FSR Forum 14-04

14th Volume July 2012 issue #4

Microfinance Competition, Interview Microfinance, and K. Molenaar Credit Information Vice-President of

Column J. G. Groeneveld

Article

European Microfinance Network

p24

p32

p38

Europees “zwemwater�

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fsrforum • volume 14 • issue #4

Microfinance

Preface

Dear readers, In front of you lies the fourth edition of the 14th volume of the FSR Forum. This edition’s theme is Microfinance. Microfinance is sometimes confused with Micro Credit, which is the division of small loans to people who are in need and cannot borrow from commercial institutions.

Micro Credit is a form of Microfinance, but the concept of Microfinance is broader than merely the provision of small loans. It also covers other financial services such as saving accounts and in some cases Microfinance Institutions even provide education to the poor. Another mistake often made is that Microfinance Institutions belong to the category of charity. Sometimes the opposite can even be true, which will be demonstrated in this edition.

As in every edition you will first find several articles about the central theme to give you a better understanding of the topic. The first article is a summary of the article ‘Microfinance Institutions and Public Policy’ by Daniel C. Hardy, Paul Holden and Vassili Prokopeno. The authors first describe the specific characteristics of Microfinance after which they give policy recommendations concerning the regulation and supervision of Microfinance Institutions (MFIs). One of their conclusions indicates that supporting MFIs is in itself positive but it will only be effective when the background of the specific MFI is considered.

The second article from M. Tonelli and C. Dalglish builds on the previous article by questioning whether Micro Credit can effectively solve the issues micro-entrepreneurs living in poor conditions face. Important to note is that this article only criticizes the specific part of Micro Credit instead of Microfinance as a whole. The authors conclude their paper with a model implemented in Mozambique, which in their opinion forms a good example for other African countries.

In the last article C. McIntosh and B. Wydick discuss the effect competition between Microfinance Institutions has on credit contracts. Traditionally competition has mainly been argued as being positive, since it ensures a better output. McIntosh and Wydick however argue that unless credit information systems are developed simultaneously, competition between MFIs will harm poor borrowers. Also this paper concludes with several policy recommendations concerning MFIs. As the authors of the articles mentioned above Klaas Molenaar, founder of Triodos Facet BV and lector at the Haagsche School, also has his concerns when it comes to the developments of Microfinance. In an interview we asked him about his opinion related to Microfinance and helping the poor micro entrepreneurs to develop. Personally this interview has provided me with new insights, such as the emergence of Microfinance. I had always thought that Microfinance originated from Bangladesh, but Molenaar made it clear that the foundation of the Rabobank also may be grouped under Microfinance initiatives.

In previous editions the professors who wrote the “Professors Column” almost all originated from the Erasmus School of Economics. This edition the dean of the International Institute of Social Studies, Leo de Haan, has written a column. Professor De Haan was present at the Access to Health Insurance Conference, initiated by Princess Maxima, on which experts on the field of financial inclusiveness and health insurance came together. In his column Professor De Haan discusses the main message spread during the conference.

2 • Preface

Since this FSR Forum is one of the last editions, almost all of our activities have taken place and the active members are finishing the last tasks. But do not worry, because you can already check out all the new events coming up next year in the activities calendar. As you can see a new event will take place at the start of the new academic year: the Erasmus Banking Congress.

The Erasmus Banking Congress will take place on the 12th of September. During this congress different speakers will give you an insight of the current economic situation and the future of banking. On page 45 you can already find an overview of the theme of this year’s EBC and the speakers of the congress. Keep an eye on the next edition of the FSR Forum because in that edition the EBC will be discussed extensively.

Besides the activities that have yet to come you can as usual find the activity reports of the latest events that took place. Other columns that can be found in this edition are the column of mister Groeneveld who links the water pollution in Europe to the financial issues of Europe, the News Update, the Former Board Member column and the FSR Member column.

The fourth and almost final edition also means that the next f.t. board has been announced. On the 7th of June they have been introduced during a social drink at the Locus Publicus. The f.t. board consists of Sep Vermeulen, Maaike van Lanphen, Taco Smit, Laurent Schmidt, Margriet van der Lubbe and Joost Vlot. The Editor in Chief of the 15th volume of the FSR Forum is going to be Maaike van Lanphen. From now on she is going to start looking for new editors to make the next volume a great success. If you are interested please do not hesitate to contact us by sending an email or visit us at H14-06.

Hopefully you will enjoy reading this FSR Forum and that it will enrich your knowledge about the different financial services provided by Microfinance Institutions!

Sincerely, Anne van Driesum Editor in Chief FSR Forum FSR board 2011-2012

Preface • 3

fsrforum • volume 14 • issue #4

Microfinance

Table of contents

Microfinance institutions and public policy Daniel Hardy, Paul Holden & Vassili Prokopenko (2003)

Many governments and nongovernmental organizations have adopted policies to promote the growth of microfinance institutions (MFIs). The appropriate level and form of support for MFIs are discussed in this paper on the basis of a review of key MFO characteristics.

8

Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty Marcello Tonelli and Carol Dalglish (2012)

This study examines the issues affecting the successful provision of micro-credit to support ­entrepreneurial activities in poor settings. The findings enable us to better understand why micro-credit, though useful, is only part of the solution.

16

Competition, Microfinance, and Credit Information Craig McIntosh & Bruce Wydick (2012)

We find that competition in microfinance eliminates cross-subsidization by non-profit lenders, potentially harming poor borrowers. Competition exacerbates asymmetric information problems, leading to less favorable equilibrium loan contracts unless credit information systems are ­developed in parallel.

24

Colofon FSR FORUM appears five times a year and is an edition of the Financial Study Association Rotterdam KvK Rotterdam no: V 40346422 VAT no: NL 805159125 B01 ISSN no: 1389-0913 14th volume, number 4, circulation 1680 copies

4 • Table of contents

Editor in chief Anne van Driesum Editorial department Jeroen van Oerle Editorial advisory Dr. M. B. J. Schauten Dr. W. F. C. Verschoor Drs. R. Van der Wal RA

With the cooperation of D. Hardy P. Holden V. Prokopenko M. Tonelli C. Dalglish C. McIntosh B. Wydick K. Molenaar Drs. J.G. Groeneveld RA RV L. de Haan D. Smits

Editorial address Editiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06 Postbus 1738, 3000 DR Rotterdam Tel. 010 408 1830 E-mail: forum@fsr.nu

Interview K. Molenaar

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Expert on Micro Fiance Column Joost Groeneveld

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Europees “zwemwater” Column professor

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FSR News Word of the Chairman

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News update

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A fast track record of success “One of the great things about working for Philips is that you get meaningful project responsibility right from the start, so you can quickly begin to add real achievements to your CV,” says Fokke Jan.

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Broad experience In addition to the speed with which he has been able to progress, Fokke Jan has

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“At Philips Lighting in Winschoten I learned a lot about supply chains and manufacturing - how you organize financial systems to cater for just-in-time production,” he says.

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The rapid pace of change within Philips means there will plenty of new opportunities for Fokke Jan to take his career in the directions he wants to go.

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fsrforum • volume 14 • issue #4

Microfinance institutions and public policy

By Daniel Hardy, Paul Holden & Vassili Prokopenko (2003)

8 • Microfinance institutions and public policy

1 Introduction The last twenty-five years have witnessed a rapid expansion in the number and size of microfinance institutions (MFIs) in many parts of the world. What distinguishes MFIs is their orientation to fill a gap left by (larger) conventional, commercial or government-sponsored institutions in the provision of financial services to poorer households and smaller enterprises. MFIs seem to promise a means to provide an especially valuable form of assistance directly to disadvantaged sections of society in a relatively cost-effective manner. MFIs may thus play a significant role in financial sector development, and therefore in overall development.

Based on this promise, the establishment and growth of MFIs has been supported by national governments, domestic nongovernmental organizations (NGOs), foreign NGOs or official donors, and multilateral development banks. These developments prompt the question of whether or not MFIs merit such assistance directly to disadvantaged sections of society in a relatively cost-effective manner. At the same time, many countries are reconsidering the question of how, if at all, MFIs should be regulated for prudential and non-prudential reasons. These questions are addressed in this paper.

2 Characteristics of MFIs The term “microfinance institutions” is generally used to refer to those financial institutions that are characterized by their commitment to assisting typically poor households and small enterprises in gaining access to financial services. This commitment may replace or supplement other private or public objectives, such as the maximization of shareholder value, the direction of investment into priority sectors, or the mobilization of savings to finance government operations. In common usage, MFIs are distinguished from purely commercial, small-scale, possibly informal financial institutions dealing with the poor (for example, village moneylenders, pawnshops, and informal transfer systems) and from large, perhaps government-sponsored schemes that may hold numerous small accounts more or less as a byproduct of their main business (for example, national savings schemes or post office savings banks). Nonetheless, the same public policy issues - especially those related to subsidization and regulation – may arise in connection with these other institutions.

2.1 Services and Clients MFIs provide a wide range of services and differ greatly in the nature of their operations. The best-known activity of MFIs is providing credit to poorer households and small enterprises, but many also take deposits. In addition, some MFIs offer other financial services, such as insurance, or advice and training to their clients. Certain MFIs are used as a vehicle to provide other services and education, e.g. in the area of health awareness.

The primary clientele of MFIs consists almost by definition those who face severe barriers to access financial products from conventional financial institutions. These barriers comprise mainly high operational costs, and risk factors. An MFI’s clientele may for example be distributed in remote locations, and the size of transactions may be small relative to fixed costs. The risk factors are pronounced because: (1) poorer borrowers’ income stream can be intrinsically risky and heavily exposed to exogenous shocks (weather, macroeconomic fluctuations); (2) the borrowers often cannot provide collateral

because they posses few negotiable assets, whether they be physical or financial, and live in an environment where enforcement of formal property rights and other contracts is expensive and uncertain; and (3) loans are bound up with personal finances of poor (e.g. a business might collapse if large medical bill must be met).

MFIs may thus play a significant role in financial sector development.

MFIs have to be innovative to overcome these barriers.

Incentives for loan repayment, for example, can be created through a number of techniques (see Morduch, 1999 for a review), such as the group lending model, which was pioneered

by Grameen Bank in Bangladesh in the mid- 1950s. Under group lending, all group members are held responsible for loan repayments even if the loans are made to individuals.

Perhaps most commonly today, credit granting MFIs use dynamic incentives, where a borrower initially receives a small sum, but as a satisfactory repayment history is established, the borrower may obtain progressively larger loans. The treat to cut off any further lending when loans are not repaid strengthens repayment incentives.

Small business loans may be a prominent part of MFI activities, but lending and deposit taking to smooth consumption by households may be more important for most MFIs and their clients. Providing savings facilities not only enables households to smooth consumption, but is of value also in making and receiving payments, and establishing a financial record. One of the lessons of the recent development of the MFI sector is that even the very poor are eager able to save.

MFIs are not equally dispersed worldwide. They appear to be especially well developed in certain Asian and Latin American countries, including Bangladesh, Bolivia, and Indonesia, but relative to the domestic financial system they are also important in such countries as Mali. In many of those countries where the MFI sector is still in an early phase of development, such as Brazil, the number and size of MFIs have recently been growing rapidly.

Most MFIs seem to be connected to NGOs and may be legally incorporated as such, perhaps in the form of a nonprofit organization or trust. MFIs may also take the form of credit unions or savings cooperatives, private limited companies, and other forms depending on the legal system of the country where they operate. So far, only a few commercial banks have successfully entered the microfinance business.

2.2 Balance Sheet Size The nature of MFI business implies that the value of individual transactions and financial stocks involved are relatively small. Typical loan size varies from US$50 or even less for institutions that target the very poor, to several thousand dollars for those institutions that target successful small businesses. Deposits might be even less (as low as US$5).

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Microfinance institutions and public policy • 9

fsrforum • volume 14 • issue #4

These sums may be large relative to the average income and assets of clients or even GDP per head, but small relative to typical financial transactions involving conventional financial institutions.

The characteristics of the clientele, combined with the localized operations of many MFIs, imply that most institutions are usually relatively small in financial terms, with total assets the equivalent of only a few million dollars and capital that rarely exceeds US$1 million. However, there are MFIs in some countries with so many depositors and borrowers that their balance sheet size is comparable to that of a commercial bank.

Some indication of the magnitudes involved is provided by the statistics in Table I, which are taken from November 2001, issue of The MicroBanking Bulletin. The sample of 148 MFIs is not large, and may be biased toward relatively large and sophisticated MFIs that are capable of providing such data, and toward MFIs specialized in lending.

2.3 Costs, Revenues, and Profitability The costs of carrying out microfinance business are usually high relative to the value of loans and deposits involved. On and fixed costs, independent of the size of the transaction.

These costs include the administrative costs of making payments, keeping open offices, loan monitoring, etc. Typically, the largest single expense is salaries, due to the very laborintensive nature of micro lending. The data in Table I support this thesis; the ratio of administrative expenses to assets in the sample is much higher than would be typical for a commercial bank, and declines with portfolio size. On the other hand, small scale projects or consumer lending to the poor is often highly risky, as explained above. This often results in a high share of impaired loans, which are sometimes bunched (e.g. after a harvest failure or natural disaster). Certain MFIs are very successful in achieving high loan recovery rates, but the potential risk is almost always present.

These high costs generally force MFIs to charge high interest rates on loans, even in real terms (Table I contains statistics on the nominal and real ratio of revenue to loans).

Also, the spread between deposits and lending rates offered

by MFIs is usually high. MFI borrowers appear willing to pay these high rates because the alternative is either borrowing at even higher rates, perhaps from an informal money-lender, or no borrowing at all. An MFI may have to operate in an oligo­ polistic manner in its local market in order to cover its fixed costs, through its presence could still be welfare improving.

Table 1: Financial Characteristics of Selected MFIs (Averages, percent except where noted) All MFIs

Financially self-sufficient

Number in sample

148

57

Years of operation

8

11

10710

89370

5,5

21,2

Active borrowers (number) Total assets (US dollar millions) Equity/assets

42,8

40,8

Loans/assets

68

71,2

Deposits/assets

13,7

53

Borrowing at commercial rates/loans

49,5

96,2

46

76,3

Average loan /GDP Revenue from loans/loans

38,1

41

Inflation -adjusted revenu from loans/loans

28,8

33

Return on assets

-3,7

5,1

Operating expenses/assets

31,2

26,2

Administrative expenses/assets

19,8

17

Interest margin/assets

18,9

24

Nonetheless, many MFIs lose money; in aggregate the MFIs for which data are reported in Table I failed to cover their costs. However, there is also a substantial contingent of

10 • Microfinance institutions and public policy

“financially self-sufficient” MFIs that manage to at least break even on a sustained basis. They are generally very much larger than other MFIs, both in terms of their loan portfolio and the number of borrowers. Their loans also tend to be larger relative to GDP per head. Their administrative costs tend to be lower relative to total assets, but their interest margin is higher, presumably because they are much more successful in attracting low-cost deposits. Savers at MFIs may be more attracted by the security and transaction services connected with having a deposit rather than with the interest yield. Financially self-sufficient MFIs also make more use of commercial borrowing, although the direction of causation is not clear: they may be able to borrow because they are financially self-sufficient, but the borrowing capacity may strengthen their performance. At the same time, even financially self-sufficient MFIs maintain a high ratio of equity to total assets.

Available data suggest that MFIs often improve their profitability as they mature, primarily by lowering their average costs; the “financially self-sufficient” MFIs included in Table I had operated on average for 11 years, compared with an average of 8 years for the full sample. This may reflect: (1) learning by doing (the institution learns what operational arrangements and loan mechanisms work best in its environment); (2) sample selection bias (only low-cost institutions survive); and (3) decreases in average costs when an institution with significant fixed/overhead expenses expands over time. Almost all MFIs seem to lose money for an initial period, which implies that most MFIs require substantial capital injection or subsidies during their start-up stage.

3 SUPPORTING THE DEVELOPMENT OF MFIS Given the tendency to make losses or earn below-market returns on capital and to incur relatively high operating costs, many, and perhaps most MFIs are associated with NGOs, and rely to some degree on support from their donors, at least during a start-up phase. Therefore, the question arises of whether and when the support provided to MFIs is worthwhile.

3.1 The Provision of Support to MFIs The obvious motivation of support for MFI is a desire to help the poor, an essentially distributional argument. At a general level, the provision of financial services through an MFI is viewed as empowering clients in a way that lump sum transfers do not: instead of aid-dependence, clients who have access to financial services gain autonomy and, ultimately, access to the formal economy. Thus, MFIs can mitigate the powerlessness that is often an intrinsic feature of poverty, and even improve the functioning of society. However, it needs to be shown that supporting an MFI is better than an alternative allocation of limited resources, and that support for MFIs does not have large negative side effects.

Perhaps the strongest formal argument for supporting MFIs is that such support is likely to be particularly well-targeted due to MFIs’ informational advantage over other mechanisms for delivering assistance to the disadvantaged. When asymmetric information (between donor, financial institution, and client) and substantial fixed costs are prevalent, assistance intermediated through MFIs can offsets these imperfections to some extent, while direct assistance cannot. This informational advantage extends along two dimensions: First, the

availability of financial services allows the clients to decide for themselves in important economic matters. Second, an MFI should be in a position to evaluate projects ex ante and to monitor their performance, so that resources are allocated more efficiently.

Several financial arguments can be added to those based on the informational advantage of channeling assistance through MFIs: • An MFI may leverage the support provided to disadvantaged groups by mobilizing savings, so that the total provision of resources to the poor is increased. In the absence of an MFI, the poor may accumulate few savings, and those that do may hold assets in the form of cash, durable goods, and possibly deposits in a commercial bank, which intermediates funds to conventional borrowers. When an MFI provides intermediation services, the savings of some of its clients are likely to be used to finance borrowing by other clients.

