AN EXAMINATION OF MICROFINANCE

Transcription

1 AN EXAMINATION OF MICROFINANCE AN EXAMINATION OF MICROFINANCE: ITS EVOLUTION, CURRENT DRIVERS, AND POTENTIAL TO EFFECT LASTING PROGRESS WHITE PAPER PREPARED BY MBA STUDENTS AT THE UNIVERSITY OF NORTH CAROLINA S KENAN-FLAGLER BUSINESS SCHOOL Authors Stacey Cloninger (MBA 2007) David Cook (MBA 2007) Katharine Laidlaw (MBA 2007) Jenny O Connor (MBA 2007) Erin Simons (MBA 2007) Abstract Microenterprises represent roughly 80% of all businesses in the developing world. This article examines the distinctions between microfinance, i.e., the loans, savings, insurance, transfer services and other financial products targeted at low-income clients, and microcredit, i.e., the small loans made to clients by banks or other lending institutions. The authors present a history of microfinance institutions (MFIs), including their origins in informal savings and credit groups, to the evolution of more sophisticated lending models operating today in Asia, Africa, Latin American and elsewhere. In addition, they examine in-depth the business models of the three most influential MFIs Grameen Bank, Accion, and Kiva including their origins, operating principles, target markets, and lending procedures. Included in this analysis is a comparison of the strengths and weaknesses of these three approaches. Finally, the authors propose creating an Integrative Exercise for the UNC Kenan-Flagler Business School curriculum in which student groups would make small microcredit loans, choosing among multiple investment options and tracking the repayment progress of each loan. Publication Date Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC, USA. Reprinted by permission. Available online at This white paper was prepared by MBA students for class MBA815 Sustainable Enterprise, taught by professors Albert H. Segars and James H. Johnson. It is reprinted for educational purposes. Citations and source accuracy have been reviewed, but cannot be guaranteed; clarifications or comments may be directed to cse@unc.edu. Keywords: microfinance, microcredit, Mohammed Yunus, Grameen Bank, Accion, Kiva, loan, bank, lending, microfinance institutions, MFIs, microenterprise, microloan W06-009

2 AN EXAMINATION OF MICROFINANCE Table of Contents 1. Introduction 2. A Brief History 3. Beginnings: Grameen Bank & Microcredit Grameen Foundation Grameen Foundation: Programs and Goals Sustainability of Grameen Foundation Business Model 4. ACCION International Beginnings The ACCION Model Sustainability of the ACCION Business Model 5. Kiva.org A New Microfinance Model Kiva s Business Model Geographic Coverage Successes Is it a Sustainable Business Model? 6. Final Thoughts and Possible Next Steps Call to Action 1. Introduction In many developing countries, self-employment through microenterprise is the only means for people to provide for themselves and their families. Statistically, microenterprises represent 80% of all businesses in the developing world, constituting the vast majority of employment for people in developing countries. 1 A microenterprise is a tiny (often one person), self-run business that can range from the sale of agricultural products in the countryside to self-propelled tuk-tuk transportation services in larger cities. Often times, the 80% of people in the developing world who run their own businesses lack access to the capital needed to sustain and grow their businesses. Whereas microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients, microcredit is the small loan to a client made by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending. 2 The role of microfinance is to provide access to capital at reasonable rates, giving the world s poor an opportunity to grow their businesses in a sustainable, self-sufficient way. Microfinance can help the poor to increase income, build viable businesses, reduce vulnerability to external shocks, and help fight many different aspects of poverty. Most compelling as it relates to sustainability, microfinance can be a powerful instrument for self-empowerment by enabling the poor to become self-sustained economic agents of change. 3 The purpose of this paper is to explore the origins and history of microfinance, evaluate the different business models of today s major players (including a retail model of microfinance born with advances in technology), and offer a discussion of its future. Our call to action at the conclusion of this paper aims to involve the UNC Kenan-Flagler Business School community by engaging them in the world of microfinance Ibid. W

