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This the second part of a series describing Kiva and microfinance in Bolivia. View the first post to find more information on Kiva.

We hear a lot about microfinance empowering the poor, but who are these people that we are ostensibly helping? Are we actually helping them? At least at Fundación Agrocapital in Bolivia, the answer is an uncontestable "YES."  

The entrepreneurs I interviewed while working at Kiva last summer professionally explained the workings of the projects that they had carefully seen to fruition, telling me that their micro-loan assisted businesses now provide them economic peace of mind, more freedom to create their own hours and be with their kids, ability to invest in their children's education and daily needs, and more connectivity to the rest of the world through cell phones, TVs, DVD players, and online access at Internet cafes. Almost every female entrepreneur told me that she wanted her child to become a professional and have an easier life than hers. Every borrower, even if s/he lived in a two room hut, took me in as his guest and offered me Coke, food, and even presents. No matter how little they had, these entrepreneurs did not think of themselves as destitute; I was a guest in their home and they wanted me to be comfortable.

They were also grateful to have access to micro-loans and surprised to find that there were strangers in foreign lands interested in supporting their ventures. In these videos, Carmen and Emma thank lenders and explain the impact micro-loans have in their lives.(Read more on my perception of Bolivian poverty in my Kiva Fellows Blog post.)

Though borrowers in Bolivia have diverse businesses and ambitions, I found a number of trends across the three regions in which we worked: La Paz, Cochabamba, and Santa Cruz. Entrepreneurs were positive and hard-working, sometimes waking up at 4 or 5, and almost always working on weekends. Here are a few different categories of businesses, along with real stories of borrowers:

Ambulatory sales: Most entrepreneurs start out their businesses by selling on foot. These entrepreneurs will carry their wares (clothing, snacks, meals, cosmetics) on their backs and travel door-to-door and through bustling marketplaces to find potential buyers. Many of these women will travel 100 miles or more several times a month to buy cheaper products in border towns and sell them in their hometowns.

Some of these businesses let entrepreneurs just eke out a living, while others have the potential to grow quickly, like Leonarda's solar ovens that use no natural gas, only sunlight. Glass sheets let in sunlight from above, and a layer of wool insulates the bottom and absorbs the heat.

Leonarda tells me that these ovens work perfectly, just like a standard natural gas-fueled oven, and are of high quality; most last for at least ten years! In fact, there is a big market for these ovens in the Bolivian countryside where consumers do not want to spend money and time buying natural gas tanks. These consumer are even aware that the ovens are environmentally-friendly. Leonarda uses her oven to make all kinds of food, including mote (a cooked grain usually eaten with charque, sun-dried llama meat or beef), rice, and cakes.

Over a few loan cycles, the family has reaped enough profits from this innovative business to buy more food for their family, a television, a DVD player, and a plot of land on which to build a house in the future.

Market stalls: If the entrepreneur is successful with ambulatory sales, she or he will save enough money to pay the monthly fee for a market stall. This is the next tier. Now, the entrepreneur has access to a large volume of clients and can sit down, though some prefer to open their businesses outside their own homes in order to be with their children during the day.

Maria Silvia used her loan to buy more products for her wallet stand, which has grown a lot with the help of micro-loans; she recently expanded to two stands in two different parts of the city. In the past, there wasn't enough food. Now, Maria brings home milk, cereal, and bananas every night, and her six children are never lacking nutritionally. Right now, they only have two rooms in their home, and in the future, Maria would like to take out a loan to build two more rooms on to her home for two of her children.

Micro-loans have also helped Maria on a psychological level. Before she took out her first loan, she felt oppressed and isolated, selling a few products out of her home. Now that she has the resources to have her own market stall, she has more friends and is more motivated to work hard to pay back the loan.

Constructed rooms: Depending on the product they sell, some entrepreneurs are able to build a room on to their homes for their businesses. Others set up a stall outside their homes. These businesses can be set-meal lunch/dinner joints, small convenience stores, or hair salons. These require a lot more investment, so these entrepreneurs usually have individual loans with a higher credit limit (v. group loans.)

Serial entrepreneurs: The majority of borrowers that succeed in one business are able to start another business on the side.

Griselda, a creative 30-year-old entrepreneur from La Paz, runs a small food store, sells clothing by delivery, makes artisanal purses and mirrors on the side, and helps her husband with his windows/doors store. Griselda's biggest goal is to open a clothing stand on the main street instead of selling through order and delivery, and she is considering exporting her artisanal mirrors and purses. Griselda recently bought a computer for her children, who are 7, 10, and 13, and hopes to save up enough to study social work someday.

