playing field and people living in poverty benefit from a broader range of choices in their MFI.
As Mario Otero of ACCION said about savings, “Those banks that can count on savings as a major source of funds for on-lending are the least affected by the global financial crisis. The same holds true for microfinance institutions….”
But this is not a new proposal. It’s just that it has seldom been implemented or has been implemented badly. Let me warn you again, this proposal could be embraced and still the essence gets lost because it follows the more commercial model that regulators are familiar and comfortable with.
Proposal IV: On the issue of interest rates countries should “Legislate either the enforcement of declining balance interest rates (i.e. making “flat” interest rates illegal) or alternatively pass truth-in-lending legislation requiring all lenders to state the annual percentage rate (APR) of all loans purchased by their clients. This proposal came from Chuck Waterfield of Microfinance Transparency. Most in the field argue against interest rate caps including responses received from ACCION and Opportunity International and there are also calls for consumer protection against usurious interest rates.
Maria Otero spoke for interest charged on a declining balance when she said, “Interest rate caps tend to discourage interest charges on a declining balance. As we have seen in India, for example, a 10% per year interest rate for a one year loan amortized over the entire tenor of the loan equals an actual interest rate of well over 500% per annum.”
Proposal V: Create high quality national or sub-regional autonomous wholesale funds to 1) provide lower cost loan funds so MFIs can more easily serve rural areas and 2) build the MFIs’ capacity. COPEME, Red Financiera Rural, and MicroNegocios called for either providing loan funds to MFIs at lower rates so they are better able to bring their services to rural areas or called for promoting best practices in financial and administrative sustainability. Seven years ago the Microcredit Summit Campaign commissioned a paper about wholesale funds written by the Managing Director of PKSF in Bangladesh who is now that country’s Central Bank Governor. PKSF, a Bangladesh wholesale fund, played a key role in developing many MFIs in that country including two global giants, BRAC and ASA. The paper on creating autonomous microfinance funds can be downloaded from the Microcredit Summit’s website.
There are several other policy proposals that remain in this paper that I will just list: 1) Promote private credit bureaus to generate more credit information from the microfinance sector and protect clients from over indebtedness; 2) Provide a regulatory framework that promotes transparency on the financial side (effective annual interest rates, elimination of commissions) and on the social side (social balance, impact on clients, statistics on populations that benefit). 3) Do not allow governments to lend microfinance funds directly to clients (see below); 4) Governments should create a facility to hold the foreign exchange risk of their own currency and thereby encourage much lower cost capital for MFIs (see below); 4) Modify social security laws so the informal sector has access to social security.
As I said at the beginning, “Out of respect for your deep commitment to change and progress in the region, I intend for my remarks to be provocative in order to push us to think and act in new ways.” I hope I have been able to do so.