3 2. A Brief History The concept of microfinance is not new. Informal savings and credit groups have operated for centuries, including the susus of Ghana, chit funds in India, tandas in Mexico, and tontines in West Africa. 4 Formal credit and savings institutions for the poor have also been around for decades, providing customers who were traditionally neglected by commercial banks a way to obtain financial services through cooperatives and development-finance institutions. One of the earlier and longer-lived microcredit organizations was the Irish Loan Fund system. Initiated in the early 1700s, it became a widespread institution of about 300 funds all over Ireland that provided small loans to the rural poor with no collateral. 5 Later in the 1800s, larger and more formal savings and credit institutions began to emerge in Europe, organized primarily among the rural and urban poor. These institutions were known as People's Banks, Credit Unions, and Savings and Credit Co-operatives. In 1895 on the other side of the globe, Indonesian People's Credit Banks (BPR) began to open, becoming the largest microfinance system in Indonesia with close to 9,000 units. 6 In the early 1900s, various adaptations of these models began to appear in parts of rural Latin America. The intent of these models generally had two specific objectives. The first was to increase the commercialization of the rural sector by mobilizing "idle" savings. The second objective was to reduce oppressive feudal relations that were enforced through indebtedness. 7 In contrast to the European model, in which the poor owned the loan systems or banks, Latin American banks were not owned by the poor, but rather by government agencies or private banks. Over the years, some of these institutions in Latin American became inefficient and sometimes abusive. Given the size of the agriculture industry between the 1950s and 1970s, governments and donors focused on providing agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. During this time, rural development banks from Latin America to Europe suffered a decrease in capital due to subsidized lending rates and poor repayment discipline. The funds did not always reach the poor, often ending up concentrated in the hands of better-off farmers. 8 Beginning in the 1970s in Bangladesh and Brazil, experimental programs extended tiny loans to groups of poor women to invest in microenterprises. This type of microenterprise credit was based on solidarity group lending in which every member of a group guaranteed the repayment of all members. 9 These small-business lending programs had an almost exclusive focus on credit for income-generating activities targeting very poor borrowers. More often than not, women were chosen as the recipients of microloans, which continues to be the case. Recent Nobel Peace Prize winner Mohammed Yunus, founder of Grameen Bank, best explains why women are a more reliable credit risk. "Women have plans for themselves, for their children, about their home, their meals. They have a vision. A man wants to enjoy himself." 10 Similarly, the availability of financial services extended to women increases the chance that resources and profits are reinvested into the development of the immediate household and family. The 1990s witnessed growing enthusiasm for promoting microfinance as a strategy for poverty alleviation and the term microcredit began to be replaced by microfinance, which includes savings and other financial services as well as credit. The microfinance sector blossomed in many countries, leading to multiple financial services firms serving the needs of microentrepreneurs and poor households. 11 Today, there are hundreds of MFI s around the world with different ways of providing various financial services to the poor Ibid W

4 The following sections will detail the most influential MFI s -- Grameen, Accion, and Kiva -- analyze each of their business models, and describe emerging trends in the industry. 3. Beginnings: Grameen Bank & Microcredit In 1976, Professor Muhammad Yunus, head of the Rural Economics Program at the University of Chittagong, began a research experiment to help the poor of Bangladesh raise themselves out of poverty through small microcredit loans. With $27 out of his own pocket, he began targeting the rural poor and offering small loans to entrepreneurs who lacked the collateral for a typical loan required by traditional banks. Today, his enterprise has grown to cover over 70,000 villages throughout Bangladesh and currently has over 6.7 million members, 97% of whom are women. The organization is 90% owned by its members and 10% by the government of Bangladesh. 12 The Grameen Bank microcredit loan is unique in that it organizes its prospective clientele within a village and chooses only two of them to receive a loan. Loans are disbursed to the remaining interested parties on the condition that these initial loans are used according to the Grameen principles and paid back on time, with interest. This format allows the collective peer pressure from the community on the recipients to replace traditional collateral. The current interest rate on all Grameen Bank loans is 16% with payback due in 50 weekly installments. Grameen Bank operates with the following objectives: - extend banking facilities to poor men and women; - eliminate the exploitation of the poor by money lenders; - create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh; - bring the disadvantaged -- mostly women from the poorest households -- within the fold of an organizational format which they can understand and manage by themselves; - reverse the age-old vicious circle of "low income, low saving and low investment" into the virtuous circle of "low income, injection of credit, investment, more income, more savings, more investment, and more income. 