• An MFI that is sufficiently viable to borrow commercially, perhaps based on the capital provided by donors, can draw on the savings of the richer part of the population for the same purpose, and in that way leverage the initial investment.

• It is now widely believed that MFIs can be designed and managed so as to attain sustainability, that is, to cover operating costs plus achieve a reasonable return on capital (Table I). Those MFIs that have achieved sustainability should ultimately be able to grow without further assistance. A very successful MFI may be able to return some assistance to donors, who can then devote the resources to new projects.

Nonetheless, support for MFIs needs to be weighed against other demands, and under some conditions may even be counterproductive. First, funds that go to MFIs could be used instead for direct income support (e.g., lump-sum transfers), undertaking infrastructure projects, or providing human capital through education and training. Such alternative forms of assistance to the poor can have significant advantages, for example, by being directed at the very poorest, who tend not to be helped by MFIs. Training schemes can provide the poor with human capital, which might offer a less uncertain return than a project financed by loans from an MFI. Second, outside support is likely to weaken the budget discipline on MFIs. This poor incentive structure can result in operational inefficiency (high overheads, excess staffing,

excessive pay levels), poor resource allocation (poor loan application selection, poor loan collection), and, perhaps, lack of innovation. Furthermore, an MFI that is structurally dependent on on-going subsidies will be constrained in its growth, and could collapse if the support is withdrawn.

Third, donor-supported MFIs could crowd out commerciallyoriented providers of financial services. At least some anecdotal evidence suggests that commercial ventures are discouraged

Support for MFIs does not have large negative side effects. from entering markets which are already well served by MFIs that receive support from NGOs or government and therefore have lower costs. The users of financial services in those markets may benefit, at least initially, but donor resources might be better devoted to providing services that commercial institutions neglect. Furthermore, an abundance of aiddependent MFIs might stifle the longer-term development of a more sophisticated, commercial financial sector.

3.2 Forms of Support for MFIs These arguments suggest that MFIs can be worth supporting, but the form of support needs to be carefully chosen to suit the needs of MFIs at different stages of development, and to minimize possible drawbacks. Several approaches can be envisaged whereby warranted assistance is provided without creating aid dependence, weakening the incentives to achieve sustainability, or suppressing the scope for competition and commercially-driven develop¬ment. One means is to provide assistance in the form of a one-time start-up grant or capital injection. Such a grant would be attached to the start-up of particular projects, and its beneficiaries would be not only microfinance institutions per se but also commercial banks willing to proceed in the microfinance business. One could also provide a start-up loan with a graduated and fairly long repayment period. Thus, such support would help cover high initial fixed costs, or could be invested to provide a stream of

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Microfinance institutions and public policy • 11

fsrforum • volume 14 • issue #3

income that reduces net average costs, but the MFI would still be motivated to keep down costs and innovate (to at least achieve satisficing profitability and to finance expansion).

A policy to provide only start-up support needs to be made credible. Especially if a donor has invested substantial sums in an MFI and if many small businesses and households are at risk if the MFI fails, a bailout may be difficult to resist. The budget constraint may be harder if a number of MFIs operate: they not only compete against one another, but the failure of any one does not leave the poor without services. Furthermore, MFIs can be innovative in their techniques to select borrowers and ensure repayment, and in stimulating savings.

The need for (intrinsically risky) innovation implies that it may be productive to encourage several institutions to be established and to undertake a variety of experiments, even if it is recognized in advance that a proportion are likely to fail.

The limitation to this approach is that relatively high fixed costs imply that few MFIs can exist in any one market—especially in more remote regions— and that competition may keep all MFIs from minimizing average costs.

If it is found that on-going support for MFIs is needed, mechanisms can be designed to limit aid-dependence and even promote competition between MFIs. One approach is to provide assistance to a central provider of services that can be used by individual MFIs, which are themselves to be selfsupporting.

4 REGULATION AND SUPERVISION OF MFIS 4.1 Costs and Benefits of Regulation Besides possible measures to promote the MFI sector, the other main policy issue concerns how they should be regulated and supervised. This regulatory framework may differ significantly from that applicable to commercial banks.

Financial institutions are generally subject to two forms of regulation: prudential regulation, which seeks to reinforce their financial soundness, and non-prudential regulation, which serves other purposes such as consumer protection and which is similar to regulations applied to other businesses. Any one piece of regulation can serve both purposes, but the distinction is useful in considering the “pros and cons” of various provisions. The appropriate form and degree of regulation and supervision depend on the balance of a number of objectives and the interest of different parties, which are worth making explicit:

12 • Microfinance institutions and public policy

• Protection of depositors. The depositors of an MFI are unlikely to be able to exercise a high degree of market discipline on the institution, perhaps because they may be relatively unsophisticated, but also because their individual deposits may be small, it may be difficult for them to coordinate, and the MFI may be in the position of a local monopolist. Furthermore, the depositors are unlikely to have diversified portfolios or reserves, so any loss from the failure of an MFI would affect them gravely and discourage them from participating in the financial system indefinitely. Depositors also need some protection from fraud; otherwise a “pyramid scheme” might call itself an MFI in order to undertake a scam (as happened in some transition countries). Hence, there are grounds for regulating and supervising MFIs that take deposits from the public.

• Protection of borrowers. An MFI may enjoy considerable local market power, and its goals could be perverted into maximizing profits at the expense of (poor) clients. Then there would be grounds to regulate its activities and in particular its pricing policies. However, it may be very difficult to establish when monopoly rents are being earned, especially if they are dissipated in high overhead costs and management remuneration. Given the worldwide evidence that MFIs tend to have high costs, and the willingness of borrowers to accept high real rates, MFI’s monopolistic lending practices may not often be of concern. Indeed, in some countries, usury laws have had to be amended or abolished in order to make MFIs viable.

• Protection of the financial system. The financial soundness of an MFI can have an effect on the state of the financial system as a whole when that MFI has borrowed significantly from commercial banks or other financial institutions, or when the failure of the MFI is likely to provoke (perhaps ill-founded) doubts about the soundness of the entire system. This is the standard rationale for regulating the financial sector more strictly than other sectors. Yet, the effects of MFI failures are likely to be of minor concern in most cases, since the institutions involved tend to be relatively small.

• Promotion of the MFI sector. An institution known to be well regulated and closely supervised may be able to attract more deposits from the public, and may be able to obtain financing at lower cost, so regulation and super­ vision may promote the development of the MFI sector.

However, there is little evidence that these effects are pro-

nounced; experience in South America suggests that MFIs grew and became more sophisticated autonomously, and only later was this development ratified by the financial supervisors (Christen and Rosenberg, 2000).

• Protection of public funds. The protection of public funds may motivate regulation and supervision of MFIs where public funds have been used to establish an MFI, or where the MFI’s liabilities are covered by explicit or implicit deposit insurance.

The possible benefits of MFI regulation and supervision need to be balanced against the costs. These costs can be relatively more important for these small institutions than they are for large commercial banks. The principal costs are:

For an MFI, credit risk is the greatest threat to survival.

• Costs to supervisors. The cost of MFI supervision may be disproportionate to their financial importance or the underlying interests that supervision is meant to serve.

Supervisory costs may be high because MFIs are often small, numerous, located in remote regions, and with poor record keeping. Furthermore, in many developing countries, skilled supervisory capacity may be in short supply, so employing these scarce skills in supervising MFIs could endanger the effective supervision of institutions that are more central to the soundness of the financial system.

• Costs to supervised institutions. Besides the costs incurred by the supervisor, complying with regulations and satisfying on- and off-site supervision can be administratively burdensome and expensive for an MFI. These costs are ultimately passed to the MFI’s clients.

• Stifling of innovation and competition. Regulation and supervision may restrict the ability of MFIs to experiment with new forms of loan agreement and systems to attract deposits by discouraging or prohibiting innovations that are not foreseen in the regulatory framework.

4.2 A Strategy for the Prudential Regulation of MFIs The balance of these factors will likely vary with the state of development of a country’s MFI sector and the services currently or potentially provided by MFIs. The regulations applied to MFIs may also have to evolve along with the institutions, with more stringent and extensive regulations applied as those MFIs that start operations that could have more important externalities. Furthermore, regulations will essentially have to apply to types of activity (lending, deposit taking, etc.), rather than to categories of institutions defined some other way, such as legal form (commercial versus nonprofit making, publicly incorporated versus cooperative, etc.). To do otherwise would be an invitation to regulatory arbitrage—shifting perhaps dubious activities to the least regulated sector—and create unwarranted market distortions.

At one extreme, where an MFI does nothing but lend out

donor funds, there seems to be little good reason to subject it to prudential regulation and supervision, except as necessary to verify that its activities remain circumscribed. At the other extreme, if an MFI acts as a full-fledged commercial bank, it will have to be subject to the same prudential regulatory regime as other commercial banks.

In any case, it is important that the supervisory authority know what activities an MFI engages in, for only with this knowledge can one know which prudential requirements to apply, if any. Therefore, a mechanism to verify that an MFI’s activities have remained within the agreed range is needed.

At the very least, the supervisory authorities should have some means to determine whether an MFI is small enough not to be of systemic importance by setting minimum standards of record keeping and publication for all but the most informal MFIs. It also follows that careful oversight at the time of the founding of an MFI is essential. It is at that stage when the founders determine the purposes of an MFI, and when the authorities can determine the requirement that will have to be met. In particular, the founders could be required to demonstrate that the controlling interests such as Board members and senior managers are qualified and otherwise “fit and proper;” provide capital commensurate to the risk structure of the MFI’s envisage portfolio; and establish a system to keep the authorities informed of major developments at the MFI. ­Concentrating the regulatory burden at the time of start-up may raise the cost of establishing new MFIs, but the future regulatory costs should be reduced. Furthermore, this regulatory approach reinforces the argument made above that external support for an MFI should mainly take the form of an initial capital injection rather than an on¬going subsidy.

Once an MFI is established, it might initially be restricted to a rather narrow range of activities. The range can be expanded over time, but only as the MFI acquires the necessary skills and structures to handle them, and demonstrates to the supervisory authority that it can carry out the new activities in a sound manner and support the heavier regulatory requirements that are entailed. Some MFIs develop from NGO-sponsored lending organizations. Others might start as savings cooperatives, which are in effect “narrow banks,” which just take deposits and invest them in fairly safe liquid assets.

When an MFI begins borrowing significantly or taking deposits from the public, probably the most important set of prudential regulations concern the recognition of impaired loans and the making of provisions. In most financial systems, and especially for an MFI, credit risk is the greatest threat to survival. Prompt and full recognition of actual or potential loan losses is the most effective means to contain them, and even if an MFI is forced to close due to loan losses, losses for depositors and other creditors are likely to be smaller if loan losses have been identified early.

Notes See Daniel Hardy, Paul Holden & Vassili Prokopenko (2003) for the complete article including the reference list.

Microfinance institutions and public policy • 13

OC&C interview Een interview met OC&C-ers Thijs Dikkers (Project Manager) en Ruben Janssen (Associate Consultant)

‘BIJ OC&C BOUWEN WE MEE AAN DE FIRMA Thijs Dikkers (1981) studeerde Civiele Techniek in Delft (MA Offshore Engineering).

Hij raakte geïnteresseerd in strategy consulting toen hij als thesaurier betrokken was bij een reorganisatie van studentensociëteit Phoenix en nam deel aan de International Strategy Workshop van OC&C in Barcelona. Thijs werkt sinds september 2006 bij OC&C en is sinds 2011 project manager.

Ruben Janssen (1986) studeerde Lucht- en Ruimtevaarttechniek in Delft, was daar onder meer betrokken bij de organisatie van het 32e lustrum van het DSC (in 2008), deed een exchange-programma in Melbourne en liep stages bij diverse bedrijven. Ruben werkt sinds medio februari 2012 bij OC&C.

Thijs Dikkers (links) en Ruben Janssen (rechts)

Thijs: Je bent nu een week of zes bij ons aan de slag. Mis je het studentenleven al een beetje?

Ruben: Nou, missen niet, maar het verschil liegt er natuurlijk niet om. Als student kon ik nog wel eens een, eh, gat in de week hebben. Dat is voorbij. Van de andere kant: nu heb ik in mijn vrije tijd tenminste wat te verteren!

Thijs: Mooi, we houden je dus kennelijk goed bezig! Hoe bevalt het werk tot nu toe?

Ruben: Heel goed! De eerste twee weken heb ik onderzoek gedaan voor nieuwe projecten. Toen werd ik ingedeeld bij een team dat aan een project werkt in de levensmiddelenindustrie. Onze cliënt is een goed lopend bedrijf in een nichesegment dat te koop staat.

KIJK VOOR ALLE KENNISMAKINGSMOGELIJKHEDEN OP WWW.OCCSTRATEGY.COM Contact: Marjolein van den Blink (Recruiter) 010 217 5555, marjolein.van.den.blink@occstrategy.nl OC&C Strategy Consultants Weena 157, 3013 CK Rotterdam 010 217 5555, www.occstrategy.com

Thijs: Jullie ondersteunen dus de verkopers …

Ruben: Ja, wij stellen als het ware een commercieel profiel op van dit bedrijf, zodat eventuele kopers een inschatting kunnen maken van de potentie die het heeft. We hebben ook voortdurend contact met het managementteam van het bedrijf, investment bankers en accountants. Ik leer hier zo veel van!

Thijs: Wat vond je trouwens van onze sollicitatieprocedure?

Ruben: Snel en leuk! Ik deed mee aan de Strategy Course (de business course van OC&C; red.) op 16 november, heb daarna gesolliciteerd en had mijn eerste sollicitatieronde op 2 december. De tweede ronde was op 22 december: drie gesprekken met partners. Na afloop kreeg ik te horen: ‘We gaan je bellen!’

Toen werd ik toch nog zenuwachtig. Ik dacht dat ik het er goed vanaf had gebracht, maar nu begon ik opeens te twijfelen. Die zelfde middag nog ging mijn telefoon: OC&C bood me een contract aan. Man wat was ik blij!

Thijs: Veel mensen die bij OC&C komen werken, zeggen dat ze zich zo aangetrokken voelden door de sfeer bij ons. Gaf dat ook voor jou de doorslag?

En maken we je verwachtingen een beetje waar?

Ruben: Absoluut! Voordat ik kennis maakte met OC&C had ik twee maanden stage gelopen bij een ander adviesbureau. Het werk was heel leuk, maar ik had daar minder een ‘klik’ met de mensen. Tijdens de Strategy Course bij OC&C voelde ik wel meteen die klik! Toen wist ik dat ik hier moest solliciteren.

Inmiddels heb ik veel collega’s al goed leren kennen, ook door de retreat die we eind maart met kantoor hebben gehad in Villars, in Zwitserland – dat was echt super leuk!

Thijs: Wilde je altijd al strategieconsultant worden?

Ruben: Nee, daar kwam ik pas vrij laat achter. Ik dacht altijd dat ik door zou gaan in de techniek. Dat trok me ook echt. Maar bij een van mijn stages zag ik consultants aan het werk. Ik merkte dat zij bovengemiddeld gedreven waren om dingen voor elkaar te krijgen – zij waren heel energiek en hadden een drive die mij ontzettend aansprak. Toen viel voor mij het kwartje en ben ik me gaan oriënteren op strategy consulting. OC&C kende ik al van naam, onder meer via het circuit in Delft. Wat mijn interesse verder in OC&C vergrootte was dat iemand bij Sequoia (corporate finance- en investeringsfirma; red.) mij vertelde dat zij ‘net als OC&C’ een beetje eigenzinnig, een tikkeltje eigenwijs in de goede zin van het woord, waren. Zoiets maakt mij nieuwsgierig.

Thijs: Dat herken ik natuurlijk. Voor mij was ook de groeiagenda van OC&C een belangrijke overweging! Behalve resultaat boeken voor de cliënt en onze eigen mensen ontwikkelen is ons derde

hoofddoel dat we samen OC&C willen uitbouwen en nog beter willen maken.

Daar krijgen we ook allemaal de ruimte voor: als je hier met een goed plan komt, dan wordt dat opgepakt.

Ruben: Wat voor ervaringen heb jij daarmee?

Thijs: Ik ben op gegeven moment onze recruitment-activiteiten gaan coördineren omdat ik vond dat dat beter kon.

We doen nu op het vlak van recruiting meer activiteiten dan ooit. Ander voorbeeld is dat ik samen met enkele collega’s ben gestart om elk jaar deel te nemen aan Limburgs Mooiste, een 160km lange wielertocht. Waanzinnig om te doen!

Ruben: Ben je eigenlijk veel naar het buitenland geweest voor OC&C? Thijs: Alles bij elkaar zo’n acht maanden.

Mijn mooiste project was in Houston Texas. Daar wilde ik per se bij zijn. Ik heb toen twee fantastische maanden gehad in Amerika. Buiten dat project in de VS heb ik ook nog twee maanden in Singapore, drie in Londen en één in Cambridge (Engeland) gezeten. En behalve projecten in het buitenland hebben we natuurlijk ook nog trainingen die we samen met andere kantoren doen, zoals Introduction to Consulting dat jij net in Düsseldorf hebt gehad met Duitse en Engelse collega’s.

je zeker niet arrogant te gedragen, want dan verlies je je geloofwaardigheid en kun je het schudden. Vorig jaar werkten we aan de prijsstelling bij een cliënt waar Sales en Operations al jarenlang met elkaar in de clinch lagen. Het heeft ons twee maanden gekost om ze op één lijn te krijgen. Maar de voldoening is er dan ook naar als je mensen na afloop hoort zeggen: ‘Pfff, dat hebben we samen toch maar mooi geflikt!’