In the end, the personal stories allow us to experience the impact. Micro-loans helped cassava seller Juana bring in more profits to feed her family two to three times a day instead of once a day. They allowed Martha to jumpstart her business of embroidering traditional clothing for festivals, which transformed her life. Martha's family had one bed and no kitchen-they used firewood for cooking. After her business grew, she now has a kitchen with a stove and refrigerator, more food, better health, a television, and a bed for every member of the family.

Micro-loans have allowed thousands of individuals like these to get their businesses on their feet. And speaking with the poor themselves is integral in order to assess impact and find more solutions for poverty alleviation.

To sum up the spirit of micro-loan borrowers, Virginia, a proud single mother of nine, explains:

"I'm doing well and have made all my payments without a problem. All by myself, I'm lifting myself up, little by little. When you have a responsibility, you do what you need to to fulfill it, even if it means not eating so your kids can. It's hard, but as they say, 'Wanting is power.' If you want something enough, you will make it happen."

In this series, NextBillion brings you Base of the Pyramid career path stories and best practices from across the BoP industry spectrum. To help our readers better navigate potential options and career decisions, we'll feature interviews with BoP professionals working  in start-ups (like One Acre Fund, Driptech, and d.light) , supporting institutions (like AIDG, IDEO, and the Grassroots Business Fund), and corporations (like SC Johnson, Accenture, and Danone), as well as founders of organizations, on-the-ground BoP practitioners, and others. Today's post features an interview with Chris Laurent, Business Development Officer at MicroVest; a capital-mobilizing intermediary for microfinance institutions.

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When Chris and I met to compare notes on the challenges facing rural microfinance in Bolivia, he had recently made the leap to a BoP career after 11 years in commercial finance and banking. Chris' progression from a "cushy Silicon Valley VC job" to his work in the rural Andes and later with MicroVest represents a particular breed of BoP professional who leave mainstream corporate positions in pursuit of more challenging and rewarding roles in the development community. Their skills and experiences play a vital role in the growing BoP development sector. After all, as Chris notes, "The poor need good minds and good hearts, not just good hearts."

Read on to learn more about Chris' path and what it takes to make the career switch. Before we get into the interview, I encourage you to read a bit more about Chris in his bio. Now let's hear what Chris had to say when we caught up about his current - and your potential - BoP Career Path:

Josh Cleveland, NextBillion.net: How did you attain your current position at MicroVest? 

Chris Laurent, MicroVest: As the commercial BoP development space remains in its infancy, specific experience does not yet pose a barrier to entry for people with good minds and good hearts.  Today, the development-specific BoP skills are largely taught and learned as on-the-job training.  I obtained a position with MicroVest's investment team covering Latin America by having three things: (1) a commercial finance and investing background - obtained in traditional, developed economy institutions,  (2) a language capacity - taken on myself at the age of 36 on my own dime, and (3) a demonstrated commitment to social change - proven by leaving a cushy Silicon Valley VC job and moving to the Andes to live for a year while learning the language and working in poverty alleviation through microfinance.

NextBillion.net: You've definitely made a conscious decision to take the road less traveled by leaving mainstream finance. Tell us about a life-changing insight, event, or person that has put you on the path that you are now.

Chris Laurent, MicroVest: After pursuing a lucrative and seemingly perfect commercial finance and banking career domestically for 11 years, I increasingly became aware of a calling and desire for a more impacting use of my time and talent, and a realization that earthly treasures were unimportant.  I was increasingly asking myself, "Is this what my life is supposed to be about?"  Over the next couple years, I then began taking on personal development through Landmark Education and then that led to spiritual development through my church and a great theologian there, and the common themes of all these teachings and learnings were "Who are you called to be?", "If not you, then who?", and that "True joy lies in finding ways to give yourself away".  Without the ability to speak even one word of Spanish at the time, I took a legitimate leap of faith toward the one thing that bubbled to surface all the time: Poverty eradication in Latin America.  I saved and planned for a year and then left for Ecuador.

NextBillion.net: What mentors who have significantly contributed to your career development? 

Chris Laurent, MicroVest: It's funny, outside of the other main religious figures from whom I gain example, strength and direction I don't have any one specific earthly mentor that inspired me. Instead, it was the story of every single person - and everyone knows of one or two people in their lives who are so crazy/bold/stupid/brave/heroic/immature to do so - who took on a life not about them, not about material gain, not about worry or risk that inspired me.

NextBillion.net: Knowing what you know now, if you were in school again, what would you be studying that you think would help you in your current role?  What degree would you go back for if you were going to go back again? 

