5/2/2004 Letter - Inch by Inch, a Lifeline for the Poor

[johnkarls]

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NY Times – 5/2/2004

Letters to the Editor on –

Inch by Inch, a Lifeline for the Poor

To the Editor:

It is true that microcredit programs grow less quickly and are less cost-effective when they make greater efforts to target the very poor. But microcredit is not just another form of banking. It is, at essence, about inclusion and alleviating suffering. It is about ending hunger. Reaching the poorest people in the world should not be seen as a ''distraction.''

When the Grameen Bank Project began extending its loans to poor villagers in Bangladesh in the late 1970's, few believed that it was possible to bank with ''landless'' villagers, let alone women.

Microcredit innovators will likely respond to the new Congressional rules by devising newer and better ways to serve people at the bottom rung of the world's economic ladder.

DAVID BORNSTEIN
New York, April 29, 2004

NY Times Editorial Note = The writer is the author of a book about the Grameen Bank.

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The article that provoked David Bornstein =

NY Times – 4/12/2004

Tiny Loans Have Big Impact on Poor
By SARITHA RAI

Trekking along the dusty rural roads of Shamsabad, a village near Hyderabad, a technology hub in southern India, Vinod Khosla, one of the most successful venture capitalists in the United States, was as far removed from his Silicon Valley office as he could get.

Mr. Khosla was in Shamsabad one afternoon in February listening to rural women recount how the tiny loans they had received from a microfinance program run by Share Microfin had helped them start home-grown businesses, transformed their poverty-striken lives and made better education possible for their children.

Microfinance is a long way from the world of venture capital where Mr. Khosla, a partner at Kleiner Perkins Caulfield & Byers, a venture capital business, and a co-founder of Sun Microsystems, has earned a formidable reputation as the man with the Midas touch. But in February he said he would start working part time at his company to spend more time with his family and on his passion: supporting microcredit initiatives for impoverished regions.

The Share program, or Society for Helping and Awakening Rural Poor Through Education, was founded in 1991 by M. Udaia Kumar, who had been involved in providing training programs to poor rural entrepreneurs. The program has reached 300,000 needy families with loans totaling $75 million.

''I was completely blown as I listened to the stories of these tenacious women,'' Mr. Khosla said. ''I started crying.'' In his view, the microfinance initiatives he visited in India and Bangladesh in February ran more efficiently than most Silicon Valley organizations. ''They have sophisticated credit algorithms,'' he said. ''Does the woman own a buffalo? Some chickens? Does she have a toilet in her home? What kind of roofing material does her home have? Does she bring a shawl to the village meeting?''

In India, microloans are usually disbursed to poor women whose total family assets are less than 20,000 rupees ($459) and whose monthly income is smaller than 350 rupees. Yet microfinance initiatives have a phenomenal repayment rate averaging more than 95 percent, better than the best commercial banks in the world. Many of the programs are highly profitable, Mr. Khosla said, adding that ''microfinance is one of the most important economic phenomena in the world in the last 50 years.''

His favorite story is that of Sivamma, a 35-year-old woman from the Guntur district of Andhra Pradesh who goes by one name. Four years ago, she took a loan of 2,000 rupees ($45) from Spandana, a microfinance initiative based there and built a successful business by employing 250 women to collect human hair. When the women travel to the nearby villages with the small toys that she buys for them, small children greet them and exchange handfuls of hair for the toys.

The hair is collected and sold to a leading Indian hair exporter in Madras, from where it eventually finds its way to the United States and other Western countries to be used for wigs and hairpieces. Sivamma's return on investment has been more than a hundredfold.

Sivamma's pride is the $3,000 home she built from the profits, the $700 motorbike she bought for her husband and her $1,000 savings.

Mr. Khosla said he intended to invest some of his own wealth as well as time in microfinance projects. Though he declined to give specifics about how he will allocate his time and money, Mr. Khosla said that he would continue to make investments with Kleiner Perkins's new $400 million fund for technology and life sciences start-ups. ''I've just made the fund's first investment,'' he said.

For the next four or five years, Mr. Khosla said, his time commitment to venture capital activities would ''be more like 75 percent.''

Having a successful, high-profile venture capitalist with hundreds of millions of dollars in personal wealth devote attention to microfinance initiatives is invigorating for the fledgling industry.

''Vinod Khosla has a reputation as a visionary and as a person who is able to identify industry trends well before others,'' said Maggie Nielson, vice president for strategic development of Unitus, an organization based in Redmond, Wash., that helps provide capital financing and strategic help to microfinance initiatives. ''Having someone with his credibility endorse this relatively unknown industry brings significant attention.''

An estimated 3,000 microfinance initiatives serve the world's poor but a scarcity of money has limited their expansion. More than 70 percent of them serve fewer than 2,500 borrowers each.

Only 30 microfinance initiatives have grown to serve more than 100,000 poor borrowers. One of them, the pioneering Grameen Bank in Bangladesh, reaches more than three million borrowers. A total of $4 billion has been disbursed since Grameen started making loans in 1976 with seed loans starting as small as $35.

The majority of the microfinance initiatives struggle to find grant financing and to stay in business. The money they do receive is often in small grants of $5,000 to $50,000. The ventures are typically viewed as risky propositions for loans from commercial banks.

But advocates hope Mr. Khosla's evangelism for the initiatives will help them increase support from mainstream institutions.

Some microfinance projects are tapping into commercial financial institutions. In India, the Grameen Foundation is starting a company called Grameen Capital India in partnership with Citigroup and India's leading ICICI Bank to help microfinance initiatives get guarantees for financing.

And business leaders and entrepreneurs are increasingly seeking to support microfinance organizations because of their financial soundness and broad social impact, said Julie Stahl, program officer of the Grameen Foundation USA.

''We are seeing a groundswell of support coming from leaders in the high-tech and venture capital worlds,'' Ms. Stahl said. Bob Gay, managing director of Bain Capital; Mike Murray, a former vice president at Microsoft; Rob Glaser, founder of RealNetworks; and Craig McCaw, a pioneer in the wireless industry, for example, have all been involved with microfinance projects.

It was heartening, Mr. Khosla said, to see that the entrepreneurial principles of Silicon Valley applied just as well in rural India and Bangladesh. ''Granted, they are not as profitable as Google, but they have the same level of social impact.''