Ruben: Ik heb voorlopig wel even genoeg aan mijn eigen stuk van het werk in de projecten, denk ik. Ik vond het al een hele ervaring om in week 1 van mijn allereerste project dat werkplan te zien, met mijn naam achter bepaalde onderdelen.

Bam, daar stond mijn verantwoordelijkheid: zwart op wit. Ik vond het een enorme kick om die vervolgens ook op te leveren. En na twee weken zat ik, hoewel wel samen met senioren van OC&C, al met de CEO van de cliënt en Amerikaanse investment bankers om tafel!

Thijs: Vind je dat genoeg vrije tijd overhoudt?

Ruben: Geen issues tot nu toe. De weekenden zijn vrij, ik squash nog steeds iedere maandagavond en het lukt ook vaak om ’s avonds naar de sportschool te gaan. Ook houd ik voldoende tijd over om te trainen voor de tourversie van de Amstel Gold Race. En voor de Ringvaartregatta: ik zit bij de acht van OC&C, als invaller voor een collega die een blessure heeft opgelopen.

Ruben: Hoe is jouw work-life balance geweest de afgelopen jaren?

Thijs: Goed. Het is natuurlijk geen baan van 9 tot 5, en er zijn zeker avonden dat je flink moet doorwerken. Maar als ik iets gepland heb voor ’s avonds lukt het me bijna altijd om dat ook te doen. In de ruim vijf jaar die ik nu bij OC&C zit, heb ik mijn hockey op donderdagavond voor 95 procent gehaald.

Ruben: Ik had niet verwacht al zo snel internationale contacten te krijgen bij OC&C. Maar als ik over een tijd eens wat langer naar het buitenland wil, heb ik daar dan zelf invloed op?

Thijs: Als je het echt wilt, dan gebeurt het ook. Het zal niet altijd stante pede geregeld kunnen worden, maar het gebeurt wel!

Ruben: Is jouw werk heel erg veranderd sinds je projectleider bent geworden?

Thijs: Je rol wordt een stuk breder.

Behalve de analyse moet ik ook mijn team goed aansturen, de relatie met de cliënt onderhouden, en natuurlijk de partners aan wie ik rapporteer goed bedienen. De sociale kant van het werk wordt belangrijker: niet alleen gelijk hebben maar ook gelijk krijgen – dat maakt het werk extra uitdagend en leuk.

Ruben: Maar ook lastig, toch? Zeker als je pas komt kijken, zoals ik. Hoe zorg je er dan voor, dat je serieus wordt genomen?

Thijs: Aan het begin van een project stuit je als consultant vaak op flink wat scepsis in de organisatie waar je komt. Daar moet je je op instellen. Zowel voor jou als voor mij geldt: je wint vertrouwen door je integer en bescheiden op te stellen, goed te luisteren, goede vragen te stellen – en

OC&C SUMMER SCHOOL Kom een week stage lopen: Consulting

• ervaar het werken in Strategy • volg intensieve trainingen ma • have fun tijdens het avondprogram T/M 7 JUNI 2012; BACHELORSTUDENTEN KUNNEN ZICH INSCHRIJVEN SELECTIEDAG OP 15 JUNI 2012 rategy.nl of neem contact op met Kijk voor meer informatie op www.occst telefoon (010) - 217 55 55 of per mail via iter) (recru Blink den van lein Marjo marjolein.van.den.blink@occstrategy.nl

OC&C Strategy Consultants Weena 157 | 3013 CK Rotterdam 010 217 5555 | www.occstrategy.com

fsrforum • volume 14 • issue #4

Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty Marcello Tonelli & Carol Dalglish (2012)

16 • Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty

The focus of micro-credit has been the alleviation of immediate poverty.

1. Introduction Micro-credit has often been used as a poverty alleviation strategy. However, there is little evidence to suggest that micro-credit alone can promote economic activities because micro-credit does not teach anything by itself (Brett 2006; Mayoux 1999; Sievers & Vandenberg 2007). Mistakenly, the focus of micro-credit has been the alleviation of immediate poverty, rather than the development of economic activity that would provide a long term solution. Paraphrasing the age old saying, “Give a man a fish and you feed him for a day, teach him to fish and you will feed him for a life time” microcredit enables the fisherman to buy a net, but in many cases does nothing to ensure that he knows how to use it to benefit his family and the community. If the borrower doesn’t know how to use the net, he will return to his old way of doing things – but with the added burden of having to pay back the debt.

Given the state of extreme poverty experienced by the vast majority of the population in developing countries, borrowed money is often used for purposes other than creating the foundations for a sustainable economic growth. Typical examples of how micro-credit is generally used include covering funeral costs, buying food, medicines, and other similarly important necessities. The main problem that derives from using loans in this way is that apart from not improving living conditions in a sustainable manner, borrowers are also exposed to the risk of over-indebtedness, with its subsequent human and social implications.

On the contrary, using microloans for the development of entrepreneurial activities can help achieving a sustainable elevation from extreme poverty (GEM 2005; Baumol 1996).

The World Bank suggests that micro-credit as part of an entrepreneurial development approach that also focuses on education, skills improvements, and innovation (Acs & Virgill 2010) can indeed have a lasting effect on economic development and the reduction of poverty.

This paper responds to recent calls for more studies to understand micro-credit and its effects on enterprise development for people living in extreme poverty. It is our hope that this study will not only stimulate future research, but also suggest new ideas and structures for development agencies and governments to further improve entrepreneurial development programs. We asked the question: What are the factors needed for the successful implementation of micro-credit in developing entrepreneurs in desperate poverty settings?

Given the research context, the term micro-credit in this

paper refers to the loaning of small sums of money to the poor for the establishment of micro-enterprises, without ­traditional collateral (Charitonenko & Campion 2003; Mwenda & Muuka 2004). With regard to entrepreneurship the definition

by Hisrich and Peters is used, which allows for a wide range of cultural contexts and stages of development (Acs & Virgill 2010) describing entrepreneurship as: “the process of creating something new with value by devoting the necessary time and effort, assuming the accompanying financial, psychic and social risks and receiving the resulting rewards of money and personal satisfaction and independence” (1998:9).

This study considers a sample of survival entrepreneurs who benefited from the delivery of micro-credit to help them take down one of the main barriers to entrepreneurial activity (i.e. access to finance). The investigation also reports the importance of gradually developing an appropriate entity, rooted in the local community, to deliver services in a socially responsible manner.

2. Background Literature The terms micro-credit and micro-finance are often used interchangeably. Micro-credit focuses on overcoming the structural barriers to the poor accessing credit. These barriers include: lack of information, lack of collateral, high cost, high risk and systemic market bias against the poor. Micro– finance on the other hand can be defined as a development approach that provides, credit, savings and insurance services (Elahi & Rahman 2006).

When exploring the role of micro-credit it is important to understand the population served. Particularly in Africa, many countries have 50% or more of their populations below the $1.25 a day poverty line (World Bank 2010), there is no significant middle class to service, illiteracy rates are often high, infrastructure inadequate, and the health of the population is plagued by diseases no longer existent in the developed world.

While the word micro-credit did not exist before the 1970s, it has now become a ‘buzz’ word often simplistically seen as the answer to all development issues. Some of the conflicting findings concerning the impact of micro-credit may reflect not a weakness in the idea, but in the delivery mode. Three different types of entities generally provide micro-credit to the poor: formal (i.e. banks) and informal (i.e. money lenders) profit-oriented institutions; development banks and semiformal institutions, such as NGOs, specialized in the offering of preferential loans; and community development initiatives.

Issues arising from lending practices are summarised in Table 1.

Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty • 17

fsrforum • volume 14 • issue #4

Table 1: Micro-credit related challenges discussed in the literature Financially

Financially self-sufficient

Not traditional collateral

Charitenenko & Campion 2003; Mwendaa & Muuka 2004

Group collateral to lending

Brett 2006; Cuong 2008; Karim 2008; Weber 2002

Measurement of success

Buckley 1997; Karim 2008; Weber 2002

Insufficient on its own

Brett 2006; Mayoux 1999; Sievers & Vanderberg 2007

Embedded in commercial framework

Weber 2002

High interest rates

Brett 2006; Byiers et al. 2010, Maimbo 2002; Rugimbana & Spring 2009; Yunus 1994

Over indebtedness

Chamlee-Wright 2005; Hudon 2009;

Disempowerment of women

Brett 2006; Rugimbana & Spring 2009; Mayoux 1999; Qadir 2003

2.1 Profit-oriented institutions Profit-based institutions sit within the familiar banking framework and must obey to the rules of the game of the industry they are in, which can be hardly seen as pro-poor.

Lending institutions show excellent results with regard to micro-credit by measuring only two variables: number of people served, and repayment rate (Buckley 1997; Karim 2008; Weber 2002). On both counts the results are impressive. The third element that contributes to their financial returns is the interest rate applied to the loans. As a result, their success is measured in terms of: ‘number of loans’ X ‘repayment rate’ X ‘interest rate’.

Apart from the questionable practices adopted in delivering credit to the poor – charging high interest rates (Maimbo 2002; Yunus 1994; Brett 2006; Rugimbana & Spring 2009; Byiers et al. 2010), tacit encouragement of over indebtedness (Hudon 2009; Chamlee-Wright 2005), use of ‘social’ collateral to guarantee repayment (Brett 2006; Cuong 2008; Karim 2008; Weber 2002), and the potential disempowerment of women (Rugimbana & Spring 2009; Brett 2006; Mayoux 1999; Qadir 2003) – there is also a second important consideration to be made when servicing people in desperate needs: many banks do not target the real bottom of the pyramid because of the lower repayment prospects. This strategy is in line with Robinson’s argument (2001) that commercial micro-finance is not appropriate for extremely poor people who are badly malnourished, ill and without skills or employment opportunities. For these people micro-finance is the next step – after they are able to work.

Of course this approach begs the question: how do people in developing economies, with little or no education, get their foot on the first step of the economic ladder? How do they move into a position where they could access commercial micro-finance?

18 • Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty

2.2 Development banks and NGOs The majority of international NGOs and development banks do not offer a valid answer to the questions above. Firstly because, as emphasized by Hudon (2008), the means by which credit is provided is important, and typical NGOs that provide financial services to the poor have systematically failed on three key dimensions: group lending, high interests, and a pressure on employees to achieve results.

Many of the existing micro-credit schemes lend money on a group basis, that is, the group is liable for the debts of each member (Brett 2006; Cuong 2008; Weber 2002). “Shame” is the collateral, as Karim puts it (2008). In different locations across the world NGOs are charging the poor anything between 20% and 60% interest per annum with the justifications that their rates are less than traditional money lenders, where those exist, and they cover the cost of servicing small loans across long distances (Maimbo 2002). Finally, NGOs are sources of employment in countries that have few opportunities. This puts pressure on staff to deliver against criteria that will secure their jobs: large numbers of borrowers and high repayment rates (i.e. the same measurements used by profit-oriented institutions). Delays with repayments have led in some circumstances to ill treatment of borrowers and high levels of competition between the organisations that are supposedly there to help the poor (Pless & Maak 2009).

Secondly, the simple provision of micro-credit as a form of assistance does not facilitate the growth process required to access commercial micro-finance. Micro-credit has become a global strategy despite warnings from the World Bank and the Asian Development Bank that micro-credit alone may not result in poverty reduction (Pless & Maak 2009). The basic argument is that access to financial resources may not in itself address the challenges facing the very poor, who also have to overcome other limitations, such as access to education and training, inadequate physical infrastructure, and government corruption when trying to put their money to good use (DANIDA 2002; Naude et al. 2008; Sachs 2005; Van Stel et al.

2005).

2.3 Community Focused Development Micro-credit Initiatives The failure of top–down approaches over the years has been attributed to the lack of participation by the intended beneficiaries (Rehnema 1992) in defining what is needed. A shift towards a bottom-up approach has gradually occurred, which

Commercial micro-finance is not appropriate for extremely poor people.

views participatory methods of interaction with the local population as essential. The Community Driven Development (CDD) approach is a bottom-up development strategy, by which rather than viewing underprivileged people as the target of poverty reduction efforts, it seeks to treat individuals and their institutions as assets and partners in development.

Evidence suggests that social cohesion is critical for economic prosperity and sustainable development. Honig (1998) contends that developing and promoting community cohesion may prove as instrumental to entrepreneurial success as any other sort of educational or institutional intervention. In line with this way of thinking and defining social capital not just as the sum of society’s institutions, but rather the glue that holds them together (World Bank 2004), the CDD approach is embedded in the idea of social capital intended as institutions, relationships and norms that shape the quality and quantity of social interactions (Elahi & Rahman 2006). Successful examples of CDDs have been reported in Indonesia, Sierra Leone, Mongolia, Nigeria, Yemen, Honduras, and Bosnia and Herzegovina (World Bank 2009).

So, while CDD initiatives often provide loans to support the poor, their emphasis is more towards empowering the beneficiaries not to rely exclusively on external support, but to gradually become financially independent. As figure_1 shows, it is only this type of lender that has the potential of addressing all needs of the borrower: loan repayment, improved living conditions, and financial sustainability.

Figure_1: How Micro-credit Delivery Can Support Borrower’s Needs

From the literature it is clear that micro-credit alone cannot be sufficient in developing entrepreneurs. Therefore, lending institutions aiming at providing micro-credit to poor individuals in devastated economies, where governments cannot be expected to play the welfare role experienced in developed countries (Mair & Marti 2009), should also support survival entrepreneurs in other ways.

While there cannot be definite indications as to how a ­successful CDD should look like or operate, given that each initiative should be developed and promoted internally by the community itself with the least possible outside interference, we also believe that certain fundamental principles should be easily transferable and almost required by all CDDs. A model trialled in Mozambique is described in the rest of this paper illustrating how an attempt is being made to use socially responsible mechanisms to deliver micro-credit to the very poor in a way that also promotes community cohe-

siveness through a strong recognition of the local social capital (figure 2). If successful this model may provide an example for elsewhere in Africa where micro-credit has not been adopted to the same extent as for example in Asia.

Figure_2: A Theoretical Model for Poverty Alleviation in Developing Countries

3. Research Site and Methods The design of a programme that carries the solutions to some of the difficulties outlined in the literature was undertaken in Beira, the second largest city of Mozambique, with a group of local micro-entrepreneurs and self-appointed community workers, often pastors. The scheme was intended to suit the needs of poor peri-urban populations who wished to develop small businesses in the absence of employment opportunities.

The choice of Mozambique was dictated by the country’s top ranking among the poorest in the world (Dana 1996) with over 50% of the population living below sustenance level (World Bank 2010).

»

Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty • 19

fsrforum • volume 14 • issue #4

The design of any humanitarian project to encourage entrepreneurship should be culturally fit.

This research takes a qualitative approach using surveys, interviews and participant observation. Qualitative methods were selected as they provide an opportunity to gain insights from the entrepreneurs themselves on the complex set of ­circumstances they face in starting any form of economic activity. To improve cultural understanding and to develop trust, the researchers engaged in participant observation, spending periods of multiple weeks within the community under study (Hammersley & Atkinson 1995).

Informal interviews with individual and in small groups were conducted in 2004, 2006, and 2011, with additional trips over the intervening seven years to help the local staff setting up the NGO. Each entrepreneur received micro-credit to start what would initially be considered a ‘survival’ enterprise in the informal sector.

The longitudinal data provided an ongoing picture of a group of aspiring entrepreneurs who started business activities and expanded their views of what was to be successful. Additionally, the collected data also illustrated the development of the NGO and its staff, with the subsequent impact on the community.

4. Discussion The literature and the initial field research indicated that the design of any humanitarian project to encourage entrepreneurship should be culturally fit, encompass local support and expertise, and at the very least not cause financial harm.

With this in mind, Despertai Mozambique was born. In designing a viable working system, the social responsibility of everyone involved was central to the undertaking.

From the start there was no imperative that the project should be commercially viable, but that it should be sustainable over time.

The manner in which the project was developed took into serious consideration the potential difficulties identified in the literature and considered them in the specific context of Beira. In particular, four issues were revealed as highly important: involvement of local community, capacity building, reduction of indebtedness risk, and new measurements of performance.

4.1 A local support system Understanding a particular cultural context is critically important (IEG 2008) and recognizing and valuing local expertise is vital for accessing knowledge networks, having local participation, and promoting ownership. Local community involvement and the development of social capital are identified as significant elements of success in any model

20 • Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty

that is aiming to reduce poverty (Cross 1998; Rugimbana & Spring 2009; Sievers & Vandenberg 2007). Chamlee-Wright (2005) recognises that tapping into the knowledge embedded within local social institutions identifies needs and opportunities, lowers transaction costs, saves time, and helps anticipate and avoid pitfalls. Embedded within the local system is also a wealth of local knowledge regarding an individual’s savings capacity, credit worthiness, business history and insurability (Yunus 1994). Soros (2007) has identified this as a key factor in the success of his foundations around the world, as has the World Bank in its Community-Driven Development Strategy (2009).

The process of setting up Despertai Mozambique as an NGO fully owned and operated by local people began in 2007, during the third visit to Beira by the researchers. Around 40 local business owners, community and church leaders attended a meeting at which they expressed a willingness to work together toward the establishment of an initiative that would provide micro-loans to individuals, who did not have access to other sources of funding. This group elected a local management committee and nominated the people they wished to run the organisation. Local involvement ensured that the mechanisms put in place would be culturally appropriate and socially responsible for that particular context. The initiative also linked into the grassroots religious movements, with the many different groups working together to support the scheme. As a consequence, most of the borrowers found their way into the Despertai network through the pastors from the various churches. With limited education and access to official networks most of these borrowers would not have had access to financial support without the local community networks.

