Keynote Presentation at the 6th Annual Microlumbia Fund Conference
Columbia University, New York City
Friday, May 3, 2013, 10:00–11:20 a.m.
Remarks as Prepared for Delivery by Accion President and CEO Michael Schlein
Good morning and thank you, Vikas.
As you just heard, Vikas served as co-president of the Microlumbia Fund three years ago while he earned his MBA – and now he’s an investment officer at Accion. We also recently hired Alina Kogan, who led the investments side of Microlumbia while earning her MBA. So, I’m starting to think that we should consider simplifying our recruiting process – and just set up shop here at Microlumbia! Seriously, in just a few years’ time, Microlumbia has emerged as a center of talent and ideas and has already begun to make a serious impact on this industry. So, congratulations to everyone involved.
Like many of you, I have a deep interest in the intersection of public service and private capital. Many of us share the goal of trying to harness the best of the private sector to help solve some of the most challenging social problems.
I spent a decade working in government, even longer on Wall Street, and I have seen repeatedly the power of financial inclusion to create great opportunity and help the most vulnerable in our society – those living in poverty. That experience led me to Accion, first as a Board member and then as CEO. And, three and half years into this job, I can tell you: my passion for this work deepens everyday.
Financial inclusion is an evolving, exciting field that builds on the proven track record of microfinance, the innovations of the startup world, and collaboration throughout the industry and beyond. By attracting mainstream investment, we can build sustainable, scalable, and profitable institutions – and partner with existing companies – to help us achieve our vision of a financially inclusive world.
Today, 2.5 billion people live in poverty and lack access to financial services. This is an enormous failure of the global financial markets – and it is a failure of our imagination. Picture a world where everyone has access to the services, technology, and financial knowledge that could help them to help themselves out of poverty. Microfinance is one piece of that puzzle. It will take an expansive, unified effort by a lot of different actors to get there, and that’s our journey – and we’re well on our way.
But let me take a step back and share a little bit about Accion, our strategy, and the industry generally. Accion is a global non-profit, based in Boston, with investments and operations throughout Latin America, Africa, India, China, the Philippines and the United States. We were founded in 1961 as a community development organization in Venezuela, as sort of a private sector Peace Corps – which is particularly impressive, given that the Peace Corps did not yet exist.
By the early 1970s, we realized that in order to address the lack of growth at the heart of poverty, we needed to take greater risk. We took the chance of making small loans to people living in poverty – and, to our surprise, they repaid those loans 97% of the time.
Since then, over our 50-year history, we have helped build 63 microfinance institutions in 32 countries on 4 continents that today serve millions of clients. Clients like Ana Lucia, a dressmaker from Manaus, in the Amazon in Brazil. She used to spend half of every day going to the market to buy materials to make a single dress that she hoped to sell that day. With a $300 loan, Ana Lucia had enough working capital to buy 2 weeks of materials. This opened up a whole new business for her; she now sells material to other women. And more importantly, she now has half of every day back to work productively and sell her products. Try to calculate that return on investment! I’ve met clients all over the world like her, and you can see the pride in their eyes. They’re more confident. They literally stand a bit taller. One small loan has the potential to transform their world – it can put them on a path to grow their businesses, put more food on the table, and send their kids to school.
Probably the biggest contribution that microfinance has made – is changing the economic image of the poor. We used to talk about the poor in terms of futility and charity. Now, more often than not, we talk about potential markets and great opportunities. That is the first step toward creating a financially inclusive world.
The need really is everywhere – even here at home in the U.S., where Accion is the largest microfinance network. Since 1991, we’ve disbursed tens of millions of dollars to thousands of clients in the U.S., and we have advised hundreds of thousands more. And yet, we estimate nearly 11 million small business owners here still can’t get the credit they need to grow their businesses. And so we have been growing and expanding our U.S. operations, which is especially important in the current economic environment. And we’re also working on efficiency. The truth is the microfinance lending process has not changed in decades. We have relied on a 1:1 relationship between a loan officer and a client – and a one-size-fits-all approach that treats all clients the same. We have a pilot program in Colombia – the country, not the school – that’s testing out a radical new model, and it could make the microfinance lending process up to 40 percent more efficient, which would be a significant step forward.
So, that’s our first and longest-running priority – building the next generation of top-tier microfinance institutions, all over the world, that can efficiently and responsibly serve more clients than ever.
Our strategy is to build institutions that will serve as role models for the industry and inspire others to compete and innovate to better serve clients – better than any one institution could do alone. That is how we will get to real scale. And we have already seen this strategy work repeatedly. Bolivia, for example, has one of the most competitive and best regulated markets, featuring consistent innovation and efficiencies. Over the last 20 years, we have seen interest rates in Bolivia fall from more than 50% to the teens! It takes an industry.
This competition and growth in the industry has been fueled by access to the capital markets. By tapping the debt and equity markets, the microfinance industry has taken off. We’ve grown from reaching hundreds of thousands to 200 million clients around the world. Some remain skeptical about tapping profit-seeking capital to help the poor. They’d prefer that this be the exclusive realm of charitable organizations. The notion of people profiting by providing services to the poor can be uncomfortable.
