Showing posts with label Video. Show all posts
Showing posts with label Video. Show all posts
Friday, 23 November 2007
Lima Reconnaissance Trip in May
In May 2007 I hitched a ride with Tom Sanderson, Director of Five Talents UK (FT UK), Craig Cole, Executive Director of Five Talents International (FTI), Helga Buck and Kelli Ross of FTI and David Fletcher, board member of FT UK, to Lima. For them it was an opportunity to visit the project they are funding in one of the southern poor districts of Lima called San Juan de Miraflores. For me it was an opportunity to meet the people I was, at that stage potentially, to work with come July. During the trip David filmed our encounters with clients as well as an interview with the Executive Director of ECLOF Peru, Carlos Venturo, one of the most upstanding citizens of the world you are liable to meet. This is the fruit of those labours.
Thursday, 22 November 2007
A Primer on Recent Peruvian History
In amongst the microfinance discussion, it would be remiss of me not to mention the political dimension here in Peru. As Jeffrey Sachs repeatedly says in his rather good book The End of Poverty, you cannot think about altering the economic situation of a country without giving ample thought to all the factors which affect it: political, geographical, historical, infrastructural, personal.
The president of Peru is currently Alan Garcia and this is his second go at running the country. He was previously in charge between 1985 and 1990 and left office with hyperinflation causing economic havoc and Sendero Luminoso (Shining Path) and the MRTA (Tupac Amaru Revolutionary Movement) causing havoc of a different kind. Strong evidence for not electing a 36 year old to head the government it might be suggested. With the country needing some strong direction Alberto Fujimori, a half Peruvian half Japanese politician whose birthplace is disputed (he claims Lima, others claim Japan and it's of importance because only people born in Peru are allowed to run for president) beat writer Mario Vargas Llosa in an unexpected victory in 1990. Interestingly five years later Fujimori beat Javier Perez de Cuellar, former United Nations Secretary General in the 1995 elections.
Fujimori turned out to be quite the authoritarian during his two terms. He succeeded in bringing the economy under control and eventually in crushing Sendero Luminoso and the MRTA. On the other hand, because Vargas Llosa's party retained control of Congress after the 1990 election and since Fujimori was finding it hard to get anything done during his first term, he simply dismissed the entire Congress and judiciary in 1992. ("If only...", Bill Clinton must have been saying a few years later when he faced the same problem.) At the end of his second term, Fujimori tried to circumvent the 1993 constitutional two-term limit which he himself had introduced and ran in and won the 2000 election against Alejandro Toledo. The ruse only lasted until evidence of political bribery eventually forced Fujimori to resign the presidency from the safety of Tokyo.
Worse than the political machinations however were the extra-judicial torture and murders. In 1993 Fujimori became close to an army Captain by the name of Vladimiro Montesinos who alerted Fujimori that certain elements of the army were planning a coup. Montesinos later became the head of Fujimori's security apparatus and was responsible for fighting the terrorists as well as for the political espionage and bribery. The findings of the CVR (Truth and Reconciliation Committee) after the downfall of the Communist terrorist groups found that up to 70,000 people were killed during the fighting. Most of these were innocents in the battles between government forces and the terrorists and their blood was not only on the hands of the terrorists. The tactics used in bringing the terrorists to their knees as well as the bribery landed Montesinos with a lengthy prison sentence with Fujimori similarly awaiting trial on human rights abuses. He was extradited from Chile in September 2007 and the trial is scheduled to start in December.
This is likely to be an unwelcome distraction for the Garcia administration as Fujimori still commands considerable public support. I was recently in the centre of Lima and saw a huge banner hanging from a hotel exclaiming "Fujimori Libertad". This time around Garcia is attempting to cast himself as the economically responsible type and is attracting foreign investment to the country as well as looking to get a Free Trade Agreement signed with the U.S. which is likely to be passed by the U.S. Senate in December, having already passed the House of Representatives. It is likely to sail through the upper house of the U.S. Congress as it did the lower house because from the U.S. point of view Peru is an important ally against the "red tide" of Chavez (Venezuela), Ortega (Nicaragua), Correa (Ecuador) and Morales (Bolivia).
