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we're here today with Wharton management professors Tyler I and Adam Cobb to talk
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a little bit about their latest research which was done in conjunction with Indiana University's Eric Zhao it
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focuses on funding for microfinance organizations Tyler and Adam thanks for being here it's great to be here thanks
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for having us so first of all give us a short summary of this research so you were looking at funding for microfinance
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organizations tell us where this came from and what questions you were trying to answer sure so Adam and I've been
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looking at microfinance in different capacities for a while now and eric has as well and one of the things that is a
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little bit surprising about the space is that you're making loans to poor people
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but the money that is actually used to finance those loans it's not like a typical Bank where they mobilize their
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deposits to then lend out the money what happens in microfinance is you count on
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upstream funders and the microfinance organizations themselves are more of a flow-through and so no one had really
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looked at how this upstream funding works and we managed to get access to really great data through the
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microfinance information exchange and it gave us a chance to look at how the upstream funding works as a way to
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analyze downstream impacts now in the literature it suggests that microfinance in a nation works best when you have a
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really robust ecology of different kinds of microfinance lenders so you want to have big established more commercial
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profitable organizations but you also want to have smaller less profitable organizations that aren't quite
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financially sustainable yet maybe doing a little bit more outreach and you need that funding go to all these
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organizations to ensure you're getting sustainable outreach good competition
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and a healthy sector overall and so what we're looking at was how funding flows
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to these different types of microfinance organizations and who the different funders are so it turns out about 30
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billion dollars a year that we can track flows into microfinance around the world
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each year and it comes primarily from two sources one is commercial lenders mostly in Western Europe in the United
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States and they have commercial goals they want to get their money back they may want a little bit of a social return
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on investment as well but really this is risk capital they're going to lend this
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money out but they want to see it returned on the other hand you have development
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banks and multilateral aid agencies and then we're interested in funding development in the sector and so when
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things are working well you have the commercial lenders funding the big established commercial microfinance
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organizations and you have the public organizations funding the smaller not yet sustainable ones and so no one had
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analyzed this our top line analysis would just to see if this actually held up in practice because some people
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suggest that doesn't and what we found is in fact it does you know in a steady
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state you see this ecology work the way it should it all kind of lines up nicely
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but when you start to look at uncertainty in a country political uncertainty financial uncertainty when
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things get volatile and it's a little less clear you know how previous strategies investment strategies are
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going to work you see all of the funders retreat to a safe harbor in the largest
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microfinance organizations and this is public and commercial funders and this is tied to a lot of very adverse
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outcomes in the microfinance sectors of this country and this is really you know
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what it was that was the gist of the paper and the big thing that we uncovered so you had you started out
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with a number of different hypotheses about microfinance and organizations and how they're funded and some of them held
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up and some of them there was a little bit of a surprise so tell us a little bit about some of the key takeaways from
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this paper yeah I mean I think one of the things that was at least a takeaway for me is it wasn't so clear to me
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exactly whether or not this would map on the way we expected in particular as Tyler alluded to there's there is there
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there is a little bit of work mostly anecdotal evidence that suggests that there's a lot of competition between
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these more public funders and these commercial funders and that they actually are both targeting these really
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large sustainable profitable organizations so I wasn't sure whether or not things would play out because the
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evidence if you look at the micro finance literature right now it suggests that there that there really kind of
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targeting the same types of microfinance lenders and so just uncover a well at least in a steady state that doesn't
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seem to be the case was I think a nice thing to discover actually doing what they profess to do
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and probably what they should be doing but at the same time the fact that even things that are a little bit further
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away or kind of higher level like political uncertainty or financial uncertainty is actually affecting these
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decisions that are being made by these commercial and public funders you know half a world away that they're actually
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really paying attention to these things and they're making conscious strategies
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to that wasn't exactly what may be a lot of people would expect and in fact we
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got a chance to talk to some of these people and they really like yeah this is totally what we do you know it doesn't
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make a lot of sense to invest in these smaller less sustainable microfinance lenders if everything's going to go you
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know if the economy is really going turning poorly and these entities might disappear anyway we should it actually
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fulfills our social mission and so another surprising thing is they actually still feel like they're holding
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to this social mission even though they're changing their lending strategy which is at least in our field is
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something that we wouldn't expect that actually that well that's seen as sort
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of kind of more of a change in your ideology or change in your strategy and they don't see that this that change in
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investment behavior is tied to a change in strategy they actually see those two things being compatible but this change
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in investment behavior it does have implications for people who might receive loans from them to the
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organization itself and so in terms of this paper what are some of the practical implications if I'm a
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microfinance organization especially if I'm a smaller one or one that's in an
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uncertain climate how can I take this paper and apply it what can I do yeah it's a great question um I'll a certain
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two parts there's the implications for the organizations and there's the what
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they can do and what they should do so in terms of the implications I mean building on what Adam was saying one of
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the really striking things about our finding is that under these conditions of uncertainty if you are a small
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microfinance organization even one that's managed well and turning a reasonable return on your investment
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there's a good chance that if things become uncertain you're going to lose
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this funding and it's going to put you in a really precarious position now at the same time these forms of
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political and economic uncertainty are also things that are likely to put people who are on the edge of poverty
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into poverty and so what this means is that as this is happening as people are more likely to be you know desperate and
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very poor the organizations that are the ones that are most targeted to addressing their needs are the ones are
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gonna have their funding dry up first so this is a it's a big issue and there's
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no easy answer to what should happen here so in the paper we talked about a couple of different things so one is on
