00:00:01
we're here today with Wharton management
00:00:03
professors Tyler I and Adam Cobb to talk
00:00:05
a little bit about their latest research
00:00:07
which was done in conjunction with
00:00:08
Indiana University's Eric Zhao it
00:00:10
focuses on funding for microfinance
00:00:12
organizations Tyler and Adam thanks for
00:00:14
being here it's great to be here thanks
00:00:16
for having us so first of all give us a
00:00:18
short summary of this research so you
00:00:20
were looking at funding for microfinance
00:00:21
organizations tell us where this came
00:00:23
from and what questions you were trying
00:00:24
to answer sure so Adam and I've been
00:00:27
looking at microfinance in different
00:00:28
capacities for a while now and eric has
00:00:30
as well and one of the things that is a
00:00:33
little bit surprising about the space is
00:00:35
that you're making loans to poor people
00:00:38
but the money that is actually used to
00:00:40
finance those loans it's not like a
00:00:42
typical Bank where they mobilize their
00:00:44
deposits to then lend out the money what
00:00:47
happens in microfinance is you count on
00:00:49
upstream funders and the microfinance
00:00:51
organizations themselves are more of a
00:00:53
flow-through and so no one had really
00:00:56
looked at how this upstream funding
00:00:59
works and we managed to get access to
00:01:01
really great data through the
00:01:02
microfinance information exchange and it
00:01:05
gave us a chance to look at how the
00:01:06
upstream funding works as a way to
00:01:08
analyze downstream impacts now in the
00:01:12
literature it suggests that microfinance
00:01:14
in a nation works best when you have a
00:01:17
really robust ecology of different kinds
00:01:19
of microfinance lenders so you want to
00:01:22
have big established more commercial
00:01:24
profitable organizations but you also
00:01:26
want to have smaller less profitable
00:01:28
organizations that aren't quite
00:01:30
financially sustainable yet maybe doing
00:01:32
a little bit more outreach and you need
00:01:34
that funding go to all these
00:01:35
organizations to ensure you're getting
00:01:37
sustainable outreach good competition
00:01:40
and a healthy sector overall and so what
00:01:43
we're looking at was how funding flows
00:01:45
to these different types of microfinance
00:01:47
organizations and who the different
00:01:49
funders are so it turns out about 30
00:01:52
billion dollars a year that we can track
00:01:54
flows into microfinance around the world
00:01:56
each year and it comes primarily from
00:01:58
two sources one is commercial lenders
00:02:00
mostly in Western Europe in the United
00:02:02
States and they have commercial goals
00:02:04
they want to get their money back they
00:02:06
may want a little bit of a social return
00:02:08
on investment as well but really this is
00:02:11
risk capital they're going to lend this
00:02:12
money out but they want to see it
00:02:13
returned
00:02:14
on the other hand you have development
00:02:16
banks and multilateral aid agencies and
00:02:19
then we're interested in funding
00:02:20
development in the sector and so when
00:02:23
things are working well you have the
00:02:24
commercial lenders funding the big
00:02:25
established commercial microfinance
00:02:27
organizations and you have the public
00:02:29
organizations funding the smaller not
00:02:31
yet sustainable ones and so no one had
00:02:34
analyzed this our top line analysis
00:02:36
would just to see if this actually held
00:02:37
up in practice because some people
00:02:38
suggest that doesn't and what we found
00:02:40
is in fact it does you know in a steady
00:02:43
state you see this ecology work the way
00:02:45
it should it all kind of lines up nicely
00:02:48
but when you start to look at
00:02:50
uncertainty in a country political
00:02:52
uncertainty financial uncertainty when
00:02:54
things get volatile and it's a little
00:02:57
less clear you know how previous
00:02:59
strategies investment strategies are
00:03:01
going to work you see all of the funders
00:03:04
retreat to a safe harbor in the largest
00:03:07
microfinance organizations and this is
00:03:09
public and commercial funders and this
00:03:11
is tied to a lot of very adverse
00:03:15
outcomes in the microfinance sectors of
00:03:17
this country and this is really you know
00:03:19
what it was that was the gist of the
00:03:20
paper and the big thing that we
00:03:21
uncovered so you had you started out
00:03:24
with a number of different hypotheses
00:03:26
about microfinance and organizations and
00:03:28
how they're funded and some of them held
00:03:31
up and some of them there was a little
00:03:33
bit of a surprise so tell us a little
