Forging Sustainable New Paths

April 11, 2014

20th Annual International Development Conference, Harvard Kennedy School, Cambridge, MA

April 11, 2014

Remarks by Accion President and CEO Michael Schlein

Thank you. Good evening.

I am delighted to join you today at the opening of the 20th Annual Kennedy School of Government’s International Development Conference.

For the last 20 years, this conference has provided a world-class forum on the latest trends, ideas, and practices in international development – all run by students. So let me start by congratulating this year’s student leaders – Sek-Loong Tan, Irene Chung, and their skilled team – for all of their hard work in pulling together a very rich agenda. Well done. Today, there are 2.5 billion people living in poverty and lacking access to financial services. Let me say that again: 2.5 billion people live in poverty and lack access to financial services. I have spent much of my life working in and regulating global financial markets. They are enormously impressive and powerful – but for 2.5 billion people, they are irrelevant. The markets fail. Billions are excluded – and their lives are much harder for it.

Financial services, in fact, are more important for the poor than for many of us in this room. Here in Cambridge, you take for granted the ATMs on every corner, the ability to get a student loan, or a mortgage. And when you’re ready, my guess is you will have no trouble borrowing to build a business, or financing your children’s education.

And think about how convenient it is that, for the most part, people get paid twice a month – and that major bills come on a monthly basis. You all probably have savings accounts and credit or debit cards that let you make payments anytime, anywhere. Forty percent of Americans usually walk around with only 20 dollars in cash in their pocket – which means we’re getting that much closer to a cashless, digital financial world.

Now, think about that rural farmer in the Philippines who gets paid once a year, at the harvest. She has to make that income last all year – but she lacks a safe place to save. If there’s a hurricane, or a medical emergency, she could be wiped out – and she lacks insurance. If she wants to grow her business, there’s no one who would invest in her. And she uses cash for every transaction which is easily stolen or lost.

We can change that. And we must change that.

In a financially inclusive world – everyone, everywhere, would have access to high-quality, affordable, transparent financial services. That farmer could have a safe place to save and help to stretch those savings all year. Insurance to protect her from natural disaster or medical emergencies. The option to borrow a small amount of capital to grow her business and support her family. Digital alternatives to cash that would make transactions safer and cheaper. And she’d have the financial education to use these products wisely. That is – she’d have all the financial tools to help work herself out of poverty.

Ana Lucia is a woman I met in the Brazilian Amazon. She used to spend half of every day going to the market to buy material to make into a single dress. If she didn’t sell that dress that day, she had nothing to bring home to her family. She had no savings, and no one to borrow from to help build her business –except for us.

Accion lent her 300 U.S. dollars. And with that small investment, she bought two weeks’ worth of materials in one trip. She now has half of every day to work productively. She’s providing more for her family. She even has a new business selling material to other women.

Try to calculate what the return on that $300 investment would be – and then think about the social, financial, and societal returns that would be realized if all the Ana Lucias in the world had the same opportunity.

Now, when we speak about international development, we think about the range of interventions that can really make a difference in the lives of the poor around the world. Certainly, that would include health care, education, clean water, rule of law – but I would argue that access to financial services is right up there.

So here’s my challenge to you. What are we going to do to help 2.5 billion people get access to the basic financial tools that can help them reach their full potential? How can we get there? Government aid and private philanthropy are not enough. If you’re trying to reach 2.5 billion people, all the philanthropy in the world is simply not enough. Traditional aid and philanthropy are inadequate – and unreliable sources of funding. They are subject to the whims of governments, individuals, and grant-makers.

Traditional aid can do great things – but it doesn’t help anyone when a good program is shut down when funding runs out, or, alternatively, when money continues to go to fund projects that no longer make sense.

If you’re trying to fight something as big as global poverty, you need the biggest weapons possible. You need to harness the capital markets. That’s the only way to build long-lasting institutions that will address the needs of the poor. You need to tap the capital markets and pay a return on that capital – which means you need to build businesses that can grow, self-sustain, and even profit. That’s how you build something that lasts.

For us, this is part of our mission. Accion is a non-profit dedicated to helping to create a financially inclusive world. Sustainability is embedded in all that we do. We help individual clients build businesses and support their families. We help institutions attract investment and grow to scale. And, perhaps most importantly, we help build industries that can thrive. Over more than 50 years, we have helped to build 63 microfinance institutions in 32 countries on four continents that today serve millions of clients. Today, we have partners and investments in most Latin American countries, several African countries, the United States, India, China, the Philippines, and soon, potentially, Myanmar.

