Micro Finance - Emerging Trends and Challenges

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<p>Micronance</p> <p>MicronanceEmerging Trends and Challenges</p> <p>Edited by</p> <p>Suresh SundaresanProfessor of Economics and Finance, Columbia Business School, USA</p> <p>Edward ElgarCheltenham, UK Northampton, MA, USA</p> <p> Suresh Sundaresan 2008 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA</p> <p>A catalogue record for this book is available from the British Library Library of Congress Control Number: 2008935924</p> <p>ISBN 978 1 84720 920 7 Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall</p> <p>ContentsList of contributors Preface 1 The changing landscape of micronance Suresh Sundaresan 2 The role of international capital markets in micronance Brad Swanson 3 Securitization and micro-credit backed securities (MCBS) Ray Rahman and Saif Shah Mohammed 4 Cell phones for delivering micro-loans Anand Shrivastav 5 How should governments regulate micronance? Richard Rosenberg 6 Gender empowerment in micronance Beatriz Armendriz and Nigel Roome Index vi xi 1 25 46 71 85 108</p> <p>123</p> <p>v</p> <p>ContributorsBeatriz Armendriz is a Lecturer in Economics at Harvard University, and a Senior Lecturer at University College London. She is also a research aliate at the David Rockefeller Center for Latin American Studies at Harvard University. She has taught at the London School of Economics and has worked as a Visiting Associate Professor at MIT, and as a Visiting Professor at the Toulouse School of Economics. Her research focuses on economic development and nance. Having published numerous articles on micronance, notably with Christian Gollier and Jonathan Morduch, she recently co-authored The Economics of Micronance, a book published by MIT Press in 2005. Her current research includes eldwork on micronance and gender empowerment, with researchers from the Innovations for Poverty Action (Yale and Harvard), and the Financial Access Initiative (Harvard, Yale, NYU). She is also co-editing a handbook on micronance, and a book, The Contemporary Latin American Economy, also for MIT Press. Lecturer Armendriz grew up in southern Mexico where she founded AlSol and Grameen Trust, Chiapas, the rst Grameen-style micronance organizations in the region. Saif Shah Mohammed is co-founder of MR Analytics. In 200506, he worked extensively on the BRAC micro-credit securitization, having moved to Bangladesh to complete and implement the transaction. Prior to joining MF Analytics, he worked as an analyst at Cornerstone Research, assisting industry and faculty experts in developing economic and nancial analyses in litigation contexts. Saif graduated from Harvard College in 2002 with a B.A. magna cum laude in economics. He currently attends the Columbia University School of Law. Ray Rahman is the founder and CEO of MF Analytics and one of the chief architects of the BRAC micro-credit securitization. Prior to starting MR Analytics, Ray was at Lehman Brothers, working on the cutting edge of asset securitization in the edgling commericial mortgage-backed security (CMBS) industry in the 1990s. He has also working in private equity, restructuring multinational companies with sales of over $1 billion. Rahman is a cofounder of Potenco, a green energy company that is creating the worlds most ecient hand-held power generator, targeted at the needsvi</p> <p>Contributors</p> <p>vii</p> <p>of developing countries. The generator was featured in Wired magazine in the summer of 2007. Rahman is also founder of Fast Forward India, a nonprot organization that links graduate students from MIT, Stanford and IIT with local mentors and NGOs, to identify and solve key problems that directly aect the life of disadvantaged populations in India. FFI helps teams pilot test proposed solutions on the eld with local NGOs, obtain funding to grow and widen the scale and scope of impact. Rahman graduated with a BS degree in mechanical engineering (high distinction) and a BA in economics, (cum laude) from the University of Rochester. He has an MBA from MIT Sloan School of Management. Nigel Roome holds the Daniel Janssen Chair in Corporate Social Responsibility at Solvay Business School, Free University of Brussels, and the University Chair in Corporate Global Responsibility and Governance at TiasNimbas Business School, Tilburg University, Netherlands. He previously held chairs in The Netherlands and Canada, and academic positions in Britain. He is widely published on topics that relate business strategies, innovation, and technology to issues of corporate responsibility, sustainable development, and global change. His books include Management Education for Sustainability and Corporate Environmental Management (1994); Sustainability Strategies for Industry (1998); and The Ecology of Information and Communications Technologies (2002). Professor Roomes career has involved innovations in both