Microfinance: New Frontiers In India And China
The Metropolitan Corporate Counsel
December 6, 2010
The Editor interviews Monica Brand, Principal Director, Frontier Investments Group, ACCION International.
Editor: Tell us about your background and experience.
Brand: I have spent most of my career in the financial services and social enterprise sectors. Early on, I worked domestically for some bank initiatives to "bank the unbanked." I am half Peruvian and attended Stanford Business School with the intention of working internationally. I was motivated by the end of apartheid to go to South Africa after graduate school to work in venture capital targeted at previously disadvantaged businesses. I embraced ACCION's vision to bring creative solutions to places where there was no prior access to capital and conventional markets. Now I run a venture capital early-stage equity fund called Frontier Investments Group, sponsored by ACCION, investing in new technologies to expand financial inclusion.
Editor: Tell us about Frontier Investments Group (Frontier).
Brand: Frontier and ACCION had a vision that the very things that made microfinance successful also held it back. Microfinance is a high-touch, paper- and people-intensive business model, and the high cost of delivering microfinance has become a barrier for us to reach certain markets and populations. Frontier was launched to invest in social enterprises that will radically expand financial inclusion. Like traditional venture capital, we seek innovative companies with solid business models and inspirational management teams who know how to scale a business. We have a strong team and are building a track record with our initial investments. Based on expressed interest, we will open up Frontier to outside investments next year.
Editor: Please provide a general description of microfinance in India. What are the broad strokes of ACCION's involvement to date?
Brand: Like China and Brazil, India is one of those contradictions in microfinance where the largest and most populous countries actually have the least penetration of microfinance. Though underserved as a whole, India has high concentrations of microfinance - some might argue excessive competition - in certain geographic areas.
Five years ago, ACCION entered India's urban areas where microfinance was almost non-existent, providing individual - what we call capacity-based - lending, wherein loan amounts are determined by analysis of the poor person's ability to pay. ACCION's approach, as always, was to reach underserved areas in India using client-centric, capacity-based lending approaches.
Editor: What are some unique regulatory considerations with respect to microfinance to India?
Brand: ACCION's hub is in Bangalore. Both of our partners, Swadhaar in Mumbai and Saija in Bihar, are non-bank financing companies or NBFCs - the legal structure available to microfinance institutions (MFIs) in India. Because regulators have been reluctant to extend banking licenses to MFIs, none can accept savings, unlike other parts of the world. Therefore, our partners, as well as most microfinance institutions, are credit only, unable to mobilize deposits that would provide stable and organic funding to MFIs, mitigate client over-indebtedness and provide clients with a second essential resource for raising revenue. Consistent with India's history, there is favoritism toward public sector banks and local governments subsidizing competing offerings of self-help groups. While big institutions, like the State Bank of India, play an important role, they also and unfortunately distort markets.
Editor: Do microfinance institutions that are not in partnership with the larger banks face difficulties with raising capital and getting started?
Brand: Absolutely. The government has communicated a very explicit mandate, both with priority lending targets and with recent regulations that enabled small deposit taking, that it wants this process to include banks like the State Bank of India. Given that much of ACCION's work abroad involves a strategy of working with commercial banks, this certainly can be a viable model. That said, we also understand that less capital-intensive models that move beyond brick and mortar may be appropriate, so we look for a more versatile strategy. Heavy-handed regulation, such as interest rate ceilings, runs counter to the goal of financial inclusion for the poor. Perhaps well-intentioned regulators simply do not have global experience and thus cannot appreciate the negative, distorting impact of certain regulation.
Editor: As a non-profit, does ACCION face special challenges or enjoy expanded privileges in its Indian operations?
Brand: No. It is important to know that ACCION does not have a direct lending model. Our philosophy includes building local capacity, so we always work in partnership with local institutions. We use our technical systems and the capital we invest to leverage local resources and be catalytic. In that sense, we have no wholly owned subsidiary in India. Our partners, Swadhaar and Saija, are independent organizations that are founded, promoted, owned and operated by Indians. Usually a minority shareholder, ACCION must conform to the foreign direct investment regulations of India and all the other regulations; therefore, we enjoy no particular advantage as a nonprofit.
As a philanthropic organization in the U.S., we receive donations from organizations such as the Gates Foundation that support our mission to bring financial services to underserved areas. Some of our capacity-building efforts are subsidized, but not from the Indian government. Rather, this support is from U.S. and other international philanthropic organizations, as well as fees for services from our local partners.
Editor: Serving the base of the economic pyramid is both noble and rife with the potential for fraud and abuse.