00:03:34
bit about some of the key takeaways from
00:03:35
this paper yeah I mean I think one of
00:03:38
the things that was at least a takeaway
00:03:42
for me is it wasn't so clear to me
00:03:45
exactly whether or not this would map on
00:03:48
the way we expected in particular as
00:03:51
Tyler alluded to there's there is there
00:03:53
there is a little bit of work mostly
00:03:56
anecdotal evidence that suggests that
00:03:58
there's a lot of competition between
00:03:59
these more public funders and these
00:04:01
commercial funders and that they
00:04:02
actually are both targeting these really
00:04:04
large sustainable profitable
00:04:07
organizations so I wasn't sure whether
00:04:09
or not things would play out because the
00:04:12
evidence if you look at the micro
00:04:14
finance literature right now it suggests
00:04:16
that there that there really kind of
00:04:18
targeting the same types of microfinance
00:04:20
lenders and so just uncover a well at
00:04:23
least in a steady state that doesn't
00:04:24
seem to be the case was I think a nice
00:04:27
thing to discover
00:04:28
actually doing what they profess to do
00:04:30
and probably what they should be doing
00:04:32
but at the same time the fact that even
00:04:36
things that are a little bit further
00:04:37
away or kind of higher level like
00:04:40
political uncertainty or financial
00:04:42
uncertainty is actually affecting these
00:04:44
decisions that are being made by these
00:04:47
commercial and public funders you know
00:04:48
half a world away that they're actually
00:04:50
really paying attention to these things
00:04:51
and they're making conscious strategies
00:04:54
to that wasn't exactly what may be a lot
00:04:58
of people would expect and in fact we
00:05:00
got a chance to talk to some of these
00:05:01
people and they really like yeah this is
00:05:04
totally what we do you know it doesn't
00:05:07
make a lot of sense to invest in these
00:05:08
smaller less sustainable microfinance
00:05:11
lenders if everything's going to go you
00:05:13
know if the economy is really going
00:05:15
turning poorly and these entities might
00:05:18
disappear anyway we should it actually
00:05:21
fulfills our social mission and so
00:05:23
another surprising thing is they
00:05:25
actually still feel like they're holding
00:05:27
to this social mission even though
00:05:28
they're changing their lending strategy
00:05:30
which is at least in our field is
00:05:32
something that we wouldn't expect that
00:05:34
actually that well that's seen as sort
00:05:36
of kind of more of a change in your
00:05:41
ideology or change in your strategy and
00:05:43
they don't see that this that change in
00:05:45
investment behavior is tied to a change
00:05:47
in strategy they actually see those two
00:05:49
things being compatible but this change
00:05:51
in investment behavior it does have
00:05:53
implications for people who might
00:05:55
receive loans from them to the
00:05:56
organization itself and so in terms of
00:05:59
this paper what are some of the
00:06:00
practical implications if I'm a
00:06:02
microfinance organization especially if
00:06:03
I'm a smaller one or one that's in an
00:06:06
uncertain climate how can I take this
00:06:08
paper and apply it what can I do yeah
00:06:10
it's a great question um I'll a certain
00:06:14
two parts there's the implications for
00:06:16
the organizations and there's the what
00:06:18
they can do and what they should do so
00:06:20
in terms of the implications I mean
00:06:21
building on what Adam was saying one of
00:06:23
the really striking things about our
00:06:25
finding is that under these conditions
00:06:26
of uncertainty if you are a small
00:06:29
microfinance organization even one
00:06:31
that's managed well and turning a
00:06:33
reasonable return on your investment
00:06:35
there's a good chance that if things
00:06:37
become uncertain you're going to lose
00:06:38
this funding and it's going to put you
00:06:40
in a really precarious position
00:06:42
now at the same time these forms of
00:06:44
political and economic uncertainty are
00:06:46
also things that are likely to put
00:06:48
people who are on the edge of poverty
00:06:49
into poverty and so what this means is
00:06:52
that as this is happening as people are
00:06:54
more likely to be you know desperate and
00:06:56
very poor the organizations that are the
00:06:59
ones that are most targeted to
00:07:01
addressing their needs are the ones are
00:07:02
gonna have their funding dry up first so
00:07:05
this is a it's a big issue and there's
00:07:07
no easy answer to what should happen
00:07:10
here so in the paper we talked about a
00:07:12
couple of different things so one is on
00:07:14
the policy side government should