Chris Laurent, MicroVest: In terms of degrees (undergrad and post-grad), it depends whether you want to be on the more hardcore commercial finance side of development or on the more social program side of development.  Regardless, I would do Peace Corps or similar work for two years to experience poverty and development face-to-face.  Then, if finance was the interest, I would then probably pursue a MBA and commercial finance experience for a couple years to learn the best practices of developed economies.  If the social side was the interest, I would instead pursue a development finance/economics degree.  The issue to weigh with this is that development jobs rarely pay a fraction of what commercial jobs do, and so paying off student loans becomes a greater challenge.

NextBillion.net: How have you managed the challenge of working on global issues with maintaining a personal life in whatever location(s) you consider your home(s)? 

Chris Laurent, MicroVest: This is a tough one, but it's all about knowing yourself, knowing what's important to you, and then balancing it all.  In general, having a development career corresponds to a lower salary and less of an ability to live the all-American lifestyle.  Specifically, having a field job - close to the action - means sacrificing that all-American lifestyle and the creature comforts familiar with it - family, friends, etc.  For me, I had the field job and although rewarding, it did not balance me.  I am a little older now - 40 years old - so establishing my own secure family unit and being close to and in the lives of family are important.  Although I'm based in DC away from the action, my present job allows me to have solid impact - I would argue more than a face-to-face job would given what I do - while balancing these other priorities.  It's tough though, and I know I am blessed and lucky to have this life.  Knowing I am making an impact on poverty gives me complete peace at the end of the day and drives me to work tirelessly the next day.

NextBillion.net: What do you think are the three most important things that someone needs if they want to work in this sector? What are the most valuable tools you use every day in your job? 

Chris Laurent, MicroVest: Demonstrated commitment to social change; real hardcore practical experience; language capacity. 

NextBillion.net: Despite the challenges, what makes you hopeful about the work you do that should make others want to choose this as a career path to follow? 

Chris Laurent, MicroVest: I know that the availability of financing to all mankind is critical and necessary - to finance a water pump or purifier, a solar panel for electricity, a home renovation or expansion, a business, a high school education, a college education, a dream - and that providing ways for capital to get from here to there is making a development impact.   

NextBillion.net: What words of advice do you have for those who want to pursue a career working in an organization at the BoP?  

Chris Laurent, MicroVest:  First, obtain perspective to the cause you want to be a part of; you can't help what you don't know.  Second, obtain language capacity in the region you want to serve; you can't serve people you can't understand.  Third, obtain best of breed experience for several years in the economies and jobs most sophisticated; you serve and teach people the best way to do things if you don't know the best way to do things; the poor need good minds and good hearts, not just good hearts. 

Even before I fully knew what mobile money was, I could tell it was going to be huge. One look at the size of immigrant remittance flows that have become the largest source of funds flowing into many developing economies (and are more stable than FDI), and you can tell that innovative ways to move money with lower transaction costs would quickly find scale.

Add to this the cumulative economic turnover at the base of the pyramid - 4 billion people without bank accounts and often any non-cash monetary instruments - and innovative ways to store money and make payments loom even larger.

Estimates for the size of the mobile money market range from $27 to $202 billion within 4 years. So I'm not the only one who thinks this will be big but doesn't know how big.

To get a handle on all this buzz and walk through what mobile payments really look like, I sat down for a tutorial with Ben Lyon of FrontlineSMS Credit while he was in the Bay Area to speak at Google. As someone accustomed to debit cards and PayPal and the like, I had to take a step back to get a feel for what the ability to send and receive money through a mobile phone - or really, a SIM card - means for someone with no other easy way to move money or convert cash into electronic form.

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When my co-worker Moses Lee at the William Davidson Institute asked me to write a blog post about my experience last year as a Kiva Fellow in Bolivia, I did not even know where to start or what to encompass. Living and breathing Kiva for three months implied me getting involved with microfinance in every sense-with laypeople that l end in hopes of making an impact, the energetic brains at the Kiva headquarters, the ambitious executives at the local microfinance institution, the underrated loan officers that work tirelessly to overcome the many obstacles in lending to the poor, the proud and driven borrowers themselves, and, equally importantly, the other Kiva Fellows that constantly collaborated on best practices, supported each other, and shared an excited, passionate energy online. Each of these interactions supplied me with so many different types of insights and inspirations that I did not know what I would even attempt to communicate to NextBillion.

At the end of the day, I just knew that I wanted to communicate the energy that every one of those interactions lent me. No matter how conversant (or not) the people at any given level were about the processes, difficulties, and possibilities of microfinance, I was struck by the way that a giant multitude of very different people had come together for something that, in fact, was functioning well and impacting thousands of lives across the globe. When one is only a tiny part of a movement, it is extremely easy to doubt its real and potential impact.  What allows this particular chain of people to shake the earth and create real change is simply their understanding that their small part of the link is not just valuable, but indispensable to the whole. They are all driven by the realization that the "whole" sums down to the simple concept of a vegetable seller's ability to feed her children or a seamstress' chance to leave her abusive husband and be self-sufficient, which they deem important enough to tackle the various difficulties one encounters when trying to create change at the base of the pyramid.

