Promised Pictures

 Here they are! Promised pictures of a few Prisma clients, their small businesses, and of course their solar energy sytems. Enjoy!

Pulpería owner

Pan dulce ready to go in the oven 

Seamstress showing off the final product

Charamuscas! or home-made popsicles

Let there be light!

Roberto checking out the battery system

Batteries

Simple technology 

Prisma Danli's Loan Officer Manuel with Don José

Solar Panel

Mountain

More mountain

Observing their curious visitors

Solar panels

Solar Panel

Coffee

Light

Client getting ready to sign

A moment like this is always monumental in its own way

Proud ownership

And another client showing off her light

Captivating view

Sometimes traffic can get a little tricky in the mountains

Crediticity

Last week I saw something incredible. For the first time I was able to witness the impact of solar panels on the lives of the Prisma clients who reside in the mountains. Throughout my internship as a loan officer, I had always heard about the solar panels provided by our branch offices outside of the city to the local rural communities. And so my mind was left to imagine clusters of homes in the countryside, each boasting a small solar panel on their roof. But alas, what I saw completely proved me wrong.

During these past months at Prisma, I had been practically begging Roberto, our Credit Manager, to take me to a branch office so I could get acquainted with Prisma’s rural demographic. One of our branch offices is in the small colonial city of Danli, but it primarily serves rural clients outside the city. I think my own interpretation of the word “rural” is where I made a mistake. As we drove farther out of Danli and into countryside, small neighborhoods on either side of the main road slowly faded into a few scattered houses here and there, and as we drove higher into the mountains and into thicker forest, I only managed to catch a glimpse of a house every 20 minutes or so. And that’s when I realized that I had been wrong in my presumptions.

To make a point, we had to drive for almost 3 hours to arrive to the first client's house, and in total we saw about 5, summing up to about 8 straight hours of meandering on the dirt roads that scraped through the edge of the mountains. I was completely astonished at what I saw. Families of at least 6 or more living literally in the middle of nowhere, surviving off gains from selling coffee and perhaps a few cattle—but with functioning electricity running through their household.

The government of Honduras launched a program called ProSol to attract MFIs in Honduras to provide solar panels on credit. Prisma was quick to sign on to this, and now works in collaboration with ProSol to offer solar panels to clients. In actuality, what clients pay off is a reduced amount from the original worth of the solar panel because of a generous government subsidy that accounts for about 18% of the original price. Prisma then finances this reduced amount.

The technology is so simple. A solar panel sitting atop a tin roof absorbs light energy from the sun, converts it to an electric current which then travels through a charge controller, then through a battery system for DC power, and through an inverter for AC power. Depending on the size of the panel, clients can charge cell phones, plug in radios and TV's, and even use an electric water filter. Again, simple technology powering rudimentary devices,  but the sight is something to behold. When you look at a household perched on the side of a mountain, with nothing but nature for miles around--but with electricity--it's captivating. 

I'm head over heels in love with the idea that Prisma finances this type of product because it reveals the institution's perception. Coming from a hyper-connected generation back in the US, one doesn't often think about the pockets of populations across borders that live in complete isolation. A basic commodity such as electricity is a proactive step towards connecting these very populations.

On a more symbolic level, I see this type of project as a crutch for some of the most important citizens of Honduras. Most of the clients I saw last Wednesday owned and cared for small coffee plantations. Coffee constitutes about 20% of export revenues and most coffee plantation owners are stiffed on the true value of their produce. Despite this sad reality, the revenues confirm that plantation owners have a significant role in sustaining the economy. To recognize the importance of coffee to the Honduran economy is to also pay tribute to those who cultivate it. I believe Prisma has done and will continue to do a beautiful job at achieving this.

At the end of our trip, Roberto told me that because of the success of this project with the current handful of clients, there were about 600 new potential clients who showed interest. As they say here, "Manos a la obra!"

P.S. To all my dedicated readers, I promise to put up a post full of pictures soon so you can see what I'm talking about!