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the policy side government should probably make provisions to step in have emergency capital reserve funds
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something to restore the funding to the organizations that are having it dry up when things become uncertain this is
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going to be the way that you ensure the money it keeps on flowing to the people who need it as well as ensuring that
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you're gonna have the the basis for a healthy microfinance sector once things
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calm down again beyond that you know seen as size seems to be the big driver of investment decisions under
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uncertainty we speculate that maybe the smaller not yet sustainable microfinance
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organizations could band together they could work together they could merge do other things to you know to get some of
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the advantages of size in order to you know compete for these loans that are progressively moving up market oh and
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another thing we found it's not as emphasized quite as strongly in the paper is that microfinance these these
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lenders if they have sort of better and more transparent financial reporting actually seems to help a little bit too
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and that is something that's relatively low cost for them to employ and it does
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suggest that really a lot of this is about risk so from from these these funders it's really about it's really
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about risk so anything that micro these microfinance lenders can do that make them appear to be less risky including
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more transparency including growing or sort of our size or anything governments can do that can you know guarantee loans
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or do other things is really going to make is really going to help ensure that the microfinance lending structure main
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you know kind of holds in place during these times of uncertainty so could you talk to me a little bit
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about some misperceptions that are dispelled by this research I think one misperception that is dispelled by this
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research is this notion that public and commercial funders are crowding each other out that Pacific alee there is
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this big concern and the microfinance literature that the these public funders don't need the same kind of rate of
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return on capital and so they're offering loans to really big stable good performing lenders in these countries
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and able to offer better rates lower interest rates and so these better loan terms and so it's actually not enabling
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the infrastructure that sort of this ecosystem to grow and so this is kind of this big push to get these public
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funders to go and invest in the smaller less sustainable and at least at the baseline our results do not indicate
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that that this is as big as a big of a problem as some the anecdotal evidence suggests I think that's definitely one
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thing yeah I think that's absolutely right you know the finding that Adams talking about caused quite a bit of
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turmoil in the microfinance community with the idea that the public funders weren't being faithful to their mission
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you know they disposed lofty goals of fostering development in the sector and if in fact they were just investing in
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the largest safest organizations trying to make their organizations look good make their investment team look good I
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mean this would have been a big problem and it certainly is out there in some instances in microfinance in different
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countries but I think you know one of the things that is valuable about our fiving is to put some boundary
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conditions around this and part of what let us do this was access to more complete data so the findings that were
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out there that were showing this crowding out effect were based on a limited sample of lenders and a limited
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sample of countries so it was really just looking in Latin American countries now with this broader data looking at
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the capital flows around the world we really get a much fuller sweep of what's
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going on and in doing that we can see that there are contexts where crowding out takes place and there should be
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action taken to address that but it really seems to be linked to political and financial
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certainty in a country where as under steady state these organizations are acting in ways that are faithful to
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their mission it's just that their mission changes a little bit under uncertainty and there's a lot of good
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rational reasons for why they'd behave in that way and now what would you say
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are some other things that kind of sets this research apart from other research being conducted about microfinance I
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mean a lot of research on microfinance is really looking at the lindy and the borrower relationship and and whether or
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not microfinance helps get people out of poverty whether it leads to these good social outcomes that's always been the
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promise of microfinance I think part of its due to data limitations people haven't really looked at this Thunder
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microfinance lindy relationship yet and the fact that microfinance lenders don't
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operate like banks so they don't mobilize their own deposits and they are dependent on these other organizations
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for them to get the capital necessary to lend out is something that I imagine if
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you talk to the two person who just has a casual understanding of microfinance might not even know that that's how
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that's how they get their money or whether or not how that money flows in and the terms actually has a big impact
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on downstream on the lindy borrow relationship so I think that was a really you know that was the one of the
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big appeals to me to take part in this research is it just really hasn't been
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explored there's only been maybe one or two studies and as Tyler alluded to they
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haven't had the best data and it hasn't been that complete over enough years and
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at least I think this is a good first step to start really looking at the importance of the funder Lindy
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relationship as opposed to not to say that the borrower Lindy relations that Linda relationship isn't important and
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obviously research needs to continue on that front as well but we really need to
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be looking at the entire supply chain and not just one part of it and what's
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next for this research where you guys going to go with this next well we've been talking about a bunch of different
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ideas it's a you know it's fun to think about where it might go so one of the
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things that we've been talking about is looking at the effects that different
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forms of capital have on the behavior of the organizations so in this research we
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were looking at how the funders cave and in follow ons we're thinking about taking that to the you know to the
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microfinance organization level and looking at how the composition of capital in a country affects the
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behavior of the organization's getting back to a question you asked earlier about you know what are the effects of
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this in terms of the organization's behavior on the ground doing their work trying to lend to poor people so we're
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starting to look at you know how these organizations make lending decisions in terms of how they apply the screens when
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they're deciding what organizations to invest in what sort of pressures this
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puts on the organization both directly and indirectly and how having different pots of capital available in a country
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might allow for different types of organizations to flourish or you know how it might you know just have the
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whole ecology you know implode on itself as well kind of like what we see under uncertainty in the funding relationship
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and you know to the extent that this speaks about issues of social finance it potentially has implications for
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understanding about how we affect positive outcomes not just through corporate social responsibility and
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social action but also how money comes in to corporations more broadly and so what we'd like to be able to show are
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some boundary conditions around when social investment has positive versus negative outcomes great thank you guys
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so much thank you you