Obstacles to the Global Mobile Banking Era

♠ Posted by Emmanuel in Development,India,Microfinance,Southeast Asia at 8/21/2013 01:34:00 PM

In many parts of the developing world, mobile banking or "m-banking" has largely supplanted conventional banking as the primary interface of customers with the financial system. For starters, many of the poor cannot meet minimums to open bank accounts. And, even if they did, bank branches are often sparse outside of urban centres. (Some m-banking heavy countries have generations of customers who've never even really used bank branches.) Just as cell phones have become far more plentiful than land lines in LDCs, though, people have needs for financial services as well as communications. Hence the ongoing popularity of using cell phones as "mobile wallets" to make purchases, pay off loans, receive salaries and so forth. As such, they can be quite handy in countries where financial services are sparsely available.

Truth be told, though, the diffusion of m-banking services has not been so swift outside of innovative countries in this space alike the Philippines in Southeast Asia, India in South Asia and Kenya in Africa. Just in time, a batch of three new articles from Global Briefing, the online publication from Commonwealth nations, tell us not only about their prospects but also why their diffusion has been slow.

First, there are competitive pressures from traditional banking institutions. Especially in the developed world, traditional bricks-and-mortar banks are afraid about what virtualization of money may do to their income. That is, what would m-banking do to their addiction to fees, fees, fees in a world where consumer choice is more unfettered in sending and receiving money across borders? There may even be broad systemic implications for the international monetary system should virtual currencies gain acceptance and replace national ones. Virtual money supplanting the dollar? I'm all in favour of it! Still, American authorities may not be so keen given the implications of such a shift...

So M-payments are a small part of the financial universe, but they are growing. In terms of the number of transactions, they are mushrooming fastest in emerging economies, although, inevitably, there is more growth in the value of transactions in developed economies. But it is not the mere expansion of transactions that is getting banks and governments hot under the collar about M-payments. What is driving the debate is the potential that mobile money has for changing the way that money works. Consider this: mobile communications are an alternative infrastructure, controlled not by private financial companies, or central banks, or governments, but to a large extent by the people who use them [...] The financial impact may only just be gathering momentum. Could it be that mobile communications will become the medium for new forms of unregulated money, beyond the reach of conventional banking and conventional financial regulation?

If that were to happen, the way the world uses and thinks about money would change beyond recognition. Bank regulation, instead of being a topic of urgent debate, would become an irrelevance. Economic management through monetary policy – the control of interest rates and the issuance of money – would be a relic of the past. Capital controls would disappear entirely. There would be no more offshore banking havens, because everything financial would effectively be offshore. Both risk and profit would be in the hands of individuals, along with whichever companies manage to grab a piece of the new commercial action. Far fetched? In fact, there are many who would welcome such a zero-regulation financial world, in which there are no safety nets and no taxpayer-funded bank bail-outs.

Second, aside from prospects for revolutionizing how the international monetary system works, less drastic regulatory concerns abound. In particular big, bad America's insistence on stringent anti-money laundering and counter-terrorist finance (AML/CTF, not AML/CFT as the article mentions, actually) is saddling consumers worldwide with additional costs:

Given modern technologies, it is hard to believe that sending money costs nine per cent on average and, in some south-south corridors, 15-20 per cent of the principal amount remitted. The fee structure is also highly regressive – the smaller the remittance, the higher the fee. International regulations, especially anti-money laundering and countering the financing of terror (AML/CFT) regulations, are increasing the cost of using mobile phone technology and internet to send money across international borders. These regulations are also preventing global banks from operating bank accounts of money transfer companies, thus contributing to higher costs. Exclusive partnership agreements between national post offices and major money transfer companies are increasing the market power of the latter and stifling competition from new players. Capital controls are preventing outward remittances from many developing countries. And exchange controls, together with dual exchange rates, are discouraging remittances in many countries.

Third, then, is the rather slow uptake of virtual currencies. At present, none can yet fulfil the traditional functions of money: store of value--no one is sure if any of these currencies are going to be around in a few years' time; medium of exchange--even fewer still are accepted by an appreciable user base; and unit of account--valuations of these virtual currencies remains...irregular. So, we still need a trustworthy virtual currency that many will be willing to use and hold:

The next step in the mobile money revolution is the emergence of virtual currencies. At present, mobile wallets use established currencies but parallel digital currencies are now being introduced that can be traded across any digital platform on a peer-to-peer basis. The first – and best known – was Bitcoin, which, unlike alternatives, is not restricted to a single website, nor used solely in gaming. The currency is created by ‘Bitcoin mining’, where rival servers compete to solve maths tests, the complexity of which regulates the supply. The winner gains the virtual money created and it can enter the market, in much the same way that currency created by a central bank is distributed.

