Microfinance Interest Rates

Interest rates. The assigned readings as well as the video we saw on Muhammad Yunus really gave us no information about what rates the borrowers were charged. We know that the loans are for relatively small amounts of money, but what kind of return are the lenders getting? In theory, a bank/lender that is dispensing and managing 1,000 loans of $100 each will have considerably more overhead than a bank/lender of one $100,000 loan. 1,000 loans, regardless of their amount, would just require more work than one loan (CGAP explains this in greater detail). So how does this manifest itself?

In short, microfinance institutions (MFIs) have high interest rates. According to CGAP (Consultative Group to Assist the Poor), the average MFI interest rate was around 28 percent in 2006. Muhammad Yunus Grameen Bank lists their interest rate for all loans at 16 percent. While these rates seem high compared to what we're used to encountering for loans in the U.S., they are a reflection of the added overhead costs with microlending. Moreover, CGAP says that MFI loans have interest rates that are lower than both consumer and credit card rates in the borrowers' countries. The loan rates are also considerably less than local, informal money lenders. Many sources say these lenders charge borrowers upwards of 300 percent. So, given the alternatives, the interest rates on MFI loans seem to be entirely fair and reasonable for the borrowers in those markets. But has anyone been able to lower those overhead costs and effectively "frugal engineer" the microlending process?

In researching this topic I came across a lending organization called Kiva (Raymar also mentioned them in his last post). My initial impression from their website, as well as this Frontline piece, was that donors make contributions through the website that become microloans for the borrowers. Once the loan is repaid, the donors get their money back with no interest. I presumed that Kiva would then either charge a small "finder's fee" or use other donations to cover their business expenses. This model would conceivably be able to lower the costs of microlending. However, in reality Kiva acts as more of a go-between.

Here is how Kiva's loan process actually works (explained here on their website). A local MFI, or Field Partner, loans the money to the borrower first and the funds from Kiva are given to the lender later. This money only covers the principal amount. Since the MFIs are still responsible for administering the loan (e.g. collecting payments), they are able to charge interest on the principal amount. Kiva's Field Partners appear to charge rates to the borrowers that are comparable to those in their countries (each Field Partner's link lists the interest rate at the bottom of their page). In this sense, the funds from Kiva act more as collateral than a direct loan. The risk of lending is then spread out over the Kiva donors instead of being assumed by the MFI. Some of the Field Partner's reflect this reduction in risk by charging the borrowers lower interest rates or offering interest refunds once the loan has been repaid. So while they are not creating a dramatic shift in the microlending process, Kiva is able to expand and, in some instances, improve the service.

Even though the MFIs are charging interest rates that are lower than the local alternatives, I still wonder what could be done to bring down the costs. Will it happen because of a technological innovation? If mainstream financial institutions enter the microlending market, will they lower the costs? Will the rates be lowered by some combination of the two? Or are the rates already more than fair?

Let me know what you think.

Thanks,

-Kyle

The Profound Impact of a Simple Social Innovation

Jane Chen: A warm embrace that saves lives | Video on TED.com

Thinking about social innovations that serve as creative solutions to social problems, this week’s topic, I came across this social innovator featured in a TED Talks. (Video link above.) While working in India, Jane Chen saw the need for incubators for premature babies that are portable, sterilized, and low-cost. In this video, Chen describes how 4 million premature babies die each year. Moreover, babies that are able to survive a premature birth, often unfortunately develop long-term health problems as a result of fighting hypothermia, negatively affecting organ development and growth, because their parents lacked access to an incubator.

Chen describes the tactics that desperate parents implement in order to keep their babies alive and healthy, including putting hot water bottles around their babies and placing the babies under light bulbs. The social innovative spirit is there, but the solutions are not optimal, and in this case also potentially dangerous.

This product will not only save lives, but also reduce population growth; families will have fewer children as the likelihood of survival of each child increases. The multiple social impacts makes this a particularly important innovation.

Being in the field and encountering the absence of incubators enabled Chen and her team to identify the need first hand and realize that they were able to develop a simple and effective solution. The necessity to be in the field to understand the needs is critical in this process, and I believe a limiting factor we face today in fighting poverty as the isolation of many impoverished nations and communities.