For the good of the country, Alan Garcia needs to be careful to attract investment to all areas of the country and not just around the big cities and the mineral and gas deposits. A little bit of money can achieve big results in a country like Peru and a little bit of patronage can go a long way. When I was visiting Puno last month, on the shores of Lake Titicaca, I met with the head of one of the floating islands of Los Uros who told me at least three times that the solar panels they had attached to their houses providing them with electricity were provided by Fujimori. "And what has Garcia done for you?", I asked. "Nothing."
The danger is that Garcia's political base is along the coast north of Lima and in the centre of the country. Outside of those areas but particularly in the south Ollanta Humala, a man the U.S. would lump in with Chavez and the rest, is the popular politician. In the first round of the most recent presidential election in 2006, Humala came top with 33%. Given that an outright majority is required to win the presidency, a second round was held in which Humala lost to Garcia who had lapped up the votes of the third placed finisher from the first round.
Peru has fantastic advantages relative to some other developing nations. Natural wealth (copper, other metals, natural gas), agriculture (top exporter of asparagus in the world, potatoes, maize, fish), access to the sea, an entrepreneurial workforce and significant tourism. Inflation has been below 4% since 1999 and GDP growth averaged 5.7% between 2002 and 2006. What Peru requires for development, to the advantage both of the poor and the country, is leadership which will, in addition to keeping the economy ticking over, ensure that the benefits of increasing wealth are distributed widely. That's not to say the leaders should tax the rich and kill the entrepreneurial spirit. More that the right combination of fiscal, monetary, trade, diplomatic and social conditions are needed to increase the general wealth of the country, which are best managed by a centrist party with an active and targeted social agenda rather than a more extreme party of one wing or the other with misplaced ideas of how to run an economy and a country.
The president of Peru is currently Alan Garcia and this is his second go at running the country. He was previously in charge between 1985 and 1990 and left office with hyperinflation causing economic havoc and Sendero Luminoso (Shining Path) and the MRTA (Tupac Amaru Revolutionary Movement) causing havoc of a different kind. Strong evidence for not electing a 36 year old to head the government it might be suggested. With the country needing some strong direction Alberto Fujimori, a half Peruvian half Japanese politician whose birthplace is disputed (he claims Lima, others claim Japan and it's of importance because only people born in Peru are allowed to run for president) beat writer Mario Vargas Llosa in an unexpected victory in 1990. Interestingly five years later Fujimori beat Javier Perez de Cuellar, former United Nations Secretary General in the 1995 elections.
Fujimori turned out to be quite the authoritarian during his two terms. He succeeded in bringing the economy under control and eventually in crushing Sendero Luminoso and the MRTA. On the other hand, because Vargas Llosa's party retained control of Congress after the 1990 election and since Fujimori was finding it hard to get anything done during his first term, he simply dismissed the entire Congress and judiciary in 1992. ("If only...", Bill Clinton must have been saying a few years later when he faced the same problem.) At the end of his second term, Fujimori tried to circumvent the 1993 constitutional two-term limit which he himself had introduced and ran in and won the 2000 election against Alejandro Toledo. The ruse only lasted until evidence of political bribery eventually forced Fujimori to resign the presidency from the safety of Tokyo.
Worse than the political machinations however were the extra-judicial torture and murders. In 1993 Fujimori became close to an army Captain by the name of Vladimiro Montesinos who alerted Fujimori that certain elements of the army were planning a coup. Montesinos later became the head of Fujimori's security apparatus and was responsible for fighting the terrorists as well as for the political espionage and bribery. The findings of the CVR (Truth and Reconciliation Committee) after the downfall of the Communist terrorist groups found that up to 70,000 people were killed during the fighting. Most of these were innocents in the battles between government forces and the terrorists and their blood was not only on the hands of the terrorists. The tactics used in bringing the terrorists to their knees as well as the bribery landed Montesinos with a lengthy prison sentence with Fujimori similarly awaiting trial on human rights abuses. He was extradited from Chile in September 2007 and the trial is scheduled to start in December.