4.2 Capacity building It was clear early on that the existing local expertise was insufficient to support the needs of the entrepreneurs; hence building capacity became a priority. As a result, a second management committee, called Awaken Mozambique, was established in Australia to raise the necessary resources for Despertai to start off. These resources included not only financial backing for direct funding and to finance loans to entrepreneurs, but also processes for sharing intellectual resources through virtual training of staff.

Training and development are in fact an integral component to the development process. Sustainability of resources is critical and it would be socially irresponsible to establish s­ ystems that keep the community dependent on external resources without

developing their local capacity to grow by themselves. This may be a long term task, but is an essential one. Therefore local people must be involved in all decision making and a problem-solving attitude is to be created (Yunus 1994).

As an example, processes and policies written in Australia are then discussed and modified in Beira by the local staff. The Despertai committee is also required to report monthly to the Australian committee with their recommendations for funding and the reasons for these recommendations, make decisions about loans and debt collection.

4.3 Reducing the risk of over indebtedness In order to reduce the risk of over indebtedness to a minimum, no interest is charged on the loans and the repayment period can be spread over one year. Only a set 10% service fee is charged to the entrepreneurs to cover for training and the support provided.

These procedures developed overtime. After a few years since inception, the Beira committee identified a potential problem for the repayment of loans. Often money was borrowed on the pretext of starting a business, but then used for personal expenses such as funerals, schooling or food. These expenditures clearly did not represent the wherewithal for repayment of the loan and it is not socially responsible to encourage people to enter into this type of debt situation. Thus, the Beira committee put in place two processes to try to prevent overindebtedness. Firstly, to be granted loans borrowers must attend initial training and develop a simple business plan. If the borrowers are illiterate, one of the committee members provides assistance. Secondly, once borrowers are funded, the local staffs assist them in setting up the business and provide support, ensuring the money is spent in such a way as to generate the ability to repay. Whilst this is a costly process, it greatly increases the chance of success for new entrepreneurs and reduces the risk of over-indebtedness.

4.4 New measurements of performance When the emphasis of an NGO is on being financially viable there is pressure on employees to deliver. This can lead to the exclusion of those most in need as they present the greatest risk. Mozambique, like many other poor developing nations, has very limited employment opportunities and NGOs offer wages that are highly desirable. Losing such a job can have a devastating impact on a whole family; hence setting realistic goals and relevant measures becomes very important.

The reason for Despertai Mozambique to exist is the development of micro-businesses that have the potential for long term financial stability. This is what needs to be measured. Measuring repayment rates and numbers of borrowers does little to evaluate the impact of micro-credit on the long term wellbeing of the community – or the sustainability of individual enterprises. On the other hand, well-structured feedback on the micro-loans and how the new ventures benefit the community enhances our understanding of the issues confronting micro-entrepreneurs and the strategies required to enable them to succeed. It is recognised that through this practice running costs greatly exceed the financial earnings on the loans (10%) – however, the social return is potentially very high. Not only are families fed, clothed and schooled, but an economic infrastructure develops that will sustain many who are outside of the loan programme per se.

5. Concluding Remarks This research enhances our understanding of the issues confronting micro-entrepreneurs in desperately poor contexts and the strategies required to enable them to be successful in the short and long term. In particular, this study investigates the role of micro-credit. There is a dilemma to unravel.

Micro-credit obviously does benefit a large number of people, but what of those who through accessing micro-credit services find themselves worse off? Do lending institutions have a moral responsibility towards them? Can the greater good for the greatest number really stand as an appropriate model of social responsibility?

We find that even when the uppermost ethical model of credit delivery is implemented to address the detrimental implications of group lending and high interests, there is also a need for the NGO to be able to empower disadvantaged borrowers with the ability of sustainably improving their living conditions. To do so, NGOs have to promote community cohesiveness in order to build the capacity required to become self-sufficient; implement strategies to reduce the risk of over indebtedness through training and guidance; and use measurements of performance that assess medium and long term impacts rather than immediate returns.

While the model has been implemented in a specific geographical area of Mozambique, it represents a blueprint for offering services at a community level in other poor developing countries. The model also provides a base for ongoing research into the process of entrepreneurial growth in African developing economies.

Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty • 21

fsrforum • volume 14 • issue #4

At NIBC, entrepreneurial bankers start at the deep end!

Company presentation

NIBC is a Dutch financial institution headquartered in The Hague and the bank of choice for talented individuals at decisive career moments. We have offices in Frankfurt, London, Brussels and Singapore.

At NIBC the aim is to get you started in a job with a concrete assignment and clear responsibilities.

At the same time, we will encourage you to develop in the Analyst Program on a financial, professional and personal level. You and your fellow analysts will attend our in-company training program at the Amsterdam Institute of Finance, designed by professors from international business schools and NIBC professionals. This 12-month Analyst Program consists of four oneweek modules.

As an analyst, new experiences will become business as usual at NIBC. To give you some insight in the recruitment activities at NIBC, Frouke Röben shows her week schedule.

Monday: In the morning I’m interviewing a candidate, who is interested in our vacancy in the sectorteam of Industrials. We try to evaluate the candidates on the same day with the team, so I already scheduled a meeting with the department and we discuss the feedback we had. The candidate is evaluated positive and I’m going to invite him for a second round. Hopefully I can make him an offer after that round, it’s always nice to add new ambitious analysts to the group.

While the year progresses more analysts are hired for the coming program, which starts in ­January. The nice thing about the fact that analysts start at their position immediately is that the analysts already know their team and are better able to apply new knowledge from the program.

Tuesday: For the coming module on corporate finance at the Analyst Program I’m planning to work on some NIBC cases, together with my colleagues from the business and the agency that is involved in the program. This module is also about commercial skills, so we want to combine some topics. The modules at the Analyst Program take one week, and are held four

“It’s always nice to add ambitious analysts to the group” Frouke Röben recruiter at NIBC

times in the analyst’s first year. I invited one of our responsible members of the Managing Board to hold a speech during the program about these topics. He made room in his busy schedule to be present.

Wednesday: A workshop and dinner is planned at a student fraternity. I’ve invited some colleagues from the M&A team to join me with a case and presentation. They have updated their case and have put the students into different groups. The cases we use are from different departments and sometimes tailored to the audience. I made a selection of their resumes and saw quite some interesting profiles. In this case we have a negotiation part, and luckily the schedule allows us to have an extensive discussion and negotiation with the whole group. The students leave the room very energized, however craving for a beer...

22 • Company presentation

“Managing Board members also present during the analyst program”

Thursday: I’m working on some trainings and workshops for analysts. Today I have a short workshop with the Analysts from The Hague and Brussels (by phone) about the do’s and don’ts of target setting. NIBC is trying to take several trainings in-house. Besides reducing costs on training venues, we can control the level of expertise in the group, and the topics that are being handled. We invite external trainers, or consult experts from NIBC to train the groups themselves.

Today I also have a try-out on one of the standard trainings for the Advanced Development Program. This program is a follow up after the Analyst Program. We give some feedback and the department will fine-tune the presentations for the actual training next week. I’m happy to see that 10 analysts have subscribed for the training already.

Friday: This day is usually a good day to have short meetings or review the most recent applications.

Our new website is generating a very good inflow of new applicants. I also have a meeting with an intern who is considering different departments within the bank. She has had lunches with several analysts to hear more about their work and department. Many interns start at NIBC during the year, and we are proud to see that there are always excellent interns who want to commit themselves to NIBC!

Company presentation • 23

fsrforum • volume 14 • issue #3

Competition, Microfinance, and Credit Information Craig McIntosh and Bruce Wydick

24 • Competition, Microfinance, and Credit Information

1. Introduction Economists have nearly always favored policies that foster competition, as competition typically results in better economic outcomes for consumers. Thus we would expect an increase in competition between microfinance institutions would unequivocally result in more favorable credit contracts for the entrepreneurial poor in developing countries. However, we argue that competition may actually prove ­detrimental to some or all of the borrowers in a microfinance market, particularly if credit information systems are not developed hand-in-hand with the expansion of microfinance. When credit information systems are developed in parallel with an increase in microfinance lending, however, some of the negative effects associated with competition in the microfinance industry may be mitigated.

In McIntosh and Wydick (1995) we develop a model in which a solitary client-maximizing microfinance institution (MFI) competes with an existing informal moneylender to the benefit of each borrower captured in the microfinance portfolio. We discuss two potentially adverse effects of the entrance of new MFIs into the same pool of borrowers. The first is that given Bertrand competition between MFIs within the subset of profitable borrowers, competition reduces the ability of a socially motivated lender to generate rents that support lending to the poorest and potentially least profitable borrowers. This diminution of the capacity to cross-subsidize means that the poorest borrowers in the client-maximizing portfolio are dropped as competition intensifies.

A second class of negative effects from MFI competition originates from the likelihood of increasing asymmetric information between lenders. With a greater number of lenders in a market, we would expect information sharing between lenders to become more difficult, all else equal. We show that this creates an incentive for some (impatient) borrowers to take multiple loans. Such instances of multiple contracting both increase average debt levels among borrowers in the portfolio and decrease the expected equilibrium repayment rate on all loan transactions, generating less-favorable Bertrand equilibrium credit contracts. This makes all patient borrowers worse off, and again results in the poorest borrowers being dropped from the loan portfolio. In general, our results show that while wealthier and impatient borrowers are likely to benefit from increasing competition among MFIs, very plausible conditions exist under which an increase in the number of lenders in a market will lower the welfare of the both the poor and the patient.

In a companion paper, McIntosh and Wydick (2009), we show that this second class of negative effects can be mitigated by the parallel introduction of credit information systems in areas where microfinance lending has brought about increased competition between MFIs. In many ways the relationship between a solidary microfinance lender operating in a village mimics the relationship a borrower may have had previously with a moneylender; both the moneylender and the MFI can often enforce repayment through the threat of denying future loans to the borrower if there is little supply-side competition for credit. While a personalized credit relationship that is not subject to competition may check moral hazard problems via threats of credit termination and/or rewards for timely repayment, a proliferation of microfinance options increases the scope for moral hazard in credit markets. This phenomenon has triggered the rapid emergence of credit

information systems in many countries where microfinance has brought about great competition between credit providers1, which allow lenders to share information about borrowers.2 We show that institutions that facilitate credit information sharing add stability to microfinance markets. Moreover, in this transformation of the credit relationship from a personalized one to a relationship with a larger market, borrowers stand to gain from competition between lenders instead of realizing many of the losses we discuss that may accrue through competition without information sharing between lenders.

McIntosh and Wydick (2009) analytically decomposes the overall impact of a credit information system into three effects.

The first two effects lower borrower default rates: a screening effect and an incentive effect. While the two positive effects of credit bureaus have been previously discussed in the literature, the main contribution of our model is that it yields a third effect: the credit expansion effect--that predicts equilibrium increases in loan size and a resultant increase in default.

This research offers some insight for international institutions that are currently financing the development of credit-information infrastructures in less-developed countries. While such efforts are likely to lead to reductions in default from screening and incentive effects, the resulting lender expansion of credit that appears to accompany the implementation of such systems may partially offset some of the stabilizing ­benefits that information systems are believed to bring to credit markets in general and microfinance in particular.

2. The Increasing Competition in the Microfinance Industry The widespread enthusiasm for microfinance has spawned a dramatic increase in the number of microfinance institutions in the developing world. Spurred by an accord reached at the Microfinance Summit in 1997 to reach 100 million of the world's poorest households with credit, there is arguably more widespread support for microfinance today than any other single tool for fighting world poverty. The microfinance movement has been both praised and supported by a broad range of academic scholars, major development finance institutions such as the World Bank, and development practitioners themselves. As the number of microfinance borrowers has increased to close to 200 million today, competition between them has increased.

The rapid early growth of the microfinance movement primarily consisted of non-profit, socially motivated lenders seeking to reach as many poor clients with credit as they were able, given their limited budgets. In the process they demonstrated that through the use of new lending technologies, such as joint liability contracts and dynamic incentives, a substantial portion of this new market could in fact be lent to profitably. This realization has drawn profit-motivated lending institutions into these markets. The presence of competition from profit-driven lenders has forced MFIs in competitive regions to rethink their strategies. Moreover, donors have questioned the need for continued subsidies, resulting in the recent focus on “institutional sustainability” in the MFI sector.

In a detailed analysis of the Grameen Bank, Morduch (1999) asserts that the failure to account for tradeoffs between sustainability and poverty reduction has hamstrung discussion about the subsidies necessary for microfinance to move forward.

In a later paper (Morduch, 2000) he challenges the notion

»

Competition, Microfinance, and Credit Information • 25

fsrforum • volume 14 • issue #4

that microfinance provides a ‘win-win’ situation for all players involved. Instead, he argues that subsidized lending to the poor as well as the creation of sustainable for-profit institutions should be important, but separate, development goals.

The motivation for our theoretical model stems from evidence from three areas of the world in which MFI activity reached a relatively advanced stage by the early 2000s, and where the effects of competition between MFIs have become increasingly clear.

The Grameen Bank in Bangladesh, long the flagship of the microfinance movement, has consistently been upheld as a pinnacle of stability, self-sufficiency, and effectiveness in using microfinance as a tool for lifting households from poverty. Yet the Grameen Bank's well-known successes have encouraged imitators, which compete for borrowers’ attention along with two other very large microcredit providers, Bangladesh Rural Advancement Committee (BRAC) and Rural Development Project 12 (RD-12), that have operated alongside the Grameen Bank for more than a decade. A Wall Street Journal article in November 2001 raised warnings about the financial health of the Grameen Bank, pointing in particular to the Grameen Bank’s lending in the region of Tangail, in which competitive pressures reduced interest rates for some borrowers, but where 32.1 percent of the bank’s loans had fallen more than two years overdue: In Tangail, signboards for rival Micro lenders dot a landscape of gravel roads, jute fields and ponds with simple fishing nets. Shopkeepers playing cards in the village of Bagil Bazar can cite from memory the terms being offered by seven competing microlenders--a typical repayment plan for a 1,000taka ($17) loan is 25 taka for 46 weeks. At an annualized rate, that works out to 30% in interest. Surveys have estimated that 23% to 43% of families borrowing from microlenders in Tangail borrow from more than one.

(WSJ: 11/27/2001) Alarming figures such as these intensified efforts by the World Bank and CGAP to help bring together a network of the largest 20 microfinance institutions in Bangladesh to implement a centrally managed credit information system during 2004 in the hope that more “centrally managed” competition between lenders in Bangladesh will both help to foster healthy competition between MFIs while bringing down arrears rates in MFI portfolios.

While East Africa is at an earlier stage of competition, the major urban centers of Uganda and Kenya are becoming saturated by competition among numerous MFIs (see Kaffu and Mutesasira, 2003). Markets for the more wealthy borrowers that were previously dominated by grant-funded, socially motivated lenders are now being contested by private institutions. For example, CERUDEB and CMF, two private lenders with access to subsidized external lines of credit, have begun competing with existing MFIs for larger microcredit borrowers. In response, there is increasing competitive pressure on socially motivated MFIs, whose interest rates may be more than 1% per month higher than the new competition.

FAULU, one of the few major MFIs to operate in both Uganda and Kenya, is troubled by the increasing presence of borrowers unknowingly receiving loans from multiple lenders.

FAULU reports that such behavior has become increasingly prevalent as the intensity of MFI activity increases. The Kenya office is able to employ a risk management network based on the country’s national ID system to detect clients within their own portfolio with multiple loans. Uganda, how-

26 • Competition, Microfinance, and Credit Information

ever, has no such national ID system, and so they are powerless to monitor the problem, even within their own institution.

The increase in both the size and number of MFIs operating in Central America since the mid-1990s has been astounding. Growth in MFI activity has been particularly heavy in Guatemala, El Salvador, and Nicaragua.

The case of Nicaragua is typical of the region. FAMA, an ACCION International affiliate, enjoyed a virtual monopoly in microfinance lending in the Managua area for the few years after it commenced operations in 1992. However, by 1996 approximately six other major MFIs entered the market, though even by 1997 no MFIs in the region had a portfolio of more than 4,000 borrowers. Moreover, according to ASOMIF, the association of Nicaraguan microfinance institutions, the portfolios of Nicaraguan MFIs grew at an annual rate of 47% between 1997 and 2001 (La Prensa, 10/02/2002). By 2001 the largest MFIs were carrying portfolios in the range of 15,00025,000 borrowers, with considerable overlap in geographical operating regions.

Guatemala and El Salvador have experienced similarly dramatic growth in MFI activity. FUNDAP in Quetzaltenango,

New entrants into its

regional market forced FUNDAP to cut interest rates.

Guatemala, like its sister ACCION institution in Nicaragua, experienced very little competition from other MFIs since its inception in 1988 until the mid-1990s. New entrants into its regional market, such as FUNDESPE and Fe y Alegria, have forced FUNDAP to cut interest rates on its larger loans from 3% to 2.5% per month. To remain solvent under competition, it has pulled away from its initial mission of offering smaller loans in the form of group-based credit, and instead now lends to a wealthier, more lucrative segment of the market. While average initial loan size was US$135 and average monthly sales were US$291 for borrowers receiving their first loans between 1988 and 1993, by 1999 these figures for new clients had grown to US$543 and US$672, respectively.3 Asymmetric information between lenders over borrower quality and indebtedness has been a mounting issue in all three countries, but there have been great differences between the three countries in the level of cooperation realized between MFIs to mitigate the problem. El Salvador, with its internet-driven Info-Red borrower database4, represents the best example of a case where a network of independent MFIs have built information-based institutions reminiscent of those in developed countries, where nearly instantaneous credit checks are possible. In Guatemala, multiple contracting by MFI clients had become so damaging by the late 1990s that REDIMIF, an association of 19 MFIs embarked on an effort to establish CREDIREF, a centralized microfinance credit bureau, which though now functional, is still in its nascent stages. Cooperation between MFIs during the mid1990s was fairly strong in Nicaragua; institutions regularly shared information on poorly performing borrowers with

one another. However, as MFIs poured into the market in the late 1990s, cooperation has deteriorated to such an extent that, as one loan officer put it "our information-sharing consists of a trip to the local cantina to ask neighbors if loan officers from other MFIs have been paying visits to a potential client.”

