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Olson’s Observations

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Archive for the ‘Microfinance’ Category

Developing Nations and Tech: Cell Phone Minutes as Currency

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I read about an interesting idea the other day centered around microfinance and developing Third World nations (yes, I forgot where I read about this and trying to remember is killing me). The idea was that cell phone minutes could be used as currency in developing nations.

The thesis behind the idea goes something like this: while banks, banking services, credit cards and ATMs are basically non-existent in the rural parts of developing nations cell phones are becoming more and more prevalent. Therefore, since the cell phone minutes hold a value of some sort they could be used as currency. All one would have to do is create a system that would allow people exchange those minutes easily, preferably via the cell phone itself, and an instant “banking” system would be born.

I find that idea fascinating for a couple reasons:

1. It is so easy to implement (relatively).
2. The impact would be huge (especially as more and more folks get cell phones).

Of course this idea makes a lot of sense in developing nations but I wonder if it makes a lot of sense in developed countries like the U.S. I can see one domestic use for a system like this already. Kids.

As a parent it could be pretty compelling to allow your kids x number of cell minutes a month that they can either use to call/text their friends and/or use as currency at the local mall.

Of course I generally think getting them one of the fixed credit cards (i.e. they can only spend the amount that their parents put on it) makes a lot more sense in terms of teaching kids about the value of money and how to manage it but nonetheless the cell phone minutes as currency idea is still interesting.

Can you think of any other domestic uses of the cell phone minutes as currency idea?

Written by Eric Olson

June 13th, 2007 at 11:15 am

Posted in Business, Microfinance

Microlending in the U.S.: Problems and Possible Solutions

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I’ve had some interesting conversations lately regarding microlending in the U.S. and it’s left me wondering why there isn’t a more reliable system here. What we do have are community-based micro loan programs which are spread out all over the country but access to those programs is incredibly restricted. The programs also have very limited funds to say the least and they have yet to get anywhere near the profitability mark meaning the programs are not self-sustainable.

A solution to the limited funds problem would be to work with Kiva or an organization like Kiva that is focused on the U.S. market (this type of group has yet to be founded - I may have to add that idea to my someday/maybe list). This way the U.S. microlending programs could send the Kiva-like organization any good candidates for microloans that they can’t help simply because they don’t have the money to loan to them.

It seems to me that a system like the one described above might have a shot. However, there are a lot of issues that hamper microfinance efforts in the U.S. that will need to be addressed.

A paper on microlending programs in the U.S. written by Mark Schreiner (Washington University in St. Louis) and Jonathan Morduch (New York University and Princeton University) back in 2001 discusses some of the hurdles facing microlending in the U.S. (download the PDF and give it a read if you have the chance). Here is a brief overview of the hurdles Schreiner and Morduch outline in the paper:

Size of the microenterprise sector: The microenterprise sector is very large in the Third World and very small in the U.S. This makes it difficult to reach critical mass. If you were to have a U.S. wide microlending program it would be hard to reach everyone in an effective way but having small independent groups in certain areas leaves those groups with a very small addressable market of potential people to loan to.

Safety net: In the U.S., unlike a lot of Third World nations, there is a safety net that essentially deters people from self-employment. The safety net comes in the form of welfare programs and and abundant amount of low wage jobs. The low wage jobs and welfare not only give folks an alternative to starting their own company via a loan they also set wage floor expectations that, at least initially, the microfinanced business may not yield.

Competition from the big guys: In the Third World stores like Wal-Mart and Best Buy aren’t present for the most part but in the U.S. they are ever present. This means that miceoenterprises in the areas covered by the big guys will have a very hard time competing. Due to this situation it seems that service based businesses would be the way to go for microentrepreneurs in the U.S.

Competition from commercial lenders: Ahhhh, the old credit cards. Here they come again. Most folks, if they have a decent credit history and a job can get a credit card which essentially provides them with small hassle-free loans whenever they need them. Therefore, credit cards provide competition to microlenders in the U.S.. On the other side of the coin credit systems in the Third World basically consist of moneylenders which charge much more interest than microlending organizations making microlending the preferred choice.

Group lending faces issues in the U.S.: Group lending is at the core of most microfinance programs around the world. The theory is that the groups will keep all the members honest and also provide background on members looking for loans. The problem with that type of system in the U.S. is that there can be less of a community feel at times. Just because people live near to one another it doesn’t mean there is a community there. In the Third World people are tied to a group of people and a plot of land making the group lending system very effective and we don’t have those same ties in the U.S..

Microfinance for housing: Sometimes people that take microloans can use some of the proceeds to fix up their house and in some cases the loan is specifically sought to fix up their house. In the U.S. this becomes a little tricky since most lower income housing does not allow for improvements and drastic changes that someone might want to make with their loan money.