Bitcoin has attracted criticism, not least because its founders are unknown, its market value volatile and it has proved attractive to drug dealers. Each Bitcoin was valued at $15 at the start of this year but quickly rose to more than $100 on investor interest. In six hours in April, the exchange rate plummeted from $266 to $76 then rebounded to $160. Other convertible virtual currencies have followed, including Ripple. Developer OpenCoin has created a fixed number of 100 billion Ripples, most of which it will give away for free. It hopes limiting the supply will increase the currency value over time, thus making the Ripples it retains worth a fortune.

The more I read about it, the more I believe that the emergence of m-banking is a necessary step in moving further into a better, post-American world. Escaping from the shackles of their junky national currency which causes American busybodies to stifle innovation over "security" concerns post-9/11 involves the development of a better alternative. In many parts of the developing world, it is already emerging with m-banking. The obstacles are not insurmountable if innovation progresses at the rate it has in the developing world, leaving America far, far, behind in the sophistication of such services.

As always, necessity is the mother of invention.

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The Microfinance Backlash in India Over Rates

♠ Posted by Emmanuel in CSR,India,Microfinance at 11/10/2010 09:28:00 AM

I thought this post would be a good follow-up to one I featured earlier regarding the debate on whether to cap interest rates on microloans. Generally, I believe that the standard of judging whether microloans are comparatively beneficial should be something sensible. For instance, in rural communities where commercial banking is scarce, a good basis of comparison would be with rates charged by local moneylenders (or worse, loan sharks). However, it now appears that microfinance is encountering more teething pains as mainstream financial concerns enter this area. Previous generation microfinance lenders were arguably more focused on social objectives and patterned themselves on Muhammad Yunus' Grameen Bank. Next generation microlenders, however, include more conventional financial services providers that want to explore the "fortune at the bottom of the pyramid" in the famous phrase of the late CK Prahalad.

It is here where we encounter difficulties. Setting aside the social mission, it is of course understandable why the cost of administering a bunch of smaller loans to borrowers in often more remote areas is higher than servicing larger loans to borrowers who come to your bank's branch. In other words, while attracting larger pools of funding may be beneficial in broadening the reach of microfinance, the higher cost of capital that commercial entities generally take into consideration translates into concomitantly higher rates of interest. So, we are back to the old issue of whether interest rates on microfinance loans should be capped. As a growing backlash in India suggests, it's certainly a topic for discussion:

The microlending movement that was supposed to help lift millions of people in India out of poverty has in recent weeks fallen into chaos. Urged on by local government officials and politicians, thousands of borrowers have simply stopped paying lenders, even though they have the money. The government has begun ratcheting up restrictions, fearing that borrowers are being buried by usurious interest rates. In some cases, officials have even arrested lending agents for allegedly harassing borrowers.

Local politicians, meanwhile, have blamed dozens of suicides on microlenders and are urging borrowers not to pay back what they owe. Though so far the backlash has been confined to a southern Indian state of Andhra Pradesh, what happens there is frequently a bellwether for microlending in India, and programs around the world. Hyderabad, the state capital, is home to some of the world's biggest microlenders, including SKS Microfinance Ltd., Spandana Sphoorty Financial, Basix & Share Microfin Ltd. The state accounts for about 30% of the loans for all of India, one of the world's biggest microfinance markets.

"This is potentially going to devastate lending to rural areas for a long time," said Vikram Akula, founder and chairman of SKS Microfinance, India's largest microlender by loan volume, which recently listed its shares in India. "We are confident that we will survive, but certainly this is going change how things could and should be done."

Microcredit is the lending of tiny amounts of money, usually less than $200, to entrepreneurs who use the loans to start or expand small businesses such as a vegetable stand or a bicycle repair shop. Most microcredit firms lend money through women's groups and reach out to borrowers who are either too far from or too poor to borrow from a bank. The repayment rate on the loans have tended to be better than that of richer borrowers. Interest rates, however, can be high, from 25% to 100% a year, mostly due to the cost of administering millions of tiny loans in remote areas...