3. Summary of Results from the Full-Information Model The model we develop in McIntosh and Wydick (2005) considers an MFI operating in a large pool of potential borrowers who, for well-established reasons, are denied access to credit in the formal financial sector. New lending technologies such as group lending, community banking, and dynamic incentives (as well as the possibility of grant funding) have allowed an MFI access to these borrowers. We allow for the possibility of both for-profit and non-profit lenders, and rank the potential pool of borrowers along an index in terms of initial capital assets.

Our model considers Bertrand competition between micro­ finance lenders over a pool of borrowers with heterogeneous levels of capital. Poor borrowers, with less initial capital, are less lucrative because they can only handle small loans without increasing the probability of default. Wealthier borrowers have higher existing levels of initial capital, and thus can be given larger loans that are more lucrative for lenders. Here we present only the basic conclusions flowing from the model, and we refer interested readers to the original paper for the formal mathematical set-up and proofs.

PROPOSITION 1: Bertrand competition between MFIs benefits wealthier borrowers, but makes a group of poorer borrowers worse off.

The intuition is that faced with entry by a profit-maximizing MFI, the client-maximizing MFI is forced to respond by conforming to the behavior of a profit-maximizing MFI. Profits to competitors go to zero in equilibrium for both rich and poor borrowers (based on initial levels of capital). All surplus is captured in higher profits to the wealthiest borrowers. The poorest borrowers are dropped from the lending portfolio of non-profit lenders because competition in microfinance eliminates the cross-subsidization that is possible when nonprofit lenders, whom we assume are client maximizers, operate without competition from other lenders.

PROPOSITION 2: The presence of a client-maximizing MFI with a non-targeted subsidy will prevent the entry, or force the exit of, any unsubsidized MFI. We show that in this case equilibrium contracts are bid down in favor of borrowers below the zero-profit constraint of any

non-subsidized lender, forcing the lender out of the market.

The implications are that subsidized lenders can be detrimental to the internal financial viability of a domestic microfinance market unless subsidies are limited to loans for poor borrowers.

PROPOSITION 3: Competition between two client-maximizing MFIs with non-targeted subsidies will lead to a Bertrand-Nash equilibrium in which the market share of each MFI will be proportional to its level of grant funding.

The intuition to the proof is that since Bertrand competition eliminates profits on each profitable borrower, all borrowers must be captured through competitive subsidy in the client maximization process. One can think of each subsidized MFI as “purchasing” borrowers for its portfolio, where in equilibrium, arbitrage behavior takes place such that the “market price” of capturing each borrower is equilibrated across all those with access to MFI credit.

PROPOSITION 4: Market entry of a client-maximizing, subsidized MFI with funding specifically targeted to poor borrowers may cause poor borrowers to lose access to MFI credit.

The intuition behind the proposition is that unsubsidized lenders, even those that lend to the poor, can be undercut by a subsidized lender, forcing some poorer borrowers to lose access to credit. The subsidized lender eliminates the cross-subsidies that are essential to serving poorer, less profitable borrowers.

Summary of Conclusions from the Basic Competitive Model: • In competitive markets, profit-maximizers and unsubsidized client-maximizers always behave the same way. Thus, under competition it is not the motivation, but rather the extent and the nature of the grant funding of a lender that matters.

• Targeting of subsidies is unimportant in a market with a single client-maximizing MFI; the distinction only becomes important under MFI competition.

• Lenders with non-targeted subsidies can always drive any unsubsidized competitor out of the market altogether, whereas targeted subsidies can never eliminate a competitor from the market.

• Every competitive scenario involving a lender with targeted subsidies results in a market that is both competitive and in which some of the poor receive loans.

• Competition never makes any profitable borrower (with a higher level of assets) worse off.

• The only way in which the poor can be reached without subsidies is if a client maximizer exists as a solitary MFI in the market and competes only with a moneylender. However, in this case subsidies are merely being generated from amongst the other, less poor borrowers.

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Competition, Microfinance, and Credit Information • 27

fsrforum • volume 14 • issue #4

4. Extended Model: Asymmetric Information between Lenders In the previous section, we discussed our basic model in which information about borrower heterogeneity was common knowledge between borrower and lender. However, we now assume that each borrower is characterized by a personal rate of time preference per lending period, information that is hidden to the MFI, whose per period profit function we assume is unchanged and homogeneous across institutions.

We now bring into our analysis the issue of dynamic incentives. Dynamic incentives provide motivation for repayment when borrowers lack collateral to secure loans by implicitly promising continued credit access as a reward for loan repayment. They are routinely used by MFIs (and other lenders) in poor areas of developing countries to mitigate issues of moral hazard involved with credit transactions. The present value to a borrower of the continued access to MFI credit is positively related to the advantage offered by MFI financing relative to the alternative (moneylender) contract, and a negatively related to a borrower’s rate of time preference.

Hoff and Stiglitz (1998) show that dynamic incentives are weakened by new market entrants as this improves the reservation loan contract available to borrowers in the case of default. Their results imply borrowers must somehow be punished for default by the financial system as a whole, through a system of negative borrower information-sharing, i.e. each lender sharing its lista negra (as it is often referred to in Latin American MFIs--the blacklist).

What we illustrate in this section is that even within a system that identifies defaulting borrowers, other gaps involving asymmetric information between lenders must be bridged.

We show that it is also critical for lenders to share positive borrower information with one another, even regarding wellperforming loans, i.e. that a lista blanca (a list of positive information) is also necessary. This is true even in a model without strategic default. In order to concentrate on this issue, we take as our informational benchmark market with Bertrand competition in which all lenders fully share the lista negra, where defaulters are denied future formal credit access, but no positive information is shared.

PROPOSITION 5: If asymmetric information between lenders increases as the number of competing lenders increases, borrowers receive less favorable loan contracts after entry of new lenders.

The proof to the proposition shows that the lower-information equilibrium with more lenders in the market results in an

28 • Competition, Microfinance, and Credit Information

equilibrium lending contract that is characterized by a higher interest rate. This is due to the increased costs of lending in an informational environment where lenders are uncertain about existing debt loads of borrowers, and where some borrowers (with a high rate of time preference who care less about the future consequences of default) have an incentive to take loans from multiple lenders. Moreover, once the competing MFIs respond to multiple contracting by adjusting equilibrium contracts for all clients, it is unclear whether or not the these impatient have indeed benefited. The interest rate “discount” received though multiple loan contracting may or may not compensate for the fact that every individual loan contract is marginally worse. What is unambiguous is that patient borrowers, who find it optimal to borrow only from a single lender, have been hurt by reduced informational flows between lenders, and the ensuing instances of multiple contracting by other borrowers. By undertaking action clearly observable to only one lender, the impatient create a classical externality whose costs are spread across the whole population of borrowers.

PROPOSITION 6: As asymmetric information between lenders increases, the poorest borrowers are dropped from the lending portfolio.

The intuition to the proof is straightforward. Increasing information asymmetries increase the cost of lending to the entire portfolio of borrowers such that the least profitable borrowers (those with the lowest amount of initial assets) are dropped from the pool.

Conclusions from extended model with asymmetric information: • With asymmetric information between competing MFIs, every loan contract yields a lower profit to the borrower than under the full information benchmark. Patient borrowers are always worse off with reduced information sharing, perhaps the impatient borrowers as well.

• If asymmetric information between lenders increases with the number of MFIs in the market, competition has an unambiguously negative effect on both the most poor and the most patient borrowers in the portfolio.

• Optimal information sharing between lenders must include not only data on defaulting borrowers, the lista negra, but also continually updated information on current borrowers, even those who are not defaulting, or the lista blanca.

5. Introduction of Credit Information Sharing In the previous section we showed that in a microfinance

Lower-information equilibrium with

more lenders in the market results in an equilibrium lending contract that is characterized by a higher interest rate.

market plagued by asymmetric information between lenders, interest rates and loan sizes adjust endogenously to account for the possibility that any borrower, ex-ante to borrowing, may possess hidden debt. In McIntosh and Wydick (2009) we model the impact of a credit information system that decreases the degree of asymmetric information between microfinance lenders in the market.

PROPOSITION 7: Positive information sharing between lenders leads to larger equilibrium loans at lower interest rates.

The intuition to the second part of the proposition is that greater positive information sharing allows lenders to screen applicants with hidden debt more effectively so that default becomes a weaker signal of hidden indebtedness. This makes the expected level of hidden debt among defaulting borrowers as well as clean borrowers lower, allowing access to better credit terms.

PROPOSITION 8: Credit information systems that facilitate positive and negative information sharing between lenders yield three distinct effects: 1) a screening effect that arises from improved borrower selection, 2) an incentive effect that comes from fear of detection, and 3) a credit expansion effect whereby larger loans create a perverse effect on default rates.

The borrower screening effect of a credit information system mitigates adverse selection problems; it is the direct effect of a lender having better information about potential defaulters.

The borrower incentive effect also reduces default rates by mitigating problems of moral hazard. As borrower information increases, there is a higher probability of being caught in an over-indebted state, and more borrowers choose to take single rather than multiple loan contracts, thus reducing the higher default associated with hidden debt. The credit expansion effect occurs as borrowers are given larger equilibrium loans. Because default is an increasing in loan size, and because lenders make bigger loans when they are more ­certain of a borrower’s existing debt, this credit expansion increases default rates, but does not overwhelm the stronger effect on default of lower expected debt, consistent with what we find in Luoto, McIntosh, and Wydick (2007).

6. Conclusion We believe that a number of policy conclusions flow from this research. At the broadest level, the results of the fullinformation version of our model may extend to other instances in which altruistic motivation induces a non-profit institution to cross-subsidize. Examples may include medical

or health services, socially motivated education programs, or provision of low-income housing, in which there exists some degree of competition between for-profit and non-profit entities.

More specifically to microfinance, our research implies that the structure of funding is unimportant in monopolistic markets, whereas the motivation of lenders is less important in competitive markets. Therefore, as competition increases, the onus for the inclusiveness of the market passes from the practitioners of microfinance to the donors. Yet the very existence of competitive markets hinges on the idea that grant funding be used in a competitive market only to subsidize the cost of lending to the poor. In light of this, our research supports the notion put forth by Morduch, that financially self-sufficient MFIs should co-exist with their subsidized counterparts, provided that these subsidies are carefully restricted to the poorest borrowers.

A clear implication from the asymmetric information version of our model is the need for credit bureaus, or internet-based central risk-management systems, which identify outstanding debt in addition to cases of default. In general the astounding growth in MFI lending in many areas has vastly outpaced the ability of MFIs to monitor borrower quality and indebtedness.

Among the Central American countries, for example, there remains great heterogeneity in informational infrastructure.

While some countries have established reasonably well-functioning centralized risk-management structures, others lag far behind in this area, although the density of MFI activity is extremely high across the region. At this stage in the microfinance movement, the establishment of such centralized risk networks must become a leading priority to ensure the success and sustainability of the microfinance movement in LDCs. Our field experiment evidence from Guatemala (Luoto, ­McIntosh, and Wydick, 2007) shows that the introduction of a credit bureau induces a strong screening effect and a more muted incentive effect. One of the factors that makes a credit bureau an attractive intervention from a policy perspective is its modest cost compared to its substantial benefits, which other work related to this project has demonstrated. In carrying out a cost-benefit analysis of the CREDIREF system, we determined that implementation of the system within the MFI branch offices yielded a net present value to the micro­ finance institution of US$185,570 over three years with an annual internal rate of return of 96.5%, generated primarily from lower defaults.

Competition, Microfinance, and Credit Information • 29

w w w.g a a a n . n U

Je kunt als bedrijf nog zo veel willen, je krijgt pas wat voor elkaar met goede mensen KPMG biedt accountancy- en adviesdiensten aan uiteenlopende organisaties. Alleen al in Nederland hebben we 4.000 medewerkers, verspreid over 15 kantoren. We zijn ambitieus: we willen op zo veel mogelijk terreinen de nummer één zijn in ons vak.

Gááán!

We zijn dan ook voortdurend op zoek naar talentvolle mensen met dezelfde passie. Zit jij zo in elkaar?

Dan wordt het tijd om kennis te maken. Dat kan via www.gaaan.nu, ons talent- en ambitieplatform. Gááán! helpt je bij je studie en je carrière en stelt je in staat contacten te leggen met KPMG’ers. Je vindt er ook alles over je carrièremogelijkheden.

Aan de slag als accountant Bij KPMG Audit start je na je universitaire studie of hbo-opleiding als trainee. Je gaat direct aan de slag bij alle soorten klanten. Tegelijk volg je een opleiding tot registeraccountant. Daarna ben je gekwalificeerd registeraccountant en beëdigd om de financiële rapportage van ondernemingen te verzorgen.

Of als adviseur Bij KPMG Advisory begin je als junior adviseur en start je direct met adviesopdrachten. Je volgt ook doelgerichte opleidingen. Afhankelijk van je universitaire studie en interesse kun je kiezen uit verschillende richtingen. Van organisatieadvies tot fusies en overnames en van het kwantificeren van complexe risico’s tot IT-advies.

Waar je ook voor gaat: kansen genoeg om samen met je collega’s aan iets moois te bouwen. Wij zouden zeggen: Gááán!

Meer informatie Ga naar www.gaaan.nu of maak een afspraak met het KPMG Recruitment Centre (020) 656 7162 of mail naar recruitment@kpmg.nl.

© 2011 KPMG N.V., alle rechten voorbehouden.

Van scriptant tot trainee

w w w.g a a a n . n U

“Ik heb een

een groep studenten in de afstudeerfase bij elkaar zit,

geweldIge

kun je met elkaar sparren en informatie uitwisselen.

Ook kreeg ik een coach toegewezen die mij wegwijs

werkgever

heeft gemaakt in de organisatie en waarbij ik met al mijn vragen terechtkon.

leren kennen.”

Je krijgt de tijd en mogelijkheden om het bedrijf, de werkzaamheden en de collega’s te leren kennen.

KPMG organiseert bijvoorbeeld diverse activiteiten voor scriptanten, zoals de Landelijke Scriptanten­ Stijn van der Heijden (27) heeft zijn scriptie bij KPMG

dagen, etentjes, borrels, etc. Daarnaast heb ik via

geschreven en is onlangs gestart als trainee in

KPMG kunnen deelnemen aan golflessen en kon ik

Rotterdam. We vroegen Stijn naar zijn stage­ervaring

binnen een paar maanden mijn GVB halen.”

en start bij KPMG. En nu aan de slag als trainee?

Waarom heb je ervoor gekozen om je scriptie bij

“Ik kijk terug op een geslaagde scriptiestage bij KPMG.

een bedrijf te schrijven?

Mijn Master is met succes afgerond en ik heb een

“Ik heb na mijn Bachelor Economie de Master

geweldige werkgever leren kennen. Sinds september

Accounting, Auditing and Control gedaan. Tijdens een

werk ik fulltime als trainee; ik ben sindsdien al veel

inhousedag ontdekte ik de mogelijkheden om je scriptie

leuke ervaringen rijker. Ik werk in wekelijks wisselende

bij een groot accountancykantoor te schrijven.

teams aan opdrachten voor verschillende bedrijven.

Naast de theoretische kennis die ik in ruim vijf jaar

Hierdoor leer je snel veel collega’s kennen en is het

had opgedaan, wilde ik graag praktijkervaring op­

werk erg divers. Mijn scriptie is dus een mooie eerste

doen. Ik ben daarom alvast op zoek gegaan naar een

carrièrestap geweest en ik kan iedereen dan ook

potentiële werkgever om daar mijn scriptie te schrijven.”

aanraden om met KPMG kennis te maken en te gaan voor je scriptie!”

Waarom KPMG? “Tijdens mijn studententijd was ik erg actief als

Wil jij ook je scriptie bij KPMG schrijven? Neem dan

wedstrijdroeier bij ARSR Skadi. Ik zocht een werkgever

contact op met het KPMG Recruitment Centre via

waar je mensen vindt met dezelfde drive en passie.

recruitment@kpmg.nl of schrijf je in op www.gaaan.nu.

Tijdens mijn kennismaking met KPMG vielen de

Kijk voor tips op facebook.com/kpmgscriptiecoach.

gedrevenheid en no­nonsensementaliteit mij op.

Niet alleen mooie verhalen, maar vooral daden.

Ook de Talentpool van KPMG vind ik erg aansprekend.

Dit houdt in dat je eerst een heel divers klantenpakket hebt en dat je daarna een keuze maakt voor de sector

KPMG Recruitment Centre

waarin je je gaat specialiseren. Voor mij voldoende redenen om mijn scriptie bij KPMG te schrijven.”

Laan van Langerhuize 1 1186 DS Amstelveen

Hoe heb je de scriptiestage ervaren?

(020) 656 7162

“Ik kreeg alle ruimte om mijn eigen plan te trekken.

recruitment@kpmg.nl

Zo kon ik het schrijven aan mijn scriptie afwisselen

www.gaaan.nu

met het opdoen van praktijkervaring. Doordat je met

© 2011 KPMG N.V., alle rechten voorbehouden.

fsrforum • volume 14 • issue #4

Interview Klaas Molenaar: Lector Finanicial Inclusion and New Entrepreneurship 19-06-2012 Haagse Hogeschool, Den Haag

By: Jeroen van Oerle and Anne van Driesum

What is microfinance?

Microfinance is a rather broad concept. The most well known element is micro credit, where individualloans are distributed.

