Interview with Alex Counts
- Mr. Alex Counts
Mr. Alex Counts gave an exclusive interview to the MICROFINANCE FOCUS during “Samvad: a dialogue on microfinance” conference organized by Grameen Koota in Bangalore .
Here are the excerpts from the interview:
MF Focus: How do you view multiple borrowing and how do you think the industry should handle it?
Mr. Counts: I think multiple borrowing is often a bad thing. Number one, if there is multiple borrowing and the woman is not over indebted it says that MFIs don’t have their credit underwriting and processes correct. They are under lending, so that should be fixed. Number two, if they do have it right you are having an opportunistic second MFI who is over indebting the client. Each of them is lending what she needs, but now she has times two. So I think in most cases it is a bad thing. At the same time, if they are under-lending it could be a good thing, at least as a temporary measure. You don’t want to take away options. I think the big issue here is that there are some loan officers who make loans they know people can’t repay. And yet they are made to meet targets, and people get into a cycle of borrowing to repay, borrowing to repay. We need to find ways to stop that, while not taking away choice from clients. One of the most powerful ways, tools to do that is some sort of effective Credit Bureau. Up until we have that, it will need to be more of a voluntary, case by case, at the field level system where MFIs work these issues out using their own judgment. Except in a few cases, I think multiple borrowing is dangerous, but you have to also realize that people can be borrowing from one MFI and get over indebted. In some senses, it is better that they borrow from three if that gets them to what they need than to borrow from only one and get too much or too little.
MF Focus : Who do you think should manage the Credit Bureau?
Mr. Counts : From my experience with this issue in Morocco, I think that it should not be the local Microfinance Association and it should not be the government. It should most likely be professionally run, but managed by people who are widely respected who know banking and microfinance. Perhaps a mix of academics, retired bankers, retired people in the microfinance sector. A mix of people who are not active practitioners and who aren’t formally affiliated with the government in any political party; the wise men and women of banking and microfinance who can oversee a professional staff of technocrats.
MF Focus : How and what kind of new technologies can contribute to the development of microfinance?
Mr. Counts : Our management tool called the Progress out of Poverty Index is very important. With it you can bring transparency and accountability to the poor, and those reaching them. Once you have this feedback loop, you can make adjustments if you want to. People need to improve the product mix. Reaching the poorest of the poor is very important from our perspective; addressing chronic hunger is a part of why we are interested in microfinance. You want to make sure you actually have the right products so that people can thrive with microfinance, not be set backward. Some work I’ve been doing Haiti is very exciting, where like a lot of microfinance programs that have their mainstream joint liability groups which are good for the moderate poor, they also have the BRAC program for the ultra poor that is heavily subsidized. Those are two important pieces, but we think that there is an important piece in the middle. Where you don’t have that big subsidy but you have some minor adjustments to the microfinance model that make it easier for the very poor to succeed. One part of it is instead of getting one six-month loan when you start, in the Fonkoze system, instead of getting one loan for $100 for six months, you get first a loan for one month for $25, and you pay that off over one month. So people get experience with a small amount and learn the discipline of payment. Then they get a second loan for $40 for two months, and then they get another loan for three months after that. So you get the same amount of money, but you get it in smaller installments. That is an easier on ramp for succeeding in microfinance. Another part of this program is they’ve adjusted their financial literacy and adult education program that they give normally; they took out key elements and then delivered it differently. It highlights what normal borrowers get over a few years and compacts that into six months, forming an easier format for someone who is illiterate. So these types of adjustments where the subsidy element is there but is small are probably more sustainable and scaleable than heavily subsidized asset transfer programs. Those will help once you get more of the very poor in, which is step one. Step two is having the products that will make it more likely for them to succeed. I think there is a tremendous amount of innovation and potential for product adjustments, some of them minor, that will be very helpful to making microfinance more relevant to very poor people.
MF Focus : What do you think about Participatory Wealth Ranking?
