From Rwanda to the Dominican Republic: This is the big impact of microfinance

By Knowledge@Wharton

Microfinance is a powerful tool that can transform communities by lifting the poorest individuals out of poverty. David Simms, who has served in various leadership positions with the nonprofit Opportunity International for the past 30 years, understands the potential of microfinance. He’s seen its impact in more than two dozen countries, where his organization has leveraged the financial instruments to improve daily life. Simms is the former president and global chief development officer of Opportunity U.S. who recently founded Olive Tree Advisors, a consulting firm to nonprofits. He sat down with Tyler Wry, a management professor at Wharton, to share his insights on where the field is heading.

Tyler Wry: What is microfinance and how does it work to address global poverty?

David Simms: At its core, microfinance is about bringing financial tools to people that wouldn’t otherwise have access to them, so that’s small savings, small loans, small insurance and training. We like to think about it as a ladder that’s helping people move up out of poverty. Frequently, it’s missing the bottom two rungs, and microfinance is a way in which we can rebuild rungs on the ladder to help people that are living on a couple of dollars a day move up out of poverty.

Wry: What’s unique about the approach that Opportunity International takes?

Simms: I’ll start by saying there are a lot of great microfinance organizations — lots of great people doing great work across the globe. Last year, Opportunity International helped about 14 million people have the ability to transform their lives, their children’s futures and their communities.

We like to think that we really are anchored in a couple of places. We like to go where others don’t. We went to sub-Saharan Africa to start banks when nobody in their right mind was thinking you could run a savings-led institution in banking. We were innovating in the micro-insurance space to provide life insurance for people when there was no way in the world you could think about life insurance in HIV-ravaged communities in sub-Saharan Africa.

We’ve started small holder farmers, rural outreach, where the pure business economics from what they taught us here at Wharton don’t make sense if you can’t really think about the changes in technology that are going to allow us to do that. Where Opportunity really is unique is innovating at the base of the pyramid, listening to the customers and saying, “How do we serve you? What are your needs? And let’s figure it out together.”

“We like to think that we really are anchored in a couple of places. We like to go where others don’t.”

Wry: I’ve read that Opportunity International focuses on entrepreneurship among its clientele. Could you talk about how venture creation feeds into poverty reduction?

Simms: I could use either of two examples, but the one that’s nearest and dearest to my heart is also one of the newer innovations in the Opportunity portfolio. Several years ago, we were at a global conference in the Dominican Republic and the chief operating officer who was running the program there was making loans to women who had started private schools. These are women who started schools because the kids in the Dominican Republic didn’t have a chance to go to government schools if they didn’t have a birth certificate.

We ended up using that idea to create a pilot. These are private schools where the tuition per term may be $10. Those entrepreneurs end up being really good banking clients. By giving them loans and training, the chance for savings, they’re creating a small business that helps educate kids, hires teachers, hires people that are preparing food, hires construction workers to build buildings.

I could take you to Uganda where a woman started a school on her back porch, and there are 900 children today in a three-story building. That’s an example of financing an entrepreneur who is doing job creation, and job creation and the education of children is a key core to poverty alleviation Twitter .

Wry: You mentioned that you train for entrepreneurs. As someone who does training for entrepreneurs in a very different context, this is interesting to me. What do you do to support entrepreneurs in countries that don’t have some of the infrastructure and basic considerations that you need to start a venture in North America?

Simms: Most of the clients that we serve are women — 90%-plus. It turns out that they’re better clients, they pay back the loans well, and they take their profits and pour them back into food for the family and better housing. We bring them together in weekly or bi-weekly groups, and that group meeting gives us a chance to do some business training.

It’s things around customer skills. Should you loan to your clients? Are you providing credit to your clients? Or, what does it cost you to provide credit to your clients when you have a loan that you’ve borrowed from Opportunity? It is core, simple business [concepts] to people that would be in America or certainly at Wharton, but it’s not core to the people who may never have had any kind of education in their own lives but have had to become entrepreneurs.

“We have never thought it was just about providing savings and credit in the absence of training because then you’re not equipping the people that are uneducated.”

If I gave you the other example, go back to the woman leading the school. What we’re trying to do is to bring training to help her run a small business, which is much bigger than a typical microfinance business. Some of the neat stuff we’re doing right now is saying, “How do we use technology? How do we use tablets and cellphones, which she now has access to? What kind of training can we bring to her? What kind of training can we bring to her teachers in order to help them be better doing their jobs in the places in which they’re administering to kids?”