13 Since its inception, Grameen Bank has disbursed over $5 million in loans with a repayment rate that has remained above 95%. These loans are comprised of everything from private enterprise to housing loans, scholarships to life insurance, and their new beggar program. Grameen Bank is fully self-sustainable and has not received outside funds since With a current rate of recovery of nearly 99% and total profits of $14 million rolled back into the organization, the Bank expects to continue to provide this service to the rural poor of Bangladesh as well as the 18,000 jobs created by its bank branches. Grameen has expanded its family of enterprises in Bangladesh to include communications, energy, education and export processing. Grameen Bank s services alone have been documented to contribute over 1% to the total GDP of Bangladesh. 14 This year the Nobel Peace Prize will be presented jointly to Muhammad Yunus and Grameen Bank. Grameen Foundation Grameen Foundation is an independent organization from Grameen Bank that was founded in 1997 to emulate the Bank s success worldwide. Professor Yunus is a founding member of the Board of Directors at Grameen Foundation and his vision has helped to shape the foundation s mission of supporting and advancing microfinance institutions around the world that embody the values of Grameen Bank. In addition, Grameen Foundation provides communication technology to its borrowers, giving them the access and means to further succeed in their entrepreneurial ventures Ibid. 14 Ibid. W

5 Like Grameen Bank, over 90% of the clients benefiting from Grameen Foundation s network are women, as they have proven the most successful at fighting poverty. Their network serves over 52 local microfinance institutions in 22 countries and they provide support through education, technology and funds. 15 The Grameen Foundation was established by Alex Counts, their founding and current president and is headquartered in Washington, D.C. Grameen Foundation: Programs and Goals Grameen Foundation operates four distinct programs (as illustrated in Figure 1): supporting microfinance institutions; harnessing the power of technology; connecting microfinance institutions with capital markets; and expanding microfinanceindustry knowledge. By focusing on these four areas, the organization: provides funding, education and technological assistance to the microfinance institutions it supports throughout the world; serves as a leader in information and communication technology dedicated to the advancement of microfinance; connects microfinance institutions to capital market resources; helps bring the issues associated with microfinance and the benefits it can provide to a broader worldwide audience through its publication series and translation project. Figure 1: Grameen Foundation Programs and Goals To fund these programs and the organization, Grameen Foundation receives the majority of their money from contributions and loan reflows, disbursing over 50% of this back into the programs it supports. 16 Figure 2: Grameen Foundation Finances Ibid. W

6 To date, Grameen Foundation benefits over 2 million microfinance clients around the world and has established the following three goals for completion by Figure 3: Grameen Foundation Progress to $80M Goal Sustainability of Grameen Foundation Business Model A microfinance loan supported by the Grameen Foundation can have a significant impact on the lives of the rural poor, below is an example: 18 Figure 4: Grameen Borrower Profile Additionally, Grameen Foundation has received the following awards for its work in the microfinance industry: a Top Four-Star Rating from Charity Navigator, an independent charity watchdog group; a Grade A Rating from the American Institute of Philanthropy for high financial standards, The Fast Company Social Capitalist Award for innovation, social impact and the sustainability of their business model; and, The Tech Museum Award for innovation to the Grameen Technology Center. However, critics of Grameen Foundation and Grameen Bank have expressed concern in two areas relating to the sustainability of their business models. First, whether the Grameen Bank s model can be replicated has been called into question. The bank has had terrific success in Bangladesh but to date has not been successfully reproduced on such a scale in different socio-political environments. 19 Second, some pundits question the current growth rate that Grameen Foundation is currently experiencing and whether the organization can sustain this growth while remaining true to the individuals it was formed to assist. As Grameen Foundation progresses towards the $80 million goal set for 2008, this theory will surely be tested. 17 Ibid. 18 Ibid W