We harness the capital markets in support of our institutions. We bring in foreign direct investment, world-class management, and the best technical assistance available. And, if we do it right, we not only create great institutions – we inspire others, and over time, develop a strong, competitive industry that will thrive and innovate to better serve the financial needs of the poor.

This is more than just a vision – this is our history. In Peru, Mexico, Columbia, Nicaragua, Tanzania and Nigeria – to name just a few – we have helped build great institutions and industries. And it all started in Bolivia.

In the 1980s, microfinance in Bolivia was provided by a handful of non-profits. Nearly three quarters of the CEOs’ time would be spent fundraising to raise the money needed to grow their operations. But, in 1992, we created BancoSol, the world’s first for-profit bank for the poor. Suddenly, BancoSol could tap the debt markets, tap the equity markets and attract high-caliber talent – and it took off. Much of the Latin American microfinance industry soon followed suit, using this new commercial model.

In Bolivia, others followed BancoSol’s model, as well. Twenty years later, there is a highly competitive, well-regulated microfinance industry serving the needs of the poor. In that time, interest rates in Bolivia have fallen from over 50 percent down to the teens. We helped build a great institution – but, much more importantly, we helped build an industry. BancoSol could go out of business tomorrow, and Bolivia would still have a strong industry competing to meet the financial needs of the poor.

And that’s our vision.

Perhaps the single biggest contribution that microfinance has made to the broader work of global development is helping to change the image of the poor. We used to talk about people living in poverty in terms of faith, hope, and charity – and futility. Now, more often than not, we talk about the markets at the base of the pyramid and the opportunities for double bottom-line businesses to produce social as well as financial returns. That change in attitude is very significant.

Over the last two decades, the microfinance industry has grown rapidly to serve more than 200 million clients around the world. But there is so much more to do.

For example, China has successfully moved hundreds of millions of people out of poverty – but it still has hundreds of millions remaining in poverty. So, the government is trying to create a microfinance industry. The Chinese have handed out many domestic microcredit licenses and three foreign licenses – one of which we were privileged to receive.

I visited a few weeks ago and I met a woman named Mrs. Wang, the noodle lady. In 2008, she was serving noodle soup from a cart. Since then, she’s borrowed and repaid several small loans – starting at around 1,000 U.S. dollars and building up to about $7,000. And she’s been able to trade that cart in for a small shop – and then another, and then two more. Today, Mrs. Wang owns and runs four restaurants, employs 20 people, and serves about 2,000 people, every morning. Her story is remarkable. But it’s even more remarkable when you consider that this is in China. Generally, in China, state-owned banks lend to state-owned enterprises, which means the government is on both sides of the transaction. And microcredit companies essentially lend only to friends and family. In other words, banking in China is largely all about who you know. So, for someone like Mrs. Wang, who doesn’t have a wealthy family or any special connections, securing a small loan was a dead end.

Until now.

What Mrs. Wang did have was the ability to repay. And that’s who we lend to – it’s not collateralized, it’s not based on who you know, it’s not based on the government. It is what we do all around the world, but in China, it’s somewhat revolutionary.

Nothing about it is easy, of course – we almost pulled the plug on our China operation early on. It’s a particularly tough environment. But we realized that if we left, we might never be able to operate there again – and what would that mean for our potential clients?

It was a tough decision to stay, but it paid off – especially for our clients. And today, our Chinese operation is sustainable, scalable and profitable. We have recently attracted significant foreign investment and we are on the verge of expansion into three new provinces. We’re planning to build a self-sustaining, national operation that can ultimately help many more Mrs. Wangs out there to grow their businesses.

So the first part of how we can build a financially inclusive world is to continue to build and grow strong, client-focused microfinance institutions – and industries – all over the world. The second part of our approach is we’re investing in innovation. We offer early- and seed-stage venture capital for start-up businesses working on disruptive, innovative ways to meet the financial services needs of the poor. There’s an impact investment panel tomorrow morning, and I encourage you to attend it, because there are so many interesting things happening in this area. And some of the most exciting start-ups in the world are working on financial inclusion.

For example, there’s Tiaxa, a Chilean company that is one of the first companies in the world to begin lending over the cell phone – which, in some ways, is the Holy Grail of financial inclusion. Tiaxa has developed an algorithm to assess an individual’s likelihood to repay a loan by analyzing their prepaid cell phone usage.

