FREE ELECTRONIC LIBRARY - Abstracts, online materials

Pages:   || 2 | 3 | 4 | 5 |   ...   | 7 |

«Jonathan Conning & Jonathan Morduch April 8, 2011 Contributions to this research made by a member of The Financial Access Initiative. The Financial ...»

-- [ Page 1 ] --

Microfinance and Social Investment

Jonathan Conning & Jonathan Morduch

April 8, 2011

Contributions to this research made by a member of The Financial Access Initiative.

The Financial Access Initiative is a

consortium of researchers at New York

University, Harvard, Yale and Innovations

for Poverty Action.

NYU Wagner Graduate School

295 Lafayette Street, 2nd Floor

New York, NY 10012-9604

T: 212.998.7523

F: 212.995.4162

E: contact@financialaccess.org

www.financialaccess.org Microfinance and Social Investment Jonathan Conning Hunter College and The Graduate Center City University of New York and Jonathan Morduch Wagner Graduate School of Public Service and the Financial Access Initiative New York University Abstract This paper puts a corporate finance lens on microfinance. Microfinance aims to democratize global financial markets through new contracts, organizations, and technology. We explain the roles that government agencies and socially-minded investors play in supporting the entry and expansion of private intermediaries in the sector, and we disentangle debates about competing social and commercial firm goals. We frame the analysis with theory that explains why microfinance institutions serving lower-income communities charge high interest rates, face high costs, monitor customers relatively intensively, and have limited ability to lever assets. The analysis blurs traditional dividing lines between non-profits and for-profits and places focus on the relationship between target market, ownership rights and access to external capital.

Key Words Financial intermediation, market development, pro-social behavior, corporate governance, social entrepreneurship, microcredit, leverage.




2.1  The microfinance schism, rekindled

2.2  Global financial data


3.1  Strategies to expand financial frontiers

3.2  Monitoring agents with other agents

3.3  Limits to joint‐liability

3.4  Competition and over‐lending


4.1  What social investment does

4.2  The social investor’s dilemma

4.3  Should the goal be commercial microfinance?




Jonathan Morduch is a member of SafeSave, a microfinance cooperative that operates in the slums of Dhaka, Bangladesh. The authors are not aware of any other affiliations, memberships, funding, or financial holdings that might be perceived as affecting the objectivity of this review.


Financial support was generously provided by the Moody’s Foundation. We thank Emily Breza and Vidula Pant for valuable conversations, and Cecelia Tanaka for research assistance.

The views here are ours only and not those of Moody’s.

–  –  –


1. INTRODUCTION  On December 30, 2010, an Indian financial institution registered under the acronym GFSPL completed its third securitization; 25,768 loans were pooled and issued as debt securities. The senior tranche was purchased by a large Indian mutual fund, and the subordinated piece was subscribed by the investment bank that arranged the transaction. Earlier that same year, GFSPL received $2.2 million in loan financing from a Dutch private fund and issued over $4 million in secured redeemable non-convertible debentures to a US-based private equity firm (IFMR 2010).

What is remarkable about this story is not the structures of these financial dealings but the identity and nature of the firms involved. Grameen Financial Services Private Limited, GFSPL, is the for-profit firm behind Grameen Koota, a microfinance service provider that almost exclusively serves poor female entrepreneurs and day laborers with incomes as low as $0.50 to $1 a day. GFSPL’s website (www.gfspl.in) describes their aim to bring “life-changing microfinance services to India’s working poor.” Launched as a nonprofit in 1999 with only $35,000 in seed capital, Grameen Koota transformed into a for-profit non-bank financial institution (NBFI) in 2007. By late 2010, it claimed 450,000 clients and plans to reach 2 million by 2012.

The investors and arrangers are notable as well. The private equity fund, Microvest I, is a $60 million fund founded in 2003, chaired by W. Bowman Cutter, a former managing director of the $25 billion venture capital firm Warburg Pincus. The three founding investors in Microvest, however, are non-profits: Mennonite Economic Development Associates; the humanitarian organization CARE; and a fund set up by the French Committee against Hunger and for Development. Such “social investors” seek to create positive social impacts alongside financial returns. (GFSPL’s reported return on equity was a modest 1.2% in 2008 and 2.6% in 2009 according to www.mixmarket.org.) What may be more remarkable is, in fact, how unremarkable this kind of mixing of social and financial goals has become. By the end of 2009, more than $6.2 billion of foreign capital was invested in microfinance through 91 specialized microfinance investment vehicles (MIVs), estimated to account for about half of foreign investment in the sector (CGAP 2010). While limited financial access has long been cited as a fundamental constraint to economic development (e.g., Galor and Zeira (1993)), the rise of institutions like GFSPL is rapidly democratizing access and connecting local micro-lenders to international capital markets. The idea of “microfinance” has now evolved beyond lending microcredit (small—often unsecured— loans) to include microsaving (entry-level saving accounts) and basic forms of insurance and transfer mechanisms. The idea of mixing social and financial goals is not new, nor is the attempt to democratize access to credit. But today’s supply-side expansion is unprecedented, and microfinance has become the leading example of a broader push for “social investment” in the health, education, and energy sectors (J.P. Morgan 2010).