7 4. ACCION International Beginnings Yunus was a pioneer in the field of microfinance as we know it today. Although a slightly different model of microfinance, ACCION International has similar goals in Latin America. The ACCION organization derives its beginnings from a young American law student named Joe Blatchford. Blatchford embarked on a Latin American tour sponsored by the US government which exposed him to the astonishing levels of poverty in the region and convinced him to take action to address this human rights problem. In 1961, he founded ACCION International. Initially, Blatchford and his team worked to alleviate poverty by focusing on projects such as building schools, installing electricity, and providing other fundamental infrastructure. After several of years, ACCION recognized that its group s efforts did not address the core of the poverty dilemma, as it created temporary solutions rather than sustainable long-term benefits. The ACCION team in Recife, Brazil observed that the poor struggled to improve their financial position because of the exorbitant interest rates they paid loan sharks. This forced them into an eternal cycle of poverty. To address this problem, the Brazil group offered its first microloan in Since this first experience in micro-financing, ACCION International has grown to pioneer the practice on a global scale. Its network has made $9.4 billion in microloans to more than 3.97 million people, with an historical repayment rate of over 97 percent. 20 ACCION provides loans to underserved poor communities that previously had no access to debt financing because traditional banks dismissed them as too risky. Loans can be as small as $75 and are designed to help small business owners launch or grow their businesses. Most importantly, they charge a reasonable interest rate that allows the poor to simultaneously make repayment while they continue to expand their business. ACCION also offers a wide range of other financial services for the poor, including: savings; insurance; housing loans; and, remittances. ACCION's partners and affiliates operate in 22 countries in Latin America, the Caribbean, Asia, sub- Saharan Africa, and in the U.S. The ACCION Model ACCION S CEO states, We don't need to give people charity. We need to give people opportunity and access." ACCION aims to make microfinancing self-sustaining. It has been estimated that it would cost over $250 billion to reach 500 million poor people. 21 Globally, donor funds are not sufficient to cover this need. As a result, ACCION s mission is to alleviate poverty by creating a microfinancing network with partner organizations that offers the poor a full range of financial services. ACCION bases its model on the principle that the interest earned from a single loan more than covers the cost of offering another loan to another individual. This enables the model to grow exponentially and reach more poor communities. As the lending history of a partner organization increases, its credibility as a viable financial institution also rises, providing them access to limitless resources in the world s capital markets. Partner institutions improved access to capital enables them to offer the poor other financial services such as insurance, savings, remittances, etc. Unlike conventional banks, ACCION partner programs do not evaluate potential borrowers solely based on revenue or collateral. They evaluate a potential borrower s business assets which could be as small as a tin stall in the market amount and cost of goods sold, cost of raw materials, and household expenses. They combine this analysis with a personal meeting with the potential borrower in his native setting. At these meetings, loan officers develop a better sense for the entrepreneur s motivations, his or her standing in the community, and the business plan. This personal information session enables loan officers to make a decision based on more than a credit score, but rather, a comprehensive picture that takes into account a borrower s character. 20www.accion.org 21 Ibid. W

8 For new borrowers, ACCION Partners offer loans that start at $75 in Latin America and $500 in the United States. As borrowers successfully repay their loans, they build their credit history and gain the opportunity to borrow additional loans for higher amounts. This incremental loan lending, called stepped lending, is beneficial to all parties involved as it minimizes initial risk for the ACCION partner as well as provides entrepreneurs the capital they need to steadily grow their businesses. 22 Borrowers can apply for loans individually, or in the absence of collateral or a co-signer, they can form a team of borrowers. ACCION started this group solidarity lending practice, which has been replicated by several microfinance organizations, in the 1970s. Solidarity loans require several borrowers to agree to collectively guarantee a loan. Social pressure from group members encourages repayments and avoids the twin problems of moral hazard (an unwillingness to repay) and adverse selection (being stuck with bad payers who inflate costs for everyone). 