Banking Review

When Opportunity knocks

Microfinancing is a capital idea, especially when it helps poverty stricken individuals
become entrepreneurs, says Opportunity International’s ambassador Andrew Tyndale

BY CHARIS PALMER

Opportunity International is one of a growing number of microfinance companies providing loans to entrepreneurs in developing countries. We caught up with Opportunity International ambassador Andrew Tyndale, a former investment banker who now looks for ways to help not-for-profit businesses improve efficiency.

RBR: Can you explain the modern concept of microfinance and how exactly it is helping to alleviate poverty?

AT: The underlying principle is the belief that the individual person essentially knows their way out of poverty _ at least they know it better than some white guy from Sydney who’s never been in their circumstances. The fact is that they’ve been surviving for a long time before anybody with a microfinance loan showed up.

There are informal sources of finance, but when you make capital available to them, their instinctive entrepreneurial spirit kicks in.

Almost all of our loans are made to women, who have in particular been struggling with the business of running a home. [Such as] providing health care, or getting education for their kids, or putting food on the table, or fixing the roof over their heads.

The husband tends to either work the local business or fields, or alternately it’s easier for them to go and sell their labour somewhere.

For most of the people that we’re dealing with, they actively know what they want to do with the capital if they can get access to it.

Predominantly, we only lend for business or income generation purposes and we always ask them to come up with a business plan. It’s not 20-page PowerPoint, it’s: “If I get a loan of $50, this is what I plan to do with it”. Our loan officers are trained to give hints and leads from their own experience and they get communities working together, but essentially it’s the borrower’s business plan that were backing.

Economic activity generates new wealth. It’s not a cannibalistic exercise where you’re just shifting from the middle class to the lower class by encouraging the grey market around the edges. What it means is that there is new economic activity generated, new margins generated, and they get captured at the people who need them most.

RBR: How do you ensure loan sharks or unethical lenders don’t infiltrate microlending? Should it be restricted to not-for-profit organisations?

AT: There have been money lenders since the world began and they are what we would call loan sharks. Around the world there are two groups of people _ the five-sixers and five-sevens. The five-sixers were dominant until the global financial crisis and now it’s the five-sevens. Five-sixers lend five rupees or pesos or dollars in the morning and then they collect six at night, so they’re charging 20 per cent interest per day. The truth is most of the micro-businesses that are run can withstand that kind of margin. If you’re buying tomatoes at the market and you’re paying five rupees for them and then you transport them back to your market you can sell them for 20. So the margins on the business can absorb and pay for the interest in many cases.

In lots of cases, especially inner urban areas and slums, what microfinance has done is displaced the traditional money lenders. Unfortunately, there’s no shortage of business for them, so they just move on to the next neighbourhood.
But microfinance normally comes along and lends at normal bank rates instead of the five-six or five-seven per day. It still might be 30 per cent flat on a six-month loan, which annualised is over 600 per cent, but given what the alternative funding was, and given the margins in the business, the people are delighted to get access to that kind of funding.

There’s no question that there is predatory pricing by both informal money lenders and also by microfinance organisations.

Microfinance has grown hugely in the past 10 or 15 years and there are probably 3,000 organisations around the world that profess to do microfinance. The truth is though, the top 20 microfinance organisations around the world would represent probably 90 per cent of the loans made and the clients, so there’s a heavy concentration among the large organisations. Those people have pretty strict codes of conduct around transparency to clients, and about ensuring you don’t over-lend to borrowers.

The reputable microfinance organisations have very strong policies. Those policies differ from country to country and then the larger ones are almost all subject to local country regulation as well.

But the criticism is probably justly aimed at the worst 1,000 of the 3,000 organisations who don’t really have good structures, who treat it opportunistically, whose motivations are not necessarily development but actually commercial and, in many cases, they could be accused of not avoiding their clients getting over-indebted or predatory pricing.

