United Prosperity Team Blog

This is a post by Gautam Rege of Josh Software.  Gautam Rege and Sethu Ashokan are the co-founders of Josh Software in Pune, India.  Josh Software is one of the experts in building software with Ruby on Rails. They have graciously agreed to support the ongoing development of the United Prosperity website on a pro bono basis. They also volunteered to do a field visit to Sri Lanka to see how their contribution is directly impacting people’s lives.  They no doubt live up to their company’s name Josh that stands for enthusiasm and passion in Hindi. The post by Gautam Rege follows.

Bhalchander

_______________Blog post on Sri Lanka visit by Gautam Rege _________________

In the first week of February, Sethu and I were on a field visit to Sri Lanka that was organized by Berendina Micro Finance Institution (BMI) and UnitedProsperity. Little did we know what’s in store for us but we have come back home changed and inspired.

The visit agenda was to study the impact of the micro loans that Berendina provides to their customers and to see its impact. UnitedProsperity has been involved in providing the micro guarantees for these loans.

We arrived at Dickoya branch near Nuwara Eliya in the morning. A 4-wheel drive was required to scale treacherous uphill and winding roads. This branch services about 4000 micro-loans and is managed by just 6 Microfinance officers. After a brief presentation on what they do, we set off to meet the people who have been helped by these loans. The clientele varied from a house-wife whose has stared a business of incense sticks, to a person who has setup a shop, to a person who has purchased a cow for this small dairy and even a plantation worker who has built his own toilet! This post later contains some photos and videos about these people and the loan impact. What I shall talk about here is how this impacted us and what I felt was wonderful about this entire setup.

Berendina has been around for more than 25 years and their meticulous approach to doing good as a non-profit is seen in their actions. They have an innovative way of providing loans.

• 3 beneficiaries form a group
• 10 groups form a cluster
• 30 clusters are managed by 1 branch officer.

This way 1 branch officer manages about 900 customers! There are regular cluster meetings where the money is recovered on a monthly basis and the group is responsible for their re-payment. This encourages the group to work together and support each other, even on repayment. In some cases to ease the process, BMI also gives loans to co-operative society as a bulk loan.

But Berendina doesn’t just stop there - they also have a Berendina Development Services (BDS) that is targeted only for improving the quality of life. One of the innovative approaches is about giving coupons for training camps - “Livelihood training”, “Entrepreneur accounts management” etc. These coupons are part of the loan and can be redeemed for training or they can get the cash value back in the case of unused coupons. This enables people to not just avail loans but also get some vocational guidance, education and knowledge. To my knowledge very few microfinance institutions anywhere in the world have implemented such a program.

The plantation worker story is an awe-inspiring one. BMI is the only Microfinance institution that supports plantation works whole-heartedly. Plantation workers are those who have been working for all their lives in tea plantations and are considered very high-risk customers for repayment. Their living conditions have traditionally been very poor. BMI strives to improve their quality of life by providing toilet loans, health camps, eye-checkups and even cataract operations all free of charge as part of their BDS initiatives.

Lets meet some of their customers:

Here are some memorable photos:

The Berendina office, which houses Kishore, the Branch Manager and his 6 Branch Officers.

Parthiban - the Hero of the day. He has received the entrepreneur award from Berendina.

The old and the new hygienic changes that Berendina is bringing about. The plantation workers earlier had common open toilets as opposed to the new private clean toilets.

The Happy Shopkeepers - Srikumaran and Bhuvaneshwari - their lives have changes after the loans they got from Berendina.

We also interviewed several clients and here is video of our interviews: Berendina visit video

We were also highly impressed by the transparency, dedication and commitment of the Berendina team. Travelling with them through the long day in a tough terrain, we were amazed to see that their energy level never flagged and they seemed to be going on an on like an energizer bunny.  This visit has energized us even more to do our bit to ending poverty.

We are delighted to announce that we have partnered with Berendina Microfinance Institute in Sri Lanka and we have new loans online. It has been a long wait, and the wait is over.

Berendina  was originally started as a Trust named Berendina Stitching in 1987 by Mrs. Berendina Borst of Netherlands.  Over time the activities grew and Berendina Microfinance Institute (BMI) was setup in 2007.

There are several reasons why we decided to choose BMI as a partner:

• BMI works directly with the borrowers rather than adopt a community based approach that is common in Sri Lanka. Thus they are able to reach the most vulnerable sections who are often neglected by the community based approach.

• BMI works in difficult areas that are further away from densely populated towns.  During the floods of 2011 in Sri Lanka, in some areas they had to visit their clients by boat.

• BMI works closely with Berendina Development Services in creating livelihood opportunities, health, sanitation and other areas.

• They work with 280 private sector companies to create employment opportunities for the youth.

• BMI has also been an innovator in several areas and has pioneered interesting approaches such as ‘enterprise and technical training’ for clients who take the enterprise loan.