Connecting this product to our readings for this week, I realized that by definition, social innovations have a triple bottom line as the value created accrues to our society; both to individuals directly impacted which transfers to the community at large. When people are able have access to basic necessities and therefore live a higher quality of life at the most basic levels, all society benefits. In the same way that this product will potentially reduce population growth in India, in addition to saving the life of a baby and enabling them to have a more healthy life, what other innovations have a similar impact on multiple fronts?

This story highlights the need to develop localized solutions. This video also reminded me that despite my indoctrination as an American that more is better, over-engineering is in fact not always better, and frugal engineering holds great possibilities.

In addition to frugal engineering, what other ways of common and broad scale thinking must we (as Americans) transform in order to be more effective social innovators?

Social Innovation 3.0

“To achieve divergent thinking, it is important to have a diverse group of people involved in the process.” This quote from one of our assigned readings last week, Design Thinking for Social Innovation, especially highlights the need for a community of problem solvers. In the past, usual problems have been solved with usual solutions; however, our world now faces so many complex problems that it is impossible to use our usual methods of resolution. So what are some unusual methods? Leveraging the power of social media and web 3.0!

Over the past 30-40 years, the world wide web has evolved through three various stages: web 1.0 was mainly person to person; web 2.0 connected the individual to a community; and now web 3.0 is facilitating community to community interactions. I will admit that I am a latecomer to the social media scene; however, there are so many valuable uses of social media, beyond having the ability to tell the world that I made homemade chicken soup for dinner last night! As Brown and Wyatt referenced in the Design article, a company called InnoCentive has mobilized an online community of creative minds to help solve some of the world’s most important problems (FYI: for cash rewards!). Social media enables a diverse group of people to bring their knowledge and backgrounds in solving these unusual problems, hence divergent thinking. While social media may have started as fun and games, it certainly seems like web 3.0 may stir the social innovation pot over the next decade. How have you seen social media enable innovation?

While checking my twitter account, I landed on Search for the Obvious, a website powered by The Acumen Fund. Similar to InnoCentive (but without the cash reward), Search for the Obvious aims to engage creative thinkers in solving a specific challenge. The website first encourages users to upload photos of products or services that have helped better the world and/or have helped millions of people. As we discussed in our first class, many of these innovations seem so obvious. The website then allows users to create the next obvious solution. The current challenge is finding an obvious solution for basic sanitation (Any ideas?).

Speaking of obvious solutions, how would you characterize social media? Whether or not you are part of the social media craze, it is happening, and there is much good that can come from communities engaging with communities. Essentially, social media is a channel for virtual human-centric design. I wonder how Bruce Hanington and his Design of Social Impact students are incorporating social media in their design processes...

MASSIVE Change

I saw this exhibit in Chicago on MASSIVE Change years ago. It was fascinating! I think the projects show the importance (and elegance) of creativity and design to social innovation. The exhibit explored the ways in which design could improve human welfare. Many of the projects/systems/products would serve the BOP population described in the articles we read for this week. In particular, I recall seeing portable, low cost water filters and transportation methods that would create enormous, positive change: women who otherwise spent hours and hours a day hauling water from remote sources to their villages would have time to pursue other productive endeavors.

As the sidebar says, “Instead of structuring our project around professional design disciplines, like graphic design and industrial design, we looked at design from the perspective of the citizen.” The Massive Change approach fits in with the notion of frugal engineering described in the Sehgal article: maximize value to the customer while minimizing nonessential costs. After all, in order to truly provide value to the customer, the designer must see what the customer wants and needs. While the BOP population has not formerly been a traditional “customer,” it is indeed a critical population of customers and often times has unique needs.

Make Something Happen: Harnessing the Power of Strength in Numbers

If you want to change something, what is the first thing you need to do? Create a strategy for achieving that change. Then, you need people to support your change so that your ideas are not trapped in your mind forever. How can you identify people in all parts of the world that would support your cause and actually back it through funding and/or action?

Enter…The Point: make something happen, a social and consumer activism site launched in November 2007. What makes thepoint.com different from other activism sites, such as change.org or kiva.org? While money can be donated to causes on thepoint.com, the mechanism that spurs this donation is different. With other websites, people donate money as soon as they see a cause they are willing to support. With thepoint.com, a member creates a campaign, and participants pledge to take action only when enough other people have pledged to do the same. If this “tipping point” is reached, members agree to boycott a product, donate money to a particular cause, or take some form of civil action. While money is not involved in all of the situations, in those where it is, credit cards will only be charged for donations in the event that the terms are met.