Regulation in its Right Place

Alright, after over a week of fickle internet, I'm back with another post. I promised in my last post that I would discuss how lack of oversight and management in certain MFIs have made interest rates the mistaken target for regulation. Earlier this year, in a New York Times opinion article, Dr. Yunus proposed that all MFIs impose interest rate caps of 10-15 percentage points over the cost of funds to prevent them from over-extracting profits. Yunus says that MFIs whose profits account for over 15% of the cost of funds are those that fall in the "red zone." However well-intended this proposal may be, as a Microfinance Information eXchange study points out, a significant number of MFIs in Latin America, Africa and South Asia fall into the red zone because operation costs are what drive interest rates to be so high. The study shows that for 2009 data from 1,027 MFIs around the world, 62% of all expenses were operating expenses that needed to be covered by the average yield and 80% of expenses that needed to be covered by the premium.

In addition, there are several other issues that come along with putting a limit to interest rates. For one, interest rate caps do not account for inflation, something which is not so uncommon in a time like this when the global economy is still recovering from the recession. Just here in Honduras, the price of food has soared, leaving many people scouring to find better prices. Secondly, interest rate caps would have the double effect of increasing demand for loans by the less poor clients, thereby undercutting the costs necessary to meet this demand, and abandoning the poorest clients (since the smallest loans are the most expensive to handle). This abandonment will have the very likely effect of pushing the poorest clients towards "loan sharks." What is a loan shark? Loan sharks is a term used to describe informal moneylenders who charge extremely high rates and who will most likely take advantage of the borrower's desperate situation by guaranteeing immediate cash flow but then will use unethical and sometimes violent methods to enforce repayment.  

This last point is an extremely important one to remember since the objective of all MFIs should be, in my opinion, to increase their outreach to the poorest of the poor. Surely capping interest rates would benefit the less poor, but losing the poorest of the poor would mean admitting that microfinance can only serve the more capable payers, the ones who pose the lesser risk. But supposing that the point of microfinance is to provide formal financial services to those who have been rejected because of their risks, if MFIs have already sent out the message "we'll accept you for your risks, as long as you pay for it," what happens when capped interest rates force them to say "nevermind your willingness to pay, we can't afford it"? It hinders an important mission of the industry for the sake of stability. And yes, stability is important, but we have to look at what has really caused the industry to become unstable.

One of the main reasons that has made interest rates a target for regulation is MFIs overlending beyond their capacity, lack of examination of borrowers' credit histories, and the use of unethical methods to enforce repayment. The most prominent example I can use is the state of Andhra Pradesh in India, one of India´s most microfinance-active states. A few MFIs in this state began lending to clients with bad credit histories, lending out too many loans at the same time, and then when the consequences of over-lending were felt, excessive debt collector harrassment led to the worst--a succession of client suicides-- tainting the mission of microfinance as a selfish mega-profit-seeking industry. It was obvious to the local government that something had to be done right away, yet the real cause of the problem, in turn, was not so obvious. For them, it made most sense to target the one thing that had caused a lot of controversy in the media--interest rates--instead of first investigating what actually led up to the crisis. And so, all microfinance borrowers were demanded to stop repayments, all MFI assets in major banks were frozen, and the interest rates were capped at 24%. Disaster.

Since then, the situation has gotten better and MFIs are beginning to gain back their independence but with much healing left to do. This brings me back to Yunus's second point in his proposal which said that in order to enforce the cap, there needed to be a microcredit regulatory authority in every country where microfinance activities take place. This is something that I hope will happen in the future since I think it lies at the root of so much of the turmoil that's happened lately. Having an overhead authority that can provide oversight over a district/state/country's microfinance activities would put pressure on MFIs to adhere to more cautious lending strategies. It would force MFIs to reevaluate the scope of their capacities by realizing that lending to their limit will only lead to their own demise and that using abusive debt collection will severely jeopardize the industry's integrity. 

So if the argument is for sustainability and stability, then capping interest rates is the absolutely wrong thing to do because it contradicts the mission for MFIs to attract private capital, and thus prolongs the path towards reaching economies of scale. And economies of scale should be the ideal trigger to lowering interest rates. For now, the question remains of whether costs of loans can be driven down to their absolute most affordable level for clients; MFIs have the challenge of proving that they are as cost-efficient as they can be as evidence that their interest rates are truly necessary. But this also means that clients have to value this affordability and stay loyal to it. If the microfinance industry wants to wash away some of the stains it has acquired for itself, it needs to focus on changing its lending and debt collection policies so that MFIs don't incur risks they truly cannot afford. Hopefully this will lead to the development of microfinance authorities in the future.