Next to credits, microfinance also covers savings, insurance, pensions and the transfer of money in general. Many of these activities are also provided by “regular” institutions. Whether or not we can classify something as microfinance is more a matter of looking to the accessibility of the financial service.

It is a new way of thinking. A terminology that seems to capture the core of microfinance nowadays is “financial inclusion”.

The main goal is to try to include those who fall outside the services of regular institutions.

Who enables microfinance?

Klaas Molenaar (1949), (MA Management Science – Rotterdam University) is an enterprising consultant and trainer crossing borders in search of new ways to apply entrepreneurship and development concepts in society. He has more than 35 years of experience in Small Enterprise Development and microfinance worldwide.

He is lector in Financial Inclusion and New Entrepreneurship at the Hague University of Applied Sciences, and director of Timpco Consultants specialized in Entrepreneurschip Development and financing in support of micro and small enterprises.

He is also founder and chairman of the SEON Foundation which specializes in business creation, migration and development. He wss founder and former general director of Triodos Facet (1990), a triple bottom MSME consultancy and training company with special expertise. He conceptualized, founded and built up IntEnt Foundation, which supports migrant entrepreneurs setting up business across borders, linking Migration, Development and Entrepreneurship. Among other functions: former Member of the National Council for Microfinance in The Netherlands, and member of the Board of Directors of MISFA, Afghanistan. He is vice president at the European microfinance network.

32 • Interview

Every institution thatpursues Financial inclusion enables microfinance. This can go from Self Help Groups to general banks. Microfinance has always been initiated by people who are socially involved. Examples are Raiffeisen and Yunus.

Such personal initiatives can result in real financial institutions and general polities. What you see is that own initiatives are developed (like the Grameen bank in Bangladesh) or that the personal initiatives are being used as policy in large financial institutions. And that is not only for profit. Those who initiate the microfinance way of thinking in large institutions develop a whole change in mindset. Sometimes large banks develop their own microfinance department. This is either an integral part of the bank or a standalone enterprise.

One of the current issues in microfinance is that the whole industry has become extremely lucrative and might attract people who try to make quick money, which is not in line with the mindset of financial inclusion. The loss of focus is one of the risks nowadays. It is not anymore about financial inclusion, but in the eyes of those investors it is merely about profits.

They may push MFIs in to lending too much at too high a pircie (and cost) to the clients leading to unwanted over- indebtedness.

Who makes use of microfinance?

Everyone who has no access to regular financing. When people are rejected from financing by formal financial institutes but were able to receive credits, they make use of microfinance.

There are certain elements that are important for the acceptation or rejection of regular financing. People who are rejected often have a too low education, live in the wrong neighbourhoods or have no collateral. The unsecured lending to those who face problems like the before mentioned are covered by microfinance.

A terminology that seems to capture

the core of microfinance nowadays is “financial inclusion”.

In your opinion; is microfinance an undervalued field of financing?

Microfinance shows that it is of vital importance to keep an eye on the relationship between people and money. This relationship is off balance currently in the financial sector, so in that sense the exemplary role of microfinance is undervalued. It is also undervalued when looking at the number of people that can be reached via microfinance. It concerns millions of people worldwide. And there is little notion of the impact microfinance has on individual lives. When looking at the balance sheet totals of microfinance institutions, it is not seen as “serious”. The amounts are simply too small. When looking at the political impact, microfinance is also undervalued because of the incapability of politicians to recognize the impact of microfinance to individuals. Look at what happened to Yunus in Bangladesh. Politicians forced him to leave his position at the Grameen bank. The true reason was not his work for the Grameen bank but the impact he had on the population via this microfinance institution. Over eight million people were brought into contact in several ways with microfinance. You can imagine the political influence is also very large.

There is also a misconception of the true meaning of microfinance within the financial field.

Too often it is thought microfinance is only a financial instrument, while in fact it should be viewed as an empowerment instrument. People are much more important than money. Without people money has no value. I think a good conclusion is that, contrary to mainstream financial institutions, within microfinance people are not numbers but individuals.

What is the main goal of microfinance in developing countries?

We have to make a distinction between what the goal was, approximately thirty years ago, and what the goal is today. The goal was social inclusion and empowerment. The current goal is sustainable economic activities via the development of sustainable financial institutions. The question how much self sustainability is enough depends on your personal way of thinking.

Those who value the Anglo-Saxon model will emphasis the financial independence of the organization through revenues generated from the sale of credit to the clients as main goal.

Those who belief in the Rhineland model (stakeholder model) accentuate that self sustainability is determined by the support of all stakeholders. Speaking of a goal is always tricky. One has to be concise in what the exact goal is, and be explicit about it. When you value customer sustainability, you have to set low interest rates. However, when your emphasis lies on creating self sustainable institutions, the interest rates need to be high(er)…..

How did microfinance evolve in developing countries?

Microfinance has become more complex. It used to be very straight forward. Social self-organized aid organizations made it possible that small, micro loans were offered to limited number of poor people locally. With the growth in numbers of clients reached complexity increased exponentially as well; new administrative, management information systems and HRM models were needed. Then other services such as savings were added. This made the structure even more complex. Nowadays , also micro insurance and micro pensions are offered by some organizations.

Figure 1 shows how the microfinance institutions transformed in developing countries. Starting as informal loan and savings groups, they ended becoming specialized and even general banks.

The focus point of the organization also shifted with this transformation from attending ­primarily to the financially excluded to small entrepreneurs. This as well was caused by the change of organizational structure. There used to be many locally rooted socially active people

» Interview • 33

fsrforum • volume 14 • issue #4

Figure 1: Micro finance institutions and the evolution of their customers. Retrieved from: Molenaar (2011) “Microfinance, evolutions and challenges Are we still in tough with the real client?” P37.

Figure 2: Transition between occuptations in combination with microfinance. Retrieved from: Schoar (2010), “The Divide between Subsistence and Transformational Entrepreneurship”.

within the microfinance organization. Gradually they had to make place for professionals and managers. This weakenedthe interconnectedness between microfinance and society.

The role of microfinance institutions might eventually change in that of of a broker. They leave the specialized financial services to those who are professionally able to deal with the complexity of the products, for instance insurance companies, and on the other side of the spectrum they advise those who require micro financing in their search for financial aid.

What are the results of microfinance in developing countries?

In some countries the impact is very high. You often hear the story of Bangladesh, but there are more countries in which microfinance was really able to make a difference. In Bolivia and Kenya the increase in self awareness can be fully traced back to the attention for individuals via microfinance. The social value added in the form of self awareness is substantial. However, it remains a question whether the subsistence entrepreneurs reached with microloans will indeed become the new small entrepreneurs society needs as well for sustained growth . Little empirical, validated evidence exist for this claim(Schoar 2010) As becomes apparent from figure 4, there is a larger outflow than inflow to business owners in the period 2001 to 2007. This implies that microfinance is not per se the basis of the transition to business owner, but rather a facilitation of entrepreneurs in the broadest sense of the word.

But it is debatable if we must look at this transition as a measure for success. At the moment it is better to look at the increase in self awareness instead of the transition of poor to rich(er).

In your Opinion, Is microfinance in developing countries a success story?

You have to define the goals before you can state whether something is a success or a failure.

From the perspective of social goals, microfinance is a success story. When purely looking at financial and macroeconomic figures, one might come to a different conclusion. There is a

34 • Interview

There is probably a universal way of thinking about microfinance but there is no universal microfinance model.

s­ ubconscious mission drift towards economic financial activities which implies a loss of contact with the target group. This is mainly caused by the lack of clear goal setting. Personal goals and institutional goals have become disentangled. What is also important to understand is that every country is unique. One cannot claim microfinance works for all developing countries, but country specific conclusions are possible. There is probably a universal way of thinking about microfinance but there is no universal microfinance model.

How does Microfinance look like in Europe?

When looking into the evolution of microfinance in Europe one has to make distinction between e Western and Northern countries and former communist countries of Eastern and Central Europe. Actually, one has to separate between a Europe with and without social welfare benefit systems. After the fall of the Berlin wall, the financial sector crashed in the former communistic countries and neo-liberalism gained ground. The problem of poverty was big and the banking system did not work anymore. Microfinance grew rapidly there and operated with other objectives than those adhered to by the MFIs in the West.

Today the divide within Europe is less prominent. There arehowever trends towards uniformity in approaches within Europe in microfinance . There is a towards financing micro enterprises on the one hand quite similar to small enterprise financing ; on the other hand programmes focusing on social microfinance are emerging . And there MFIs investing in the development of informal savings-credit and insurance schemes.

What is the role of the European microfinance network?

The European Microfinance Network (EMN) tries to get microfinance on the political agenda.

“The mission of EMN is to promote microfinance as a tool to fight social and economic exclusion by developing self-employment and micro entrepreneurship. This will be achieved by supporting the development of microfinance organizations through the dissemination of good practices and by improving the regulatory framework at European Union and country level” (Molenaar, 2011 P49).

Within the financial sector as a whole, the EMN and its members are only small players. But when the EMN can establish a connection with the banking industry, they can become complementary. Within some countries (e.g. Germany), the savings banks fulfill the role of microfinance institution. But, as in other parts of the world, many banks have lost their social roots. The EMN focuses on putting microfinance on the agenda in order to regain focus. The complementary function of microfinance sector is also to demonstrate that the direct contact with the client has a tremendous value;. Personal contact needs to become a central focus point again.

In your Opinion; Is microfinance in Europe a success story?

When looking at what we have achieved over the past five years, then yes, it has been a success.

Microfinance was put on the European political agenda, technical and political decisions were put through and funds, time and people were made available. Despite the great achievement over the past years, it must be concluded that it remains a weak sector still. If the expectations are too big, a failure is very likely due to disappointing results.

Do we need microfinance in the Netherlands?

There are still many people in the Netherlands who are excluded from financing, so yes. Studies have revealed that there are about 2.5 million people in the Netherlands with the idea to start

» Interview • 35

fsrforum • volume 14 • issue #4

If the expectations are too big, a failure is very likely due to disappointing results.

a business. Around 1.2 million of them are serious about it. In the “Raad voor Microfinanciering 2008” we set the goal of having at least 10.0000 businesses started per year. In the Netherlands so far only the system of extending micro loans (in combination with coaching) for micro and small businesses has now been developed.. However, the needs within society are larger than that. Self employed have the need for new forms of insurances. Migrants have a strong need for new gfrms of transferring money and new types of pension schemes. The needs for financial services will only increase in the years to come. Our society has become more transnational and less restricted by boundaries ; financial services have to adapt to that as well.

How does microfinance in the Netherlands compare to microfinance in developing countries?

In the Netherlands, the result of the earliest example microfinance is the Rabo bank. Rabo bank is the result of a merger of “Coöperatieve centrale Raiffeisen bank” and “Coöperatieve central boerenleenbank” in 1972. In both settings, farmers formed a group. Within this group, members could get loans and they could stack their savings. Farmers, at that point in time, were excluded from society with regard to their financial needs, so they cooperated in a group and formed their own access to financing. Next to access to financing, they also needed insurance against fire (most importantly of haystacks). Achmea is the result of the merger of several insurance companies initiated by, amongst others, Draisma in Friesland. By means of grouping together, the farmers insured each-other for compensation in case of fire. The next important pillar of microfinance in the Netherlands resulted in Fortis bank. People needed to save their money somewhere. Also the poor had their savings. Relatively, the poor save more than the rich. In order to safeguard this money, savings banks were developed. Again, this started from the necessity of a group of people who were excluded from participating in their financial needs.

Currently, the microfinance funds are relatively high (about 80 million euro). When we speak about micro credit we are fully developed. In the Netherlands the average loan sum is about 18.000 euro. For comparison; in Europe this amount is about 7.700 euro. When we speak of insurances, pensions and other micro finance activities we are only at a starting stage and we have much to learn (also from developing countries).

In your opinion; what should be the goals of microfinance in the Netherlands?

We need more microfinance. Definitely when we look to the lower part of society. We still did not succeed in reaching out to those people. In the Netherlands we are too busy with everything around the notion of lifelong employment. This needs to change. We need to focus on hybrid solutions too. For example, when someone who receives social welfare benefits starts up his own company for 2 days per week, he looses his social welfare benefit. Instead, we should support these people to start up their business and work out a hybrid solution. When looking to insurances, we have to determine which new insurances are needed in the Netherlands and we have to facilitate such processes. When looking at pensions there is also a large area to be covered. I told about the goal of 10.000 new micro businesses to be set up with microloans.per.

In the Netherlands we do not yet reach this goal. Only 2500 businesses are now supported. It would help if we think more in people rather than in businesses , in enterprising people supported. In other words; we need to reach out to 40.000 individuals per annum via microfinance in the Netherlands.

36 • Interview

You’re a mix of the best qualities

International Trainee at Ahold Europe

fsrforum • volume 14 • issue #4

Europees “zwemwater”

K(r)anttekening | Drs. Joost Groeneveld RA RV1

NRC handelsbad, 24 mei 2012: “Calciumpillen zijn slecht voor het hart”. Als je de krant zo eens leest, zijn dat niet alleen die pillen. Enkele koppen: “Hollande kalmeert de markten niet”, “Ook in Nederland schade Facebook”, “Dibi: Onveilig gevoel in partij sinds Kunduz”, “Golfstaten zijn als de dood voor Iran”. Maar het echt schokkende nieuws staat bij een foto op de voorpagina, namelijk “dat in Nederland ruim tien procent van het zwemwater niet voldoet aan de eisen, of van matige kwaliteit is. … Uiterlijk eind 2014 moet al het Europese zwemwater aan de richtlijnen van de Europese Unie voldoen”. De beste jongetjes uit de klas worden ook genoemd: Cyprus, Kroatië, Malta en Griekenland. We zullen met onze vakanties dus toch die kant op moeten.

Drs. Joost G. Groeneveld RA RV is directeur van Wingman Business Valuators B.V. te Breda en voorzitter van de Stichting WBO (register van business valuators).

Hij was hoofddocent aan de Economische Faculteit van de Erasmus Universiteit te Rotterdam.

Je vraagt je af hoe het kan. Daarom heb ik dat rapport van de Europese Commissie eens opgezocht. En dan blijkt dat onderscheid is gemaakt tussen zwemwater in het binnenland en aan de kust. De beste jongetjes hebben per 1.000 Km2 (vrijwel) geen binnenlands zwemwater. Zij hebben dus wat dat betreft geen probleem. Nederland steekt daarin qua aantal met kop en schouders boven alle andere landen uit.

Maar per miljoen inwoners zit Nederland ongeveer op het Europese gemiddelde. De braverikken zitten daar ver boven: ze hebben kennelijk niet zo veel inwoners om te laten zwemmen. Zonder toerisme ziet dat er ginds dus heel goed uit.

Anders gezegd: ze hebben relatief veel overcapaciteit om die miljoenen toeristen te laten zwemmen. Maar dat wisten we eigenlijk wel.

Zwemwater staat in de

vereiste kwaliteit model voor heel Europa.

Bij ons is het onbehoorlijk mis. De vraag is natuurlijk wie er voor gaat zorgen dat Nederland binnen twee jaar aan de Europese eisen voldoet. De eenvoudigste methode is waarschijnlijk om het vervuilde water niet als zwemwater te ­kwalificeren. Alleen water dat aan de eisen voldoet, is zwemwater. En dan hoeven we alleen een paar paaltjes te slaan: “geen zwemwater”. We heten van oudsher een proper volkje

38 • Europees “zwemwater”

te zijn. Waar komt die verontreiniging vandaan? Ik beluister de laatste tijd dat we in Europa geen “eiland” zijn. Komt die viezigheid binnen gespoeld uit de ons omringende landen?

Als de vervuiler betaalt, zou dat wel plezierig zijn.

Het lijkt me niet zo vreemd dat het water in de dichtbevolkte geïndustrialiseerde landen meer vervuiling heeft dan dat in de paradijselijke vakantieoorden. Maar we hebben alleen die ene Europese norm. Zwemwater staat in de vereiste kwaliteit model voor heel Europa. Net doen alsof dat Europa een homogeen geheel is. Gelijkschakeling en nivellering. Culturele verschillen zijn natuurlijk wel interessant en boeiend: reden om - behalve voor de zon - verre reizen te maken. Taal; eten; drank; armoe. Met al die verschillen heb je een heerlijke vakantie. Maar weer thuis stellen we uniforme eisen aan elkaar. Gemeten naar dezelfde maatstaven. Dat lijkt heel ­eerlijk. Je moet gelijke partijen gelijk behandelen, anders ontstaat discriminatie. Maar de partijen zijn niet gelijk; ­integendeel. Meting met uniforme maatstaven – zoals de Euro - is de beste manier om de bestaande heterogeniteit tot uitdrukking te brengen. En dat lukt tegenwoordig dus erg goed. Verzet lijkt te groeien.

Vluchten in de drachme, de lire of de peseta kan niet meer.

De onderlinge ongelijkheden worden steeds duidelijker en de onhaalbaarheid van de gestelde eisen ook. We helpen elkaar op deze manier aardig in de puree. Van medestanders worden we elkaars tegenstanders. En dat gaat echt niet alleen om de Euro. Schoon zwemwater staat voor al die andere dingen die aanpassing behoeven.

Neem zoiets eenvoudigs als een de aanstaande Europese kampioenschappen voetbal. In feite een toernooi van de EU zelve. Toegegeven, Oekraïne en Rusland zijn buitenbeentjes, maar verder zijn alle deelnemers lid van de EU-club. We zijn daar dus eigenlijk vrienden onder elkaar. Of niet? Een paar voorvallen brengen me aan het twijfelen.

• De Italiaanse politie – die onderzoek doet naar omkoping in het voetbal – doet in de week die aan het EK voorafgaat invallen (onder andere in het trainingscentrum van de ­Italiaanse voetbalploeg in Coverciano) en arresteert 19 verdachten terwijl enkele anderen onder huisarrest worden geplaatst. Dat lijkt daar traditie te worden.