Mr. Counts : I think that the model being promoted ten years ago was the CASHPOR Housing Index, which is probably more accurate than nothing, but we are finding that it is limited. Participatory Wealth Ranking is probably more accurate than the CASHPOR Housing Index. The problem with it is that it takes more time, because you have to repeat it village by village. The other thing is that it can’t be benchmarked to other villages, it is just to that village. It creates a stack ordering of the poor. It doesn’t tell you, for example in one village 75% may be very poor where in a comparative village only 10% are. You are just getting a rank ordering if it is accurate. You should be treating a village not only in terms of its relative poverty within the village, but also how it stacks up against other ones. The Participatory Wealth Ranking doesn’t do that. Some groups that are very serious about this have used two methodologies to be sure, where one is a way of checking the other. Participatory Wealth Ranking is a powerful tool, though it has limitations. The big strength of the Poverty out of Progress Index is that it allows for benchmarking, not only within an institution, but also within a country and even across organizations in different countries.
MF Focus : How do you differentiate between acceptable profits made by MFIs and the commercialization of microfinance institutions?
Mr. Counts : I think this is a good question about acceptable levels of profits. The basic principle I apply, which is a kind of version of one of Professor Yunus’s points on this, is when you are lending to people below the poverty line, particularly if they are far below the poverty line, your goal should be to recover your costs and not to lose money. If you make some limited profits, probably want to say if they get beyond a certain point, you want to plow those back into better services or bring the interest rates down. Then when people do that job well and are covering their costs, a certain number of those borrowers are going to come out of poverty, some of them will come a little bit over, some of them way over. I think that’s where MFIs should make as much profit as they can in conformance with business ethics. With those 10-30% percent of clients that come through their system who are the true entrepreneurs, not the survival entrepreneurs. The ones who if they had been born with privilege might have been Bill Gates or Warren Buffet. For those people I think the sky is the limit. You keep bringing value to them they are going to bring profits to you. Just like a lot of businesses who make 80% of profits on 20% of clients. Let those people be the clients who have left poverty behind. I wouldn’t put an upward limit, because on those clients you do the best business you can. On the people who are below the poverty line, however many those are, you should be thinking of it as fundamentally a breakeven business. That’s the feeder for the profitable clients later on. My views reflect a market segmentation approach to poverty. If you are truly pro-poor, by some threshold that is locally defined, you need to start giving a refund overall, which can be done in several different ways. Eventually too much profit should become a refund to borrowers in the form of lower interest rates, better services, or stock options. MFIs should offer these refunds before they are externally pressured to do so.
MF Focus : How can the gap between the highest limit of MFI loans and the lowest
limit of commercial bank loans be filled?
Mr. Counts : This is the whole missing middle discussion. One of the trends of many MFIs has been to create a business development loan, individual loan product, with no upward limit, a trend particularly apparent when organizations aren’t credit constrained. Those are often for graduated, formerly poor clients, though sometimes MFIs take people directly. MFIs are getting better at serving small businesses. Some will have to do their underwriting more like a traditional bank. This is a good business opportunity to bring the banks down. Somewhere those will meet, it is naturally happening, maybe too slowly. The missing middle to some degree will take care of itself, particularly as MFIs see that if they alter their product mix, just like they need to alter their product mix for the very poor, they also need to alter their product mix for the formally poor. It took Grameen Bank about five years to figure out how to do that, and how to incentivize loan officers the right way to take risks on all sorts of loans, seeing that our culture makes certain credit losses unacceptable. Building the right incentive structure for the loan officers who are originating the larger loans is the biggest barrier along with making sure MFIs have enough liquidity to fully meet those loans.
MF Focus : From your experience working with Grameen Foundation, CARE Bangladesh, and the PLAN Fund, has there been a particular experience that served as a turning point in your microfinance career?