education and research. His achievements as a European Faculty Pioneer over 20 years were acknowledged by The Aspen Institute in 2006. Roome is currently Chair of the Academic Board of the European Academy of Business in Society and is a member of the academys management board. In addition to these responsibilities Roome has served as an environment councilor, an advisor to the president of Ontario Hydro and the Oce of the Canadian Commissioner for Environment and Sustainable Development, a member of ABBs global stakeholder advisory group, an expert to the European Commissions Futures project, and Chair of the European Commissions expert group on competitive and sustainable production systems to the year 2020. He has been invited to contribute his views on corporate responsibility and sustainability to meetings of the European Union, under successive presidencies of Sweden, The Netherlands, Finland, and Germany. Richard Rosenberg holds a law degree from Harvard University. He has worked in international development since 1984 with USAID and the World Bank, concentrating on development nance, especially micronance. He has authored or co-authored two dozen publications on micronance, including several on issues associated with regulation and</p> <p>viii</p> <p>Contributors</p> <p>supervision of micronance, and teaches regularly on that topic at the Boulder Institute of Micronance Training. Anand Shrivastav is the chief software architect and founder of Suvidha. He has over 25 years of experience in marketing and distribution of consumer, nutrition, and health care products besides telecom and banking services. He has set up projects, implemented marketing strategies, and managed large distribution channels. Shrivastav currently serves on the boards of the following organizations: Suvidha Starnet (mobile transaction services), as Chairman; and Genesis Biogen (stem cell technologies), as Chairman. In the past Shrivastav has served Intercorp Biotech (biotechnology, nutrition) as managing director, Hiperworld (information technology/ software) as managing director, The Home Store India (retail chain) as director, Intercorp Industries (hybrid seeds) as director, IEPCL (telecom, chemicals) as executive director, as marketing consultant for public sector units Kerala State Drugs &amp; Pharmaceuticals and Kerala Soaps &amp; Oils (consumer products), and as resident manager with RG Soft Drinks. Shrivastav attended Harvard University Graduate School of Engineering Design. Suresh Sundaresan is the Chase Manhattan Bank Professor of Economics and Finance at Columbia University. He is currently the Chair of the Finance subdivision. He has published in the areas of Treasury auctions, bidding, default risk, habit formation, term structure of interest rates, asset pricing, pension asset allocation, swaps, options, forwards, futures, xedincome securities markets, and risk management. His research papers have appeared in major journals such as the Journal of Finance, Review of Financial Studies, Journal of Business, Journal of Financial and Quantitative Analysis, European Economic Review, Journal of Banking and Finance, and Journal of Political Economy, among others. He has also contributed articles in the Financial Times and to World Bank conferences. He is an associate editor of Journal of Finance and Review of Derivatives Research. His current research focus is on default risk and how it aects asset pricing and sovereign debt securities. Sundaresan has consulted for Morgan Stanley Asset Management and Ernst and Young. His consulting work focuses on term structure models, swap pricing models, credit risk models, valuation, and risk management. He is the author of the book Fixed-income Markets and their Derivatives (1996). He has served on the Treasury Bond Markets Advisory Committee. He has served as a resident scholar at the Federal Reserve Bank of New York. He has worked with the Center for Micronance Research (CMFR) on issues relating to interest rates on micro-loans, the eects of repeated borrowings, and contract design.</p> <p>Contributors</p> <p>ix</p> <p>Brad Swanson is a partner in Developing World Markets, a socially responsible investment bank and fund manager, which he joined in 2003. As a banker and a diplomat, he has worked in emerging markets for 25 years and has done business in more than 50 countries. He began his career in the US State Department and was posted to West Africa. He then worked for Donaldson, Lufkin &amp; Jenrette Securities Corp. in New York, Bankers Trust and Banque Nationale de Paris in London, and Global Environment Fund in Washington, DC. During spring and summer of 2004, he was on assignment with the US Department of Defense in Iraq running private-sector nance programs for the occupation government. He is a member of the Investment Committee of Partners for the Common Good, a non-prot community development nance organization, and has served on the boards of investment banks in Poland and the Ivory Coast. He has a BA from Princeton University and an MBA from Columbia University.