Still, maintaining a balance of social and financial goals is tricky. By the start of 2011, the Indian microfinance sector was in a full-blown crisis, with politicians accusing micro-lenders of aggressive loan collection practices, over-lending to indebted customers, and exploitative interest rates (Rhyne 2010, Yunus 2011). State-level politicians responded with a tough microfinance 2    ordinance in October 2010. In January 2011, the Indian central bank stepped in with a broader set of rules whose effect (if not their intention) will likely shut down many micro-lenders serving the poorest customers (M-CRIL 2011).

This tension between social and commercial goals has run through the history of microfinance. Morduch (2000) characterizes a long-standing schism among leading microfinance proponents, centered on whether commercial transformation is the best strategy to expand financial services to poor families. The debate is often framed as involving for-profit versus non-profit strategies, but that is too simple and clouds the issues. Muhammad Yunus (2011), for example, asserts that it is “possible to harness investment in microcredit — and even make a profit — without working through either charities or global financial markets.” Yunus is right that neither a strictly philanthropic path nor a fully-commercial path has delivered institutions that serve most of the people most of the time. But neither theory nor evidence supports his assertion that charities and global financial markets should be side-lined. To the contrary, experience suggests that the future of microfinance rests with the ability to combine forces.

Finding the right path requires a more rigorous “corporate finance of microfinance.” So far, corporate finance has had relatively little to say about businesses that pursue social goals, and many economists are swayed by Milton Friedman’s (1970) argument that the primary social responsibility of business is a fiduciary responsibility to shareholders. Business and philanthropy should therefore not be mixed. But Friedman’s argument is most compelling when markets are complete. When market imperfections are rife – which is the fundamental premise of microfinance—the theoretical case emerges that mixing philanthropy and business may sometimes be necessary to build markets and increase economic efficiency (and not just reduce inequality). Understanding that possibility and its limits requires getting a handle on microfinance institutions’ internal incentives, financial structure, ownership, governance, and market context.   The economics of microfinance has generated a steady flow of strong studies, but the ideas here are relatively unexplored in the academic literature. Our aim is to draw theoretical links and illustrate key ideas with new evidence. Section 2 details the landscape of microfinance, placed in the context of the Indian microfinance crisis of late 2010. Global data reveal a world that mixes socially-driven institutions and more narrowly commercial for-profit players. The evidence suggests that the institutions co-exist but are not always substitutes: their typical target

populations and financial structures often differ markedly. The evidence sets up the question:

how can financial intermediation frontiers be pushed out?

Section 3 begins the work of describing a corporate finance approach to microfinance. We draw on the workhorse corporate finance model of Tirole (2006) and the model of financial intermediation of Holmstrom and Tirole (1997), which highlights two elements important for understanding the structure and limits of microfinance: costly delegated monitoring and scarce intermediary capital. The setup helps to explain why financial markets tend to fragment into clusters served by formal and informal financial institutions. Borrowers with ample pledgeable income or collateral can gain access to traditional bank loans and other formal financial services.

Borrowers with little or no collateral have difficulty gaining access to these formal services but may have access to monitoring-intensive finance from informal sector providers and microfinance, or they may remain entirely excluded. In this context, we explain the rationale of “group lending” contracts that encourage peer-monitoring among microfinance borrowers.

  Much of the literature on microfinance incentive mechanisms focuses on new monitoringintensive products and dynamic repayment incentives but goes no further. We show that these products are costly because they rely so heavily on costly monitoring to create and maintain their value. The products also create constraints that shape the capital structures and the ownership of the microfinance institutions. Section 4 explores these issues and turns to the role of social investors. We argue that the rapid expansion of microfinance would not have been possible without the support of philanthropic seed capital and policy entrepreneurs with pro-social motivations, even though--once they are established--many of these institutions can be run as profit-making institutions. We also clarify the fundamental trade-offs face by social investors, involving choices between who is served and how many are served. The section frames that choice, and explains why—counter to a strong push for commercialized microfinance—some profitable institutions may nonetheless want to continue as non-profits. In Section 5, these ideas are applied to the Indian microfinance crisis of 2010.