Now, think about this. How much can you know about a person based on their prepaid cell phone usage? Well, it turns out, Tiaxa tracks 70 different variables.

If you prepay on the same day each month, it’s different than if you prepay randomly. If always you prepay the same amount, it’s different from a variable amount. If you prepay a lot, it’s different than prepaying a little. If you’re texting, it says you’re literate. If you use five cell phone towers, it is different than if you only use one. And if you regularly call a dozen people, that’s different than if you regularly call three.

Based on this data, when you run out of airtime, Tiaxa will automatically give you an appropriate “nano loan” to let you complete your call, keep sending text messages, or continue to navigate the internet. They will trust that you will repay them – and 97 percent of the time, in fact, they are repaid.

In other words, they’re using “big data” to know their customer in order to make loans over the phone. They are making mobile phones into a powerful tool for the unbanked. Today, Tiaxa facilitates over one million transactions per day – making it the most successful big data company serving the poor.

And Tiaxa’s hardly alone in its potentially game-changing work. In the developed world, banks reject many borrowers, not because they have a bad credit history, but because they have no credit history at all – or at least, none visible to the bank. But now, by harnessing big data and other digital tools, we can start reaching more people faster, with better and cheaper services.

We can make the invisible, visible.

Other companies use your digital footprint on social networks, for example, to determine credit worthiness, or examine psychometrics and behavioral economics to know their customer better. Some find unserved market segments – like a South African company that offers micro-insurance to people diagnosed with HIV/AIDS – and find ways to serve them, sustainably and profitably. And still others take existing services and find ways to improve them. For instance, global remittances are a multi-billion-dollar business. It may cost $15 to send $100 from Boston to Mexico. We are working with a company called Quippi that makes it free!

There is a tremendous explosion of very exciting, innovative companies like these that can completely disrupt the traditional ways of meeting the financial needs of the poor. These are start-ups, so they may fail, but if they succeed…they may change the world.

The third part of our efforts recognizes that industry-wide challenges require industry-wide solutions. It used to be that working with the poor was the exclusive province of nonprofits, but, as I’ve said, we’re seeing new commercial actors coming in to work at the base of the pyramid – and that’s critical to our success. So, as new players emerge, with a variety of different motivations, it becomes increasingly important to set out the rules for working at the base of the pyramid.

We created the Center for Financial Inclusion – an industry-wide think tank that, in turn, created the Smart Campaign – the world’s first consumer protection campaign for the poor. If you want to do business with the most vulnerable people in the world, you need to abide by certain standards. Today, the Smart Campaign is in 130 countries and reaches 70 million clients – helping each of them avoid problems from over-indebtedness, bad collection practices, and opaque pricing.

The Center also created Financial Inclusion 2020, an industry-wide initiative that sets 2020 as a focal point for working toward our overarching goal – much like the Millennium Development Goals set targets for this community. We convened an amazing array of players at our Global Forum last October – mobile network operators, banks, payment companies, retailers, insurance providers, regulators, high tech start-ups, and microfinance leaders – all to help chart the path toward full financial inclusion by 2020. And two weeks before the conference, World Bank President Jim Young Kim endorsed that 2020 goal!

And there’s also the “Global Microscope,” a project by the Economist Intelligence Unit, Accion and other partners, which ranks countries based on the regulatory environment they create for microfinance – and soon, this will be expanded to a broader financial inclusion measure. By ranking the countries, we create transparency and competition among the world’s regulators to improve the financial environments they create. This may well be the single most important initiative we have to promote progress on regulation to help create a financially inclusive world.

It’s a world that’s already starting to take shape, and we are so privileged to be a part of it. In my job, I get to travel all around the world. And, every time I meet a client, it is enormously humbling. Whatever challenges we face in our lives, it’s nothing compared to what they face every day. That’s why we’re here. That’s why we do what we do: we help them meet and overcome those challenges, with strength and with dignity.

You have a terrific agenda at this year’s conference. I encourage you to consider not only what works and what doesn’t work – but also how it works. What lessons can we learn from the last twenty years of development work? How can we apply those lessons? Is it scalable? Is it sustainable? Will it stand the test of time?

The answers will guide us through the next 20 years of international development and ensure that our work is better informed, more effective, and longer lasting than ever before. Congratulations again to everyone who’s helped make this conference happen, this year and for the last twenty.

Thank you, and I look forward to your questions.