23 They also provide borrowers the opportunity to establish their credit history, which can be leveraged for future loans. Solidarity loans also dramatically reduce ACCION partner s costs of screening borrowers because group members screen each other. Many of ACCION s partners begin as non-profit, charity-dependent institutions and then transition into banks or formal financial institutions. During this process, ACCION provides partners with the advice and guidance to successfully transform themselves into microfinance organizations. For example, it teaches partners about loan methodology, borrower evaluation, credit services, etc. It also runs microenterprise training to increase the likelihood of success of ACCION entrepreneurs. In addition, ACCION provides loan guarantees to improve access to international commercial capital markets. Three of ACCION s most successful partners, Bancosolidario (Ecuador), Compartamos (Mexico), and Mibanco (Peru) have worked with 100,000 people and have assets of between $100 and $200 million each. The demonstrated success of the ACCION Network lending program has caused traditional commercial banks to recognize the opportunity to lend to the poor. Several banks have joined the ACCION Network, including SOGEBANK (Haiti), Banco del Pichincha (Ecuador), and Banco ABN- AMRO Real (Brazil). Sustainability of ACCION business model By seeking to eliminate the need for outside donor support, ACCION S model offers a high level of long-term sustainability, specifically from a financial standpoint. Unlike other non-profit organizations that depend upon charitable donations, ACCION relies on business principles and revenue generation to expand, thus preserving its viability as a self-sustaining institution. This model frees long-term development and growth from constraints completely unrelated to the business. Instead of wasting time pursuing donations, ACCION s structure enables it to scale quickly. In general, microfinance institutions generate rates of return on assets of between 3.5% and 5% and returns on equity of over 20%. 24 ACCION Partners invest these significant returns to fund additional loans and expand the reach of the program. The successful conversion of multiple non-profits into self-sustaining microfinance institutions demonstrates the financial sustainability of this model. Similar organizations, FINCA and Grameen, which use several of the ACCION business model principles, also speak to the viability of this model. Finally, traditional banks recognition and development of the financial services for the poor market lend further credence to the long-term financial viability of the market. Driven by the potential of revenue growth, not social purpose, banks view this sector as an emerging growth opportunity. 22 A little credit can go a long way., Burrus, William, Credit World, , May/Jun97, Vol. 85, Issue 5 23 From charity to business. Economist, , 11/5/2005, Vol. 377, Issue A Peso Saved, Latin Finance, X, Mar2006, Issue 175 W

9 With close to 4 million poor touched by the ACCION Network, its positive impact on a social level is unquestioned. It has created a long-term solution to poverty by providing the opportunity for poor entrepreneurs to build lasting businesses. Its model stands in stark contrast to other nonprofits that attempt to alleviate poverty through projects and donations that simply create change in the shortterm. Despite the exemplary results of the ACCION model, it fails to take into account its influence on the environment. Its Partner Network loans money based on credit risk, entrepreneur motivation, business idea, etc. It does not, however, consider how the entrepreneur s use of his loans will impact a community s surrounding environment. If a farmer, for example, applied for loans to improve his crop productivity and increase revenues, ACCION might award him the money based on the financial merit of his strategy without considering the potential for long-term environmental risk. To increase crop yield, the farmer may purchase pesticides, which contaminate the environment and render the field useless in the long-term. Therefore, ACCION s model fails to effectively address its impact on the long-term environmental sustainability of an area. This example demonstrates the inherent challenge of managing the trade-off between balancing rapid business growth in the short term with environmental conservation in the long term. As ACCION faces environmental and other trials, it will undoubtedly adapt its model to serve impoverished communities more effectively. In the past, it encountered an obstacle with its solidarity group-lending model. As group members businesses grew at varying rates, their future capital requirements and willingness to guarantee additional debt differed from one another. 25 These differences, combined with time-consuming meetings, frustrated entrepreneurs. Recognizing these limitations in its business model, ACCION expanded the financial services offered to better address the needs of entrepreneurs at different stages of development. If ACCION s model remains flexible, it will become more adept at overcoming the current environmental limitations in its model. 