Troubles emerge as international capital enters the picture:

As the microfinance industry has grown, it has attracted international capital that has greatly boosted the size of the industry, much as payday lending and subprime borrowing soared until two years ago in the U.S. In a significant move that showed international investors' interest in the industry, SKS recently sold $350 million of its shares on the Indian stock market.

But along with that has come concern among politicians, regulators—and indeed some in the industry—that unfettered expansion was leading to poor lending practices, multiple loans to the same borrowers, and fears of widespread repayment problems. While they have been much in demand wherever they have been introduced as they provide a kinder, cheaper alternative to the village loan shark, some economists are skeptical about whether the small loans actually help lift people out of poverty.

And in regions where there are more than one microlender competing for clients, some experts are concerned that the poor are being encouraged to take on more debt than they can bear. So far, the repayment rate across the microlending industry has remained extremely high. But Andhra Pradesh's payment strike could presage a turn—and put the capital that has flooded into the industry at risk. Mainstream Indian and international banks have backed the microlending industry in India with more than $4 billion of loans this year, with private-equity funds pouring more than $250 million into the industry in India last year alone.

The repayment strike is a rare black mark for an industry that has long been viewed as a social benefit. One of the industry's leaders, Muhammad Yunus of Grameen Bank in Bangladesh, won the Nobel Peace Prize in 2006 for pioneering the system. The industry has spread across emerging Asia, Africa and South America. India, with its giant population and hundreds of millions of people living in poverty, is one of the most important markets...

There is a hysteria fuelling restrictions in Andra Pradesh state about microfinance causing several defaulting to seek the suicide solution:

Andhra Pradesh slapped new restrictions on the industry that effectively shut it down last week. While a state court order put the restrictions on hold and allowed the lenders back in the field this week, close to half of all borrowers are continuing to avoid payments, microlenders say. State officials say they are trying to protect the poor from usurious interest rates and heavy-handed practices, which they say have triggered more than 70 suicides in the state. Microlending companies say that often where they have investigated suicides attributed to their lending, they have found that microloans were among the smallest of the many problems of the people that have killed themselves.

In Sankarampet village about 2½ hours from Hyderabad, Satyama Ayrene is still in mourning over the death of her son who hanged himself. While local police say they have been told to investigate whether microdebt caused the death, Ms. Ayrene says it was the $2,200 he owed loan sharks that was bothering him, not the $220 his wife owed to a microlender. "He did not commit suicide because of the [microloan] companies," said Ms. Ayrene, 55 years old. "He was burdened with loans from the local moneylenders and didn't know how to pay them back."

Microlenders say they are being punished for the success at reaching the poor and that if the resistance continues, many of them will go out of business. Many have been taking steps to create good will to try to avert the situation from worsening. The biggest lenders who account for the majority of borrowing say they will cap their rates at around 24% and form a fund to help troubled borrowers reschedule their loan payments. They say they are ready to comply with more government restrictions as long as they are given time to meet new requirements. But in the meantime, the industry has ground to a halt.

To alleviate this lending logjam, legislators in Andra Pradesh look set to go forward with laws aimed at regulating the industry by--get this--ensuring that microfinance institutions do not lend to the same groups over and over. The general thrust of this legislation is that these lenders are pushing loans that self-help groups keep taking due to the proliferation of lenders. Said end result? Overborrowing and a reduced capacity to pay:

Though the Bill is still being given the final touches, sources said the key elements of the ordinance will definitely be carried forward in the Bill. Registration will be mandatory for the MFIs keen to operate in the state will be mandatory and any MFI operating without such registration will face punitive action including punishment up to three years and Rs1 lakh fine. There is also a proposal for naming all the directors and the top management in case of violation of this rule, though the government is said to be seeking legal opinion on such a move.

With the preliminary information on the MFI activity in the state suggesting the borrowers are being pushed into a debt trap due to multiple lending by the companies, the government has decided to cap such lending.

The MFIs will be asked to apply to the registering authority before lending to a borrower or a self help group already covered by a bank. The authorities will then verify the repaying capacity of the borrowers. Only after ascertaining the repayment capacity will the MFIs be allowed to extend loans. Lending to SHGs with a bank linkage without seeking the prior approval of the authorities is also a punishable offence.