Some highlighted objectives/causes on the website and their related terms and conditions include:

1. Objective: Get a major magazine to publish an issue without airbrushing or photoshopping the models in any of the features or the cover. TERMS: If this objective is met, then buy at least two copies of the magazine. (to show the demand for images “real women”)

2. Objective: Raise money for an AIDS orphanage in India. Provide basic needs, housing, and volunteer support. Terms: If we reach at least $1,000, then we will give money to: Peace Children Care Home, India.

The idea behind thepoint.com is simple: strength in numbers. It allows people to achieve change that would be difficult to spark alone. To support a campaign on this website represents a step further from “liking” a cause on Facebook. While I agree that awareness is an essential first step, it is hardly ever sufficient in creating large-scale change. With regards to thepoint.com, some actual action does follow when the tipping point is reached. Thus, some sort of compact is maintained and carried out, paving the way for real change.

From the above discussion, the creator of thepoint.com, Andrew Mason, can be seen as a social entrepreneur, and his website can be seen as a social innovation. Both Mason and thepoint.com bring people together in an innovative (novel, significantly better than what exists today, and sustainable) way to indirectly further all sorts of causes to further the mission of generating social value. A few points, however, complicate this assignment of labels:

1. Not all of the campaigns and fundraisers on the website enhance the wellbeing of the population. Is this problematic? Is it sufficient that the majority of the efforts on the website do? Does mixing these two categories of initiatives devalue those in the category of “greater overall good”?

2. Will the possible addition of advertisements to generate revenue affect the social value of thepoint.com?

3. Will requiring members to pay a certain amount in order to create a campaign or initiative detract from the overall social value of the website?

Additional Resources for Those Interested in Design Thinking and Frugal Engineering

As a holder of a BS in Electrical Engineering, I was pleased that three of this week’s readings focused largely on engineering and product development and how social entrepreneurs are utilizing it to solve social issues. “Products for the other 3 billion,” “Design Thinking,” and “The Importance of Frugal Engineering,” each highlighted how understanding the customer and focusing on low-cost methods and inputs can lead to the successful and profitable creation of products and services fit for solving key issues of the developing world. Rather than rehash the arguments stated in those articles, the aim of this post is to focus on additional readings that can provide additional information to students interesting in learning more about these areas.

• Frugal Engineering: History: Patton, Phil. “The Meek Shall Inherit the Market.” The Design Observer Group. 4 October 2010. http://changeobserver.designobserver.com/entry.html?entry=18948 
• Support/Adoption: “Global Automotive Industry — Frugal engineering holds the key.” The Hindu Business Line. 6 May 2009. http://www.thehindubusinessline.com/2009/05/06/stories/2009050650010800.htm 
• Design Thinking: Proponents: Merholz, Peter. “Why Design Thinking Won’t Save You.” Harvard Business Review – Blogs. 9 October 2009. http://blogs.hbr.org/merholz/2009/10/why-design-thinking-wont-save.html
• Adoption: Martin, Roger. “Design Thinking Comes to the US Army.” The Design Observer Group. 3 May 2010. http://www.designobserver.com/changeobserver/entry.html?entry=13478
• Support: Rodriquez, Diego. “Why Design Matters.” Bloomberg Business Week. 1 February 2010. http://www.businessweek.com/innovate/content/jan2010/id20100127_150531.htm
• History/Detailed Explanation: “Video: Tim Brown urges designers to think big.” TED: Ideas Worth Spreading. July 2009. http://www.ted.com/talks/tim_brown_urges_designers_to_think_big.html 

In addition to reading the aforementioned information, interested parties may benefit from attending the upcoming TechBridgeWorld Conference hosted here at CMU on November 11. The conference will focus on the TechBridgeWorld research group’s work developing products and solutions for the world’s developing community. Indeed, design thinking, frugal engineering, and more largely, social innovation is a large part of the group’s focus. Thus attending the event will be beneficial to both students interested in design thinking and/or frugal engineering and to the entire Foundation of Social Innovation and Enterprise class. Those interested can find more information here: http://www.techbridgeworld.org/Interactive2010/