There are some not-for-profits who do it really well and some who do it really badly. Probably the worst of the well-doers and good meaning people do it really badly and then on the flipside of that there’s a number of commercial operators who do it very well and have got efficiencies down so that they can lower their cost of funds to the borrowers in a way that not-for-profits find really difficult. I don’t think it should be simply restricted to the not-for-profits.

RBR: Now that microfinance is growing so quickly, do you think we will see an increase in microinsurance? Is the business case for microinsurance as strong as microfinance?

AT: You’re going to see microinsurance come through as the second wave of financial products. It’s already very significant. Opportunity International has its own microinsurance company called MicroEnsure and we insure the lives of about 3.5 million people. We also provide health insurance for a large number of others.

We generally define microfinance as the provision of financial services to the poor, so financial inclusion, rather than defining it as loans or credit and so microfinance can include straight credit or lending, and it can include deposits. It can also absolutely cover insurance.

At the very basic level, you can insure the loan. If the borrower dies, the family hasn’t just lost its chief money earner, it’s also left with a $250 loan on top, which is probably enough to send people on the lowest rung of the economy back under.

So we’ve established worldwide a number of ways in which we can insure the loan in the case of the death of the borrower. In Africa, there’s a huge weight on people to have significant funerals and the funeral expense can send a family back into poverty when they’ve just about made their way out. So you can, as part of your loan offering, not only insure the loan, but also funeral expenses. And if you can do that, you can insure other expenses, so if somebody dies, they can be left with a pot of money to look after the family after they die. That whole series of health insurance related products is really critical and it just provides a safety net for people.

In countries like India, where Opportunity has 1.35 million clients, we have a platform where we can develop an insurance program for health needs. We can then negotiate with local region hospitals to say, if somebody walks in with this piece of paper, you’re allowed to treat them for up to 400 rupees. Suddenly, our clients have access to hospitals they couldn’t get into before and at no cost to themselves, because it’s been paid for by the insurance program.

It can do two things. One, it can absolutely change the life and economic viability of a small business where they might only lose a week instead of six weeks a year to illness, but also it actually keeps the hospitals going on a profitable basis and enables them to open their doors to the poor where they couldn’t before.

If you’re lending to a poor person and you require a return on equity of 15 to 30 per cent, that means essentially it’s coming straight out of the poor person, so that the poor people are subsidising the return on equity. In insurance there are so many more factors that affect the level of profitability rather than the premiums that you’re charging: the level of gearing, the investment returns that you get from the cash, the correct pricing of products, and the level of underwriting losses you make. Those are much greater influences on the profitability of the organisations, than the price of the premium that you charge the clients. So there’s probably a greater argument that the poor aren’t paying for insurance returns in the way that they’re paying for lending returns.

RBR: Do you think there is a market for more microlending in Australia?

AT: Clearly there are a number of people in Australia that could be described as financially excluded. Most of the trading banks have programs where they’re reaching into specific areas, whether it be migrants or Indigenous people, or women.

Some of them are doing it direct, but most of them are doing it through third party organisations. We find that corporates and banks find it easier to talk to microfinance organisations because they understand the business model and they can negotiate on terms they are familiar with.

There are a number of challenges of doing microfinance in the first world. There have been lots of initiatives and many of them are lying as skeletons along the side of the road.

One of those challenges is the cost of developing a new business. The Government will tell you it takes $80,000 of investment to create a business significant enough to cover the livelihood of a person, whereas, on average, it costs $200 in the third world.

There are also terrible tax consequences of earning your first dollar if you’re on the dole because you lose the dole, and so there’s a series of mechanisms where people can begin to accumulate wealth in a trust account. The tax office is working and the Government’s working to get there, but they’re not fully there yet.

In the third world, there’s no social safety net, so it’s difficult to walk away, whereas in Australia and most of the first world countries, if business gets hard and you hit a hiccup, which most businesses do, the temptation is to just throw your hands up and say “it’s too hard” and go back on the dole and that has been a challenge for most organisations.