Wry: Is there a lot of access to this technology?

Simms: It’s interesting to see just over the last decade how much the world has changed on the use of technology. At the school proprietor level, there’s access to this kind of technology. But even among our clients, even across India, across sub-Saharan Africa, well over two-thirds of our clients — people living on a couple of dollars a day — have access to a cellphone.

What’s really exciting is the pace in which banking services are now being rolled out across this technology. In Bangladesh, BRAC Bank now has perhaps the biggest program through its bKash with technology. They’re doing that because if you’re a poor person living in the developing world, you have to get on a bus, you have to spend time away from your business and your family, you could be gone for hours in order to go visit a bank or go get cash, or you could have a bank in your hand with your cellphone as long as there’s a cell tower nearby.

[This] technology in the developing world is just rapidly surpassing anything that we’re even doing in this country with the exception that smartphones aren’t yet there. They’re too expensive, which is part of the issue. The other issue with smartphones is they chew up battery. And if you don’t have access, if you’re not on the grid, we have to solve the energy issue to solve the smartphone issue.

Wry: Do you get a sense that the entrepreneurship training you’re doing with these clients makes a difference in their businesses?

Simms: We do. Our repayment rates across the globe are 98% to 99%. I spent five years of my career with a large bank in America, but I can assure you that with our credit card portfolio in the U.S., we didn’t touch anything like 98% to 99% repayment rates.

Some of that is because you’re helping people understand how to use credit properly, and that takes training. We have never thought it was just about providing savings and credit in the absence of training because then you’re not equipping the people that are uneducated. They just haven’t had the chance to learn — what’s the power of savings? Why is credit useful and how do you get in trouble if you get overindebted? How do you actually keep customers and build a business? Those kinds of core training concepts allow them to succeed, and we want them to move out of poverty. Without that kind of training, we think it’s less likely that they could succeed.

Wry: Being involved for the past 45 years, you must have a very broad sense of how the trends have evolved. Is there starting to be a situation where the commercialization of microfinance is leading to it looking more like traditional banks and some of this training maybe goes out the door with that?

Simms: I have been around for 32 years, not the full 45. We’ve had huge growth in the types of products, but we haven’t kept the evolution to do cutting-edge training as much as I think we need to. I think some of that is the cost structure of delivering training is expensive. It’s expensive for the clients to come together in weekly meetings, and it’s expensive for us to send staff out there to do it.

Mobile technology is giving us an opportunity to turbocharge training and to allow training to catch up. I think for the banks that you mention, which clearly want to do more in this space, there’s several billion people on Earth living on less than $2 a day. The future markets for our big financial institutions are still in that level of billions of people. For them to help these people succeed as good customers, they need training. We need a cost-effective way to deliver training so that they become good customers and move up out of poverty.

“Job creation and the education of children is a key core to poverty alleviation.”

Wry: You see a lot of ventures, a lot of ideas good and bad. One characteristic is that most fail. Is this something you see with micro-enterprises? If so, how do you deal with losing your money with an entrepreneur?

Simms: Well, it does. One of the things about the power of the operating model is that we start small. The average first-time loan is around $180, so it’s a small amount of money. It’s put into a group setting where people are mutually supporting one another, they’re guaranteeing one another, so the repayment rates can be supported because others in the community make sure that the business succeeds. But where people from the outside may not see the power of this model is in the developing world. If you were sick and you couldn’t go to your market stall on that day, that would mean that you don’t have any income for that day, which means that you don’t have any income to buy food for your family for that day.

If you weren’t in a group, you wouldn’t have somebody that may be able to step in and help support your business. Maybe they’ll be in the market stall next to you and they’ll handle your business for the day while you are sick. You’re in the same trust group because you’ve mutually guaranteed one another. They’ll also share their tips about how they’re succeeding and growing their business with newer people that are part of these trust groups.

You minimize the risk early on and then the natural entrepreneurs, the people that really have the ability to grow and scale businesses, migrate out of a group-based lending into an individual loan. Those go up over time so that you’re watching the risk profile as people prove that they have a business model that succeeds. As they get more money and they get more income, they get larger loans, they get to the point that they’re hiring people and growing a business. That’s kind of the way you’re managing the riskiness of microfinance.

Wry: Are there any considerations that you have when you’re putting together the groups?

Simms: There’s a bit of art and science to it because 90%-plus of our clients are women. In some countries, they’re 100% women. In other countries, it’s mixed gender. You’re trying to build group cohesion where people are going to work with one another.