The launch in Sri Lanka is an important step forward. We have survived the tough microfinance crisis in India and were able to successfully return 100% of the money loaned by lenders.

We are back on our feet now  and we  plan to grow UnitedProsperity.org with your continued support. Let us start by lending one loan guarantee at a time.

We are pleased to announce that we have started putting together the paperwork  for the launch in Sri Lanka. While the structure of the agreement with the bank is in place, there are still some clarifications needed on specific documentation requirements.

We will be updating the blog on the progress over the next few weeks. Thanks again for your patience and we look forward to  have entrepreneurs online soon.

In my  previous post, I had written that we were expecting to hear from the bank in Sri Lanka on the legal agreement. While we were expecting to hear back in 10 days from my previous post, we heard back only last week.

It has taken longer than what we expected, but fortunately things are moving forward. For now, I will not make a prediction on how soon we will be able to move to the next step, but I promise to update the blog by the middle of December.

Thanks for your patience.

In my last post, I had written that the loan to BMI had been approved. However there have been some unanticipated delays in getting the legal agreement finalized. We are expecting to hear from the bank over the next 10 days. Hopefully we will start seeing progress soon.

Thanks for your patience.

We are delighted to announce that a bank in Sri Lanka has approved a loan of $100,000 with a 50% guarantee to Berendina Microfinance, Sri Lanka. This will be the first ever bank loan to Berendina.

While the bank’s credit and risk committees have approved the loan, the bank’s legal department is reviewing the guarantee agreement we have shared with them. We hope to get their feedback in the next few days. Once the legal agreement is approved and we complete the necessary paperwork we will have new loans on the website.

We are really excited about this development and we are keeping our fingers crossed that we do not run into any unexpected obstacles. Watch out for more posts on this subject in the next few days.

Previously I had written about signing up a partner in Sri Lanka. At this stage we have learned that a proposal to approve the loan to Berendina Microfinance Institution backed by our guarantee is being reviewed by the bank’s risk and credit committees. We have been informed that the reviews should be complete by the end of July. We are cautiously optimistic that this process should go through smoothly and we hope to have loans online soon.

As I had mentioned in my previous post we are also getting a positive response from South and Central America. We have been able to make considerable progress with an MFI in Honduras. We hope to report on further developments over the next few weeks.

In India, the Ministry of Finance proposed a new bill for regulating microfinance in India. After receiving feedback from the public the bill will be presented in Parliament to be made into law. At this stage it is definitely a step forward. While some have commented on the bill, it is still a bit early to say how the final law and regulations will take shape and the impact they will have.

We are eagerly looking forward to report on new loans! Please do visit again for further updates.

The Reserve Bank of India, the regulator for microfinance broadly accepted the recommendations of the Malegam committee and proposed some guidelines recently. Banks in India have been traditionally mandated to lend a certain percentage of their total lending to priority sectors such as microfinance, small business, agriculture and so on. Previously all loans to microfinance institutions (MFIs) came under priority sector lending and that encouraged banks to lend to MFIs especially since the defaults were extremely low as compared to other priority sector areas.

The new guidelines are more specific on what constitutes priority sector lending under microfinance. The overall objective for the new guidelines seems to be to protect MFI clients (borrowers) while holding banks indirectly accountable for client protection through the priority sector guidelines. The guidelines try to achieve client protection by putting several restrictions (caps) on the way microlending can done and these include:

1) Interest rate caps on loans made by microfinance institutions (MFIs)

2) Margin cap for MFIs

3) Loan size caps based on rural/urban area

4) Loan size caps based on loan cycle

5) Minimum prescribed loan tenors (duration) based on loan size

6) Portfolio mix caps ( what percentage of a loan portfolio of a MFI should be income generating )

The guidelines are however silent on specific client protection practices the MFIs should have in place. In many ways the approach seems convoluted and noted industry commentators N Srinivasan and M S Sriram seem to indicate that the microfinance sector will continue to pay a heavy price for the lack of appropriate regulation. To my knowledge, bank lending is yet to resume in India even after these new guidelines have been released. Hopefully the reasons are just procedural and banks will start lending soon.

In my opinion the regulations need to be a lot simpler. The RBI should have intervened in just two broad areas without getting unduly involved in specifying how the loan product should be structured. They should:

a) Allow sustainability of MFIs but put restrictions on profiteering: The RBI could have specified reasonable dividend cap and a bonus share issue cap (i.e. no stock splits) for MFIs that want to avail of priority sector lending from banks. Additional related caps would be on compensation to key executives of the MFI. Thus MFIs can operate sustainably without resorting to profiteering and the right kind of investors would get involved with microfinance. See Ramesh Arunachalam’s blog for a more elaborate note on this subject.

b) Hold MFIs directly accountable for client protection: The RBI should have mandated specific and strong client protection guidelines and the responsibility should be directly on MFIs and not indirectly on banks that are far removed from the actual practices on the ground.