For those that are not familiar with Kiva, it is a person-to-person micro-lending website on which anyone can lend as little as $25 to an entrepreneur in the developing world. Kiva loans have a 98% repayment rate with 0% interest, but the lenders do receive a summary of the impact of the loan (a "Journal" update) on the entrepreneur's business and quality of life. These Journal entries are fundamental to the Kiva model because they take the place of the interest a lender would receive on a loan, instead providing them with the satisfaction of having had a positive impact on another individual. That is not to say that there is no interest charged to the entrepreneurs. After a lender sends their money by PayPal to Kiva, Kiva funds the microfinance institution, which charges interest to its borrowers. Kiva currently has 108 partner microfinance institutions (MFIs) in 52 countries.

Fundación Agrocapital, the MFI with which I worked in Bolivia, charges 30% interest on most micro-loans, which the institution uses to sustain and expand their own operations, repaying only the principal amount back to Kiva to be disbursed back to lenders. Though this may seem like a high interest rate, in the world of microfinance it is relatively standard. Microfinance institutions must cover many extra costs that a mainstream financial institution does not have to, like compensation for the time and money involved in travelling to borrowers' homes in far-flung locations. In addition, these interest rates are much lower than the entrepreneurs' alternative: borrowing from local moneylenders or "loan sharks" for rates up to 150%! Many women I spoke with were grateful to have access to capital at a manageable interest rate.  

With this model, Kiva revolutionized capital flows to MFIs around the world because for the first time, there are hundreds of small capital streams supporting many credible MFIs around the world, as opposed to in the past, when there were infrequent, very large investments producing a bottleneck effect in just a few localized MFIs. Kiva monitors their partner MFIs' administrative capacities and restricts its funding limits accordingly in order to avoid bottlenecks. Kiva recognizes itself as an administrative burden as well, since loan officers must write borrower profiles (a personal synopsis of the borrower and her business) and periodic Journal updates, and therefore sends Kiva Fellows to partner institutions in order to assist with administrative tasks and implement sustainable and efficient processes at the MFI in working with Kiva.

That is how I was given the opportunity to speak with hundreds of borrowers in Bolivia about their experience with micro-loans. The women and men I interviewed for Journal updates had a variety of businesses, the most common being ambulatory clothing/cosmetics/food sales, market stalls (more expensive), small stores (even more expensive), and small "cocinas," or simple lunch or dinner joints outside of their homes. The majority of the borrowers were positive about its effects; the micro-loans had allowed them to incrementally keep growing their businesses.

Most borrowers started out with very small businesses, and after a series of loans had grown their businesses substantially. The borrowing process works like this: borrowers take out short-term (think 6 months) loans to buy capital, they pay back the whole loan, and then take out another, usually slightly larger amount to buy even more capital. The borrowers normally go through a series of loans before one can see the impact on their businesses, but the businesses do grow substantially, and the majority of borrowers I spoke with had a more stable economic situation after a few years because of the micro-loans.

Stay tuned for personal stories of the driven, assiduous Bolivian borrowers and their innovative businesses. 

How does one convert "credit" extended to low-income households into tradable "commodities"? Is there a way to use the best know-how of financial markets to transform an industry that makes small loans to low-income households? Is it possible to diversify an organization's sources of funding lowering its cost of capital while at the same time increasing the returns of an investor's portfolio?

Securitization, which typically involves conversion of assets that have predictable future cash-flows (like mortgages, automobile loans, student loans, home equity loans, credit card receivables, etc.) into rated, standardized and tradable securities, promises to offer an answer to all these questions.

Highlighting the recent $10.4 million transaction that involved India's first mutual fund investment (by ICICI Prudential AMC) in the Indian microfinance industry, a recent blog entry by Dr. Nachiket Mor emphasized the importance of securitization as a financing channel for the microfinance industry. His blog triggered an interesting debate that argued how Micro Finance Institutions (MFIs), who have traditionally depended on uneven year-end inflows from banks, could diversify their sources of funding by participating in the assets-backed securities market via "rated" securitizations.

This particular transaction involved the securitization of receivables from over 55,000 micro loans originated by Equitas Micro Finance, a MFI based out of Chennai. It demonstrates that receivables securitization offers an economically attractive alternative to conventional sources of financing for MFIs. So, how does it all work? Securitization converts an illiquid asset into a tradable instrument in the debt-capital markets. In the case of a MFI, the underlying asset comprises of a pool of micro loans that are originated by the MFI and are backed by the future cash flows related to the loans (i.e. the collections from the low-income clients). A structurer, then, performs rigorous due diligence on the MFI by creating strict underwriting guidelines to ensure that only the most credit worthy MFIs are chosen to participate in the securitization process.