Mr. Counts : There have been many turning points. I remember when I was working in Bangladesh there was one region of the country where I was looking to do the research for my book, Small Loans, Big Dreams. When I was doing my research, I saw that a regional manager was trying to overtake all of the other regions in terms of loans made, led to over indebtedness of clients and small-scale corruption so ultimately he was fired. It took about ten years for that region to come back. This experience showed me the dark side of trying to think with a short-term mentality where you are thinking about transactions not transformations. I saw that take on a life of its own, and that was a big lesson. That experience put in my mind that this whole process can have a dark side when loan officers or field managers have the wrong incentives or wrong intentions. That was a turning point. A second turning point was with Grameen Foundation when we began to get very aggressive about implementing and developing a $30 million loan guarantee program, which was specifically aimed at helping MFIs mobilize local sources of capital. We were criticizing the fact that MFIs were borrowing in dollars and euros and being vulnerable when the dollar or euro appreciated. We were critical, so we asked how do we become part of the solution? We decided we wanted to help MFIs develop local banking relationships, and if the banks aren’t interested maybe they’ll be interested with the credit enhancement. We developed a big facility called the Growth Guarantee Program, which we’ve used a number of times in India with SKS, CASHPOR, Grameen Koota, etc. That was the largest experience where we’ve gone from being critical of some trend to actually changing and bringing resources to the table that have created an alternative path. That led to us creating with CGAP and the Ford Foundation the Progress out of Poverty Index, another case where we had enough confidence as an organization and resources to not just be critical of a shortcoming of the industry, but also help create a solution to address the shortcoming. Now we are doing this in quite a number of areas.
MF Focus : How do the practices of social performance management and transparency affect the financial sustainability of MFIs?
Mr. Counts : Ultimately, an MFI can become profitable by taking some shortcuts for a short time in many, many ways; it can do payday lending, more speculative lending, etc. But the only way to generate long-term sustainable profits is to create value for the customer. That’s the only way they are going to be loyal, and the only way they are going to be able to pay and borrow increasing amounts. One way to look at social performance is to look at what the value creation in an economic-income sense is. Though there is a lot of value this doesn’t capture, we must see if people are improving economic conditions or are just treading water? Because if they are just treading water, they might be able to earn profit for a short time, but ultimately they are not sustainable. Where as if each year people are getting closer and economic and income situations are improving, that signifies (though it could just be coincidental, but if it’s enough people, a large enough trend) their lending is actually helping people get more economically stable. More economical stability will make borrowers better customers for the full range of products. Apart from the poverty alleviation agenda, this is really a sense of not customer satisfaction (did you like your loan officer?), but about at an economic level whether value is being created? That’s the only basis for a long-term sustainable, profitable relationship. Many view microfinance as a hybrid between social and financial objectives. If an MFI that is incorporated as for-profit is attacked by the government and media for exploiting the poor, and responds by saying that at least they are better than moneylenders, that is not a good answer. It’s not a good reason for getting tax-free regulatory support. Where as if they can actually show that even though their rates and profits sound high, the people making the most profits are the poor, they have the a chance. This is the biggest way to blunt the argument that MFIs are exploiting the poor. If you have data to backup that the poor are actually improving their conditions, criticisms that can then lead to a tarnished reputation, a harsher regulatory environment and taxation consequences will melt away. I think the bigger argument for social performance is that it gives you a pretty good indicator across many people, at a low cost, whether value is being created for the client. If it is, there is a basis for long-term microfinance, a business case for microfinance that refutes the idea that microfinance isn’t going anywhere except for very short periods of time.
MF Focus : What do you think the next level of microfinance is?