But – and this is important – if you care about reaching the 2.5 billion living in poverty, all of the philanthropy in the world is simply not enough. We need to harness the capital markets and, to do that, we need to pay a return on that capital. And it cannot be an average return; it must be an attractive return, if we really want to help billions.
And if you are not comfortable with that idea, then you are giving up.
You are giving up on helping 2.5 billion people.
You also have to be comfortable with the idea that microfinance alone won’t get us to full financial inclusion. That’s where the second piece of our strategy comes in: investing in innovative new companies – beyond microfinance institutions – that aim to serve the financial needs of the poor. Impact investing uses venture capital tools to generate social returns. This can help bring new services and connectivity to our client base.
At Accion, we have two vehicles for impact investing: the Frontier Investments Group and Accion’s Venture Lab, where Vikas and Alina are now working in two of the coolest jobs out there. Frontier focuses on early stage investing, and Venture Lab focuses on seed stage. As a non-profit, we can take risks that no one else will take. And, though some say it is hard to find the pipeline of investable companies, we’ve found the opposite to be the case. For example:
PayClip in Mexico. The Mexican government provides many benefits through plastic – so everyone has cards – but merchants don’t have the infrastructure to use these cards in transactions. PayClip makes a device that allows any smartphone to process payments (like Square in the US).
Demyst.Data is a startup that mines online and social media sources to electronically assess character for unsecured lending – which is exactly what microfinance is. Demyst can help us successfully lend to people who may have been rejected by big banks not because they have bad credit history– but because they have no credit history.
AllLife, a South African company that is the 1st company in the world to provide microinsurance to people diagnosed with HIV/AIDS.
Tiaxa, in Chile, is among the first companies in the world to extend credit via “nanoloans” on cell phones.
Impact investment is still a relatively new field, especially in the financial services arena. But there are a staggering number of great ideas out there, and, in the next few years, you’ll hear about more and more of them.
The third part of our strategy is to help build a strong industry with high standards. As people have come to see the base of the pyramid as a potential market, many new actors have come into the field. It is no longer the exclusive province of non-profits – and that is called progress. But different actors – bankers, retailers, phone companies, insurers – have different motives and it therefore becomes more important to establish meaningful global standards. To that end, Accion created the Center for Financial Inclusion – an outward-looking think tank that has brought together the entire industry in ways that would never have happened just a few years ago. For example, the Center created the Smart Campaign – the industry’s first-ever consumer protection campaign. More than 3,000 MFIs and individuals in 130 countries, covering more than 60 million clients, have signed on to the Consumer Protection Principles. I can’t think of another global effort to raise standards that has had this sort of success in just three years.
The industry has grown very fast in a short amount of time – and we certainly have experienced our share of growing pains. Over-indebtedness, high interest rates, bad collection practices, and a lack of transparency are issues that we need to address head-on. In some regions, we’ve even seen overheating – too many institutions chasing too few clients.
These are problems we can fix – and that we are working to fix – but there are no quick solutions. That’s why we need to come together. We have to agree to a common industry-wide agenda focused on client protection, transparency, and developing a uniform approach to measuring social performance. There are plenty of risks ahead of us – but so much potential as well. We know that, by itself, financial inclusion is not the silver bullet to end poverty. Access to healthcare, education, and the rule of law, for example, are essential ingredients – but access to financial services is right up there, too. Today, the microfinance industry reaches about 200 million clients. That’s an impressive number – but when you think about the 2.5 billion people who live in poverty and lack access to financial services, you see that we have much more work to do. We are really just getting started. Here in the U.S., we take for granted the availability of financial services. Most of us have a safe place to save, access to loans if we need them, credit cards, mortgages, insurance, ATMs, and so on – and our lives are better for it. Whether it helps us go to school, get an MBA, or buy a home… being included in the financial system makes our lives easier. 2.5 billion people in the world cannot say the same… yet.
We have the power to change that – by building the next generation of microfinance institutions, by investing in innovation, and by building an industry with high standards, we can get closer to that vision of a financially inclusive world.
How can you get more involved?
First, get engaged. We still rely on donors to keep our work growing, but the biggest need in this industry is really capacity-building. We need smart, dedicated people – idealists who can read a balance sheet. Microfinance and impact investing are such interesting, hybrid fields… so, keep all this in mind when you graduate and start looking for what comes next!
Second, get connected – sign up for our electronic newsletter, endorse the Smart Campaign for Client Protection, and let us know what else we can do to keep you informed and engaged.
Third, travel. We run a program called Accion Ambassadors, for instance, which embeds volunteers with our partners around the world for summer-long experiences in the field. It’s an incredible chance to see the mechanics and the impact of microfinance firsthand.
We have great momentum – let’s keep it going!
Thank you again for attending this morning and for your commitment to microfinance!