• Al een paar weken eerder besloten Europese politici dat ze toch maar liever niet naar Oekraïne moeten afreizen omdat een voormalig eerste minister daar slecht wordt behandeld.

Alleen is het nu nog de vraag of zelfs onze minister van sport maar moet thuisblijven. Nuance zit in een klein hoekje.

• Nadat in ons land commotie ontstond over de nationale dodenherdenking die op 4 mei (te) ruime(re) vormen leek aan te nemen met een gedicht over een vernoemde SS-oudoom in het programma, laat de BBC een filmpje zien over “stadions van haat” in Polen en Oekraïne. In dat filmpje gaat het niet over het wel of niet herdenken van de vijanden van vroeger, maar over “Hitlergroeten, hakenkruizen, apengeluiden richting zwarte spelers en in elkaar geslagen supporters van Aziatische afkomst”.

Vluchten in de drachme, de lire of de peseta kan niet meer.

Hoe is het mogelijk? Sport heet te verbroederen. Het zijn voorbeelden van onaanvaardbare toestanden. En dat is ons Europese “zwemwater”. Het lijkt me zo hier en daar onbehoorlijk vervuild. Wie gaat daar schoonmaak houden? Is daarvoor een uiterste datum vastgesteld? Ik zou er maar liever niet op speculeren dat we wel naar elkaar toegroeien of dat bij toenemende welvaart alles vast wel veel beter gaat. Voorlopig zie ik trouwens vooral keiharde bezuiniging. En daarmee zijn we weer terug bij de Euro. Heeft die echt prioriteit? Om welk Europa gaat het ons eigenlijk?

1 Directeur Wingman Business Valuators B.V., Breda

Europees “zwemwater” • 39

fsrforum • volume 14 • issue #4

Inclusive finance and access to health care for all Prof. dr. Leo de Haan - Rector ISS*

On the initiative of H.R.H Princess Máxima of The Netherlands, in her capacities as the United Nations Secretary General’s Special Advocate for Inclusive Finance for Development (UNSGSA) and Chair of the Curatorium of the Prince Claus Chair, and Professor Stella Quimbo, the current Prince Claus Chairholder at the International Institute of Social Studies (ISS) of Erasmus University Rotterdam an Access to Health Insurance Conference was held on the Woudenstein campus on June 5. The conference was organized by ISS, the Institute of Health Policy and Management, the Rotterdam Global Health Initiative, the Curatorium of the Prince Claus Chair, PharmAccess International, the Dutch Ministry of Foreign Affairs and the Office of the UNSGSA.

The conference originated from the joint interest of H.R.H. Princess Máxima and Professor Quimbo in inclusive finance and health insurance and was designed to bring together experts from these two fields for the first time ever. Their idea was that closer collaboration between these two fields would result in cross-fertilization and synergies and bring us closer to finding workable solutions to a seemingly intractable problem. The conference succeeded in bringing together some 100 experts in financial systems, health care and development in an attempt to move forward the agenda on developing equitable health insurance mechanisms that are available and accessible to all populations around the world.

The problem statement for the conference made clear that “health care insurance – whether public or private –is not common in developing countries. It accounts for a fraction of health expenditure— only 4% in Sub-Saharan countries.

Without health insurance, people endure high out-of-pocket expenditures. Especially among lower income households, these expenses result in adverse effects on food consumption and other basic needs. Or, people simply forgo care altogether, which can lead to longer-term health issues, even bigger expenses and, potentially, reduced earning capacity and incomes. On the supply side, health systems are too often fragmented. They may lack quality standards and a financial basis that facilitates the development of services that can meet the needs of the population”.

Recently, the ISS expertise in research and teaching on access to health care and health insurance was reinforced with the appointment of Professor Stella Quimbo from the Philippines, as the new ISS Prince Claus Chairholder in Development & Equity. Her inaugural address dealt with the effects of various policy measures in the Philippines on the health of children. She demonstrated convincingly how a number of policy measures in health care had a positive effect on children’s health. Her findings also formed an important input for the Access to Health Insurance conference.

Professor Quimbo’s work is a fine example of what makes ISS strong. The driving force is the combination of excellence in academic research and teaching, with the will to make a ­difference in practice. Put simply, a key element of the ISS mission is to contribute to solving major social challenges such as the eradication of poverty and the provision of ­universal health care coverage.

40 • Inclusive finance and access to health care for alll

In her opening speech HRH Princess Máxima identified four objectives: the identification of knowledge gaps; the identification of areas for new pilots; agreement on successes and failures; and finally a call for more attention for the importance of Access to Health Insurance.

With respect to the knowledge gaps it became clear to me that context specificity is key. What works in Thailand is not likely to work in Nigeria. What works in Ruanda is not likely to work in the Philippines. We do not yet know how to combine local and donor money in such a way that the sum of the parts is greater than the whole. We also do not know how to ensure donor coordination. Examples of confusing and conflicting advice from donors abound. In the course of the day, it became abundantly clear that integrated and comprehensive knowledge on what works best and why it works, is not yet available.

With respect to areas for pilots, the message I took home is that pilots must spring from bottomup initiatives and ideas. Instead of relying on ‘experts’ to suggest areas for pilots top-down, we should identify ‘local’ ideas that might work and then use the expertise we have to help design pilots, evaluate data and then disseminate the results.

With respect to successes and failures, I sensed a growing awareness that the definition of success and failure must be based on evidence and rigorous evaluation of data and not on hopes and good intentions. We need both rigorous quantitative analysis and solid qualitative assessment.

Although everyone agreed that access to health insurance is a good thing, we disagree, often fiercely, about how to move forward to universal coverage. I think that if we act wisely, we can use this very disagreement as a catalyst for progress. Disagreement, when handled intelligently, can lead to diversity of approach, and this diversity is sorely needed.

A call for more attention for the importance of Access to Health Insurance is basically a call for action. It means that policy makers, practitioners and scientists need to continue this dialogue and translate the words into action. One delegate said that access to health insurance is 97% politics and only 3% technique. We might quibble about the exact percentages but the message is that we need each other to move the agenda forward. It is also clear that we need to do this with a combination of approaches. Bottom-up approaches like Community Based Health Insurance are an important step on the road towards universal social health insurance, but only one step on the road. Large scale nation-wide programmes are desperately needed.

What struck me throughout the day, is that the conference – not by coincidence – was a tribute to the thoughts on development & equity of the late Prince Claus, a legacy that also underpins the Prince Claus Chair. He stressed time and again that development as “progress” and “improved standards of living” often go together with growing disparities and inequalities. By adding the concept of equity to the concept of development, Prince Claus spurred us to focus on fairness in terms of distribution of returns among social groups and across generations.

Fairness is, without doubt, the fundament on which the pursuit of financial inclusiveness and the drive to provide access to universal health insurance for all, are based.

* ISS is the International Institute of Social Studies of Erasmus University Rotterdam.

Inclusive finance and access to health care for alll • 41

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fsrforum • volume 14 • issue #4

Word of the chairman

Wessel Ploegmakers

Dear members, The end of the academic year is near and many of us are busy with the final exams of their study year. We have been busy as well the last period organising some of the last but certainly not the least FSR events in cooperation with our partners. The participants of our prestigious International Research Project had a great two weeks in Bangkok and Ho Chi Minh City and all returned safely home. The Investment Banking Masterclass proved to be a great success organised for the third time in a row this year and the battle during the Corporate Finance Competition was fierce.

The participants of this year initiated Cleantech Challenge did above everyone’s expectations at the global finals in London. The Dutch team won the global finals including a lot of prize money. We as organisation can look back at another successful event in the FSR portfolio. For the next year this events will advance even further and hopefully we are able to deliver another winning team for the finals.

FSR News

Column Marco van Vliet

For the orientating bachelor students we held the Finance Day and the Bachelor Accountancy Day in cooperation with some other study associations at the university. Not to forget a lady like Female Business Tour, the nationwide Multinational Battle and an Italian European Finance Tour to Milan which took place the last couple of months.

As you can see a lot of events have taken place this year and new membership enrolments keep coming in. We foresee that this trend will continue in the future, not only because of the growth in numbers of starting students but also because of our coverage at several faculties.

Our position at the Erasmus School of Economics is strong as always since most of the finance and accountancy students are members of our association.

Column Ard Boonstoppel

For many years, we see more and more students with a Business Administration background becoming members of the FSR. As an International Business Administration student myself I am glad to see this development increasing its pace. Our association has many events to offer for the finance and accountancy interested RSM student.

There is more important news I would like to share with you. Next year the FSR will organise a brand new Erasmus Banking Congress. This congress will take place before the start of our well-known International Banking Cycle at the beginning of the academic year. The subject of the congress will be about political influence and the future of banking. I am looking forward to some interesting speakers and though debates!

European Finance Tour

As mentioned above the academic year is coming to an end and so is our board year. We have been looking for talented and enthusiastic successors and are very pleased with the six ambitious students we found to form the XVth FSR board. They cannot wait to start and I am sure they will give everything to make the fifteenth year a great succes. I wish you all success with your last exams and hope you have a great summer period.

Female Business Tour

48 49 50 56 FSR news • 43

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fsrforum • volume 14 • issue #4

News Update Clinton backs Bangladesh microfinance pioneer Muhammad Yunus Banglades h's ' ap tr for Grame Yunus fears Microcredit 'death en Bank fu (APF May30 ture for Bangladesh's poor ld Service 3Nov 2010)

(Business Daily, BBC Wor

US Secretary of State Hillary Clinton gave her support Sunday to the microfinance pioneer Muhammad Yunus on a visit to Bangladesh, calling the embattled Nobel laureate a global inspiration. Clinton invited Yunus, the founder of the Grameen Bank, which provides small loans to the poor, to morning tea before waiting cameras at the US ambassador's residence, a day after she met Bangladesh's bickering political leaders.

The other invitee for the meeting was Fazle Hasan Abed, the head of the Bangladesh Rehabilitation Assistance Committee (BRAC), a major development group. Founded in 1972, BRAC has become one of the most important providers of Microfinance in developing countries. Rural development and woman empowerment are listed high on the agenda of BRAC. Both Yunus and Abed are able to unite Microfinance investments and poverty reduction together with a high level of self-sustainability. For that reason, Clinton called them "two of my favourite men in the world" during the meeting.

Despite winning the 2006 Nobel Peace Prize and becoming friends with former US president Bill Clinton, Yunus was removed from the helm of his bank last year in a move widely seen as engineered by an envious government. Hillary Clinton, speaking to students after her meeting with Yunus, said Grameen Bank and BRAC were "viewed internationally as the two best development organisations in the world." "I can only hope that nothing is done that in any way undermines the success of what Grameen Bank has accomplished on behalf of many millions of poor women," Clinton said to cheers at the International School Dhaka.

Clinton, a staunch advocate of women's empowerment, said that Grameen Bank had uplifted Bangladeshis through the generations, saying she met a woman who was able to attend university after her mother earned a livelihood through a microloan. "That's the story of America. I want it to be the story of Bangladesh," Clinton said, calling on Bangladesh to preserve Grameen's independence and "unique organisational structure" in which loan recipients themselves are considered owners.

Bangladesh's central bank fired Yunus, 71, in March last year after saying that he had exceeded the mandatory retirement age of 60. Supporters say the step was retaliation after Yunus

th 2012)

previously hinted at joining politics to break the logjam in a country bitterly divided for decades between two political parties. With a direct clientele of roughly eight million Microfinance users, Yunus could have gathered a large stake in Bangladeshi politics in 2007. Although it was claimed Yunus had voluntarily retreated from the elections, insiders say Yunus was “urgently requested to let go of his political ambitions”. In December last year, Prime Minister Sheikh Hasina accused Yunus of treating Grameen Bank as his “personal property” and claimed that it was “sucking blood from the poor”. The last statement comes from the disability of Grameen bank to cut interest rates in loans. The average thirtyfive percent interest is considered disproportionate by many critics. The Bangladeshi government owns twenty-five percent of Grameen bank. A fact which Hasina was willingly sharing with Clinton in a meeting. Clinton urged to put aside the differences between Sheikh and Yunus’ for the good of the impoverished country. "In a strong democracy, everybody has to be rowing in the same direction because you're all in the same boat," she said Saturday at Hasina's office.

"We want to see Bangladesh succeed.”

Microfinance Works Forws tNohvembe erR8thic20h11) (IPS ne

Clinton is the first secretary of state to visit Bangladesh since 2003. She earlier put off her trip due to concern over Yunus, even though the world's third-largest Muslim-majority country is friendly with the United States. Clinton, speaking to students on Sunday, renewed a call for Bangladesh to investigate recent disappearances of activists and abuses against labour. "You don't want to get a reputation as a place where labour activists are murdered or taken advantage of, because in today's world that will cause big manufacturers of clothing to be afraid to stay or come to Bangladesh," she said.

Part of this text was written by Shaun Tandon and published in AFP-news on may 6th 2012.

Microloan patients r s for mental-health olling out a The Globe a cross Ontario nd Mail (Business da ily, Jun 1st 2012) FSR news • 47

fsrforum • volume 14 • issue #4

FSR Former board member

Marco van Vliet

Passport

It has already been more than three years since I finished my active period at the Financial Study association Rotterdam.

Currently I still face the benefits of this remarkable year, both in my personal as in my professional life!

Name Marco van Vliet

Well before I became a board member, I got in touch with the FSR through their activities. What attracted me to the FSR was the inspiring group of people, passionate about finance and the corporate world. The drive to become successful in business is something people within the FSR share. This was exactly the environment that interested me; therefore I decided to apply for a position in the FSR board. In that year I wanted to develop myself further and have a great time with all the awesome people within the FSR. In the FSR board, my function was External Relations. In this position I was responsible for all commercial contacts of the FSR: maintaining and expanding relationships with all the business partners. Within this function I had the opportunity to turbocharge my commercial and negotiation skills.

Besides, I also got in contact with many companies that were potential employers for a finance student. During my year as a board member, I was responsible for some major FSRevents as well. By organizing great events such as the National Corporate Finance Competition I developed more leadership skills and learned really well how to motivate my colleagues.

Beside the career-focus of the association, the social network of the FSR largely contributed to my great experiences during the time as a board member. The life as a FSR board member stays not confined to participation in formal activities. We had tons of great parties, dinners and drinks as well.

Some of my highlights were the active members weekends in Brussels and Milan.

While working closely together with my fellow board members for more than a year, we build a strong friendship. This friendship lasts until today; we organize drinks and dinners with each other on a regular base. Currently, one of my fellow board members is also one of my roommates!

After having finished my FSR board year I resumed my studies in Econometrics and Dutch law. In the meanwhile, I continued looking for potential employers. The diverse and challenging

48 • FSR news

Age 25 Residence Amsterdam Employed at McKinsey&Company

work of strategy consultants seemed very interesting, therefore I applied for an internship at McKinsey&Company.

During my internship I had a fantastic time at that firm, while serving a large client in Johannesburg, South Africa.

This was a great experience, particularly because I was in Johannesburg during the 2010 Worldcup. After this internship I was 100% positive: McKinsey would be my ideal first employer. What attracted me in this employer is the open and internationally oriented culture, combined with both challenging client engagements and working together with very bright and inspiring colleagues. Luckily, my dream came true because in January 2012 I started working at McKinsey and I am having a fantastic time. Now I also realize that the skills which I learned during my FSR board year are very useful throughout my consultancy projects.

I have to say that I am still amazed by the professionalism of the FSR and the way all the activities are organized. I am proud to have been a part of this association.

Current position Consultant Which FSR Board 11th FSR Board Board function External Relations Study Econometrics (Quantitative Finance) and Dutch law Year of graduation 2011 Which car do you drive Lexus CT200h What do you drink on a Friday night Heineken (preferably in De Pijp, Amsterdam) Life Motto Life isn't about fitting in, it’s about standing out!

fsrforum • volume 14 • issue #4

FSR Member

Ard Boonstoppel

Passport Name Ard Boonstoppel Age 25 Residence Rotterdam Study MSc Auditing, Accounting en Control FSR event International Research Project Internship at/job at KPMG Stationed at which department Audit Year of graduation 2011 What car do you drive Peugeot 307 What do you drink on a Friday night Beer Life motto ‘If everything seems under control, you're just not going fast enough’

I joined the FSR in my master year as member of the Accountancy Committee. During my pre-master I went to some social drinks of the FSR and heard some good stories about FSR events and coming into contact with the Big Four and other audit firms. As master student the end of studying was nearby and the moment of applying for a job came close.

I realized that it should take some time to find out which audit firm I wanted to work at. Becoming an active member of the Accountancy Committee was a way to understand the business of audit firms and make a choice between the different audit firms.

With the Accountancy Committee we organized inhousedays at the Big Four companies. Through the inhouse-days the first contacts were made with recruiters and people already working at audit firms. Almost at the same time I also participated within the International Research Project 2011, one of the best projects of the FSR. This project was well ­prepared and organized by the FSR. This project gave 20 students the opportunity to conduct academic research in Kuala Lumpur and Singapore. Before we went we visited the companies that supported the project, which included the Big Four companies, BDO, Varova investments and Chartis.

The companies organized sessions to prepare us for our journey to Asia. One of the first sessions we met an audit partner that stayed in Singapore for some years. This partner talked about interesting facts of Singapore and what he liked about living there. With another session at KPMG we received etiquette training to upgrade our skills on Asian business etiquettes and dining etiquettes, which was a great experience. After the session there was an Asian buffet to bring our training into practice. During this buffet I had an interesting conservation with the recruiter and people of KPMG, which gave me a good impression and feeling about working at KPMG. So, I made use of the opportunity and asked for an internship to write my master thesis at KPMG. I was confident because I already met the people of KPMG and knew what I liked about the company that was different than other audit firms. In just a short period of time I applied for an internship and signed a contract.