Mr. Counts : I think the next level of microfinance is about using technology to ring out some of the inefficiencies of microfinance. There are many technological solutions that are fascinating, but not practical, because they are only partial solutions. I think the whole process of borrower meetings and carrying cash entails a lot of inefficiencies. If we find ways to transfer money electronically and have it interfaced with banking information systems, we could bring down costs significantly. In addition, I think that microfinance becoming accountable is the next level; for those MFIs that have poverty reduction as part of their mission becoming much more accountable and transparent for that is necessary. They need to create real but performance benchmarks in order to do so. It will give meaning to their mission. For those that don’t have that mission it still might be useful but it’s totally optional. That will, particularly with better information systems, spur a lot of innovation. Suddenly people will see, from a poverty reduction perspective, that this branch is performing better than this branch, or that this MFI is performing better than that MFI. From a profitability perspective they might all be the same. But from a poverty reduction perspective, which is at the core of many of these group’s missions, you are going to see differential performance. Now there is good data on profitability that makes people want to study and learn the best practices. But since we don’t really know who is achieving the most from a poverty reduction perspective, we don’t actually know who has got the best practices. What we have are ten year old studies that are outdated. Creating a real marketplace for those that are in this about poverty, performance standards and benchmarks I think will spur an enormous amount of pro-poor innovation in microfinance. To summarize, first, using technology to bring efficiencies; second, using social performance to spur innovation; and third, using the platform of microfinance to deliver both business opportunities to the poor and social services at a much reduced cost are the three things I see being the next level of microfinance. As for the third, in delivering educational scholarships and health programs there may be a subsidy, but the subsidy is reduced 80% when it is delivered through the microfinance channel. So thinking about how to use that channel, that pipe connecting the rest of society with the poor that microfinance represents is the third and perhaps most important. If we continue to just think of microfinance as a way to conduct financial transactions and deliver a few financial products that the regulators let us deliver to a certain niche we will be at a loss. I maintain that microfinance through the creation of the MFIs and the relationships is the largest intentional organization of the poor in human history. So if we’re only going to use this organization of people, of the excluded, to deliver a couple of loans, and maybe if we can a savings or insurance product, we’ve missed a huge opportunity. The next level is making that system better, and then figuring out how to leverage that system through all sorts of strategic alliances and doing it in an ethical way, in a smart way, in a pro-poor way, none of which are a given. If we can do that, then we have created a major force for integrating the poor into the world economy and world society that large numbers of people have been excluded from since the beginning of time. That’s the biggest opportunity I see.
MF Focus : What is your message for young social entrepreneurs who wish to enter the industry?
Mr. Counts : For someone who considers himself or herself a social entrepreneur or high-achieving person, and wants to achieve social outcomes primarily, use your intelligence to see about where the field is going. Ask what are going to be the big issues to tackle in the next five years? Five years ago that was technology, so get yourself a technology background and make yourself indispensable. Maybe people don’t see you as indispensable now, but they will in a couple years. Right now one of the things that is most critical is human resources and human resource management. If I were a young person I’d say I want to be an expert in human resource best practices from the corporate sector, and think about how to apply them in microfinance, because there’s going to be a huge need for that in a few years. There is a huge need now, but people don’t see it yet. It is important to think carefully. A social entrepreneur typically wants to be the head of something, to run something, partly because they’re entrepreneurial, and partly because of certain insecurity. If you’re running an organization no one is going to see your deficiencies as you work them out through your youth. However, I think most markets in microfinance don’t need a lot of new MFIs, don’t need a lot of new actors, but instead need better people, more professional people, but with a good social grounding in existing organizations that will take them to the next level. I would say look first to see how you can integrate into an existing organization that is only reaching a small part of its potential but is sound. Then get yourself the training of what everyone’s going to be looking for desperately in two or three years, which is something that can be figured out. People have done that in the past, and people can do that going forward.
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An Introduction
Alex Counts is President and CEO of Grameen Foundation, a dynamic Washington D.C.-based nonprofit organization focusing on enabling the poor, and especially the poorest, to create a world without poverty, utilizing the tools of microfinance and technology. GF has grown to a global network of microfinance and technology partners in more than 25 countries. Counts became Grameen Foundation’s first chief executive in 1997, after ten years of working in microfinance and poverty reduction, including six years living and working in Bangladesh. A 1988 Cornell University graduate, with a degree in economics, Counts’ commitment to poverty eradication deepened as a 1988-9 Fulbright scholar in Bangladesh, where he witnessed dire poverty as well as the innovative solutions that had been developed and applied on a wide scale by the Grameen Bank and other members of the Grameen family of companies. He trained under and worked closely with Dr. Muhammad Yunus, the founder and managing director of the Grameen Bank, and the co-recipient of the 2006 Nobel Peace Prize.