Brand: Frontier is a global fund and ACCION is very involved in the field; thus, we are connected with the industry. We have heard about exaggerations in the media regarding the suicides in Andhra Pradesh, confusing correlation with causation. Indeed, most people in Andhra Pradesh have a microfinance loan; however, responsible journalists should provide balanced reporting that includes traditional suicide rates irrespective of microfinance activity.
No doubt, there are some irresponsible lending practices in "financial first" or for-profit investors. Seeking profits, as the sole business purpose, will always drive you to grow fast and then exit as quickly as possible, often creating perverse incentives. Through The Smart Campaign, ACCION's Center for Financial Inclusion promotes the notion that it makes good business sense to lend responsibly. The negative lesson from our own subprime crisis reinforces ACCION's process of analyzing capacity to pay and understanding a borrower's entire debt picture. The Smart Campaign is about working at a practical level to educate microlenders, thereby reducing the likelihood of over-indebtedness.
With respect to government programs, there is frustration among some of the self-help groups that receive public subsidy, both about competition from larger microfinance institutions and the apparent desire of local regulators to shut down microfinance. Indian banks have stopped lending, and responsible, well-run institutions cannot access financing to serve their clients. The combination of some inappropriate policies and bad regulations has created a sad situation in India. The press bears responsibility to report precisely what is happening because it is poor people who will suffer ultimately. While it is compelling to report that 30 people committed suicide because of evil microlenders who made money in the IPO, such stories do not address what is really happening.
Editor: How does Frontier bridge the gap between purely philanthropic and for-profit investing?
Brand: In serving its shareholders, Frontier seeks to build social as well as financial value - and build real businesses that serve the poor. Unlike a purely profit-driven venture capitalist, it matters to us what we're building, how we exit and where we go next. Certainly, we will not sacrifice good business models or sound investment practices just for a social story, but neither do we ignore broader areas for involvement. For example, we are very active in supporting management teams and being board members, and we bring ACCION's industry connections and 50 years of experience. We bring all that to bear in a socially responsible investing practice. Venture capital and even private equity used to involve building value - versus newer business models, which are just financial engineering or playing with the balance sheet. We're like old school value investors: that's the way we work.
Editor: How will ACCION expand its operations in India and in what other countries are you looking to expand?
Brand: ACCION gets involved where markets are underserved and where we can use our global experience to add value. In India, we have focused on markets in which there were very few, if any, microfinance players, notably Mumbai and Bihar. Expansion depends on market circumstances, but we'd rather do a few right than do many poorly.
Consistent with this strategy are dealings in China and Brazil. We are one of only two foreign-operated microfinance companies in Inner Mongolia. We are going to Manaus, Brazil; thus, there is a theme of focusing on large countries and specifically in areas where a great majority of the poor live and lack access to quality financial services. ACCION's modus operandi is to harness market forces so that they benefit the many instead of just the few.
Editor: Can you describe ACCION's outreach, both domestically and internationally, to educate people about microfinance?
Brand: Outreach is integral, and ACCION continually reinvests profits to expand its nonprofit mission. For example, we subsidize initially unprofitable operations, like those in China and Brazil, with the goal of becoming profitable and enabling future projects. Also, we do a lot of public good in education. ACCION paid for me to go out to University of California, Berkeley's Haas Business School, where its class in microfinance is simultaneously broadcast to 70 campuses across the country, plus others in the UK and India. This serves students who want to learn about microfinance but don't have the resources to hire a fantastic professor like Sean Foote, who started the class at Haas. For my class, I discussed the famous Compartamos IPO, which was the most successful Mexican MFI by any standard. Our investment in this IPO generated resources for ACCION to capitalize Frontier, move into new markets like China and Brazil and start important initiatives at the Center for Financial Inclusion.
ACCION also has global training centers in its hubs in Accra, Bangalore and Beijing. Last year alone, ACCION participated in over 75 conferences and trained more than 1,500 field practitioners to be successful and professional microfinance managers.
ACCION's Center for Financial Inclusion seeks to influence how private sector shows up in delivering financial services to the poor. They offer executive training courses in partnership with Harvard Business School, and they help sponsor conferences worldwide. In these and many other efforts, we try to share what we know and learn from our peers - with the goal of improving financial services to the poor.
Editor: Do you have any closing remarks for our readers and viewers?
Brand: Notwithstanding recent bad press, microfinance remains a powerful tool in the fight to alleviate poverty. Holding ourselves to high standards as an industry is very important, but to dismiss microfinance as "yesterday's news" is a disservice to the poor. With respect to high interest rates and other difficult issues, I encourage the media to continue asking questions, but also to appreciate and report how labor-intensive microfinance is. We should work together to strengthen, not eliminate, this powerful tool.
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