A portfolio of loans is then sold to a bankruptcy-remote entity, "Special Purpose Vehicle (SPV)," that is housed in a separate legal entity (usually a private Trust). A rating agency performs due diligence on the MFI and the loan portfolio; in order to acquire a high desired rating for the to-be-issued securities, it is critical for the originator of micro loans (the MFI in this case) and / or the investors, to provide adequate credit enhancement. Credit enhancements, such as subordination (first loss default guarantee by the originator, and second loss deficiency guarantee by the investors), over collateralization, etc. are vital risk-reduction techniques that aid in protecting the securities backed by a pool of collateral (for example, collections from low-income clients in our case) from potential losses arising out of defaults in the underlying assets (the micro loans in our case).

After purchasing the assets, the SPV then creates investment-grade debt securities, which are then sold to investors in the debt capital markets. The returns that the investors receive are directly affected by the performance of the underlying assets since the investors take in the interest and principal payments on the underlying assets for the duration of the security's life. Also, since the SPV is a legal entity independent from the MFI, the rights of investors to the assets held by the SPV are protected in the event of the MFI experiences financial trouble.

So, why would an investor (in our case, banks, insurance companies, mutual funds, private wealth managers, etc.) like to participate in an asset-backed securities market comprising of micro loans to low income families as the underlying assets? It is because microfinance loans are an increasingly attractive asset class due to the following salient features of Microfinance loans: 1) lower acquisition costs given a loyal client base that results in high portfolio quality and loan repayment rates; 2) high liquidity and solvency given the short tenor of the micro-loans, typically less than a year, thus giving entities such as mutual funds to have an additional short-term investment opportunity; and, 3) high returns and portfolio diversity given microfinance loans' low correlation to the mainstream markets.

On the other hand, securitization helps the MFI broaden its borrowing sources, reduce the cost of borrowings, impart pricing flexibility on the lending side, enhance ROA and other financial ratios, and/or lower leverage and boost financial return ratios. For example, since the securitization process results in the "true" sale of assets, there is generally a corresponding removal of the assets from the balance sheet of the MFI. The MFI can then realize meaningful improved balance sheet metrics (such as Return on Assets, Return on Equity and Return on Capital) and financial flexibility to manage higher growth with existing capital. Specifically, issuing additional debt (bank loans) may have adverse effects on the MFI's balance sheet, as well as undesirable dilutive effects while issuing additional equity.

The term debt, additionally, usually carries covenants that restrict the MFI's financial flexibility (specifically around the timing of the repayments). But, by raising funds through the sale of an asset (that already exists on the MFI's balance sheet) and by receiving cash for the receivables within days of an invoice being issued, the MFI's working capital needs are dramatically reduced. The MFI can then re-deploy these funds to originate and service a larger number of loans, optimize its existing distribution network and correspondingly reduce its operating costs passing on this benefit to the end customer in the form of a reduced interest rate. A lower interest rate for the microloan, finally, spurs demand for microloans and will empower the MFI to fulfill its social mission of reaching more unbanked households.

The Gates Foundation is at it again.  Yesterday it announced $38 million dollars in funding to support programming that will give the poor safe, effective ways to house their savings. 

Six grants will go to 18 MFIs that offer microcredit but will "make savings accounts available to an initial 11 million poor people across 12 countries in Africa, Asia, and Latin America over five years."  Potentially game-changing model?  Check.  Learn by doing?  Check.  Strategic geographic reach?  Double-check.  The grantees, which include ACCION, FINCA, the Grameen Foundation, ShoreBank, Women's World Banking, and World Vision, represent leaders in the field of microfinance.  Notably, the grant to Women's World Banking is the largest it has ever received.

Clearly, this effort focuses attention on an element of access to finance that has been less emphasized.  One of the arguments that Portfolios of the Poor makes is that the poor lack robust, flexible, and effective financial tools.  Perhaps not surprisingly, this lack of resources spurs creative money management among poor households.  Some utilize products in ways that defy their original design.  For example, several borrow money through microcredit as a way to save it for future use.

Interestingly, savings are a key component of the Community Economic Development approach of Nuru International, a relatively new NGO that has applied design and systems thinking to the problems of the rural poor in Kenya.  Granted, Nuru applies microcredit's "group borrower" model to savings.  But their approach definitely prioritizes savings as a tool for community-based economic sustainability.  Perhaps this is just a footnote, but it will be interesting to note whether the Gates funding and the emerging emphasis on savings will result in an inflection point in microfinance.