This is likely to be an unwelcome distraction for the Garcia administration as Fujimori still commands considerable public support. I was recently in the centre of Lima and saw a huge banner hanging from a hotel exclaiming "Fujimori Libertad". This time around Garcia is attempting to cast himself as the economically responsible type and is attracting foreign investment to the country as well as looking to get a Free Trade Agreement signed with the U.S. which is likely to be passed by the U.S. Senate in December, having already passed the House of Representatives. It is likely to sail through the upper house of the U.S. Congress as it did the lower house because from the U.S. point of view Peru is an important ally against the "red tide" of Chavez (Venezuela), Ortega (Nicaragua), Correa (Ecuador) and Morales (Bolivia).
For the good of the country, Alan Garcia needs to be careful to attract investment to all areas of the country and not just around the big cities and the mineral and gas deposits. A little bit of money can achieve big results in a country like Peru and a little bit of patronage can go a long way. When I was visiting Puno last month, on the shores of Lake Titicaca, I met with the head of one of the floating islands of Los Uros who told me at least three times that the solar panels they had attached to their houses providing them with electricity were provided by Fujimori. "And what has Garcia done for you?", I asked. "Nothing."
The danger is that Garcia's political base is along the coast north of Lima and in the centre of the country. Outside of those areas but particularly in the south Ollanta Humala, a man the U.S. would lump in with Chavez and the rest, is the popular politician. In the first round of the most recent presidential election in 2006, Humala came top with 33%. Given that an outright majority is required to win the presidency, a second round was held in which Humala lost to Garcia who had lapped up the votes of the third placed finisher from the first round.
Peru has fantastic advantages relative to some other developing nations. Natural wealth (copper, other metals, natural gas), agriculture (top exporter of asparagus in the world, potatoes, maize, fish), access to the sea, an entrepreneurial workforce and significant tourism. Inflation has been below 4% since 1999 and GDP growth averaged 5.7% between 2002 and 2006. What Peru requires for development, to the advantage both of the poor and the country, is leadership which will, in addition to keeping the economy ticking over, ensure that the benefits of increasing wealth are distributed widely. That's not to say the leaders should tax the rich and kill the entrepreneurial spirit. More that the right combination of fiscal, monetary, trade, diplomatic and social conditions are needed to increase the general wealth of the country, which are best managed by a centrist party with an active and targeted social agenda rather than a more extreme party of one wing or the other with misplaced ideas of how to run an economy and a country.
Tuesday, 30 October 2007
To profit or not to profit (part II)
Imagine if you will, Mother Teresa finding out that Donald Trump was going to take over her hospice and, although promising to continue catering to the dying, things were going to be run a little differently from now on. This gives you some idea of the shockwave that spread through the microfinance world in April of this year when Banco Compartamos of Mexico, a microfinance lender of 17 years' standing, completed its IPO (initial public offering). The IPO was 13 times oversubscribed and reportedly made US dollar millionaires of some board members and senior officers. Accusations of making money off the backs of hard-working poor people flew.
In the entry from 2nd October I gave a short explanation of the non-profit model of microfinance. The for-profit version involves the same mechanics. Short-term, small-sized loans aimed at poor businesspeople with (comparatively high) interest rates applied. Both the for-profit and non-profit models cover administrative and capital costs (staff salaries, cost of funds, infrastructure) out of interest charged so we'll leave that out of the picture. However there are some very fundamental differences. At first glance, running a microfinance institution (MFI in development parlance) as a for-profit means simply that some of the cash generated from interest on loans is taken out of the cycle as profit, instead of being plowed back into further loans, as all of it is in the non-profit version. Is this making money off the backs of poor people?
