If you haven’t thought about it in a while, the word “microfinance” might evoke an image of a circle of women sitting under a mango tree.
In its early days, Grameen Bank put microfinance on the map by making tiny loans to communities of female small-business owners who put social pressure on one another to repay the loans.
Microfinance has come a long way since then. Today, data-enabled microloans are made to small-business owners, farmers and consumers all over the world, often through smartphones and loan officers wielding iPads. Artificial intelligence is used in credit scoring and credit decisions as well as fraud detection.
And the loans are profitable. So much so that Credit Suisse has built a business around letting its private banking and private equity fund clients invest in microfinance loans, and the returns are competitive. To keep the supply of those loans going, the bank’s philanthropic arm gives financial aid to microfinance institutions and bank employees help them solve management and technology problems.
The evolution of microfinance
Grameen’s group lending model, focused on women starting small businesses such as tailoring and fruit vending, was microfinance 1.0, said Laura Hemrika, global head of corporate citizenship and foundations at Credit Suisse.
“Needless to say, there’s a need for more diverse products and services,” she said.
Microfinance 2.0, as she calls it, involved individual loans, savings products and micro-insurance, not just for small businesses, but for farms, schools and individuals paying for education, health care or a home as well, often taking advantage of new technology.
“We wouldn’t use small-business loans to pay a mortgage, so why would we expect people at the base of the pyramid to use their group small-business loan to add a toilet to their house?” Hemrika said. Microfinance institutions are becoming more like traditional banks with varied products and services.
The Swiss bank got involved in microfinance in a counterintuitive way: at the behest of its wealthiest clients.
Fifteen years ago, some ultra-high-net-worth private banking clients expressed interest in investments that would create a financial return but also deliver social impact.
“Microfinance was the leading way to do that at the time,” Hemrika said.
Credit Suisse partnered with other Swiss firms to cofound a social investment manager called Responsibility. It develops microfinance debt funds and private equity funds that invest in microfinance institutions. The bank offered those funds to its clients.
Returns in the industry have generally hovered around 2-4% for debt products, higher for other vehicles.
“We run our microfinance and impact investing work as a business that’s financially sustainable to us and clients; they are getting a financial return,” Hemrika said. “Some clients who are more socially motivated are willing to take a little bit of a cut on return. A majority are looking for market or commercial returns.”
Institutional investors and pension funds have started investing in these funds, too.
“People are seeing how investing in microfinance can be a good portfolio diversifier,” Hemrika said.
The funds have done so well, in fact, that Credit Suisse started having trouble finding microfinance institutions with the management and systems capability to use the new money to grow.
At the same time, the bank was wondering where to focus its philanthropic activities, which it calls “corporate citizenship.”
So in 2008 Credit Suisse launched the Microfinance Capacity Building Initiative alongside the impact investing business. MCBI provides philanthropic capital from the Credit Suisse Foundation to Opportunity International, a network of microfinance institutions that make loans of around $200. (It’s run by the Illinois nonprofit Opportunity Inc.)
The bank also sends employees to microfinance institutions out in the field in Africa, Latin America and Asia, for a week to three months to help them address their business problems and strengthen their operations and management so they can grow responsibly.
“Maybe a microfinance institution needs advice on how to structure a savings product or how to best train some of their loan officers or improve their risk management,” Hemrika said. “Our employees will be selected based on their professional competencies and their interest and ability to benefit from the experience and will go spend that time on the ground.”
Credit Suisse and Opportunity International say they have helped 7.1 million people living in poverty, mostly in Africa and India, by providing financial services, digital banking and training.
A Citi banker turns to microloans
When Atul Tandon was global branch distribution director at Citi in the 1980s and 1990s, he introduced affluent banking at the company and worked on its first website.
Today he’s the U.S. CEO of Opportunity International.
“When I was born in India, 80% of people in my country lived on less than $1 a day,” he said. “I didn’t live in that kind of poverty, but I saw it.”
When he left Citi in 2000, “I felt in my heart I should take what I’d learned all these years and go and directly serve the very poor. It’s a full circle.”
By 2020, Opportunity International wants to help 20 million to obtain a livelihood. “Our aim is to help them get out of poverty and stay out of poverty, and eventually get to a point where they have a thriving life — where they’re no longer on assistance, they’re able to serve themselves and their families and are supplying goods and products to the local community.”
The help takes the form of small loans to farmers, schools and parents who struggle to pay for their children’s education and health care.
“Extreme poverty in its most prodigious forms exists in rural areas, where the single biggest source of employment is agriculture,” Tandon said. “So we wanted to get to the root of, how do you improve livelihood and the ability of families to put food on the table? We started with giving them loans on seeds and fertilizer and tools, and we’re expanding that to look at things like crop insurance.”