Additionally, it might be worth observing whether m-banking and savings accounts dovetail at some point.  After all, m-banking emerged from a need to circumvent the hefty fixed costs associated with "banking via brick and mortar branch."  Finally, given the diversity of grantee initiatives-from ShoreBank's distribution innovation (staff members with handhelds and motorobikes) to Women World's Banking focus on financial literacy via social soap opera-we'll all want to know which methods prove most effective and why.

Microfinance is widely touted as a major private sector success in tackling development. According to the State of the Microcredit Summit Campaign Report 2009, microfinance now reaches more than 100 million people through more than 3,500 organizations. Nonetheless, like many forms of financing, microfinance is a coarse tool to lift people out of poverty insofar as it usually lends to people who may be willing to invest in the development of fixed assets, traditionally in farming or small businesses. More recently, microfinance products have tried to sharpen their focus to stimulate investment in particular assets such housing or healthcare.

However, one of the most glaring omissions in the 30-year development of the microfinance industry has been the lack of attention paid to possible synergies between microfinance products and education. Although there are already some mechanisms to promote basic education in low-income communities through Conditional Cash Transfer programs, there are few microfinance institutions (MFIs) offering micro-loans for students who may want to take their education beyond the secondary level. With the exception of a handful of avant-garde MFIs working independently or in partnership with Vittana, MFIs have yet to figure out the right approach to profitably offer student loans directed to those wanting to enter into tertiary education. Furthermore, investors are reluctant about risking their money in exploring possible venues to develop these business models. After all, the benefits of doing so would not be captured only by the investors themselves but by the whole microfinance industry, while the exploration costs would be accrued by the investors alone. This results in a “vicious circle” by which no organization has yet developed a suitable business model.

Such a lack of private sector solutions is an important market failure. Studies show that tertiary education, while often neglected in favor of primary and secondary schooling, can be an equally effective poverty alleviation tool. Private returns to tertiary education in low-income countries seem to be frequently on par with the returns from primary education. For example, at the country level, in Sub-Saharan Africa, a one-year increase in average tertiary education levels is estimated to raise annual GDP growth by 0.39 percentage points (World Bank, 2008). At the individual level, each additional year of education can yield 10% to 15% returns in the form of higher wages (World Bank, 2008). The private benefits for individuals are well established and include better employment prospects, higher salaries, and a greater ability to save and invest (Bloom, Canning and Chan, 2005). These benefits may in turn result in better health and improved quality of life (Bloom, Canning and Chan, 2005).

Stimulating tertiary education also seems to make business sense.  MFIs estimate that the market for student micro-loans will amount to between 10% (Peru) to 40% (India) of their future portfolio (Source: internal market studies from MFIs and Vittana). Time appears to be ripe for a profitable microfinance product that enables prospective borrowers to further their education.

Vittana is a young, non-profit start-up founded 18 months ago that is aiming to fill this market failure. It was founded by Kushal Chakrabarti (at left), who used to run the personalized recommendations team at Amazon.com, along with Brett Witt. Vittana’s stated mission is to break the vicious cycle mentioned above by which big investors are not willing to start offering student micro-loans until they see a significant track record of student micro-loans being profitable and having a positive social impact. To this effect it has developed a business model to offer student micro-loans based on two pillars.

First, Vittana makes use of its extensive field experience to share best practices with MFIs and to co-develop a micro-loan product adapted to local markets. Many of the ingredients required to develop student micro-loans are not as similar to standard microfinance practices as one could expect. For example, instead of lending to groups of individuals, Vittana suggests that mothers of prospective borrowers should co-sign the loan. Moreover, the ideal student-borrower is a high school graduate wanting to enroll in a vocational school to acquire a set of skills that will allow him or her to find formal employment. The majority of the “best” student-borrowers are often the children of successful previous microfinance borrowers, to whom MFIs have easy access and about whom they have good financial information. Therefore, finding successful and efficient MFIs is crucial in order to gain scale and fine-tune the loan product to specific regional circumstances. MFIs are fully responsible for marketing the loan, finding suitable borrowers and managing the customer relationship. Moreover, Vittana is engaged in random audits of their partners to ensure that the individual lenders’ money is well spent.

However, this first pillar alone is not enough to break the vicious circle because the business model remains to be conclusively proven. This need gives rise to the second pillar, Vittana’s search engine. Following Kiva’s footprint, Vittana has developed a person-to-person microlending website. Since there are no big investors willing or able to step in, Vittana’s solution is to make it possible for potentially millions of small investors to fill in the financing gap. Their website allows individual lenders to browse through possible student-borrowers and select an individual to receive the loan. You can view, for instance, the profiles of several of their current student-borrowers here: 1, 2 and 3. Vittana has no capital of its own to disburse, so it exclusively depends on individual lenders to generate cash for their loans. According to Vittana’s strategy, these two pillars will enable them to develop and provide a source of finance to a healthy portfolio of student micro-loan products.