A Different Take on Design Thinking Strategy

Crowdsourcing. Wikipedia (a sort of product of crowdsourcing), defines the term as "the act of outsourcing tasks, traditionally performed by an employee or contractor, to a large group of people or community (a crowd), through an open call." The term is used to describe a trend of leveraging the creativeness/innovation of the collaborative masses. Its a process used by Institute for Human Centered Design to attract social innovators through competition. But there are those like Dan Woods of Forbes.com, who don't hold much faith in the collective intelligence of the crowd. In his article "The Myth of Crowdsourcing," Woods agrues "there is no crowd in crowdsourcing. There are only virtuosos, usually uniquely talented... from their fervent brains spring new ideas... the crowd solves nothing, creates nothing." There may be some merit to his ranting, for he later assersts his frustration with the trendy phrase is that the "misplaced faith in the crowd is a blow the the image of the heroic inventor. We need to nurture and fund inventors and give them time to explore, play and fail. A false idea of the crowd reduces the motivation for this investment, with the supposition that companies can tap the minds of inventors on the cheap." In the end Woods hits a criticial node with me. In the world of Social Innovation it's true that 1 plus 1 is greater than 2, as professed by Tim Zak of ISI, but what is the net gain of the 'crowd' versus the 'virtuoso'?

Rethinking Piracy

Mexico, Russia and China are the countries with the highest rates of illegal copies of music and movies; this fact is usually known as Piracy. I come from Mexico City, if you have been there before, surely you remember the vendors offering pirate movies and music on the main streets, in the metro and on the buses.  There is a large supply of piracy because there is a large demand of these products.

In the last years, the biggest chains of movie theaters had launched campaigns to make aware people that buying piracy they foster delinquency and break out property rights. As well, the International Intellectual Property Alliance profits each opportunity for claiming to the Mexican government to enforce the law appliance and to prosecute the “pirates”; The Mexican government had done improvements during the past years.  However, buying piracy in Mexico continues to be a widely extended practice.

I know that Piracy breaks out property rights and from a moral and law perspective is wrong, but I want to appeal you to look at this problem in a different way.  The largest consumers of Piracy are the urban people from the base of the economic pyramid (BOP). They can afford the price of buying a DVD player for the family, but they cannot pay for original movies; they can either pay for tickets for all the family for the movie theater.  Much less they can buy an Ipod or to go dinner outside to a restaurant. In resume, the only leisure time they can have is through the radio or the public television. 

Inequality makes the problem worst.  In countries with high disparities in income distribution, such as Mexico, the BOP people see how their rich counterparts have access to a wide range of leisure offers, as movie theaters everywhere, Max screens, ipods, digital music and internet downloads, but they don’t. The only way to have some access is through Piracy.

From a Social Innovation perspective, Piracy would be an opportunity area for social innovators.  Quoting Martin & Osberg’ s first step to have a social entrepreneurship: “identify a stable but inherently unjust equilibrium that causes the exclusion, marginalization or suffering of a segment of humanity that lacks the financial means”.  Well, everybody is losing under the current equilibrium, except the black marketers.  The government loses because the informal economy doesn’t pay taxes. The entertainment industry loses because they are selling nothing to a huge market that is demanding their products. As well, the BOP people is losing too because the quality of the pirate products is not as good as the original ones.

According to Martin & Osberg, the next step would be to forge a new and better equilibrium. Well, why don’t we create a leisure industry for the urban BOP population? Why don’t we bring low cost movie theaters to poverty neighborhoods and poverty belts. For example, in Mexico the entrance to a cinema costs $3.50 dollars and the minimum wage is $4 dollars per day working. The movie theaters in Mexico are usually located at nice shopping malls, have parking, nice seats and sell snacks. Maybe in a joint venture between the movies industry, the government and the nonprofit sector we can build simplest and cheapest movie theaters to offer tickets by 0.50 cents. I know that leisure is not as crucial as education or health services, but in this case it is because is a form of social exclusion of the BOP people that is operating now.