It’s also helping farmers form co-ops to control how their product goes to market, and assisting them to set up processing plants.
“We don’t simply hand a man or woman a fish, we teach them how to fish and then we teach them how to sell the fish and down the road make fish and chips and sell those,” Tandon said.
Opportunity also teaches them how to navigate the system.
“One of the principal reasons people are poor is because the local market systems are dead set against them — they want to keep them poor to take advantage,” Tandon explained. “The traditional middlemen and money lenders in these markets don’t want the poor to escape out because they make massive profit margins off the poor.”
When farmers get help processing and selling what they grow, they can get the highest return on their labor and circumvent some of the corruption.
Early on, the group realized many small towns in Africa and India did not have schools at all or they were not well run.
“They asked us for help and our response, which is where Credit Suisse stepped in, was to give local entrepreneurs loans to set up schools, and then give loans to families to send the kids to school,” Tandon said. The two organizations also provided help in designing classrooms and curricula. A Credit Suisse banker and his wife wrote a manual for education entrepreneurs.
Opportunity and Credit Suisse have made 2,272 loans to schools for improvements and 103,057 “school fee” loans to parents to help them put their children through school. They have facilitated nearly 11,000 EduSave accounts in Uganda that cover a child’s school costs in the event of a parent or guardian’s death or disability. And Opportunity has opened 13,060 child savings accounts since it began its partnership with Credit Suisse in 2014.
Technology has been critical to the effort.
“The challenge in a place like Africa is often that people are far apart and it’s hard to get from a small village to a bigger city where there might be a bank branch,” Hemrika said. “You have to close your business for the day, you have to travel all day, you have to carry your money on you — and someone might take the money away from you, and then you have to wait in a long line when you get to the financial institution.”
It would take far too much time and money to build a microfinance bank branch in every small village.
Credit Suisse and Opportunity International have partnered on deploying a number of delivery channel product innovations such as mobile banking and education finance. Among other projects, the partners have helped microfinance institutions strengthen their IT infrastructures and digital skills so they can roll out mobile banking, Hemrika said.
With mobile banking and a debit card combined with an ATM or a local person connected to a microfinance institution with a specialized point-of-sale device, a user could deposit cash or transfer money to a relative in a faraway city.
“The more transactions you do that are technologically enabled, the less cash handling you have, the less money can go missing, and the more data you have about your customers, about your own transactions, about your own systems and processes,” Hemrika said. “And everything can go much faster. You’ll see situations where loan approvals could go from 30 days to just a couple of days.”
Data analytics are helping these microfinance institutions understand repayment rates by region or type of client.
“I would have that information in my tablet as a loan officer because we’re able to collect it electronically. Therefore I can make a quicker and more informed decision the next time I’m going to make a loan to a similar type of client, so that helps with risk management,” Hemrika explained.
Analytics also help lenders anticipate coffee prices in a given market so they know how much to lend a farmer who wants to grow more coffee plants. Or calculate how much seed and fertilizer a farmer needs to buy for a field.
“Like any bank, a microfinance institution is going to want to have the most robust IT systems possible and all information it needs to make financial decisions, to report, and to manage its own staff and resources,” Hemrika said.
Artificial intelligence is starting to creep into this world, too.
In East Africa, Opportunity International has received a Gates Foundation grant to create an open-source credit scoring system. The organizations are collaborating with MyBucks, which already makes heavy use of AI in credit scoring.
Because credit bureau data doesn’t exist for financially unserved people, the MyBucks system gathers alternative data for credit scoring. In Kenya, it pulls behavioral data from smartphones, such as calling patterns and transaction histories.
It’s also working on a facial recognition algorithm that can detect if a person’s face is connected to another identity.
“A human cannot possibly recognize what identical faces exist in a database. You need an algorithm,” said out Richard van der Wath, chief data officer at MyBucks.
The system also uses behavioral biometrics (e.g. how hard the user presses down on her screen) to try to root out fraud, as well as to analyze the way people fill out loan applications. An impersonator, for instance, might copy and paste the applicant’s name or ID number from a list, where the real person would type those out.
“It’s not a black-and-white rule. That’s why you need AI that can combine many factors,” van der Wath said.
The ultimate goal
The end goal for these organizations is to eradicate extreme poverty by 2030. (People living on less than $2 a day are considered to be in extreme poverty.)
Credit Suisse sees a benefit to business in this mission.
“As a global bank we know the world is interconnected and what’s happening in one place might affect economic and social stability elsewhere,” Hemrika said. “Financial inclusion means resilience to the economic shocks in life. It means potential income, access to all the basic services you might need, such as health, education, shelter. When you don’t have these things, that’s when situations of social unrest and economic disparity become more likely.”
Overseeing these kinds of initiatives is a rewarding gig, she said. “I’ve said it’s the best job at the bank."
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