While coercion will be a crime of sorts, leading to a punishment of up to three years, the MFIs will also have to disclose the interest collected to the authorities on a monthly basis. The government will also set up fast track courts to try the violations of the MFIs. “The information available with the authorities so far indicates that the interest rates are higher than what is being claimed by the MFIs. The average rate is upwards of 30%. There is also proposal to make the MFIs start collecting the repayments on a monthly basis instead of weekly. There is no final decision on this yet,” the source said.

Industry officials fear the conditions being laid out by the government would have a significant negative impact on the MFI activity in the state initially, though the institutions will have to find ways to keep themselves afloat.

What to regulate? Multiple lenders chasing the same pool of customers--in which case shouldn't borrowers be made more cognizant of the troubles that could arise from overborrowing? Or, should interest rates be capped? There are also obvious costs in meeting all these new regulations that will be passed on to borrowers, possibly defeating the objective of lowering borrowing costs in the first place. It's interesting, and Andra Pradesh certainly is a litmus test for India--and after India, the world that has grown accustomed to microfinance.

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Microfinance - Should Interest Rates be Capped?

♠ Posted by Emmanuel in CSR,Development,Microfinance at 10/15/2010 12:01:00 AM

Hot on the heels of my recent microfinance in Cuba post, here comes a more mainstream debate on whether rates charged by lenders should be capped. As with the example of European banks leading the charge into Cuba, so it is around the world: more conventional commercial banks are seeking to enter the realm of microfinance in search of new markets. Yet, the involvement of these banks literally comes at a price since (a) the profit motive gains salience alongside the social one; and (b) servicing several small loans in often widely dispersed areas is not usually the modus operandi of commercial lenders who are accustomed to having lenders come to them instead of the other way around. So, just as I alluded to in the Cuban microfinance post, there is a concern from segments of civil society that the entry of those representing rentier classes--some fresh from being implicated in the global financial crisis--would dilute the social mission of microfinance.

So, the question becomes one of "Is microfinance selling out?" to some. Still, the counterargument involves my current favourite development buzzword of "scaling." The argument here is that welcoming the involvement of commercial banks can expand the number of those availing of microfinance loans. On the other hand, they may also have less reluctance in charging interest rates that those in the West would consider usurious.

I found this article in Forbes of all places; the conclusion follows though the rest is well worth reading:

While there are legitimate reasons for concern over the interest rates charged by commercial lenders, their role in the industry is an important one. Profit seeking lenders will allow the industry to scale by tapping into the funding potential of global capital markets. A Deutsche Bank research paper reveals that only a fraction of global demand for microloans are being serviced. It’s estimated that while the current amount of microcredit loans amounts to roughly $25 billion, an additional $250 billion will be needed in order to satisfy global demand. The introduction of commercial lenders provides access to vast pools of capital that can’t be matched by donor based models. In addition to attracting capital, the success of commercial lenders will attract competitors, which in turn will eventually exert downward pressure on interest rates. Dr. Yunus, in a recent debate with SKS founder Vikram Akula at the Clinton Global Initiative, acknowledged the capital raising power of for-profit models, but voiced concern over the implications of their involvement. He argued the need for locally owned and operated banks to prevent against the volatility of global capital markets. He also stressed the need for a clear definition of the term microfinance so that it could only be applied to microcredit lenders with social objectives.

Perhaps a clear delineation between microfinance and “bottom of the pyramid credit” lenders (Dr. Yunus’ term for commercial lenders) should be made. After all, they are different funding models that service different segments of the market. Labeling them as such would subject them to different regulations and expectations. That said, there is a need for multiple investment models in the industry as it will help to close the estimated $250 billion funding gap.

Moving forward, transparency will also have to take on an important role for the microfinance industry in order to retain the trust of those on both sides of the equation. Either through non-reciprocal peer reviews or through examination by regulatory bodies, transparency, which is crucial to maintaining the integrity of the industry, will have to be rigorously enforced. In the immensely large and nuanced world of microfinance, there’s a need serviced by each investment model and collectively they work to advance the industry, the frontier, and perhaps most importantly, the access to people who are in need of their services.

I suppose that the latent demand for microfinance will help set interest rates, but there are indeed ethical concerns if "what the market will bear" is used as an approach in this context.