</p> <p>PrefaceThis bookMicronance: Emerging Trends and Challengesbrings together recent practical innovations and policy questions in the eld of micronance, and is largely based on the contributions made by dierent scholars and practitioners to the conference hosted by the Social Enterprise Program of Columbia Business School on 20 April 2007 at Columbia University. This conference, entitled Credit Markets for the Poor: Focus on Micro-Finance, examined recent developments in the eld, research ndings, and the challenges that lie ahead. The contributions in this book, after the introductory chapter, focus on (1) integration of capital markets with micronance, (2) securitization and micro-credit backed securities, (3) technological innovations such as the delivery of banking services to the unbanked sector using mobile phone technology, (4) the regulatory challenges and opportunities as the landscape of micronance undergoes a sea change, and (5) the consequences of gender empowerment, where women, especially among the poorest, predominate micro-loan borrowings.</p> <p>xi</p> <p>1. The changing landscape of micronanceSuresh SundaresanINTRODUCTIONThe ability of households to save, access capital, and manage risk exposures of various kinds, such as life, property, and health through insurance is a prerequisite for their economic and social development. Access to basic nancial services (such as credit, savings, and insurance) is most likely to develop the entrepreneurial skills and opportunities among those poor who are currently outside the perimeter of such nancial markets and services. Furthermore, over time, such access will promote better risk management capabilities and promote the economic aspirations of the poor. The World Bank uses two reference benchmark levels of consumption/ income to measure poverty: a consumption level of (US) $1.08 per day and a consumption level of $2.15 per day.1 These levels are measured in 1993 purchasing parity terms. As of 2001, the World Bank estimated 1.1 billion people had consumption levels below $1 a day, and 2.7 billion lived on less than $2 a day. While these gures are very stark, it is also true that the proportion of people living under $1 a day has fallen from 28 percent in 1990 to 21 percent in 2001. This progress not withstanding, it remains clear that poverty alleviation should be a major priority, especially for countries where a great proportion of people live under $12 a day. It is dicult to visualize how countries such as Brazil, China, and India could truly emerge as developing economies until their numerous poor citizens nd easy access to essential nancial services, which is critical to them in climbing out of poverty. Micronance, which has emerged and evolved over the past 35 years, is one such mechanism that has attempted to deliver the core nancial services to the poor. This mechanism along with some recent developments in this eld is the focus of this book. It should be made clear that while the provision of low-cost access to nancial services is an important ingredient in alleviating poverty, there are a number of other basic services that are unavailable to the poor. These constraints include (1) absence of primary education, (2) absence of1</p> <p>2</p> <p>Micronance</p> <p>primary health care, and (3) relatively primitive technologies used by the households. These constraints need to be tackled in parallel as the momentum to deliver nancial services gathers speed. There are signicant complementarities between access to nancial services and the ability of the poor to access education, health care, and better technologies.</p> <p>FORMAL AND INFORMAL MARKETSCapital markets and nancial institutions help provide mechanisms for thrifty households to save and provide access to households and institutions seeking capital for funding their consumption and investment plans. In addition, they oer nancial services such as life insurance, property insurance, and health insurance. The successful development of economies in Europe and the United States is in no small measure due to the services provided by such institutions and markets, which allocate savings from one part of the economy to nance the capital requirements in other parts. Organized stock exchanges, bond markets, dealer markets, commercial banks, insurance companies and other institutions, constitute a vital part of nancial architecture of most economies, whereby households and institutions are able to allocate their savings and have access to capital. These markets and institutions are known as formal markets for nancial services. Formal credit markets consist of institutions such as commercial banks, credit unions, rural banks, and other nancial institutions, which are subject to...</p>