5. Kiva.org A New Microfinance Model Founded by Matthew and Jessica Flannery, Kiva was a non-profit venture that could fill a void in the space of microfinance. Through the internet, Kiva has created the first person-to-person microlending website ( It allows average income individuals to lend small amounts of money to small businesses and entrepreneurs in the developing world. In March 2005, Kiva began to raise loans for seven businesses in Uganda. Since then, they have expanded across the globe and support entrepreneurs from Togo to Ecuador in industries ranging from beauty salons to food sales. Kiva s Business Model Unlike microfinance organizations such as Grameen Bank, Kiva connects individual lenders directly with entrepreneurs. Somewhat like Save the Children or other sponsoring organizations, Kiva allows individuals to sponsor a business. Kiva is using the power of the internet to facilitate oneto-one connections that were previously prohibitively expensive. Child sponsorship has always been a high overhead business. Kiva creates a similar interpersonal connection at much lower costs due to the instant, inexpensive nature of internet delivery. The individuals featured on our website are real people who need a loan and who are waiting for socially-minded individuals to lend them money. Kiva partners with existing microfinance institutions who work with local entrepreneurs to help make their businesses successful. This on the ground connection is essential to Kiva s business model. The microfinance institutions knowledge of local needs and trends allows Kiva to build relationships with a variety of entrepreneurs across the world. Each Field Partner is rated according to its size, history, sources of funding, demonstrated ability to make repayments on time, and external evaluations. This rating determines the Partner s positioning within Kiva.org's five-level risk-management system, which corresponds to the total credit extended to them each month. Kiva.org continually re-evaluates this rating according to a Field Partner's performance. As Field 25 From charity to business, Economist, , 11/5/2005, Vol. 377, Issue 8451 W

10 Partners fulfill additional requirements and demonstrate reliability in making repayments, they graduate to a higher rating level. Entrepreneurs who are interested in getting a loan from Kiva complete an application process with a local microfinance institution that serves as a Field Partner with Kiva. The Field Partner is entrusted with the distribution, administration and collection of the loan. Before receiving any access to capital, the Partner must conduct Kiva s Due Diligence process. Entrepreneurs are then profiled on Kiva s website with a description of the venture, the Field Partner, and the amount needed to complete the loan. Individuals can then peruse the profiles and choose in which particular venture they choose to invest. Through Paypal, individuals can donate any amount of money to the entrepreneur. Desired loan amounts range from $200 to $ Individuals can loan as little as $25 at a time. In order to minimize risk of investing, Kiva recommends that lenders diversify by investing small amounts to a number of businesses instead of larger amounts to a single venture. To date, the repayment rate is 100%. 27 Lenders receive regular updates on the progress of the business and the course of repayments. When the entire loan has been repaid, the lender is credited for his or her portion of the loan. Kiva s loans constitute a personal agreement between the borrower and lender with no note or security involved. 28 Currently, Kiva does not charge interest on its loans, but commencing in 2007, it will charge 2% interest to its Field Partners in order to fulfill its own goal of sustainability. 29 Previously, Kiva s administrative costs have been funded through corporate sponsorship and the support of angel investors. Paypal currently processes the loans at no fee and 100% of the loan goes to the entrepreneur. Field Partners, on the other hand, have always been free to charge interest to the entrepreneurs, although those interest rates must be disclosed to Kiva. Figure 5: Example of typical Kiva loan applicant Source: Figure 6: Kiva Loan Cycle Sourcing fee-free money over the Internet gives entrepreneurs more capital to run their businesses while avoiding the high interest payments common in the developing world. In some places, MFIs pay 18% to a local commercial bank for their loan money, then turn around and lend it to the customer at a 35% interest rate, says Premal Shah, Kiva's president and a former PayPal executive Ibid Ibid 30 Ibid W