Consider two MFIs charging the same level of interest to clients, say the roughly 35% per annum that my firm ECLOF Peru charges. The first, the non-profit uses 30% to cover costs and the remaining 5% goes into enlarging the loan pool. The second, the for-profit uses 30% to cover costs and the remaining 5% goes to infrastructure improvements, staff bonuses and shareholder dividends. From the point of view of an individual borrower there's nothing to separate the two institutions. Whichever she pitches up at, they're charging 35% interest.
One might then argue that the earned interest that doesn't go into increasing liquidity at the for-profit has an opportunity cost which is the reduction in possibilities for an incremental few borrowers to finance their businesses. This is true, but then not providing an opportunity to borrow doesn't count as profiteering from the poor. So in principle a for-profit structure in this field may not necessarily be morally wrong. For-profits bring many advantages which non-profits lack, not least of which is much easier access to funds. Even social investors are more likely to place their available dollars where a financial, as well as social, return of some kind is likely. However, there are also some serious disadvantages to the for-profit model. Not least of which is the profit motive itself.
The returns available in the informal economy are considerable. Which is why MFI loan clients are able to pay such hefty levels of interest. Large institutions are prevented from piling in with large sums of money to take advantage of these returns because the barriers to entry are high and scaling up would be logistically problematic to say the least. In addition to which the margins may be significant relative to the investment (i.e. in percentage terms) but in absolute terms we're still talking about small dollar amounts. An interesting example of this is demonstrated by our recycling clients. There's big demand from large manufacturers for scrap metal, which is abundant in the poor areas around Lima. The same goes for used plastic, cardboard, cans and so on. However there's no systematised collection mechanism. The manufacturers will pay a decent rate for this material, enough to incentivise locals to start businesses and make good money by paying local residents for their scrap and selling it back to the manufacturers. However those manufacturers could never do this for themselves. Having to take on employees, pay benefits, taxes, etc. would likely make them run this part of their business at a loss.
The heads of for-profit MFIs are well aware of this return potential. If the loan clients can therefore absorb higher interest rates, why not charge them? There's clearly a tension between social and commercial objectives here. And even the best-intentioned for-profit MFI head might be at pains to argue the case in the face of agitating shareholders. The current housing situation in several developed countries demonstrates the point. The difference is that intense competition in that arena means that interest rates are set by the market so it's the size of the loans which are being jacked up, with evident consequences. In the microfinance space there's only so much the size of the loans can increase (for now), so the interest rate is the flexible variable.
Banco Compartamos has been skewered on this point from various quarters. Their website is not exactly forthcoming but a report by the Consultative Group to Assist the Poor (CGAP), a kind of industry think-tank, estimates that Compartamos has been charging its clients 100% interest, a quarter of which being profit. Rates are generally higher in the Mexican market for various reasons, however on Compartamos' 2006 reported gross loan portfolio of $271 million, the estimated profit would be around $64 million. Is this profiteering from the poor? Is this the way to fix global poverty?
Further reading / Sources:
CGAP Report on the Compartamos IPO (PDF format)
Commentary on the Compartamos IPO by Jonathan Lewis, CEO Microcredit Enterprises (PDF format)
General discussion on the Compartamos IPO
PBS mini documentary on Compartamos (20 mins)
Banco Compartamos
In the entry from 2nd October I gave a short explanation of the non-profit model of microfinance. The for-profit version involves the same mechanics. Short-term, small-sized loans aimed at poor businesspeople with (comparatively high) interest rates applied. Both the for-profit and non-profit models cover administrative and capital costs (staff salaries, cost of funds, infrastructure) out of interest charged so we'll leave that out of the picture. However there are some very fundamental differences. At first glance, running a microfinance institution (MFI in development parlance) as a for-profit means simply that some of the cash generated from interest on loans is taken out of the cycle as profit, instead of being plowed back into further loans, as all of it is in the non-profit version. Is this making money off the backs of poor people?
Consider two MFIs charging the same level of interest to clients, say the roughly 35% per annum that my firm ECLOF Peru charges. The first, the non-profit uses 30% to cover costs and the remaining 5% goes into enlarging the loan pool. The second, the for-profit uses 30% to cover costs and the remaining 5% goes to infrastructure improvements, staff bonuses and shareholder dividends. From the point of view of an individual borrower there's nothing to separate the two institutions. Whichever she pitches up at, they're charging 35% interest.
