Do you think ''Patient Capital'' and Microfinance can work together? I'd like to hear people's opinion on this potential synergy,

I feel this could be a great complimentary model to the Microfinance model. A lot has been said about the challenge of sutainability in microfinance, but I think bringing in the model of ''Patient Capital'' is fundamental to solve this challenge.

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Permalink Reply by Kevin Parcell on November 28, 2011 at 11:37am

ACCION, which invented modern microfinance, thinks that patient capital lent to microfinance investors is needed. Here is a link to ACCION Investments briefly discussing this: http://www.accion.org/page.aspx?pid=493

In the investment model I'm developing (http://reconomy.net), local currency that continually circulates in its community is used to microfinance genuine local development when the borrower's business goal contributes to community self-sufficiency. For example, an artist might borrow to build a gallery, employing local workers in the construction and providing a retail outlet for local artists. As part of this strategy, we're using STRO's experience and success (http://www.socialtrade.org/) asking that the loans are repaid using local currency, contributing to the value of that currency because there is a perceived demand. A borrower might also give a discount to purchases made with local currency so as to attract the money it needs to meet its obligation, and in this way further increase demand for the community currency; and this discount can be absorbed by the business through raising the base price of its offerings enough to compensate, and also because we give a discount on energy purchased with local currency such that the business saves national currency. Since we print this currency rather than borrow the money we lend, and since increased demand for our currency allows us to issue more, we gain from seignorage, and so costs might be reduced and loan terms improved for our borrowers.

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Permalink Reply by Jini Sebakunzi on December 1, 2011 at 7:15am

Hey Kevin,

Thanks for your reply! I really like your concept of adding the variable of improving the demand of local currency: the dominance of popular currencies (USD, EUR, etc) does not help Latin America & Africa. Since they also have to pay long-term debts in those currencies, they are so penalised to make any of their local currency worth it.

I will take a look at STRO, thanks for sharing the link!

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Permalink Reply by Antonio Bryant on December 4, 2011 at 9:25pm

Jini,

I believe there is synergy between microfinance and patient capital. I think that microfinance investment funds (MIV) can be tailored to be "categorized" as patient capital. MVIs have the structure to take on a long investment horizon and the risk tolerance (due to the nature of investing in microfinance) as well as adequate financial support. They need to be tailored to offer management support and therefore yearly expense ratios should be charged to keep the MVI sustainable or maybe have a front load type of charge to enter into the fund. The fund should be fully transparent as to highlight the cost for supporting management- this will help entice the investor and justify the cost. With the funds- the MVI will then allocate loans to a few businesses as to diversify the risk but to also concentrate the funding amounts. The loans could be structured as debt or equity however maybe with a bias towards debt for tax reasons for the entrepreneur and to charge a fair interest rate to keep ties with both parties. It would be nice to charge a lower interest rate because of the initial cost for investor to enter the MVI or because of the expense ratios. However the majority of the funding coming from the charges should be allocated to management support. The reason for a lower interest rate is to give the investee a higher probability of success and for creating value. Thus investor should be aware that the investments made within these types of MVI are for maximizing social return rather than financial return. I do think some return is necessary to make the MVI sustainable and possibly allow for full or partial refunding on the expense ratios. Also the expense ratios could be lowered depending on the amount of capital being invested in the MVI. Just an idea…What do you think?

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Permalink Reply by Jini Sebakunzi on December 5, 2011 at 2:30am

Antonio,

You bring up some good points on MVI and sustainability: for sure you need to return if you want to make a change. We all know that by giving access to finance to local entrepreneurs for 5 years is not enough to make any social return. As stated in the ''Blue Sweater'': technological change is hard to make, but behavioral change is even harder to sustain.

Based on some research I have done cost management seems to be real issue: the issue of charging an interest rate too high in order to run the business profitably. I think the parallel, or the missing link is ''how do you make financial AND social return?''. It is the similar to the question most companies ask themselves of ''how do I stay profitable AND increase my market share?''.

I did some research on the evolution of MVIs in a country like Brazil, and they did run into problems of not making any profit as they were either trying to offer low interest that did not cover their costs, or the local government setting a high barrier for public lending, which was passed on to the people taking out the loans.

In my opinion, for MVIs to work you need both the private AND public sector to set the right environments for it to work. Most importantly, a lot of work needs to be done within the communities to understand where the areas of improvements are needed: where and who are the local entrepreneurs? What kind of services do the local people urgently need? The book ''Blue Sweater'' highlights that very well, in the case of telemedecine in rural India.

Also look out for this 30min podcast on the issue of microfinance, from the UK paper the Guardian. It is a panel of experts talking about the pros and cons of microfinance. They bring out some good points:

http://www.guardian.co.uk/world/audio/2011/apr/01/focus-podcast-dev...