The challenge for “micro-lenders” is to create banking models that work for the unbanked and under-served. The potential demand is vast. Chaia et al. (2009) compile global data to count 2.5 billion adults without formal financial accounts (provided by regulated banks) or “semi-formal” financial services (provided by microfinance institutions and similar institutions regulated separately from banks). Most, nearly 2.2 billion of these unbanked adults, live in developing regions. There is no up-to-date count of the reach of microfinance (and much depends on definitions), but all credible estimates are between 100-200 million customers globally, falling far short of the total unbanked population. The broad question is: how can the gap be filled? By banks going “down-market”? By NGOs supported by donors? By state banks? By newly-created commercial microfinance institutions?


2.1 The microfinance schism, rekindled  In the same week that the GFSPL securitization was announced, Bloomberg ran a story titled “Suicides in India Revealing How Men Made a Mess of Microcredit (Lee & David 2010 ).” The article cited a government report that claimed excessive debt, coupled with aggressive loan collection practices, had driven more than 70 people to kill themselves in the southern state of Andhra Pradesh between March and November 2010.1 The suicides spurred the state government to come down hard on microlenders, and an ordinance in October 2010 restricted the ability to meet with customers and approve loans. Within weeks, loan collection levels plummeted from 98 percent to under 20 percent.

The Bloomberg story highlighted India’s first microfinance IPO, completed in August 2010.

SKS Microfinance, with 7.8 million customers by September 2010, rose to become the largest


The Bloomberg article puts the debt-related suicide data into perspective: “Andhra Pradesh, where three-quarters of the 76 million people live in rural areas, suffered a total of 14,364 suicide cases in the first nine months of 2010, according to state police.” The article continues, “SKS [the largest microlender] says 17 of its clients have committed suicide, none because of loans being in arrears or harassment.”

Pages:   || 2 | 3 | 4 | 5 |   ...   | 7 |

Similar works:

«BOARDS OF TRUSTEES AND INTERNATIONAL ADVISORS BOARD OF TRUSTEES BOARD OF INTERNATIONAL ADVISORS Dr. George Faris, Dr. Paul F. Boulos, Chair of the Board of Trustees Chair of the Board of International Advisors Dr. Charles Elachi, Dr. Nadim Daouk, Chair Elect Vice Chair of the Board of International Advisors Dr. Mary Mikhael, Mrs. Youmna Salame, Vice Chair Elect Secretary of the Board of International Advisors Mr. Joseph Maroun, Mr. Mike Ahmar Secretary of the Board of Trustees...»

«Yasargil Permanent Aneurysm Clips Yasargil aneurysm clips Figure captions 1 Yasargil Phynox aneurysm clip, example of a straight clip 2 Yasargil titanium aneurysm clip, example of a straight clip 3 Yasargil aneurysm clip, correctly positioned 4 Yasargil aneurysm clip, incorrectly positioned 5 Yasargil aneurysm clip, incorrectly positioned 6 Yasargil aneurysm clip, incorrectly positioned Legend A Test point B Force C Length of jaw part Symbols on product and packages Sterilization using...»

«J U LY 2 0 1 6 METHODOLOGY Rating CLOs Backed by Loans to European SMEs Rating CLOs Backed by Loans to European SMEs 2 DBRS.COM Table of Contents Contact Information EUROPE Scope and Limitations 3 Carlos Silva Introduction 3 Senior Vice President EU Structured Credit DBRS Rating Process for European SME CLOs 4 Tel. +44 (0)20 7855 6604 carlos.silva@dbrs.com Determining Stressed Default Rates 5 Maria Lopez DBRS Diversity Model 5 Vice President EU Structured Credit Probability of Default 5 Tel....»

«TOWN OF Electors’ General Meeting EAST FREMANTLE 1 February 2016 MINUTES MINUTES OF THE ELECTORS’ GENERAL MEETING, HELD AT THE TOWN HALL ON MONDAY, 1 FEBRUARY 2016 COMMENCING AT 6.35PM. 1. OPENING OF MEETING Present Mayor J O’Neill Presiding Member Cr C Collinson Cr J Harrington (To 8.35pm) Cr A McPhail Cr M McPhail Cr D Nardi Cr L Nicholson Cr A Watkins Cr A White Mr G Clark Acting Chief Executive Officer Mr L Mainwaring Executive Manager Finance and Administration Mr J Douglas Manager...»