One of the most powerful things I’ve ever seen in my life is when we started in Rwanda more than a decade ago. That was post genocide. Today, to see the power of people who have committed to reconciliation and working together, it’s absolutely transformational to you as a person who might visit it. In our trust groups in Rwanda, there are people who are working together, helping one another succeed, mutually guaranteeing one another’s loans, and they would have been in the two opposite tribes back in the day.

Wry: How do you line up cause and effect to actually show that you’re moving the needle on social impact?

Simms: For as long as we’ve been around, Opportunity has always said we have a triple bottom line. Unlike most people who go to Wharton who are used to one bottom line, we say, “No, we think there’s three that we care about.” The first everybody would understand: There’s financial performance. Are you sustainable? Do your revenues exceed cost? The truth is the Opportunity model is sustainable, so if we didn’t raise another donor dollar, the microfinance institutions in the field would continue because their revenues exceed cost.

Second for us is scale. How many people are we serving? For all of 45 years, if you asked how many clients does Opportunity serve, at any given point in time we could tell you. Today, we’re actually serving 14 million people. Back when Kim and I wrote our first check, we were serving 1,000 people in 1983. It’s been some pretty phenomenal growth.

The third bottom line for us, we call transformation. What are the outcomes that our clients are achieving in their lives, their children’s futures and their communities? I could regale you with story after story of fabulous life change around the people who have opportunity today and didn’t before and how their kids are in school and they’re in a better place, but I couldn’t give you metrics.

But in the last three, four years, we’ve started to equip our loan officers with tablets or cellphones so that when they’re going out to visit clients, we’re actually collecting data. Does the client have a cement floor? Are the kids in school? In particular, are the girls in school? With the use of technology, we’re then able to track the status of people from a whole range of social metric dimensions.

Your academic colleagues are going to say, “Can you prove causality?” And I will say, I can’t prove causality, but I can show over time and we have reports on our website that would show what we call our social performance management. We’ll show you what percentage of clients have access to potable water today that didn’t have potable water, what percentage of our clients have kids in school that didn’t have kids in school, what’s the nutritional situation? Do they have toilets?

“The people living on less than $2 a day are really, really hard to serve and expensive to serve.”

Wry: Do you ever get to the point where you graduate your clients into the formal financial system?

Simms: Yes, and historically we used to say, “We’re not going to serve them.” We’d work up to a certain level and then they’d go off to be with the bigger banks, the ones that anybody could name that are working in Africa. But our clients would come back to us, including this woman that was at the school I mentioned earlier. She said, “Wait a minute, those banks wouldn’t serve me when I was starting my business. Not only would they not serve me, I wouldn’t be welcome in their lobby because I’m a woman in the rural area and I don’t have any assets. So why would I want to go to them now instead of continue to be served by you?”

That has forced us to think we need to stay with our clients for a longer time period. Some of our clients will be with us for a very long time and have multi-thousand dollar loans. We don’t have lots of clients at that end of the spectrum, but it has cost us strategically to shift to serve clients who have more resources now because they’ve built successful businesses that we never would have served back 20 years ago.

Wry: Are you able to use some of the revenue from those bigger loans to finance further social outreach, or does it get rolled into the bottom line and increase the health of the organization?

Simms: It really is the bigger loans and the ability to serve clients that are, in pure Wharton terms, more profitable and allow us to make sure that we can keep reaching down to those clients that are under $2 a day.

Our core mission is how do we help to eradicate extreme poverty? That’s what really gets so many of us excited. The people living on less than $2 a day are really, really hard to serve and expensive to serve. One of my colleagues who ran our African operation for many years worked for a big bank for 20-plus years in his career and came to me one day and said, “David, do you know what you’re paying me to do today? In my old job, all of the clients that I had to get rid of because they weren’t profitable, those are the clients that you want me to go find and serve.” I said, “Good, you got it right.”

Wry: Looking ahead, where do you see microfinance going in general, and Opportunity International, specifically?

Simms: I think we are still among the leaders in the pack here. I think the industry understands the power of microfinance and the ability to do that rural outreach, to drive costs down and to get training out is based on technology. So, we think the future is around the role of technology and banking coming together. We think the future is around financial technology, bringing that into microfinance, marrying it together. … As the clients move increasingly to the cellphones and smartphones will start to penetrate [more deeply] — all of that allows us to serve more clients cost effectively.