Happy New Year! 2005 is the UN Year of Microcredit

This seemed like a good time to write a quick overview post, providing some context for people who are new to the blog in the new year.

Here's an excerpt from my "New Year's Letter":

I joined the Reuters Digital Vision Program at Stanford in September, a one-year fellowship for mid-career tech professionals to tackle projects in the developing world. My own research has focused on microcredit, the practice of loaning small amounts (as little as $50) to women (better credit risks than men, larger impact on family) in the developing world to start income-generating microbusinesses (e.g., small retail, livestock or agriculture, handicraft or apparel). Microcredit is an effective way to move people out of poverty, with billions of dollars loaned (and repaid, at 97+% rate for well-run programs) to about 50 million people. Microcredit is not charity; interest rates often top 30% to enable the “banks” (microfinance institutions tend NOT to be real banks, though some real ones, especially in India, are getting into it) to run a sustainable program. While this may seem to be taking advantage of the poor, consider the overhead of sending a loan officer to a village 20 miles away to make a bi-weekly collection run for the 15 borrowers there. Also, these borrowers can’t get a cash advance on their credit card or tap their home equity line. Their alternative, if any, is a moneylender who might charge 20% per DAY.

The next challenge for microcredit is scaling up from 50 million borrowers to 500 million. One aspect of the challenge is operational: many programs run on paper and pencil. The most popular software package for those that have computerized is Excel, hardly the soundest system to maintain the far-flung transactions of tens or hundreds of thousands of borrowers. The second aspect of the challenge is related: ensuring there’s enough money to lend. Most programs are capitalized with donations or grants (USAID is doing good things here). Restrictions against accepting deposits for most of these non-banks cut off another common source. The capital markets will need to provide the money, but until the microfinance institutions are more transparent (providing detailed information about their loan portfolio) the major players won’t invest.

My plan is to address both issues by developing loan portfolio management software, and giving it away to any of the approximately 7,000 microfinance institutions that wants it. After about a month at Stanford identifying this solution, I discovered another group working toward the same end: the Grameen Foundation USA Technology Center. They’re about a dozen people, based in Seattle, an offshoot of the Grameen Bank in Bangladesh, the bank that grew out of the first microfinance loans made out of Prof. Muhammad Yunus’ pocket some 30 years ago. (Prof. Yunus is still the Executive Director of this 3+ million member co-op; I had dinner with him at Berkeley in November. He’s incredibly dedicated, down-to-earth, and inspirational.) I’ve enjoyed working with my talented colleagues both at Stanford and Grameen Foundation. We’re in the midst of defining the functional and technical specs, the data model and user experience of the software, with implementation planned to start in February, using a combination of volunteers in the US and contractors in places where microfinance is more common.

I’ll close the “soap box” portion of my letter with a link for people that want to learn more or are interested in ways that their talents or capital can help:

http://www.rdvp.org/~sketchpel/microfinance/

Happy New Year!