00:07:16
probably make provisions to step in have
00:07:18
emergency capital reserve funds
00:07:20
something to restore the funding to the
00:07:22
organizations that are having it dry up
00:07:24
when things become uncertain this is
00:07:27
going to be the way that you ensure the
00:07:28
money it keeps on flowing to the people
00:07:30
who need it as well as ensuring that
00:07:32
you're gonna have the the basis for a
00:07:34
healthy microfinance sector once things
00:07:36
calm down again beyond that you know
00:07:40
seen as size seems to be the big driver
00:07:42
of investment decisions under
00:07:44
uncertainty we speculate that maybe the
00:07:47
smaller not yet sustainable microfinance
00:07:49
organizations could band together they
00:07:52
could work together they could merge do
00:07:55
other things to you know to get some of
00:07:57
the advantages of size in order to you
00:08:00
know compete for these loans that are
00:08:02
progressively moving up market oh and
00:08:05
another thing we found it's not as
00:08:07
emphasized quite as strongly in the
00:08:08
paper is that microfinance these these
00:08:11
lenders if they have sort of better and
00:08:14
more transparent financial reporting
00:08:17
actually seems to help a little bit too
00:08:19
and that is something that's relatively
00:08:20
low cost for them to employ and it does
00:08:23
suggest that really a lot of this is
00:08:26
about risk so from from these these
00:08:28
funders it's really about it's really
00:08:30
about risk so anything that micro these
00:08:32
microfinance lenders can do that make
00:08:34
them appear to be less risky including
00:08:37
more transparency including growing or
00:08:39
sort of our size or anything governments
00:08:41
can do that can you know guarantee loans
00:08:44
or do other things is really going to
00:08:47
make is really going to help ensure that
00:08:49
the microfinance lending structure main
00:08:53
you know kind of holds in place during
00:08:54
these times of uncertainty
00:08:56
so could you talk to me a little bit
00:08:57
about some misperceptions that are
00:08:59
dispelled by this research I think one
00:09:02
misperception that is dispelled by this
00:09:04
research is this notion that public and
00:09:06
commercial funders are crowding each
00:09:09
other out that Pacific alee there is
00:09:12
this big concern and the microfinance
00:09:14
literature that the these public funders
00:09:17
don't need the same kind of rate of
00:09:18
return on capital and so they're
00:09:20
offering loans to really big stable good
00:09:25
performing lenders in these countries
00:09:27
and able to offer better rates lower
00:09:30
interest rates and so these better loan
00:09:32
terms and so it's actually not enabling
00:09:35
the infrastructure that sort of this
00:09:37
ecosystem to grow and so this is kind of
00:09:39
this big push to get these public
00:09:42
funders to go and invest in the smaller
00:09:44
less sustainable and at least at the
00:09:46
baseline our results do not indicate
00:09:49
that that this is as big as a big of a
00:09:51
problem as some the anecdotal evidence
00:09:53
suggests I think that's definitely one
00:09:55
thing yeah I think that's absolutely
00:09:57
right you know the finding that Adams
00:10:00
talking about caused quite a bit of
00:10:02
turmoil in the microfinance community
00:10:03
with the idea that the public funders
00:10:05
weren't being faithful to their mission
00:10:07
you know they disposed lofty goals of
00:10:09
fostering development in the sector and
00:10:11
if in fact they were just investing in
00:10:14
the largest safest organizations trying
00:10:15
to make their organizations look good
00:10:17
make their investment team look good I
00:10:19
mean this would have been a big problem
00:10:22
and it certainly is out there in some
00:10:25
instances in microfinance in different
00:10:27
countries but I think you know one of
00:10:30
the things that is valuable about our
00:10:33
fiving is to put some boundary
00:10:35
conditions around this and part of what
00:10:37
let us do this was access to more
00:10:39
complete data so the findings that were
00:10:42
out there that were showing this
00:10:44
crowding out effect were based on a
00:10:46
limited sample of lenders and a limited
00:10:48
sample of countries so it was really
00:10:49
just looking in Latin American countries
00:10:51
now with this broader data looking at
00:10:54
the capital flows around the world we
00:10:57
really get a much fuller sweep of what's
00:11:00
going on and in doing that we can see
00:11:02
that there are contexts where crowding
00:11:04
out takes place and there should be
00:11:05
action taken to address that but it
00:11:07
