Posts Tagged ‘micro-finance’

The Informal Economy Symposium, Barcelona on October 12th 2012

Our aim with this symposium is to explore the global scope, innovations and potential futures of the informal economy.

Opening Keynote will be John Keith Hart, who coined the term “informal economy” and the day long symposium on the 12th of October will be closed by John Thackara.  There will be three panel discussions, as follows:

PANEL 1: SCOPE, MEANING AND TENSIONS IN THE INFORMAL ECONOMY

This panel will explore the scope, tensions and influences of the informal economy. It will set the stage, provide case studies, and present new themes that make clear why the informal economy is a key topic for business and society today. It will address critical questions for the symposium: What are historical foundations, contemporary developments, conception and misconceptions of the informal economy? What parts are institutionalised or marginalised and which are not?  What does regulation look like?  How is the informal economy similar or different in emerging vs. developed markets?  What kinds of goods and services does it include?  Are there good and bad informal economies? How are the informal and formal linked? How do labor, goods and services move within and between them? Why does contemporary business need to understand the informal economy?

PANEL 2: THE FUTURE OF MONEY AND THE INFORMAL ECONOMY

This panel will explore the use of money and other exchanges in the informal economy. This panel builds on the previous, starting with the premise that the informal economy is a place to create new value for business and society. It will discuss the relationship between regulated finance and informal exchanges, focusing on, among other things, mobile money. Some key questions to be addressed include: How is the use, exchange and idea of money similar or different in formal vs. informal economies? How do digital technologies encourage and expand informal practices and exchanges?  What are the ways to establish financial links and other bridges between formal businesses and informal practices? What are specific financial needs in various informal economies? What are the challenges faced by companies operating in financial services and other businesses when addressing the context and practices of the informal economy?
panelists: Ben Lyon, Ignacio Mas, Niti Bhan  moderator: Rich Radka

PANEL 3: INNOVATION AND OPPORTUNITIES IN THE INFORMAL ECONOMY

This panel will look at innovation within the informal economy. Rather than approach informal economic practices as make-do strategies of people in the margins, panelists explore the potential for the lean and agile practices of the informal economy to adapt to contemporary global shifts. Some key questions to be addressed include: Can informal economic practices be indicators of future economic activity? What can these practices teach us about our own innovation efforts and modes of doing business?  What does the persistence of informal economies mean for the future of business? What challenges does it present? What are some ways companies can act on opportunities?

You can register for the symposium here, or follow the blog and twitter hashtag #informaleconomy.

Women Together: Incentivising Savings

Prema Salgaonkar has been working with Mahila Milan for over 20 years and now heads a group of local facilitators of a daily savings scheme for Dharavi residents. Mahila Milan means “women together” and provides a decentralised vehicle for the empowerment of women via leadership roles and advocacy alongside its pivotal daily savings collection. Prema visits around 450 households each day, of which a third will deposit anything between Rs 5 to 200, with almost all households banking something each week. Such a savings mechanism is ideally suited to the irregular nature of earnings at the base of the pyramid which we have been widely discussing here.

The deposits from a number of collectives are formally banked but rather than paying interest Mahila Milan provides community and emergency support in a transparent manner. For many, without this daily visit which both incentivises and protects savings, surplus cash would not even be conceived of – let alone put aside. Savings are readily accessible and members of the scheme can apply for credit if required. If loans are requested the local Mahila Milan leaders will assess the need and ability to repay, possibly consulting with neighbours as to the borrower’s situation. Repayment terms are negotiated on a case-by-case basis around the borrower’s earning patterns, with consideration given to the maintenance of some savings alongside repayments. Loans – usually for up to Rs 500 at 2% interest – have helped with school fees, medical bills and entrepreneurial start-ups from tailoring services to coconut vending.

Beginning in Mumbai in the eighties, initially Mahila Milan had many more illiterate members and developed a system whereby coloured squares of paper would be exchanged for deposits and kept by the saving member in a plastic bag: red for one rupee, yellow for two, green for three and so on. This way members could always check how much money they had access to and plan accordingly. Now this system has been largely disbanded and replaced with passbooks which members were proud to show us and explain the context of various peaks in savings and withdrawal. Currently Mahila Milan constitutes a networked federation of nationwide woman’s collectives encompassing 60,000 women

The system is not just about collecting money but also about daily contact which deepens the understanding of various issues facing Dharavi residents. Contributing to a consensus of community priorities, this information is often passed on to other support groups in the area such as the local community council (panchayat) plus used to inform a number of Mahila Milan initiatives. One of our informants (above) who used the scheme conveyed that even on the days when she has nothing to deposit that its was reassuring to be visited by a trusted outsider with sound financial knowledge and that she sometimes used the opportunity to discuss issues such as how rising food prices were affecting those beyond her own neighbourhood. She notes that watching her savings grow has allowed her to start imagining and planning a better future for her family – with her mother and sister also active members in the scheme.

We were told of numerous success stories like the woman who saved towards buying a second-hand sewing machine which allowed her daughter to leave a gruelling job at a local garment factory to start her own now-flourishing dressmaking business. Another woman with six children and an alcoholic husband saved Rs 5-10 a day till she had Rs 5000 with which she bought a machine to process heavy duty plastic for recycling and now boasts a much higher standard of living for herself and her family. Others access their savings on a more short term basis to counter income fluctuations – still signalling a heightened life standard. And significantly most continue with their savings schemes while servicing their loans.