The RBI is expected to come up with more detailed guidelines. I hope that they will take the opportunity to solve the Gordian Knot of Indian microfinance. India has more poor people than the whole of Africa put together and this requires the government’s and the regulator’s utmost attention. A crisis should never be wasted.

Meanwhile we have also been introduced to the bank in Sri Lanka. Being the first loan to a microfinance institution in Sri Lanka, the bank is moving cautiously and we will have more updates soon.

Over the last few weeks we have also contacted several microfinance institutions in South and Central America. The response we have got has been a bit overwhelming and nearly a dozen MFIs out of the forty MFIs we contacted are interested in partnering with us. In hind sight we should have approached MFIs in South and Central America much earlier, but we did not take it up because we wanted to build some more organizational capacity before we expanded operations to multiple countries.

While we have one volunteer who knows Spanish and is helping us connect with MFIs in South and Central America, we need the help of a few more volunteers who know Spanish. If anyone is interested in volunteering, please write to me at bhalchander(at)unitedprosperity(dot)org. Thanks again for stopping by.

In the last post I mentioned that we are working on signing a new partner in South Asia. As a part of the sign up process, the new partner Microfinance institution (MFI) needs to fill an extensive evaluation questionnaire which we then assess. We also take third party reference checks, review their financials and also assess the commitment of the MFIs’ senior management to the mission of ending poverty. We also need to find a bank that is willing to make a loan based on the guarantee. Signing up the bank is one of the toughest aspects of our guarantee model.

We have been making good progress with an organization in Sri Lanka called Berendina Microfinance Institute (GTE) Ltd. One of the most interesting aspects about this organization is that apart from providing microloans they also provide business development services to their clients and they are able to do it sustainably through the usage of coupons. We took a third party reference check about the organization and the feedback we received is that Berendina is a very progressive microfinance institution. I am told that they are very professional, have a good long term vision and have good loan products. Their challenge is access to funding.

Berendina has recently approached a few banks to see if they can lend to Berendina based on a guarantee. Berendina has never borrowed from a bank previously so this loan would be the first of its kind. At present one bank is evaluating their proposal and a decision by the bank’s lending committee is likely in the next two to three weeks. From what I understand from Berendina, if the loan gets approved this could be the first loan to an MFI in Sri Lanka from a bank. We are cautiously optimistic that the approval would come through and I will be posting an update on this over the next few weeks.

Meanwhile in India, the Reserve Bank of India which is the Central Bank and the regulator for the large for-profit MFIs has yet to publish its revised regulations for microfinance. Thus the uncertainty amongst banks and MFIs in India continues. As a result there are virtually no loans being made to MFIs from banks. It is nearly seven months since the crisis emerged in Andhra Pradesh state in India and if clarity on regulations does not emerge quickly it will be an increasingly uphill task of reviving the confidence of banks in lending to MFIs especially the smaller and more socially oriented MFIs. While banks will not be much affected if they do not lend to MFIs as microfinance constitutes only a small percentage of the total loans they make, the biggest losers are going to be millions of low income families and especially those who are poorer and in the more remote regions.

I sincerely hope that the government and the regulators in India show the urgency and determination in laying out appropriate regulations for microfinance in India. This is the absolute need of the hour.

Over the past few months we have been approaching MFI in several countries – Kenya, Nigeria, Sierra Leone, Sri Lanka, Pakistan, Indonesia, Philippines and Cambodia. While most of the MFIs in India get their loan funds from local banks, in these countries there seems to be very little funding from local banks.

Even in cases where banks fund MFIs, the loan is backed by an international guarantee and in many cases it is a 100% guarantee. In a few countries we found local development wholesale funds that lend to MFIs without a guarantee.

We have started the process of evaluating some of these organizations and we are glad to announce that we are making steady progress with one organization in Sri Lanka. This will be the first loan for the organization from a Bank. We hope to have more news to share soon.

In India, the regulator (Reserve Bank of India - RBI) is likely to implement some of the recommendations of the Malegam committee. These regulations will be applicable for the large Non Banking Finance Company (NBFC) MFIs that were already being regulated by the RBI. A microfinance bill to cover all categories of MFIs will also be drafted over the next few weeks and it will be eventually presented to the Indian Parliament around July 2011. The uncertainty and dramatic slow-down in bank funding is likely to continue till the regulations are fully crystallized.

All these tell us that governments and regulators in countries have a very important role to play in making sure that microcredit is suitably supported and properly regulated. In India, there needs to be appropriate and comprehensive regulations backed by timely action against any errant organizations so that microcredit is safely and consistently delivered to clients.

In many other countries regulators need to find ways for MFIs to mobilize a reasonable amount of funds from local banks and/or the savings of microfinance clients so that adequate funds are available for the larger future needs. Further mobilizing local funds will also reduce foreign aid dependence, make local economies self sufficient and also make MFIs and their clients insulated from currency devaluations and international financial shocks. Our guarantees will make a positive contribution here in the years to come.

Meanwhile, we continue to look forward to an early spring.