Souktel-Opening the Jobs Market with Cell Phone Technology

Souktel

Opening the Jobs Market with Cell Phone Technology

by Carol Erickson | Oct 12, 2010

Foundations in Social Innovation and Enterprise: Souktel-Opening the Jobs Market with Cell Phone Technology

Lana Hijazi and Jacob Korenblum have met many people in the Palestinian Territory whose job searches were hindered by a lack of access to information. While working in the region's international aid and telecommunications sectors, they discovered that the biggest barrier to finding a job in the West Bank of the Palestinian Territory is not always a lack of employment opportunities, but too little information about available jobs.

Job seekers also have to get past roadblocks and checkpoints that impede physical movement in the region. So Hijazi and Korenblum launched a citizen sector organization, Souktel, that surmounts these obstacles by using a new mobile phone technology to deliver job opportunities to men and women via text message on their cell phones.

Souktel's entry, Mobile Phone Employment Service, was a finalist in the Women | Tools | Technology competition

Their service promotes gender equality and provides a way for thousands of people across three continents to generate significant income. Souktel comes from Arabic word “Souk” for “market” or “marketplace,” where one goes for shopping and to get information. 

Newspapers in the region have mostly advertised only  executive-level positions. Some jobs have been advertised on the internet, but only one-third of Palestinians have internet access, largely through Internet cafes that are often dominated by men and off-limits to women.

Women’s job searches are often further hindered when traditional families don’t allow women to search for jobs in person, leaving female job-seekers with few resources for finding work, and a greater chance than men of remaining unemployed. Their unemployed status may lead them to enter into an unwanted early marriage.

While many Palestinians are able to get information about jobs through word-of-mouth or their own personal networks, unemployment remains staggeringly high. The Palestinian Central Bureau of Statistics estimates unemployment at 24.5 percent in 2009. Korenblum believes that the real figure is higher, noting that youth employment is particularly troubling, with about 40 percent of 18- to 25-year-olds unable to find work. 

The idea for Souktel came as Korenblum and Hijazi struggled to answer the question, “What can we do to help people get better access to employment information?” They knew that almost everyone had cell phones, and recognized that this would also give women a safe way to search for work from the comfort of their homes, or from anywhere they wish.

Korenblum and Hijazi tried a small scale JobMatch pilot to deliver information about jobs to a few people via text message, and found that the technology actually worked. They began to recruit employers to use their service by convincing them that newspaper advertisements were an inefficient way to find staff, and that mobile technology would give employers greater reach, costing them on average about US $10 per month.

The effort to recruit job seekers was fairly straightforward, because Korenblum and Hijazi knew that college campuses and technical training schools had no in-house counseling services to help graduating students find jobs. They began with a workshop at Berzeit University, one of the larger colleges in the Palestinian Territory, where half of the students are women. Job seekers can post a mini-curriculum vitae and search for job openings in the fields of their choice using their cell phone for a fee of US $1 per month.

To monitor its impact, Souktel tracks the number of people who call in to search for jobs, and contacts random samples of job seekers to see if they have had success. They also call all of the employers and ask if they hired a person through Souktel’s services.

Each month since 2005, Souktel has matched an average of 40-50 people in the Palestinian Territory with jobs. Souktel has been operating in Somaliland for a year and has matched about 330 young people with job opportunities. More than 8,000 people access Souktel services annually to find jobs or employees, generating an estimated US $9.6 million in income for these newly-employed workers.

Diaa’, a resident of the Palestinian refugee camp, Qalandia, is a typical Souktel user. She is in her twenties and studied computers but had no job prospects. Coming from a refugee camp, her family had no connections among local employers, her university had no tips for her, and the newspaper had no job ads for entry-level posts.  

Qalandia also has few places for women to use the internet, so this made web searching impossible. Like most young women her age, Diaa’ knew that if she failed to find a job, ultimately she would be forced to marry early, and her family would have wasted its investment in her education.

Diaa’ heard about Souktel from a friend, and signed up from her mobile phone. She stayed updated on job opportunities from inside her home, which was safer and made her family more comfortable. Soon after she signed up for Souktel’s service, she found a well-paying data entry job at a local company, earning her new respect in her community.

Souktel plans to launch a voice recognition mobile phone technology in 2011 that will allow illiterate job seekers to find work, giving them the ability to create a mini-resume and search for job through a series of touch-tone voice menus. This new technology will allow Souktel to increase its outreach to approximately 60,000 beneficiaries by 2012, making a significant impact on income generation and poverty alleviation in the Palestinian Territory, Somaliland, and Morocco, with plans for additional geographic expansion.