11 Geographic Coverage Although Kiva started working with businesses in Uganda, it has expanded across the globe. With a presence in Central America, South America, Eastern Europe, the Middle East, Africa, and Asia, Kiva partners and supports entrepreneurs in: Mexico, Hondura, Ecuador, Moldova, Bulgaria, Gaza, Senegal, Kenya, Ghana, Tanzania, Nigeria, Uganda, Cambodia, and Togo. Successes 31 Since launching over a year ago, Kiva.org has: Become the most trafficked website in microfinance with over 250,000 visitors; Raised $430,000 in loans in $25 increments from more than 5,400 users; Provided capital for 750 micro-enterprises in 12 developing countries; Grew its partner network to 14 partners in Africa, Asia, Eastern Europe, the Middle east and Latin America; Partnered with PayPal, an ebay company, to provide free payment processing on an ongoing basis -- PayPal's first such partnership; Achieved a 100% repayment rate on 28 completed loans thus far (Kiva expects the longterm repayment rate to match the 97% microfinance industry average); and, Built a strong grassroots following in the blogosphere (+1,300 blogs including Daily Kos and Huffington Post), on campuses and on MySpace. Is it a Sustainable Business Model? Currently funded by angel investors and corporate sponsorships, Kiva s goal is to be self-sustainable by It plans to achieve this transition through the implementation of a number of income streams that may include optional transaction charges to lenders and low debt capital fees to Field Partners. Without a thorough understanding of Kiva s future strategy, it is difficult to conceive that sustainability is possible. Is the 2% interest that will be derived from the Field Partners enough? Where will its revenues come from? And, how will it continue to attract investors without financial incentives? Can a feel-good attitude coupled with stories and photos of the entrepreneurs compel ongoing participation? At its present, small size Kiva is successful, but does it possess a scalable model? The first concern is whether Kiva will continue to draw interest from lenders once the newness of its innovative model wears off. Because lenders do not receive any interest, they are essentially donating capital to a cause, sacrificing the interest they would have earned elsewhere. Kiva does not serve as a legitimate vehicle for investment. It could be argued, however, that lenders receive an intangible interest for their participation their chance to connect with others through the internet. Kiva has been compared to social networking sites like MySpace and LinkedIn. With the growth of this industry, Kiva s concept appeals to new users and individuals interested in engaging directly with businesses on the ground. With the power of the internet, Kiva is facilitating access to ventures that previously were only accessible by big microfinance institutions. Another valid concern raised by the Kiva concept is whether facilitating direct investment to individual entrepreneurs raises or diffuses the need to strengthen local financial institutions, which are dependent on international support. Giving money to individuals may increase their standard of living, but it is equally essential to improve local institutions and infrastructure in order to bring countries, as a whole, out of poverty. "We need to be careful to not be naive by thinking that simply transferring money from the North to the South is going to solve problems," said Elizabeth Littlefield, director of the Consultative Group 31 Ibid W

12 to Assist the Poor (CGAP), a microfinance think tank. "Savings exist in the places where we work, but it's under mattresses or buried under floorboards." Final Thoughts and Possible Next Steps Throughout this class, one stubborn question has persisted, particularly in regard to tackling social sustainability: what can one person do to effect change? How can we, as UNC Kenan-Flagler students and burgeoning leaders, act now to solve some of these problems? In many respects, the problems we have examined are deep-rooted, with possible solutions stymied by bureaucracy and a myriad of complex issues surrounding the viability of providing social justice. It would be easy for us to leave UNC Kenan-Flagler with all the best intentions, and no tangible course of action. We were attracted to the concept of microfinance because overwhelming evidence confirms its efficacy in providing opportunities to individuals in emerging economies. In theory, it is a more sustainable concept than charity. Because the majority of lenders receive their capital back, they can lend again and help to nurture new businesses. We were also struck by the Kiva Organization s model for the ways in which it removed many of the barriers that would ordinarily preclude an average individual from participating in microfinance. As CNN Money surmises, with 25 bucks, a PC, and a Paypal account, [anyone has] the wherewithal to be an international financier. 33 Nevertheless, it is a valid argument that lending through Kiva remains a form of charity, since lenders receive no return on capital. But Kiva is still in its infancy. As it moves to its own sustainable model in 2007, beginning to charge interest to the microfinance institutions to which it lends, perhaps it can also evolve to offer modest return on capital to individual lenders, commensurate, for example, with the return one would receive on a savings account (which is appropriate given the small increments of most loans tendered through the sites). Another way in which Kiva may choose to evolve its business model is to develop some element of social networking within its matrix. True, many lenders may prefer to remain anonymous, but others may welcome interaction with other like-minded individuals interested in microfinance. Kiva could further engage its