One might then argue that the earned interest that doesn't go into increasing liquidity at the for-profit has an opportunity cost which is the reduction in possibilities for an incremental few borrowers to finance their businesses. This is true, but then not providing an opportunity to borrow doesn't count as profiteering from the poor. So in principle a for-profit structure in this field may not necessarily be morally wrong. For-profits bring many advantages which non-profits lack, not least of which is much easier access to funds. Even social investors are more likely to place their available dollars where a financial, as well as social, return of some kind is likely. However, there are also some serious disadvantages to the for-profit model. Not least of which is the profit motive itself.
The returns available in the informal economy are considerable. Which is why MFI loan clients are able to pay such hefty levels of interest. Large institutions are prevented from piling in with large sums of money to take advantage of these returns because the barriers to entry are high and scaling up would be logistically problematic to say the least. In addition to which the margins may be significant relative to the investment (i.e. in percentage terms) but in absolute terms we're still talking about small dollar amounts. An interesting example of this is demonstrated by our recycling clients. There's big demand from large manufacturers for scrap metal, which is abundant in the poor areas around Lima. The same goes for used plastic, cardboard, cans and so on. However there's no systematised collection mechanism. The manufacturers will pay a decent rate for this material, enough to incentivise locals to start businesses and make good money by paying local residents for their scrap and selling it back to the manufacturers. However those manufacturers could never do this for themselves. Having to take on employees, pay benefits, taxes, etc. would likely make them run this part of their business at a loss.
The heads of for-profit MFIs are well aware of this return potential. If the loan clients can therefore absorb higher interest rates, why not charge them? There's clearly a tension between social and commercial objectives here. And even the best-intentioned for-profit MFI head might be at pains to argue the case in the face of agitating shareholders. The current housing situation in several developed countries demonstrates the point. The difference is that intense competition in that arena means that interest rates are set by the market so it's the size of the loans which are being jacked up, with evident consequences. In the microfinance space there's only so much the size of the loans can increase (for now), so the interest rate is the flexible variable.
Banco Compartamos has been skewered on this point from various quarters. Their website is not exactly forthcoming but a report by the Consultative Group to Assist the Poor (CGAP), a kind of industry think-tank, estimates that Compartamos has been charging its clients 100% interest, a quarter of which being profit. Rates are generally higher in the Mexican market for various reasons, however on Compartamos' 2006 reported gross loan portfolio of $271 million, the estimated profit would be around $64 million. Is this profiteering from the poor? Is this the way to fix global poverty?
Further reading / Sources:
CGAP Report on the Compartamos IPO (PDF format)
Commentary on the Compartamos IPO by Jonathan Lewis, CEO Microcredit Enterprises (PDF format)
General discussion on the Compartamos IPO
PBS mini documentary on Compartamos (20 mins)
Banco Compartamos
Wednesday, 24 October 2007
Change the flower pot
I am linking to the next two videos in the same series on Grameen and Yunus. Both of these are well worth the three or four minutes they last, but my favourite is this one on creating a poverty-free world. "No matter how rich you get under the present [financial] system, you'll have poor people", states Mr Yunus. So let's change the system.
The other video focuses on social business entrepreneurs. A subject close to my heart. There exists a growing population of young people who don't see a contradiction between making money and helping the disenfranchised, but where are the educational and financial structures to accommodate them?
(Our Man in Lima has been Our Man Around Peru and Bolivia these last few weeks, so please excuse my absence!)
The other video focuses on social business entrepreneurs. A subject close to my heart. There exists a growing population of young people who don't see a contradiction between making money and helping the disenfranchised, but where are the educational and financial structures to accommodate them?
(Our Man in Lima has been Our Man Around Peru and Bolivia these last few weeks, so please excuse my absence!)