Regulation: Here it is. The pièce de résistance. Unlike Third World countries where there are sections of the countries where taxes and regulations are essentially absent the U.S. is regulated to the hilt. The other interesting thing about the U.S. in the context of regulations is that banks and non-profits are under scrutiny and if they are found to have charged the poor more interest than the rich they will be taken to task in the press.

Considering that microlending programs in the Third World charge anywhere from 20% - 30% interest they are way above the interest rates charged to someone like me meaning that they wouldn’t be able to use the same interest rates in the U.S.. Unfortunately microlending is expensive so the high interest rates are justified (and they are usually far less than the local moneylenders in Third World nations charge which is why they are accepted and embraced).

Microfinance is expensive because borrowers are spread out so getting to them is costly. Also, loaning $1mm to one person or $1mm in ten thousand $100 installments to ten thousand individuals is a very different animal. The earlier is much easier to scale than the latter meaning the cost to administer the earlier is much less leading to lesser interest rates for the rich.

I still think the answer to the problem must lie in the internet. Yeah, I may be a bit biased but hear me out. The internet allows you to scale quickly since anyone in the world with a connection, and in this case anyone in the U.S. with a connection, can find you and interact with you. Of course the key phrase here is “with a connection.” Since a lot of the poor are still without an internet connection we need to hop that hurdle.

This is where that Kiva-like system comes into play. The microlending organizations in the U.S. can be the folks that source the loans and pass them up to the Kiva-like organization (man, I need a snappier name than that) which will place the listings online and allow anyone in the world to loan to them. This would bring more cash into the mix and hopefully allow the U.S. microfinance organizations to cut a lot of their costs in relation to sourcing funds and to make more money since they can get more loans out into the market.

We’ve seen peer to peer lending in this country starting to make another push with both Prosper.com and Facebook’s new P2P lending program leading the way. People could use these systems to get their microloans but this still assumes the people in question have access to the net. The digital divide needs to be bridged and it can br bridged now by having folks on the ground finding people in need and then passing them up to internet based lending systems.

Of course this is easier said than done but the first step could be to unite all of the fragmented U.S. microlending folks together and then possibly build that Kiva-like system for them to share.

In the end of the day we still need to work on regulations that incentivise people to become microentrepreneurs. The regulations will be a big catalyst in the U.S. microlending push. Once the regulations get hammered out the national microlending network with Kiva-like system could get things moving in the right direction.

Written by Eric Olson

May 30th, 2007 at 10:55 am

Posted in Microfinance

Grameen Foundation Launches Blog

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GF USAI just wanted to alert all of you to the fact that the Grameen Foundation now has a blog. This is great news for the microfinance community since the GF USA team will no doubt provide some interesting insights into what is happening in the world of microfinance. Here is a quick blurb from the official press release:

The blog will give new and longtime supporters of microfinance and Professor Yunus’ work (www.thesocialcorp.com) a centralized point for active discussion and commentary on microfinance and the eradication of poverty – and a window to experience the excitement of the ceremony in Oslo. The featured bloggers will be Alex Counts, CEO of Grameen Foundation; Susan Davis, Chair of Grameen Foundation’ board of directors; and Sam Daley-Harris, director of the Microcredit Summit Campaign and president and founder of RESULTS.

As you can see, the blog started as a way to cover the Nobel Peace Prize ceremony live but I hope it continues to provide great information going forward. If you’re a microfinance enthusiast definitely subscribe to the feed (which is powered by FeedBurner of course). Without further adieu I’d like to say - Welcome to the blogosphere GF USA. We’re happy to have you!

Written by Eric Olson

December 13th, 2006 at 12:48 pm

Posted in Microfinance

Ads on The Wannabe VC

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KivaI haven’t done much with ads on The Wannabe VC in the last 1+ years of its existence. I had experimented with Google Ad Sense but I didn’t see results that warranted it staying on my site so I decided to forgo the small amount of extra revenue and ads all together. However, a CPM (cost per 1,000 views) model would work great on the site and feed and that is just what we do at FeedBurner.

So, after setting a lot of other publishers up with our ad system and seeing great results I thought it was time to get FeedBurner ads going on my site and feed. What to do with the money though?

As you all know, I love microfinance so I was thinking of ways I could give my ad revenue back to the cause. My conclusion was to take all of my ad earnings, head over to Kiva.org and give the money out as microfinance loans. This way the money will essentially last forever and help the most people. I will keep you all in the loop about who gets the loans and what businesses they are in as time goes on since, without out you guys, the ads wouldn’t make any money and I wouldn’t be able to give the loans (you can also check out my Kiva lender page to see where my loans are going).

Thank you all so much for reading The Wannabe VC. I hope you will continue to read and help my thoughts and ideas grow through your comments.