So are you working in an MVI? I have been working in the private sector, but looking to get involved in MVIs. There are some certificates on Microfinance, but I do not know if that is necessarily the right step to learn more about it.

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Permalink Reply by Antonio Bryant on December 5, 2011 at 1:58pm

Jini,

You make valid points and what people fail to realize with MFI and MVI is the aspect of sustainability. MFI is not only focused on economic sustainability but is intertwined with social, technological, and environmental factors too. Microcredit is a product and the MFI must deliver a system to ensure that it works properly and sustainably.

In regards to cost management- this is what makes MFI so complex. Microcredit is only one tool in the MFI tool box and if run properly, it could be supported by other tools that are offered such as insurance or educational loans. The issue now at hand is an agency problem with pushing more of the other services because of the cash flows they provide- but remember that an interest rate is linked to the credit extension so price at-cost and deduct by subsidizing it from the other cash flows. Another idea could be to artificially hold rates low by subsidizing it though outside collateral as given by donors or create a new type of MVI as a microfinance investment collateral vehicle where every year investment rounds are made as to set the interest rates or you can structure after the fact as to have an open collateral fund open all year as to set the real rate at the end of the year and then refund the clients on interest payments. Therefore if the client is paying rate x (based on current practice with no exposure to the collateral fund) the whole year and after the collateral fund has been closed, conduct the calculations to lower the average interest rate, and then refund as needed. This is a complex idea of mine but this could offer a more efficient manner of using subsidies or government capital.

Could you provide me more specifics in Brazil? It would be interesting to see the cases; I am not familiar with MFI or MVI in that region.

Understanding your client is vital. It’s what caused over indebtedness and an issue that has help chip away at the brand of microfinance.

Thanks for that podcast- it brought up many issues that I see people bring up and how there is much focus of on microcredit rather than microfinance.

I don’t work in an MVI, I actually work in the private sector with mutual funds but microfinance and social business has always been a passion of mine, and hopefully a career later on. As of certificates- you are the first one to mention them to me. My suggestion would be that these certificates are not as valuable yet because of the maturity of the industry and program but rather the CFA (Chartered Financial Analyst) would be more beneficial because it is established, known, respected, and creates skill that is greatly needed in microfinance.

Thanks!

Jini Sebakunzi said:

Antonio,

You bring up some good points on MVI and sustainability: for sure you need to return if you want to make a change. We all know that by giving access to finance to local entrepreneurs for 5 years is not enough to make any social return. As stated in the ''Blue Sweater'': technological change is hard to make, but behavioral change is even harder to sustain.

Based on some research I have done cost management seems to be real issue: the issue of charging an interest rate too high in order to run the business profitably. I think the parallel, or the missing link is ''how do you make financial AND social return?''. It is the similar to the question most companies ask themselves of ''how do I stay profitable AND increase my market share?''.

I did some research on the evolution of MVIs in a country like Brazil, and they did run into problems of not making any profit as they were either trying to offer low interest that did not cover their costs, or the local government setting a high barrier for public lending, which was passed on to the people taking out the loans.

In my opinion, for MVIs to work you need both the private AND public sector to set the right environments for it to work. Most importantly, a lot of work needs to be done within the communities to understand where the areas of improvements are needed: where and who are the local entrepreneurs? What kind of services do the local people urgently need? The book ''Blue Sweater'' highlights that very well, in the case of telemedecine in rural India.

Also look out for this 30min podcast on the issue of microfinance, from the UK paper the Guardian. It is a panel of experts talking about the pros and cons of microfinance. They bring out some good points:

http://www.guardian.co.uk/world/audio/2011/apr/01/focus-podcast-dev...

So are you working in an MVI? I have been working in the private sector, but looking to get involved in MVIs. There are some certificates on Microfinance, but I do not know if that is necessarily the right step to learn more about it.

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Permalink Reply by Jini Sebakunzi on December 11, 2011 at 10:51am

On microfinance in brazil, I found this thesis while doing this research titled

Microfinance in Brazil: Government Policies and Their Effects (2008)

http://etd.ohiolink.edu/send-pdf.cgi/Serpa%20Flavio%20A.pdf?ohiou11...

It is dated as of 2008, but it gives you a good background of MFI in Brazil, and some of the changes the govertment had to make, to make it work and also some failures. Speaking of failures, I just watched this TED video, which talks about failures in NGO, for which in my opinion MFI cold learn from too

http://www.ted.com/talks/david_damberger_what_happens_when_an_ngo_admits_failure.html

Thanks for your advice on how to get in the field of Microfinance. I am due to move to Brazil for 6 months, so I hope to get some experience while I am there.