Souktel is a social enterprise that is non-profit in nature, covering almost all of its operating costs through corporate-style, fee-for-service revenue generation.  Any surplus revenue allows them to pay for research and development, and new market expansion. 

“This social enterprise model is both innovative and extremely successful,” Korenblum said. “Most nonprofits in our region rely on donations and grants, and  spend much of their resources trying to acquire more money to stay afloat. Souktel, by contrast, earns income to support our running costs by directly doing our core work -- matching people with jobs. This gives us regular, reliable income that will continue to flow in over time, unlike a grant that has a fixed end date.”

Souktel also connects aid agencies to people who need  help. Using AidLink, aid agencies that previously had to call thousands of people individually by telephone can now reach them all through the touch of a button, and send news about the arrival of food at distribution centers, or other emergency aid services. Souktel’s technology allows aid agencies,  including the United Nations World Food Program, World Vision, and the Red Cross, to upload community member phone numbers to a central database, and distribute information to certain geographies, women, or other specific groups in need. 

“We’d love to see this technology being used by more countries around the world,” Korenblum said. “Right now, we’re just small team of about ten people,  but we know that this technology has made a difference for an enormous number of people who have received important information on their cell phones because of our services.”

Souktel's participation in the Women | Tools | Technology competition helped them forge a new partnership with the Cherie Blair Foundation for Women (CBFW). Headed by the wife of former British Prime Minister Tony Blair, CBFW supports female entrepreneurs, with a specific focus on strengthening women-led businesses through mobile technology.

At the fall 2010 Annual Clinton Global Initiative, Cherie Blair and Mohammad Kilany of SoukTel participated on a panel and shared details of the new initiative, which, in partnership with the Palestinian nonprofit, Tomorrow's Youth, will work to distribute information to women involved in entrepreneurship programs.   Using the technology developed by Souktel, the women will receive business tips, financial management advice, and information related to women’s health, motherhood and personal development.

Once the women launch their businesses, the partners will help the women entrepreneurs develop their own distribution lists so that they can publicize their business and send potential clients promotions by text messages. SoukTel will also build a closed network of entrepreneurs and mentors from Tomorrow's Youth and its partners. Through this mobile phone network, the women will have real-time and low-cost access to information and advice by sending a text question to the entire group and receiving free replies on their mobile handsets.

Social entrepreneurs plays the role of change agents in the social sector by adopting a mission to create and sustain social value (Souktel creates a mobile job searching platform for college graduates, and continues to reinvest revenue to development and new market expansion); recognizing and relentlessly pursuing new opportunities to serve that mission (From a pilot project start, to now including text message for helping women launch their businesses, Souktel is always pursuing the mission of using a new mobile phone technology to deliver job opportunities to men and women via text message on their cell phones.) Besides the features that almost all social entrepreneurs possess, what is special about Lana Hijazi and Jacob Korenblum?

The success could more be attributed to their focus on the "BOP market", mentioned in article "The Next 4 Billion". The BOP in Palestine here refers to the job searching woman whose traditional families don’t allow them to search for jobs in person. Instead of the traditional approach which usually neglects the social value in job-searching woman in Palestine, Souktel identified the market value within the fundamental job searching market, delivered a sustainable solution (affordable text message) that makes markets more efficient so that woman in Palestine has more opportunity finding a job.

According to the "The Next 4 Billion", between 2000-2005 the number of mobile subscribers in developing countries grew more than fivefold-to nearly 1.4 billion. Traditional labelled "poor" mostly are willing to pay for mobile phone access to benefit from the increase opportunity to job, medical care and financial service etc. The model Souktel uses--that taking advantage of development of technology in BOP market expansion is now a growing profit-generating approach & a proven success in BOP market, 


But the future problem (my question as well) for start-up business like Souktel is: 

For future sustainability, how they compete with existing or potential big player in the market (eg. Celtel in Africa) as well as telecom tycoon (eg. Vodafone), who started to pay more attention on developing strategy in developing country (eg. Vodafone established "Vodafone Foundation" to invest and research on rural health & micro-franchise project, and working on expand signal coverage to more rural area in developing country)?