participant base by establishing a message board by which registered investors could log in and share ideas about the various economies and individual businesses in which they had invested. Kiva already provides investor profiles that accompany entrepreneurship opportunities still engaged in the fundraising process. Provided the investor is willing, his or her profile could also include a contact address by which prospective or other current investors could reach out to that individual. There is also an intangible benefit provided through lending to Kiva that has specific relevance to the UNC Kenan-Flagler community and reputation. It is here that we propose a call to action, to address that fundamental question of: how do we immediately begin to effect sustainable improvements to the world? Call to Action UNC Kenan-Flagler espouses a number of different philanthropic endeavors, including Habitat for Humanity, Food Bank of North Carolina, Mentorship of Durham Youth, and many others. Although most of these activities are community-based, and thus appropriate for a state-funded academic institution, the Kenan Center serves to vet opportunities for the school to address areas of international concern. Aside from the higher objectives that accompany these efforts of goodwill, these activities serve a highly pragmatic role in Kenan-Flagler s marketing toolkit to prospective students, donors, and foundations. 32 Be a global financier on a shoestring. CNN, January 17, CNN Money Commentary. Appeared on 1/17/06. Source: W

13 UNC Kenan-Flagler has also achieved a reputation among the business school community for the caliber of its sustainability program. It is certainly in a position to take leadership of a new sustainable initiative that would attract other business schools to participate in a worthy exercise. Our Proposal: Next year, UNC Kenan-Flagler announces an opportunity to students (either through the Sustainable Enterprise Course, the Fall or Spring Integrative Exercise, or a one-day symposium for course credit) to participate in a Kiva Case Study. Teams in groups of five would commit to making a $25.00 investment in a Kiva entrepreneurship venture. A thorough intellectual analysis would accompany their decision. Although the investment would be nominal, students would be advised to treat this opportunity as they would any other business investment of more significant monetary value in a global context. They would be expected to: a) research the emerging economy of entrepreneurial ventures of interest; b) analyze the viability of the business model in that context (including the amount of monies needed to establish business and whether the funds solicited were appropriate; and, c) if entrepreneurship venture were to be successful, predict when the enterprise will achieve self-sufficient and loaned monies may be returned. They would summarize their analysis through a PowerPoint presentation at the exercise s conclusion. It would also add an interesting layer to the competition if teams were given the opportunity to pitch to one another, meaning groups could formally meet to outline their rationales and try to bring another team s investment to their chosen vehicle. True, it may take the length of the students tenure at Kenan-Flagler to know if their selection was successful, but the exercise itself will have provided the recompense, as an analytical, team-building exercise, and as a proxy experience for evaluating venture opportunities with significant ambiguity. If successful, the model could be expanded to a live sustainability exercise that UNC Kenan-Flagler invites other schools to take part in, possibly through an on-campus event or in conjunction with a larger forum such as the national Net Impact Conference. The fundraising aspect could be expanded to include solicitations to students participating in the exercise (the selection scenario described above) and also as a lifeline from the conference to other students in their respective programs. Judges would consider the merit of the individual teams investment analyses, presentations, as well as the amount of money they were able to raise in support of their idea. To keep the competition on an even kilter, teams would be restricted to a nominal amount that they could solicit from others (for example, no more than $5 per individual, or $25 per participating team). Kiva administrators could be invited to lecture, advise, and ultimately judge the event. Ultimately, the Kiva organization would receive all submitted analyses, which it could then choose to disseminate appropriate content to its microfinance field partners. We contend that initiating this exercise would: a) provide a positive team-building and analytical experience for students; b) compel students to consider issues of global context with respect to investment and economic development; c) provide an opportunity for students to focus on their presentation, persuasion, and influence skills; d) serve as a credit to Kenan-Flagler s philanthropic endeavors; and, e) enhance Kenan-Flagler s reputation as a forerunner in the discipline of sustainability. W