A Crisis in MicroFinance?

Image credit: Brett Epic/Wikimedia 

A new Wall Street Journal article says that India’s microfinance industry is in “major crisis,” as usurious interest rates spur borrowers to default on loans on a mass scale, while the government raises regulatory barriers to MFIs. 

While the mass defaults are largely confined to the state of Andhra Pradesh, home to India’s biggest microlending firms, the Journal portends a ripple effect: “what happens there is frequently a bellwether for microlending in India, and programs around the world.”

The Journal has played the devil’s advocate with regard to microfinance in India for some time now, with coverage that has highlighted the possibility of a lending bubble, and questions whether microfinance is in fact a sustainable mechanism for poverty alleviation. This particular article is far more dramatic however, highlighting the fact that the current microlending system is in fact corrupt, and that that the industry as it currently stands is not sustainable. 

The aim of microlending, in its ideal form, is to provide those who fall outside the traditional banking sector with easy access to small amounts of money at fair interest rates. The underlying rationale is that MFIs will be a significant poverty alleviation tool by providing people with the funds to start their own small businesses, and in time generate a sustainable stream of revenue.

The problem is that, in reality, not everyone is in a position to start a business – most of the time microfinance loans are used to say buy food, pay school fees, or pay off other loans. Not a bad thing in and of itself since these are all of course essential. But the money disappears. The criticism has been that borrowers are then encouraged to take more and more loans to keep paying off previous loans, until they’re caught in giant spider web of debt – which is what the increasing number of suicides in Andhra Pradesh has been pegged to.

Harvard's David Gergen Highlights Policy Barriers to Social Entrepreneurship

Earlier this month, NYU’s Reynold’s Program in Social Entreprenurship kicked off its speaker series for the Fall, with a conversation between Catherine Reynolds, who heads a foundation that finances American college students, and David Gergen, a senior political analyst for CNN, a professor of public service at the Harvard Kennedy School, and a board member of Teach for America.

The panelists raised several interesting points. While Reynolds highlighted public private partnerships as one valuable way to scale up a project, Gergen pointed out that “the relationship with the government comes fraught with problems.”

He talked about the hazards of entering the public realm. In particular, he said that policy barriers, involving foreign ventures, tax and other regulations are hindering social entrepreneurship ventures from achieving scale.

MIT's D-Lab to Host Rickshaw Bank Founder

Image credit: Steve Evans

For the next two weeks, MIT’s D-Lab will be hosting Dr Pradip Sarmah, a veterinarian by profession, who has collaborated with the Indian Institute of Technology in Guwahati to design lighter, larger and more stable rickshaws in India.

Rickshaws are a common means of transportation in Indian cities such as New Delhi and Calcutta. Most rickshaw pullers pay rental fees that make it impossible for them to save enough to buy their own rickshaws. The vehicles are also not covered under insurance, leaving the pullers liable for any damages.

Sarmah has partnered with the Centre for Rural Development to approach insurance companies and banks to create the Rickshaw Bank, providing rickshaw pullers with social security and financing options. 

While Sarmah’s model is not based on charity—the rickshaw pullers pay Rs. 25 (about 50 cents) a day as rent, which allow them to become the owner of the rickshaws over a period of 15-18 months—the Rickshaw Bank is a non-profit.

Some Waters Taste Better Than Others – Or Do They

Abstract

The object of my experiment was to measure whether prior ideas about what a particular sample of water would taste like would affect the way people perceived the water they were drinking. I measured this by polling two different groups--one of whom knew what they were drinking and the other who did not—and asking them which water they preferred. I hypothesized that people who knew they were drinking Fiji water (a water with more luxurious brand associations) would prefer this to either Poland Spring (a more commonly sold brand of bottled water that does not have such luxurious associations) or tap water, and that people who knew they were drinking tap water would dislike this more than either Fiji or Poland Spring. My conclusions about Fiji proved largely correct, while those about tap water did not. 

Gates Foundation Earmarks $20 Million for Education Technology

Image credit: Gates Foundation

The Gates Foundation is offering $20 million in grants to individuals and institutions who are harnessing or developing innovative technologies to make students more successful.

In a blog post, Bill Gates introduces the Next Generation Learning Challenge, a project that aims to “accelerate the integration of technology in ways that substantially improve learning.”

The program will provide grants and gather evidence about effective educational practices in order to facilitate the development and implementation of affordable, high-quality tools in order to meet the needs of students within the budgetary confines of today’s education system. 

The first round of grants is focused on technology that can aid post secondary students complete college. Grants will be given in waves of 6-12 months, with each period focusing on a different topic area.

On Innovation, Entrepreneurship, Economic Growth and Democracy

Image credit: Aruinathan

The Economist, has posted a video interview with Vijay Govindarajan, the founding director of Tuck’s Center for Global Leadership, in which Govindarajan explains the concept of “frugal innovation” – the idea that while historically multinationals would innovate in rich countries like the US and sell to the developing world, in recent times this trend has reversed. 

“Frual innovation is where we innovate in poor countries and bring those products to rich countries,” says Govindarajan, citing GE’S low cost ultrasound machine, developed in Asia and now sold in the US.

According to Govindarajan, the idea of frugal innovation encompasses innovations that facilitate 300-400 percent decreases in the price point, rather than simply 30-40 percent decreases.

While conceiving of an innovation is important, Govindarajan emphasizes this is just "one percent" of the battle – the remainder falling to execution, which most companies tackle badly. 

He goes on to cite companies like Kodak, Sears and Microsoft as all having failed at executing innovation – whether this be in commercializing the digital camera, mass discount retail, or the ebook.

The most interesting part of the interview comes towards the end, when Govindarajan responds to a question about whether India could ever overtake China’s economic growth.

Microfinance – Profiteering, Bubbles and Poverty Alleviation

David Roodman, of the Center for Global Development, has written a post offering his thoughts on the microfinance ownership/business model debate between Muhammud Yunus, founder of the famed Bangladesh based Grameen Bank, and Vikram Akula founder of India based SKS Microfinance, which took place at the New York based Clinton Global Initiative Conference last month. 

The gist of the Yunus-Akula disagreement is that Yunus is critical of SKS’s business model.  He described its IPO as “Pushing microfinance in the loansharking direction. It’s not mission drift. It’s endangering the whole mission.”

Akula advocates that the best way to scale up operations is by going to the money markets. Yunus says that in doing so, one is giving ownership of the institution to people other than the customers, hence raising the possibility that the owners will not act in the best interests of this group.  

He says that Grameen, unlike SKS, is owned by its borrowers, and hence profit goes back to them. It is comprised of local savings – something Akula points out that SKS cannot do because the Indian government does not allow it.