In defense of interest rates

Interest rates have always been a hot topic in the discussion of microfinance. Simply put, they are high, and sometimes very high. It's no surprise that people ask "But isn't microfinance supposed to help the poor? Aren't these interest rates hurting them?" Where to begin with answering this question. Microloan interest rates are not this high without good reason, in fact, it's what's keeping the industry self-reliant as opposed to becoming a donation-based business. This is extremely important if microfinance institutions (MFIs) want to increase their impact by expanding their services to the poorest of the poor. Expansion is expensive, and expanding to clients that pose larger risks than their middle class counterparts, well, that's even more expensive. High interest rates allow MFI's to factor in those risks without compromising quality services.

I read somewhere that it is inappropriate to compare microcredit interest rates to commercial bank interest rates. The argument was that commerical banks deal with much larger loans and transactions so the cost per unit of a commercial loan is much less than the cost per unit of a microloan. It is more costly to give out several small loans than a few large ones. Secondly, commercial banks will always recieve larger subsidies than an MFI would recieve, thereby making the risks incurred by each incomparable. Commercial banks loan to customers with more or less stable recorded financial histories, sometimes with the secure backing of subsidies and collateral meant to cover 80%-100% of the loan value. MFI's loan to clients with little or no recorded financial history, with the secure backing of collateral worth at most 80% of the loan value (at least in Prisma's case), or a guarantor. The target clientele for each is different, the risks are different, the costs are different, and the services are different. MFI's must charge for this difference.

I want to delve into what I mean by the risks that make microfinance more costly. When a client repeadtedly fails to pay on time, MFI staff will travel to the client's home or business to voice the concern and come up with a payment plan. From my own experience at Prisma, traveling to the client's home/business doesn't mean taking a 10 minute drive down the nicely paved roads of the city. No. I'm talking the very low-income areas on the outskirts of the city, where you find dirt roads, pot holes galore, gang-infested neighborhoods (a Prisma client was killed by gang memebers last year for going to the police about a robbery), no street names, and to top it off the client may not even be there once you arrive. I admit this is not always the case, but it is about 65% of the time.  My boss Susan and I have already gone 3 times to see the same client about her late payments, with traffic and road conditions making it 45 minutes each way. And she's not the only client we've made repeated visits to. Like I said, risks are expensive.

Let's not also forget that MFI's have to take out loans to operate and have to pay interest on those as well. If clients fail to pay their dues, MFI's suffer the consequences on many levels. Every month Prisma has to pay its own dues to the larger banks where it has loans. If the clients pay late, Prisma pays late, jeapordising its own financial integrity.

Another thing I want to point out that Susan mentioned to me is that the people who have long been shunned by formal banks for all these years are the same people who are willing to pay high interest rates for the personalized and amicable attention they receive at MFI's like Prisma. I've personally heard a few clients complain about how they are made to feel when entering large banks: like lesser people. Large banks demand clients to put valuable assets at stake in order to take out a loan. Many of Prisma's simply don't have that much to offer save maybe a TV or a fridge.  But MFI's understand the value of these items to the client and that is why they will consider those assets as worthy for a loan. MFI's must consider assets beyond their face value, and more in relation to the client.

Communication is also something that clients pay for. My first few weeks here I watched in amazement as Susan conversed with clients in almost street talk about Prisma's policies and application procedures. She speaks to them as if they were her nextdoor neighbors of 10 years. That is what clients pay for: comfort and simple conversation.  

This is my defense for high interest rates on microloans. This is not to say that interest rates haven't had their fair share of attacks and accusations. Interest rates have been wrongly attacked as a result of irresponsible management and over-lending in places like South Asia and Latin America. These issues also need to be addressed and discussed. In my next post, I will discuss how the abusive enforcement of payment and lack of oversight have damaged microfinance's reputation and have made the industry's operations subject to government intervention, especially when it comes to capping interest rates. I will conclude by saying that high interest rates are what is keeping the microfinance industry afloat, giving it an opportunity to expand to poorer clients while covering the costs. They are more than just the interest on top of loan. They lead to quality services, personalized attention, and an opportunity to expand to those who are financially isolated.