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Vile Capitalists Invade Cuba...With Microfinance

♠ Posted by Emmanuel in Latin America,Microfinance at 10/12/2010 12:01:00 AM

[NOTE: Inspired by the story in question, what follows is my finest World Socialist Website impression at the moment. See what you make of it.] Friends, comrades, lend me your ears. The imperialists are once more attempting to take over the island of Cuba with their financial chicanery. Their latest attempt involves subjugating our free peoples via the evil machinations of "microfinance." Sure, they like to portray it as some sort of grassroots movement by the proletariat, but no, it's a full-blown assault planned and orchestrated by the global rentier class. Having sucked the life out of the rest of the developing world and even turned inward to destroy some of its workings in the imperialist's metropoles, its sights are now set on Cuba. The spinners of capitalist propaganda at Reuters have the details. It's as if the conquistadors never left...

Some European countries are quietly working to bring hard-currency loans to Cuban farmers, an idea the communist-led government has traditionally resisted but now looks ready to accept to help its economic reforms. A small flow of Spanish money for credits in Cuba is set to start up in 2011 and there are hopes it can grow as Cuba modernizes its state-dominated socialist economy.

The first loans will be financed by Spain's Agency for International Development Cooperation, which next year will donate 490,000 euros ($680,000) for agriculture, a priority for the cash-strapped Caribbean state dependent on food imports. "We are trying to help create a financial instrument currently nonexistent in Cuba to provide the agriculture sector with credit in hard currency," said Juan Diego Ruiz, local coordinator of the Spanish government aid agency.

Cuban officials have for long been wary of "microcredits" -- first developed in the 1980s to provide financial services to the poor in Bangladesh -- because they worry the small loans to groups of individuals could undermine the country's socialist principles, especially if coming from abroad.

But Western diplomats say Cuba's government now appears ready to give such financing a try, even though it does not want to talk openly about "microcredits". Hard currency loans would allow groups of Cuban farmers, who lease land from the state, to buy the imported supplies, ranging from irrigation systems to seeds, they badly need to increase production, Ruiz said.

Cuban President Raul Castro has made a series of reforms aimed at boosting agricultural output and he unveiled plans last month to lay off 500,000 state workers in the next six months. The government says many of those being laid off will be allowed to enter the private sector in the boldest reform since Castro succeeded his older brother Fidel Castro in 2008.

Those changes have made Cuba more appealing for European policymakers and Ruiz said the hard currency small loans "could eventually become an instrument linked to the ongoing process of economic adjustments." Spain has offered 4 million euros ($5.5 million) to finance potential future loans for microcredit in Cuba under very favorable terms that take into account the island's current acute liquidity shortage.

The 27-nation European Union also has been discussing providing up to 2 million euros ($2.8 million) for credit. "The European Commission is willing to accompany or facilitate the process of economic reforms at the request of the Cuban government," said the EU representative in Cuba, Javier Nino-Perez...

Western diplomats say Cuba's resistance to microcredits in the past seems to have eased following sharp economic shocks in recent years. The island was battered by three hurricanes in 2008, which did an estimated $10 billion in damage and dragged down the already struggling economy. The global financial crisis that followed delivered another blow.

Traditionally, the government blames the long U.S. trade embargo against Cuba for most of its financial woes. When last month's ground-breaking labor reforms were announced, state media said the central bank was studying the idea of offering credits to small private enterprise, but specifics were not spelled out.

Because of the political sensitivities, diplomats said the loans will not go directly from foreign providers to individuals. Instead, the initial Spanish funds will be channeled through the state-owned Bank of Credit and Commerce to groups of farmers leasing land from the state.

But Cuba would have to allow microcredit recipients to open bank accounts in hard currency. Cuba does not belong to multilateral financial institutions such as the International Monetary Fund or World Bank, so its success in microfinancing will depend on credits from friendly nations.

"The main challenge is scale. Microfinances only work when there is sufficient scale to have an impact, and in order to reach that, external financing is critical," said Sergio Navajas, an expert with the Inter-American Development Bank in Washington. Experts say Cuba appears headed down a path taken by its communist ally Vietnam, which has developed a market socialism often seen as a model for Raul Castro's current reforms. Microfinances played a key role in the Vietnamese economic transformation. "At first, Vietnamese authorities were also cautious," a Western diplomat in Cuba said.

My goodness...doi moi for the hoi polloi! First came DVD players. Then came cell phones. Pretty soon the remaining sanctity of Cuban labour will be further encroached by these lecherous usurers. They've softened us up real good with various crises endemic to capitalism. With our resistance crumbling, they now want to turn us into "market socialists"--code words for imperial corporate takeover. If Comrade Fidel were in good health, he'd have none of these bourgeois affectations. But alas, the revolution limps along meekly.

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