Micro-credit has been commanding a fair amount of attention surrounding poverty alleviation of late – including voices of caution as have featured on blog posts below. Mahila Milan seeks to strengthen financial assets primarily through savings-led services with micro-loans being offered as a secondary and complimentary service. Last year’s brief article Putting the Microsavings in Microfinance from the New York Times makes the highly relevant point that “only some poor people will benefit from the chance to borrow, but almost all will benefit from the chance to save.”

[Check out more photos from fieldwork at Dharavi.]

Traditional moneylending – informal, flexible, trust based and changing fast

As Microfinance Grows in India, So Do Its Rivals is the title of a recent WSJ article by Ketaki Gokhale which begins so,

The practice of making tiny loans to poor people, or microfinance, was supposed to help drive traditional village moneylenders from rural India.

Instead, traditional moneylenders, who typically charge high interest rates, are thriving, even in areas most heavily targeted by microfinance, [..]
Even as the government and nonprofit organizations came together to create the Indian microfinance market in the 1990s, traditional moneylenders’ share of total rural Indian household debt grew to 29.6% from 17.5%, according to a government survey.
[…]
One potential reason for their growth: Some microfinance borrowers say they need village moneylenders to help them pay their debts on time. Some academic researchers believe the moneylenders are keeping afloat many microfinance groups.

Peer pressure to pay back microfinance loans is intense, because microlenders almost always require borrowers to join small, tightknit groups. If one member defaults, none can get another loan. Microloans have a stellar repayment rate — close to 100% — and some analysts believe a hidden reason is the stopgap provided by moneylenders.

Drive out the village bania, a caricatured movie villain whose like has not graced the silver screen for quite some time. Before we continue to look at the anecdotes in the WSJ article, it behooves us to take a fair and balanced view of the village moneylender in India

There are 34,000 money lenders – and they have lent money to more than 2,00,00,000 farmers. They account for nearly 30% of the rural credit flows – and more credit than all the nationalized banks put together.

They charge between 18% to 36% p.a. interest generally. Lesser than what most ‘educated’ credit card users pay – and what ‘modern’ banks charge their English speaking customers.

So much about ‘usury’ by money lenders.

even while the WSJ’s own Indian arm loses all rights to call itself an objective observer of society.

The article seems to imply that traditional moneylenders charge far more interest than MFIs quoting the CGAP on this “fact”,

But the rates are still lower than those offered by the traditional
Indian moneylending industry, a chaotic jumble of pawn brokers, gold merchants and other private moneylenders — some licensed, most not. For centuries they have monopolized rural Indian credit markets but have been accused of fleecing people who don’t have access to formal banking by charging exorbitant rates and seizing all their belongings as collateral. They typically charge between 24% and 120% annually, according to CGAP.

I’m sure that no one had access to “formal banking” during those very centuries an extensive, sophisticated yet simple system of indigenous banking that extended credit and enabled trade to flourish across India.

I found it fascinating that this article set out to show why the informal economy had to be wiped out by the formal MFI one, in order to better serve the poor, only to support the exact opposite argument anecdotally. Perhaps its MFIs which need to be driven out of rural India’s villages?

One lender, who wished to remain anonymous because his business is unregistered, gives borrowers short-term, collateral-free loans “as quickly as an ATM gives money,” he boasts. Interest sometimes has to be paid on a daily basis and works out to an annual rate of 48%.

The poor use his loans as a stopgap when they can’t make their weekly microfinance repayments because their income was less than expected, he says.
[…]
The difference, however, is that the moneylenders give loans faster, without asking the women to form groups and serve as each other’s guarantors, as microfinance lenders do in order to ensure a higher repayment rate. They also charge significantly more than the four microlenders serving the neighborhood.

“Group pressure makes us go to moneylenders” to cover their microfinance loans, says Baleshwari, who goes by only one name, as does her sister. “We get small loans for 15 days to fill the gaps when we can’t pay. If you lag behind, the rest of the group members can’t get new loans.”

This dynamic is why some analysts believe the village moneylenders are actually floating the microfinance lenders.

The inherent conflict between the schedule of payments and the irregular income stream of income is the crux of this research. Rural MFI consultant and CGAP consultant  Brett Matthews had pointed out over many emails that MFIs prefer not deal with seasonality yet it was an overwhelming aspect of rural life,

But here in Mahabubnagar, few women have started their own businesses. Some of those in business have to rely on moneylenders. Microloan repayments begin the week after the loan is disbursed and continue with weekly payments. Most businesses don’t produce instant profits, and many are seasonal, so moneylenders can help when funds are tight.

This challenge was observed in The Philippines during fieldwork and discussed here  – specifically pointing out that MFIs expect repayment to start the week following the loan, an additional burden if the business for which the loan was secured needed some lead time to get going. One wishes the author had shared her source for this insight as it would have been interesting to follow up and explore other findings in this subject area in greater depth, if available.

Where microlenders, relative newcomers to rural India, rely on peer pressure for repayment, private moneylenders have historically been conservative in their practices: extending loans based on an intimate knowledge of people’s finances, and building their client bases over many years,

 

Trust.

The most critical element of doing business within rural communities everywhere as well observed among the urban BoP. What are the odds that your neighbourhood moneylender would be open to negotiation on smaller payments made as and when cash was in hand since he knew how and where you made your money?

But since microfinance took off in Mahabubnagar, he has seen moneylenders start to “adopt the methods of microfinance” — small loans, large volumes and regular repayments — “to scale up their business.”

In summary, it seems that traditional ways and means which offer speed, flexibility and trust are definitely in danger from their rivals, the
microfinance organizations but not that of being pushed out. Instead we
find they too are taking on the practices of high volume micro loans to
scale and compete with these newcomers.