An invitation to muse...

Hello everyone! This is my first entry on my first-ever blog. I’ve never had a reason so start one before but since my arrival in Honduras about 5 weeks ago to practice microfinance, the things I have seen and learned have compelled me to create a blog, ponder endlessly for some catchy name (quickly gave up on that) and think of a way to draw attention to it. How am I doing so far? I guess not that great since I have yet to arrive at my point for writing. Let’s take a look.

I arrived in Honduras about 5 weeks ago to take on an internship with a microfinance institution (MFI) called Prisma. My work with them has caused me to reflect on the past developments of the industry and how these and the people they involve will shape its future.  Microfinance is a growing for-profit social concept that grew out of Bangladesh in the 1970’s with the help of Nobel Peace Prize Winner Mohammed Yunus, the “founding father” of microcredit. Not many people in the US are very familiar with the actual practice of microfinance since these take place in developing countries, such as Honduras. Before I move on to my own musings, I want to first take a glance at the basic elements that make up the concept of microfinance.

In 1976, Professor Muhummad Yunus of Bangladesh, taking notice of the poor’s severe lack of access to financial services, came up with the idea of formalizing the very informal economies that support many populations in developing countries. Specifically, he figured out how to modify commercial financial services for the poor by giving small loans to small business owners, thereby validating their enterprises and giving them an opportunity to grow. Until very recently commercial banks did not consider loan applications from individuals with barely any credit history or assets, leaving many poor populations isolated from the world of formal banking. The idea of microloans allows people to take out small sums of money for a specific purpose (in most cases for business development, however, since the development of microfinance, there are now emergency, vehicle repair, and home improvement microloans. More than this later). In essence, it aims to proportion finance to suit the needs of the borrower, for example, taking out a $1,000.00 loan to help a street vendor buy merchandise for his stand. Another aspect that makes microloans different is the interest rates, which, depending on the type and amount of the loan, can range between 24% annually and 32% annually, sometimes even higher. Because giving out microloans to individuals with very little or no credit history poses large risks for an MFI, high interest rates are necessary to compensate for this insecurity. In addition, MFI’s carry the extra task of bringing formal banking to the client’s door, meaning traveling to the outskirts of urban areas and even rural towns to make microfinance work. Sometimes, these travels also include training sessions. These too are compensated for in the interest rate. 

Microfinance still has a lot of growing to do. Recent events in Nicaragua and India have made the industry a magnet for negative media without the proper scrutiny needed to evaluate what areas call for improvement. Dr Yunus' recent forced removal from his position at Grameen Bank also doesn't help people take a step back and ask the right questions. What I will attempt to do with this blog is exactly that: try and ask the right questions that can help me, and hopefully you if you're still reading, reflect on the current situation of the microfinance industry and perhaps muse on the industry's future. Some of the topics I will try to cover are the effects of high interest rates on the growth of microfinance, the recent surge in commercial banks' adoption of microcredit programs, when microcredit may no longer be so "micro," why microcredit is not the answer to poverty, among others. As a disclaimer I have to say I don't intend for my thoughts and reflections to be interpreted as part of Prisma's mission or projects. What I say here is completely my own opinion, heavily influenced by what I have read and done through microfinance. 

I realize that this is a very short summary of a very large and dynamic industry, however if you'd like to find out more, I suggest doing some research on http://www.microcapital.org/, http://www.microfinancegateway.org/, or http://www.syminvest.com/. In addition, through my hands-on experience here in Honduras, I hope to gain knowledge that I will be able to share later. Please also keep in mind that I still have much learning to do and that I don't claim to be an expert; but that I hope this blog will serve that purpose: to learn.

I hope you'll continue reading and hopefully contribute to discussion. This blog is not only for my musings, but for your own as well. Enjoy! 

Note: All links in this blog are connected to http://www.microcapital.org/, an excellent online newspaper dedicated to reporting everyday news on microfinance activities, reports, and events around the world. Please also check out their wiki page at http://www.microcapital.org/microfinanceuniverse/tiki-index.php if you would like to find out more about important individuals, organizations, or terms in microfinance.