Wednesday, 3 October 2007
Banker to the Poor
Meet Muhammad Yunus. Rock star of the microfinance world. Nobel Peace Prize winner 2006 (shared with the institution he founded). This man started making loans, out of his own pocket, in the mid 70s. He first lent about $27 to a bunch of ladies in a village in Bangladesh, from whence he hails. As of his most recent update Grameen Bank had dished out a cumulative $6.44 billion (that's United States greenbacks) in loans. Rather embarrassingly I would suggest, the Banker to the Poor is starting up an office in Queens, New York City to provide microfinance services there and more widely in the United States. Not sure how it is that the richest country in the world with the most sophisticated financial markets needs to rely on a Bangladeshi to come solve a domestic poverty issue, but there you have it. A shining example of globalisation you might argue.
This is the first of three videos in a series made on Yunus and Grameen Bank. It's an appropriate juncture in my 'basics of microfinance' to include this because Yunus was the original structurer of a microfinance institution as a non-profit venture. These days Grameen Bank is majority owned by its (poor) borrowers. There's a wealth of information out there on Yunus and Grameen. A good place to start, as ever, is with the respective Wikipedia entries (Yunus, Grameen). For information from Yunus himself, see here.
This is the first of three videos in a series made on Yunus and Grameen Bank. It's an appropriate juncture in my 'basics of microfinance' to include this because Yunus was the original structurer of a microfinance institution as a non-profit venture. These days Grameen Bank is majority owned by its (poor) borrowers. There's a wealth of information out there on Yunus and Grameen. A good place to start, as ever, is with the respective Wikipedia entries (Yunus, Grameen). For information from Yunus himself, see here.
Tuesday, 11 September 2007
An introduction to microfinance
Whilst Comunion Peru's excellent work to help earthquake victims continues, I unfortunately don't have any major successes to report. At last count we had opened eight communal kitchens in the areas around Chincha, Pisco and Ica. I'll be heading back down to Chincha this weekend with Movimiento de Vida Cristiana to pack boxes of food, clothes and so on and to distribute them. This organisation has also been doing sterling work, including organising a concert on Saturday by a major international classical pianist (who I'd never heard of; more a comment on my knowledge of classical music than his level of fame I suspect) all receipts from which will go to their earthquake fund.
I'd like to say thank you to those who have either donated money to Comunion Peru's efforts or are engaging in efforts to fundraise on our behalf. It is truly appreciated and I can assure you every penny goes to relieve suffering and help people who need it.
I'm posting a video produced by Five Talents and starring the UK Director Tom Sanderson (oddly flirting with a South African accent during the radio interview) and Charles Eve, a Five Talents Trustee and Co-head of EMEA Compliance at Goldman Sachs. It was the latter of these two gentlemen who started the ball rolling towards my eventual employment with Five Talents and secondment to ECLOF Peru.
This blog is supposed to be geared towards explaining the ins and outs of microfinance, but for good reason has been diverted to discussion of the earthquake. In anticipation of my first post on microfinance, provisionally entitled Microfinance 101, this video is a good introduction to the topic and although filmed in Uganda the realities, views and ideas observable and expressed therein give a good feel for the issues I will raise later.
I'd like to say thank you to those who have either donated money to Comunion Peru's efforts or are engaging in efforts to fundraise on our behalf. It is truly appreciated and I can assure you every penny goes to relieve suffering and help people who need it.
I'm posting a video produced by Five Talents and starring the UK Director Tom Sanderson (oddly flirting with a South African accent during the radio interview) and Charles Eve, a Five Talents Trustee and Co-head of EMEA Compliance at Goldman Sachs. It was the latter of these two gentlemen who started the ball rolling towards my eventual employment with Five Talents and secondment to ECLOF Peru.
This blog is supposed to be geared towards explaining the ins and outs of microfinance, but for good reason has been diverted to discussion of the earthquake. In anticipation of my first post on microfinance, provisionally entitled Microfinance 101, this video is a good introduction to the topic and although filmed in Uganda the realities, views and ideas observable and expressed therein give a good feel for the issues I will raise later.
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