really seems to be linked to political
00:11:09
and financial
00:11:09
certainty in a country where as under
00:11:12
steady state these organizations are
00:11:14
acting in ways that are faithful to
00:11:15
their mission it's just that their
00:11:17
mission changes a little bit under
00:11:18
uncertainty and there's a lot of good
00:11:20
rational reasons for why they'd behave
00:11:21
in that way and now what would you say
00:11:24
are some other things that kind of sets
00:11:26
this research apart from other research
00:11:28
being conducted about microfinance I
00:11:30
mean a lot of research on microfinance
00:11:33
is really looking at the lindy and the
00:11:36
borrower relationship and and whether or
00:11:38
not microfinance helps get people out of
00:11:41
poverty whether it leads to these good
00:11:42
social outcomes that's always been the
00:11:44
promise of microfinance I think part of
00:11:46
its due to data limitations people
00:11:49
haven't really looked at this Thunder
00:11:51
microfinance lindy relationship yet and
00:11:55
the fact that microfinance lenders don't
00:11:59
operate like banks so they don't
00:12:00
mobilize their own deposits and they are
00:12:02
dependent on these other organizations
00:12:04
for them to get the capital necessary to
00:12:06
lend out is something that I imagine if
00:12:08
you talk to the two person who just has
00:12:10
a casual understanding of microfinance
00:12:12
might not even know that that's how
00:12:14
that's how they get their money or
00:12:16
whether or not how that money flows in
00:12:18
and the terms actually has a big impact
00:12:20
on downstream on the lindy borrow
00:12:24
relationship so I think that was a
00:12:26
really you know that was the one of the
00:12:28
big appeals to me to take part in this
00:12:31
research is it just really hasn't been
00:12:33
explored there's only been maybe one or
00:12:34
two studies and as Tyler alluded to they
00:12:38
haven't had the best data and it hasn't
00:12:40
been that complete over enough years and
00:12:42
at least I think this is a good first
00:12:44
step to start really looking at the
00:12:46
importance of the funder Lindy
00:12:48
relationship as opposed to not to say
00:12:51
that the borrower Lindy relations that
00:12:53
Linda relationship isn't important and
00:12:55
obviously research needs to continue on
00:12:57
that front as well but we really need to
00:12:59
be looking at the entire supply chain
00:13:01
and not just one part of it and what's
00:13:05
next for this research where you guys
00:13:06
going to go with this next well we've
00:13:07
been talking about a bunch of different
00:13:09
ideas it's a you know it's fun to think
00:13:11
about where it might go so one of the
00:13:14
things that we've been talking about is
00:13:16
looking at the effects that different
00:13:17
forms of capital have on the behavior of
00:13:19
the organizations so in this research we
00:13:21
were looking at how the funders
00:13:23
cave and in follow ons we're thinking
00:13:25
about taking that to the you know to the
00:13:27
microfinance organization level and
00:13:29
looking at how the composition of
00:13:30
capital in a country affects the
00:13:33
behavior of the organization's getting
00:13:34
back to a question you asked earlier
00:13:35
about you know what are the effects of
00:13:37
this in terms of the organization's
00:13:39
behavior on the ground doing their work
00:13:41
trying to lend to poor people so we're
00:13:44
starting to look at you know how these
00:13:46
organizations make lending decisions in
00:13:48
terms of how they apply the screens when
00:13:51
they're deciding what organizations to
00:13:52
invest in what sort of pressures this
00:13:54
puts on the organization both directly
00:13:56
and indirectly and how having different
00:13:59
pots of capital available in a country
00:14:02
might allow for different types of
00:14:04
organizations to flourish or you know
00:14:07
how it might you know just have the
00:14:08
whole ecology you know implode on itself
00:14:09
as well kind of like what we see under
00:14:11
uncertainty in the funding relationship
00:14:13
and you know to the extent that this
00:14:15
speaks about issues of social finance it
00:14:19
potentially has implications for
00:14:20
understanding about how we affect
00:14:21
positive outcomes not just through
00:14:23
corporate social responsibility and
00:14:25
social action but also how money comes
00:14:27
in to corporations more broadly and so
00:14:30
what we'd like to be able to show are
00:14:31
some boundary conditions around when
00:14:33
social investment has positive versus
00:14:35
negative outcomes great thank you guys
00:14:37
so much thank you
00:14:56
you