Given their innovative model and the importance of the gap they are trying to address, it is no wonder that the Huffington Post has named Vittana number one of the top 10 “game changers” in philanthropy. Vittana makes no secret of its huge ambition and its early success in its promotional video and in its public figures. After Vittana’s first agreement  with a Paraguayan MFI one year ago, people around the world (mostly the United States, but also Sweden, Germany, and The Netherlands) have been disbursing more than $10,000 in loans every month. Loan volumes are experiencing double digit monthly percentage growth rates with nearly perfect (97%) repayment rates. Vittana now supports about 50 students and is adding 10 students per month to its portfolio.

Even though it currently operates exclusively in Paraguay, Nicaragua, Peru and Mongolia, Vittana is looking forward to expanding into other countries very soon. In the long term, it aims to jump-start a broad, global system in student micro-loans and become a focal point for MFIs interested in figuring out how to add this type of loans to their array of services. In fact, there are already indications of this: Vittana is emerging as the “go-to” organization for interested MFIs eager to find a way of increasing their bottom line as microfinance products such as business loans, home loans and other credit lines become increasingly standard.

Those of our readers interested in lending money to Vittana should know that the full amount of their money will go towards the loan. After the disbursement they can also make small donations to Vittana as well (there is a short video explanation online about how the loan process works). As in Kiva, many individual lenders are needed to reach the total amount of money required by the borrower to enroll in further studies (usually between $500 and $1,500). The typical loan recipient is between 18 to 25 years of age and takes 6 to 24 months to fully repay the loan.

Neither Vittana nor Vittana lenders receive any interest on the loans, although MFIs do charge some interest to cover their operating costs. These rates are usually much lower (10-15% per year) than those of traditional microfinance (40-60% per year). Vittana's daily activities are maintained by optional donations made by its lenders, as well as generous support from its lead funders including the Mitchell Kapor Foundation, several Unitus board members and alumni (including its founder, Mike Murray), the Peery Foundation, and a number of top-level Amazon executives.  Additionally, they count as advisors a number of top-level executives and founders from technology and microfinance companies like Amazon, Real Networks, Kiva, Unitus and Apple.

With such a sharp and well-defined business model and powerful supporters, this organization may be well on its way to making a significant impact in the world of microfinance. It may also represent a way forward for the next generation in microfinance in which networked MFIs jointly develop particular learning hubs devoted to specific products as a way of tackling more pervasive social ills (MFIs representatives interested in hearing more about what Vittana may have to offer are welcome to contact the organization through questions@vittana.org). Additionally, the partnership blueprint developed between Vittana and other MFIs represents an interesting model for other knowledge centers in developed countries, such as research institutions or public/private investors, for gaining access and leveraging their skills in the field. I advise our readers to keep a close watch on Vittana – I am sure we will hear more about them in the near future.

Although microfinance (MF) has not been a panacea for economic development and poverty eradication at the base of the pyramid, its significant impact has prompted many to urge the MF community to expand that success by moving into "Microfinance 2.0." This weekend's 2009 Net Impact conference addressed this transition through the panel, "Beyond Microfinance: New Knowledge and Models for Development."

Too much expansion or not enough?

In his opening comments moderator David Maxson, of Accion's Frontier Investments Group, noted that MF is experiencing growing pains as it moves from 1.0 to 2.0. Microfinance investors, several represented on the panel, are witnessing a profusion of new business models as they explore ways to move beyond providing liquidity to microfinance institutions (MFIs). Even as Accion encourages these new models, Maxson asked the panelists whether the industry is moving too far, too fast or not yet far enough, fast enough.

Overall, Gil Crawford, CEO of MicroVest Capital Management, concluded that the rapid increase in the amount of money invested in MF and the degree of commercialization of MFIs has been too much, too quickly. He predicted that the recent increase in bad MF loans may be the tip of the iceberg created by an excess of easy money that enthusiasm has pushed through the MF system and warned of probable MFI failures in the near-term. Moreover, he worried that the commercialization of MFIs will lead to a bad corporate governance and corruption.

Alex Counts, President & CEO of the Grameen Foundation USA, generally disagreed and encouraged the industry to moderate the hand-wringing in which it's currently engaged. He emphasized that waves of innovation and failure are natural and that MF has many "self-correcting elements at play." Counts labeled recent talk of women frequently borrowing from many MFIs as "rumors." In one Indian state in which such borrowing had been reported, a subsequent study concluded that 89% of the women had borrowed from only 1 MFI and that most of the remaining 11% borrowed from two. That said, Counts noted that, as MF grows and commercializes, each MFI must be clear about whether its primary goal is poverty alleviation or profit generation.