«Introduction: Designing Mixed Reality An emerging generation of artists is turning to digital technologies to fundamentally transform theater. At the same time, by collaborating with technologists, they are also reshaping the nature of human interaction with computers. Working at the cutting edge of live performance, these artists are increasingly employing digital technologies to create distinctive forms of interactive, distributed, and often deeply subjective theatrical performance. Although...»

«Measuring Power Power Distribution in Weighted Voting Systems Taylor Borcyk Ithaca College May 9, 2012 Contents 1 Abstract 3 2 Introduction 4 3 Weighted Voting Systems 5 4 Measuring Power 6 4.1 The Banzhaf Index of Power............................ 6 4.2 Alternative Method for Computing Banzhaf Power.............. 7 5 Generating Function 9 6 Distribution of Power 11 6.1 Veto Power........................................»

«cF January 27, 2015 Founded 1923 Chair Ms. Ann Trowbridge Nancy J. MacWood Associate Director for Planning Vice-Chair Smithsonian Institution Monte Edwards Office of Planning and Management Secretary 600 Maryland Avenue, SW, Suite 5001 Meg Maguire MRC 511 PO Box 37012 Washington, D.C. 20013 Treasurer Carol F. Aten SUBJECT: Smithsonian South Mall Campus Master Plan Trustees Judy Chesser Dear Ms. Trowbridge: George Clark Dorothy Douglas The Committee of 100 on the Federal City (Committee of 100),...»

«FINAL REPORT F SAN BER N O A TY RD N COU INO Qu G em aer i t e Ve r i t a t RY RA JU ND SAN BERNARDINO COUNTY GRAND JURY 2014-2015 FINAL REPORT SAN BERN OF AR TY UN DI NO CO Qu G em ae r i te Ver itat RY RA JU ND SAN BERNARDINO COUNTY GRAND JURY 2014-2015 EDITORIAL COMMITTEE RUTH McMILLAN, CHAIR CLARA BOSWELL ED JABO LES KIRK GARY McGAHA MARVA X. The Editorial Committee acknowledges and thanks the following individuals for their hard work and invaluable assistance in the preparation of the...»

«CURRICULUM VITAE ROBERT B. KOEHL Department of Classical and Oriental Studies Hunter College, CUNY HIGHER EDUCATION 9/74-6/82 University of Pennsylvania, Ph.D., Classical Archaeology 9/70-6/74 Pomona College, B.A., Classics PROFESSIONAL EXPERIENCE Employment 9/87-present Hunter College, CUNY, Professor of Archaeology 9/83-7/87 Florida State University, Assistant Professor of Classics Archaeological Fieldwork 2001-present Tell Atchana (ancient Alalakh), Turkey, Specialist in Aegean material...»

«Western Kentucky University TopSCHOLAR® Dissertations Graduate School 5-2015 Perceptions of Incivility in Nursing Education: A Survey of Associate and Baccalaureate Program Nursing Students Kim Elaine Young Vickous Western Kentucky University, kim.vickous@wku.edu Follow this and additional works at: http://digitalcommons.wku.edu/diss Part of the Educational Leadership Commons, Higher Education and Teaching Commons, and the Nursing Commons Recommended Citation Vickous, Kim Elaine Young,...»

«FY17 Compact and Budget Planning Guidelines Academic Units January 15, 2016 Materials Due: (see sections E and F beginning on page 27) 1. Compact Information 2. Investment Opportunities 3. Reallocations 4. Scholarship Funds 5. Tuition, O&M in Lieu of Tuition, Tuition Waivers 6. ICR Estimates 7. Collegiate/Campus & Durable Goods Fees (& Fee entry into the system) 8. Student Services Fee Waivers 9. Transfers Between Units 10. Budget Development Worksheet 11. O&M/State Special Compensation 12. ISO...»

«Interview of Rex Larsen By Richard Van Wagoner March 5, 1989 Richard: Interview with Rex Larsen at his home on the fifth of March, 1989.  The  topic is Mink ranching industry in Lehi. Richard: Ok, I’ll just start out by asking how your dad, Neil Larsen, was one of the  pioneering mink ranchers in this area.  Just talk a little about what it was like when he ...»

<<  HOME   |    CONTACTS
2017 www.abstract.dislib.info - Abstracts, online materials

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.