The internship was for five months and at the same time a group of other master students started. KPMG offered us the facilities to write our master thesis and the chance to meet

all different people within the company. Besides working on our master thesis there were good opportunities to know more about the culture of the company and all interesting aspects of the work that is carried out. Five months of writing master thesis passed very quickly and in those months I had become encouraged to finish my master thesis and start working.

Finally in September last year I started working at KPMG. The first months were great! To some extent I knew what to expect, because I already had some working experience.

However, in the first weeks you get many presentations and trainings and you receive an overload of information. You go directly to the client and you meet people at clients and your new team members. Every day is quite different, because you get different tasks and assignments to perform. It is remarkably that every team member is keen on giving training on job and explaining how to get the work done. On every assignment you work in teams with intelligent colleagues that have different levels of experience. Even if you’re starting as trainee you get involved and are stimulated to take on a proactive attitude.

I noticed that it is important that you’re self-driven and motivated to develop your skills and knowledge, because after one year of working you already need to explain things that you have learned to new trainees that are starting. When you’re good team player and with the right attitude you can accomplish much. Participating in the FSR events helps you to already explore what it is like to work at different organizations. I advise everyone to join some FSR events and explore you future career path and find out what you’re ambitions are.

FSR news • 49

fsrforum • volume 14 • issue #4

European Finance Tour 2012: Milan

After a long preparation for the European Finance Tour, we finally went to Milan with a spectacular week in view. Very early in the morning, we travelled by taxi to the airport for departure. About nine o’clock we arrived in Milan and took the airport shuttle to the city center. After a short check-in and a lunch we bought the tickets for the public transport and went to our first company: Unilever! After a warm welcome we had several presentations from different finance departments interspersed by a few coffeebreaks. After this visit we decided to have a taste of a real Italian kitchen, so we went to a small pizza restaurant close to Duomo. Being satisfied we went for a quick break in the hotel followed by our first night in the ‘fashion capital of the world’. Conclusion: an exciting first day!

Tuesday we had to wake up at 7 for an all day visit at PepsiCo. Across the street from the hotel, there was a typical Italian bakery where we had breakfast among the many people who went for a quick coffee before work. When we arrived at PepsiCo we were welcomed by the CFO, Dario Zangrandi and a few other financial employees. The first presentation was quite general about the financial aspects of PepsiCo’s business. It was a very interactive day and around 1 o’clock Dario invited us for a ‘quick’ lunch. We expected a half-an-hour lunch, but in Italy they are used to a little bit more time.

After lunch we went back to the office and meanwhile we could ask about all the aspects of PepsiCo. Back at the office we started on a case study. This was really interesting while we worked on different activities and projects Dario dealt

50 • FSR news

with in the past. For instance, he told us about the considerations of the product-mix to increase the profits of PepsiCo Italy. In the evening we went out for diner and afterwards we visited the club ‘Circle’. Many Bocconi students go there, so we had the opportunity to experience the nightlife of the Italian student.

On Wednesday Heineken was on the planning. We were picked up by a bus from Heineken and traveled to the brewery in Bergamo. After having arrived at the brewery, we were welcomed by two Dutch expats –among which Heineken’s CFO Italy - and we had a tour through the whole brewery. It was very impressive to see the complete supply chain and at the end their unique product: a bottle of beer! We then had to

solve a case study about an investment decision whether Heineken should import or produce ‘Sol’ in that particular country. These decisions are very usual pursuits for the financial team. On the way back we ended up in a traffic jam, so we could only watch the second half of the Champions League quarter finals between AC Milan and Barcelona.

Afterwards we had some drinks in local pubs and went home.

Thursday after breakfast, a visit to the Consulaat-Generaal was planned. At their office, the Consul-General Kramer gave us a short view on his daily activities and focused particularly on the current economic situation in Italy and the good work of Prime Minister Monti. In the afternoon we had a typical Italian lunch at a pizzeria and then went to Leonardo & Co. for end presentations of the case study we had prepared in The Netherlands. For the assessment of the cases, Johan Dubbeldeman had come from The Netherlands and acompanied us at the Leonardo drink afterwards as well. After the aperitivo we went for a quick stop at the hotel to refresh and then went out.

Friday morning we went to KPMG. At the office we had an interesting presentation about the Italian business and the current condition of the Italian economy. Thereafter we had a presentation from people who worked at Transaction Services and at the Corporate Finance department. The last company visit of the week was planned at CONSOB, the Italian equivalent

of the Dutch AFM. At the CONSOB they told us about the legislation and control of the banks and insurance companies.

Afterwards there was some time left for sightseeing and visiting ‘Il Duomo’, the famous cathedral in the center. The ladies could indulge themselves with shopping and about 8 o’clock we went out for dinner. As last evening we decided to go out at Club Old Fashion. This is one of the most prominent clubs in Milan and despite of the tiredness everybody had a spectacular last evening!

Saturday morning we had to wake up at 6am. Tired but satisfied we went back to Rotterdam. With the help of the committee but also the participants we had a fantastic experience!

Thank you all!

FSR news • 51

fsrforum • volume 14 • issue #4

The Cleantech Challenge

This event was new to the FSR portfolio and we are very pleased with the results and the opportunity we can now offer to the Erasmus students. The Cleantech Challenge originated in London in 2009 as a student competition designed to nurture innovative ideas. For the first year this competition had a Dutch counterpart and after completion of the challenge here in the Netherlands the winning team got an opportunity to fly to London to compete at the global finals to win an amount of £10.000!

The Cleantech Challenge provides entrepreneurial students with all backgrounds first and foremost with an incredible opportunity to test the strength and viability of their start-up concept on both a local and international platform. You do not need a brilliant idea to make it happen, the challenge is there to provide the opportunity to look at an idea critically and see what it takes to make it to the next level. In order to create a powerful team the competition encourages students with technical and business backgrounds to integrate their experience and expertise. The Dutch challenge consisted of three rounds, the first round with a kick-off of inspiring speakers and a motivating speech of last year worldwide winner Black Silicon Solar. After a selection process in the first round, 22 teams started the second round of the challenge.

First these teams got a technical consult of Alstom, the world’s leading energy solutions and transport company. For the business and finance students interesting due to the insight about how these large companies like to buy up successful developing new ventures and make them part of their businesses. The second consult was organized together with the merchant bank Kempen & Co and focused on the finan-

52 • FSR news

cial side of the business plans. How to attract funding, where should you look for funding and how do you negotiate yourself a favorable deal. Kempen & Co is becoming one of the top players in the clean technology market. After these two consults the business plans had to be taken a step further and a jury of four partners made a selection of eight teams that could go through to the third round.

In this round consultant Mckinsey & Company assisted the teams with their presentation skills and tested the plans by firing some critical questions at the teams to see if they would hold their ground. During the All Energy Day organized by organizing partner the Delft Energy Club the teams all had to pitch their idea in front of a Mckinsey & Company jury. The consultants carefully addressed the weaknesses of every plan and they provided some valuable feedback. The teams started working on their plans for the Dutch final held at the YES!Delft incubator building on the 30th of March.

The Dutch final was a big happing with a though jury to convince. The jury consisted of Hero Prins from Climate-KIC, Peter Westerhuis from Valorisation Centre TU Delft, Jeroen Kroes from Kempen & Co, Theun Baller from Delft Energy Initiative and Elderd Land from GIMV. All the teams worked hard for this moment and gave their best during the presentations for the jury. Finally only one can be the best and Sunuru proved to be the true winner and went home with e3000,- and a ticket to the global final in London. Sunuru has designed a netting construction to attach solar panels. Via this netting construction they can track the sun efficiently and reduce production cost enormously. Empower People and aQuista came in close behind

at the second and third place and also received venture capital for their business plan.

Sunuru and the committee went to the London Business School for the global finals of the Cleantech Challenge. We had to prove ourselves as we were a new country to take part in the challenge and as you all know a first impression counts. Ten diverse teams from England, China, Denmark, America, Belgium, Italia, Denmark and the Netherlands would battle for the ÂŁ10.000 prize money and the honor of winner of the global Cleantech Challenge 2012. The finals consisted of a boot camp set-up of two days. In this boot camp the teams got a difficult situation to deal within their potential startup and had to figure out how to convince the jury of their strength. The competition was tough but we were very proud to see that Sunuru performed as the best team of this international group. The jury was amazed by the idea, business plan and strength of the concept of Sunuru.

They deserved the victory and were very happy with their achieved result.

Although the Cleantech Challenge is new to the FSR portfolio we can all agree that it is a great success already. We would like to thank our organizing partner YES!Delft Students and the Delft Energy Club. Furthermore we would like to thank the partners that took part in the three round of the Dutch challenge, without them it would not be possible to setup this event. We look forward to next year and have to work hard to deliver a winner in the global finals!

FSR news • 53

fsrforum • volume 14 • issue #4

Investment Banking Masterclass

On May 7, the FSR organized for the third consecutive time the Investment Banking Masterclass. From London, Training The Street came over to teach the participants an in-depth valuation course. Training The Street is the world’s leader in providing instructor-led courses in financial modeling and corporate valuation. These courses are offered at investment banks, business schools and universities around the world at for example Harvard Business School, New York University, INSEAD and several investment banks at Wall Street and in London. The FSR is the first study association in the Netherlands that organizes masterclasses like these in the Netherlands. Training The Street’s corporate valuation training explores the common valuation techniques used by Wall Street firms. Developed by their employees who are instructors who possess the direct training and experience “on the job”, the curriculum provides practical application of the applied standards and methods that a new hire within an Investment Bank needs to know to perform effectively. Course also explores the common valuation techniques used by Wall Street firms. The primary focus of the program is to teach participants the practical applications of the theoretical methodologies.Mr. D. Zane Hurst was the instructor for this day. He is a former investment banker who worked at several

54 • FSR news

large investment banks in London. Because of his experience, he was able to clarify all the theory with examples from the real world. The several topics he covered were: - Public Comparables Analysis - Acquisition Comparables Analysis - Discounted Cash Flow Analysis - Merger Consequences Analysis - Leveraged Buyout Analysis - Imputing Valuation Ranges To make sure everybody could start with the same knowledge, we started with an overview of the main concepts used in valuation, like differences between equity and enterprise ­ value, the several financial performance measures as EBIT(DA), EPS and Free cash flow. After this introduction we started

with the first valuation methodology, Public Comparables Analysis. With all the methodologies we followed the same path. First there was an extensive theoretical introduction to the specific methodology. All the formulas and for instance where to find the needed data, how to select relevant peers and which posts on the balance sheets are relevant for each method. When this all was clear to everybody, the theory was followed by a (numerical) example given from a real world example. Finally all the taught methodologies were used to value a company which was actually acquired a while ago, so participants could really compare their valuations to those done by actual Investment Bankers. Eventually there were also given some other considerations regarding mergers and acquisitions. For instance political and regulatory powers which might influence the way the deal is closed. For example whether stocks can be included in the deal or not. In an example given by Zane Hurst, it was clear that this is not always the case as institutional investors may be limited in their investment policies.

Overall, these valuation techniques will be a valuable asset when applying for internships or for participating in one of the upcoming events organized by the FSR. During events like the International Banking Cycle (September-October),

Financial Business Cycle (January) and the Corporate Finance Competition (May) this knowledge will be very useful and will definitely help you in getting a job. So for those of you, who missed out on the Investment Banking Masterclass this year, should really use this excellent opportunity and apply for the Investment Banking Masterclass next year to boost your career.

TRAINING THE STREET

SM

FSR news • 55

fsrforum • volume 14 • issue #4

Female Business Tour 2012

a real life case. The case consisted of advising a charity organization in teams, with help from BCG employers, after which the results had to be presented. The BCG employers were very helpful in solving the case and challenged the students.

Besides that, a number of female employers told us about their experiences at BCG. The visit gave the students a good understanding on what it is like to work as a consultant and more specifically, to work at BCG.

On Wednesday the 4th and Thursday the 5th of April, the Female Business Tour 2012 took place. This year’s partners of the event are the Boston Consulting Group, Deloitte M&A and ING. Nowadays an increasing number of companies focus on female leadership and women at the top. Therefore, last year the FSR initiated this event, exclusively for women.

The event focuses on a broad range of financial companies that have a special interest in attracting the top female students. Twenty female students from Rotterdam travelled together to Amsterdam for an exclusive and interesting tour.

On the first day, we visited the office of the Boston Consulting Group. During the visit, we had the chance to meet the employers of BCG, learn about your opportunities at BCG and experience what it is like to work as a consultant by solving

56 • FSR news

After the company visit in the afternoon, we traveled to Brasserie van Baerle for informal drinks and a delicious dinner together with employers of the participating companies.

During the dinner, which consisted of three courses, groups of students rotated between the three participating companies.

In this way, each student had the opportunity to talk to the employers of the companies in an informal setting. At the end of the dinner we had the possibility to ask our last questions during the drinks. Together with the students we traveled back to our hotel where we could rest and prepare for the second day.

Thursday morning, we visited ING’s office. After a coffee we were talked through the opportunities at ING and had the chance to ask our questions to a woman at the top of ING, one of the Managing Directors Equity Capital Markets, which was very interesting. ING as well showed us what kind of cases they have to deal with. We solved a case that focused on

Risk Management. We had to work under high time pressure and work together in teams to maximize the profit of ING but at the same time meet the restrictions of the Basel III standard. A very topical and interesting subject that learned the students how difficult it is for banks to manage conflicts of interests with such regulations. The team with the highest profit received an ING goodie.

Finally, the tour went on to the office of Deloitte in the Crystal Tower. At Deloitte a female partner told us about her life and choices regarding her work-life balance and growing to the top as one of the few women in a men’s world. Furthermore, a couple of female employers introduced themselves after which we started with a case. The case focused both on M&A and Transaction Services and clearly showed us what the process of a merger or acquisition incorporates. The enthusiastic women helped us solving the cases and explained what it is like to work at Deloitte. After the presentations of the findings of the case, the winning team received a prize and we ended this visit with an informal drink. More Deloitte employers were present so we had the opportunity to meet even more people and get to know the company even better.

After this final visit, we went back to the hotel to pick up our bags and travel back to Rotterdam, tired of all the new information but satisfied. We want to thank all of the partners and participants for making this event such a huge success!

FSR news • 57

Mazars is ontstaan uit een fusie tussen Mazars en Paardekooper&Hoffman

ℜ ς ϓ ℘ ΞΒ⇓ ∗ ∨

⎥ ⎦ W.w e ∼ kΨn bij m Ε z a rs .⇔ ← .

Ga verder met Mazars.

WANTED: COMMITTEE MEMBERS

Interested? Mail to hr@fsr.nu The FSR is looking for enthusiastic committee members for the academic year 2012-2013. As a committee member you have the opportunity to distinguish yourself from other students and to get connected to the corporate world.

Are you a Bachelor 3 or a Master’s student the coming year and do you have affinity with finance, accountancy or controlling? Grab this chance to become an active member at the FSR in one of the following committees: Accountancy Committee CleanTech Challenge Committee Corporate Finance Competition Committee European Finance Tour Committee FAN Committee More information on FSR.NL

Female Business Tour Committee Finance Committee FSR Forum Editorial Committee International Banking Cycle Committee International Research Project Committee

fsrforum • volume 14 • issue #4

FSR Activity Agenda 2012-2013

September/October/November BIG 4 Cycle Get to know the 4 leading accounting firms

Erasmus Banking Congress The official kickoff of the International Banking Cycle

International Banking Cycle The investment in your career

November Accountant Firms Day Get familiar with the world of accounting at a top class location in Rotterdam!

Investment Banking Masterclass Learn to valuate, like an investment banker

December Traders Trophy

Cartoon: Deef Smits www.coolgraphix.nl

Can you handle the pressure?

January/February Financial Business Cycle

April Female Business Tour

Explore the financial opportunities

It might be a men’s world but it would be nothing without women

January-April CleanTech Challenge

April/May International Research Project

Grow your green ideas!

Doing research from an international perspective

February Banking Dinner

National Investment Competition

Get acquainted with the world of banking

May European Finance Tour

March Corporate Finance Competition Five star event: hotel, companies and participants!

Multinational Battle Five multinationals, five battling cities, are you part of it?

60 • FSR news

Invest and be a winner!

Exploring European financial world

www.werkenbijpwc.nl

Soms weet je precies wat je wilt

Soms sta je open voor suggesties Je hebt tijdens je studie alle mogelijke kennis opgedaan.

En nu wil je aan de slag. Op een plek waar je al je ambities kwijt kunt. Waar de lat hoog ligt en waar je samenwerkt met professionals. Je start je carrière vliegend en gaat recht op je doel af. Dat is: het beste in jezelf naar boven halen.

Kom verder op werkenbijpwc.nl

Neem voor meer informatie contact op met een recruiter: 088 792 87 77 werkenbijpwc@nl.pwc.com www.werkenbijpwc.nl/contact Volg werkenbijpwc op Facebook en Twitter

Š 2012 PricewaterhouseCoopers B.V. (KvK 3412089) Alle rechten voorbehouden.

Blijkt de universiteit ineens een vooropleiding.

Diederik van de Scheur Consultant TAS

Piet-Hein Touw Staff FSO

Een succesvolle carrièrestart is meer dan een goede cijferlijst. Het begint met karakter en inzicht in jezelf. Ontdekken wie je bent, weten waar je naartoe wilt groeien Ên hoe je dat voor elkaar krijgt staat altijd aan de basis. Ernst & Young coacht jou actief op weg naar jouw succes. We bieden je volop kansen in de wereld van assurance, tax, transaction en advisory. Ontdek ze op ey.nl/carriere