Henry Gonzalez, Vice President at Morgan Stanley in charge of the company's Emerging Markets Debt Group and former founding member of its Microfinance Institutions Group, largely echoed this moderate but laudatory tone. He identified two trends as indicative of the industry's progress: increasing numbers of MFIs starting life as for-profit institutions and increasing numbers of specialized investor funds understanding that health and education are inextricably tied to economic development. Gonzalez agreed, though, both with Counts's caveat that for-profit or integrated models must be very clear about their goals and Crawford's concern that they must have very clear governance.

Focus on core competencies or leverage existing network?

The discussion of MF's commercialization naturally gave way to another critical area of transition: new products and services. Again, Crawford remained the most skeptical about using the MF platform for either distribution of consumer goods and services or for sale of consumer and small and medium enterprise (SME) financial products. Offering working capital to the working class is a very different proposition than lending money to SMEs, and that new venture often falls outside of MFIs' core competencies. Noting, "Some very bright people are trying a little bit too hard," he encouraged all MFIs to be able to write their value proposition on a 3x5 index card - in large font.

In the middle of the spectrum, Gonzalez argued that MFIs should leverage their existing financial structure to offer a large menu of financial products. Only after financial expansion should they evaluate whether and how to use it to distribute non-financial products and services.

Counts advocated for MFIs to expand their missions by forming mutually reinforcing institutions to touch non-financial products and services. Offering products to solve other problems of the poor through sister organizations makes the otherwise generic financial products more sticky. He further urged MFIs to continuing innovating and adapting their business models in order to expand their reach into new countries and new regions within existing MF countries.

Growing under the microscope

The tremendous enthusiasm for MF in recent years has simultaneously garnered waves of new investors and thrust the industry under the microscope. The lively conversation among these four prominent players reinforced these two issues' interconnectedness. As investors enter the space, many seek a focus on growth and profit. As MFIs commercialize, increase their funds, and expand their product offerings, the new public scrutiny often concludes that profit motives are dictating the changes.

Many people further conclude that such motives are bad. They're not - if the tools are still alleviating poverty. If the desire for profit encourages expansion, and expansion both tackles poverty and generates profits, MF is indeed building the powerful ecosystem for which it is praised. As the discussion highlighted, however, we must continue to push MFIs to clearly articulate their goals, delineate their governance, and demonstrate their results. Particularly as it grows, we must keep it firmly under the microscope.

Photograph above: A northern Bangladeshi (Netrokona) tea stall owner who started his business with a $260 loan from ASA, another prominent Bangladesh MFI.

BRAC, a Bangladesh-based NGO, is just giving stuff away to the poor. One of the world's largest and most innovative poverty alleviation organizations has decided that aid, and not profit, is the way forward to help the very poorest.

As an intern this past summer at BRAC, I was told this in our orientation right before the program coordinator happily proclaimed BRAC to be a social business (think sustainable). The coordinator said that 80% of BRAC's funds are self-generated and that its goal is to become fully sustainable.

BRAC is no foreigner to market-based approaches to poverty. It was one of the pioneers in microfinance (banking for the bottom of the economic pyramid); it has established BRAC Dairy to sell milk to the poor; and its successful chain of handicraft stores sells the cultural products of villagers to wealthy urbanites. It seemed odd that with all its experience in business applications, BRAC was turning to a handout. Not only that, but this program was funded entirely by donations. What led them to the conclusion that BoP methods just wouldn't cut it? And could this be sustainable?

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(Apologies for the silence, which some may prefer anyway: I have been in a medical fog these past weeks.  I owe another installment on Francisco's and Manuel's entries on platforms -- one on micro-finance -- and some comments and questions from previous posts.  Fortunately, NextBillion has been really rich as I slept, so I also need to catch up on fifty or so entries).

In a prior post I commented on the potential of traditional utilities to serve as a platform for expansion into a non-traditional area: decentralized energy. It was suggested (by Paul Rigterink) that it would be helpful to provide more cost information and he kindly suggested some resources. While such resources may be helpful for "back-of-envelope" calculations, it is more relevant and frankly more important that you reverse-engineer the product search a bit by looking at what is currently available within a region you may wish to serve or study. 

Product Pricing presumes Product Access, which is not always the case. It makes little sense to determine that a particular solar lantern might be available for $25 in market X if your interest is in market Y half a continent away. If there is a logical way to move the product between points (Uganda to Tanzania for example), then costs in one market may serve as a useful placeholder for another until you get a firm price quote.  Such regional prices will result in better business planning than catalog estimates.  There is a second caveat: most imported goods (solar panels, for example) are very volume sensitive, so general or catalog unit prices may only serve as the roughest of approximations.

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