Written by Eric Olson

November 30th, 2006 at 10:33 am

Nobel Peace Prize Ceremony - December 10th

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Muhammad Yunus, founder of the Grameen Bank and microfinance, will be receiving the Nobel Peace Prize this year. This is a very big step forward for microfinance and it should cause a lot more investment dollars to flow in. I urge you all to watch the Nobel Peace Prize Ceremony live on Sunday, December 10th. There are a few ways you can do this:

  1. On the Web: NobelPrize.org - Live Broadcast: 1 pm Oslo time, 7 am Eastern, 6 am Central, 5 am Mountain, 4 am Pacific. The video will also be available for viewing on demand after the live ceremony.
  2. C-SPAN TV - delayed broadcast on Dec. 10th. Please check local listings for air times in your area.
  3. CNN International (as opposed to “regular” CNN) - There is a 60 minute special program at 12 noon Atlantic, 11 am Eastern, 10 Central, 9 Mountain, 8 Pacific. The program includes a long interview with Professor Yunus and only short excerpts from the ceremony.

The folks over at the Microcredit Summit Campaign have suggested setting up viewing parties. I love the idea and am thinking about setting one up myself (who’s up for it?). If you do decide to set up a viewing party the Microcredit Summit folks urge you to e-mail them at - info [at] microcreditsummit.org - with the party info including the date, time, city and country. Enjoy the ceremony!

Written by Eric Olson

November 29th, 2006 at 12:19 am

Posted in Microfinance

Microfinance on the CS Monitor’s Ethical Investing Show

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CS MonitorLaurent Belsie of the Christian Science Monitor produces a monthly show called Ethical Investing which I was recently made aware of. The show is available online and usually runs about 20 minutes. The most recent show took a look at microfinance as a viable investment opportunity which is why it popped up on my radar. The guests for the microfinance show were Scott Budde (managing director of social and community investing at TIAA-CREF) and Roy Jacobowitz (senior vice president of Accion International).

Laurent and his guests do a great job with the following:

  • Explaining microfinance in simple terms.
  • Talking about repayment rates.
  • Discussing how people can get involved with microfinance as investors (although Kiva.org is not mentioned most likely since you can’t earn a return on top of your principal at this time).

One of the other key things about microfinance that was lightly touched on towards the end of the show was the expansion of microfinance from microcredit to microinsurance and other micro financial services. Thirty years into microfinance and a Nobel Peace Prize later we know microcredit works. It is now time to bring other financial services to the poor along with microcredit. Financial services should be considered a basic human right and we are getting closer every day to everyone having access to them.

In closing the group touches on the movement of microfinance from its non-profit/NGO roots to an emerging financial market. As long time readers know I am very much looking forward to seeing this change progress. As microfinance is treated more and more as a viable investment vehicle and a place where for-profit ventures can flourish more money will flow in, interest rates will continue to drop, innovation will thrive and more people will be able to help themselves out of poverty. This is, without a doubt, a very exciting time for microfinance.

Watch the Video - Read a Brief Synopsis

Written by Eric Olson

November 15th, 2006 at 11:10 pm

Posted in Microfinance

Grameen Foundation Launches Mifos

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Grameen FoundationThe Grameen Foundation officially launched the Mifos initiative yesterday in Halifax, Canada at the Global Microcredit Summit. Mifos is an open source information management platform that aims to address the considerable technology challenges that face microfinance institutions. One of the major hurdles to sustainable growth in microfinance is the lack of access to affordable data management technology that can scale and grow with each MFI so Mifos comes as very welcome news. Here is a segment from the official press release that sums up the issue and how Mifos will help.

A 2004 survey by the Consultative Group to Assist the Poor found that 46 percent of microfinance institutions (MFIs) around the world were still using spreadsheets or manual systems to manage their portfolio and client information, severely hindering their efficiency and capacity to scale into the hundreds of thousands. With Mifos, a single technology “backbone” that all microfinance institutions can access and adapt is now available. Its innovative open source model allows microfinance institutions to engage local IT specialists to customize Mifos and to provide ongoing support at local, affordable rates rather than being dependent on one vendor that may sit on the other side of the world.

Many organizations and people have helped the Grameen Foundation with Mifos. The Omidyar Network provided a $1.5mm grant, Cisco Systems was an early supporter and the Global Markets Institute at Goldman Sachs has given 1300 hours of time to this effort. It is great to see so many world class organizations and top notch people pitching in to help further microfinance sustainability.

I am very excited to see how Mifos will help MFIs grow especially because it combines two of my passions: technology and microfinance. The open source nature of Mifos should also prove very engaging as interested people can hop in and work on the code base to make it stronger and more robust. Microfinance and Mifos are truly situations where many hands have made light work so let’s all keep pitching in and evangelizing what microfinance can do.

If you’re a Java developer please click here to get acquainted with Mifos.

Written by Eric Olson

November 14th, 2006 at 10:24 pm

Posted in Microfinance