Q & A

Can markets help the poor?

Mary Ellen Iskenderian & Dean Karlan & Tony Sheldon & Nelun de Silva Wijeyeratne & Andrea Levere — October 2007

A loan might allow you to buy a bike to commute to a new job or to nurse your business through an unexpected setback. But billions of people around the world have little or no access to financial markets. Microfinance is one potential solution to this dilemma.

"Credit markets are very difficult to operate in developing countries," says Mushfiq Mobarak, assistant professor of economics at Yale SOM.

Subsidized lending programs in the 1950s and 1960s mostly collapsed, undermined by repayment rates as low as 20-30%. Mobarak explains that loan recipients often felt free to default, either because there were no negative consequences or because the government would eventually forgive the debt. Corruption further rotted the programs.

A key moment in the development of what's now called microfinance — meaning the provision of financial services, especially small loans, to underserved communities — came in the mid-1970s when economist Muhammad Yunus lent money out of his own pocket to poor women in Bangladesh. They used the funds to start small enterprises and were able to pay it back. Building on this experience, Yunus founded the Grameen Bank, which started making unsecured loans to groups of women. The Grameen Bank's repayment rate is over 98%, according to the bank, and it now supports all of its activities from its own revenues. "The group-lending model lessens the problems of adverse selection and moral hazard, because it creates incentives for group members to monitor each other's activities and to be very careful about whom to select into their group," says Mobarak. "Microfinance solved a market failure."

This lending model has been replicated around the world, with institutions adding services such as savings accounts, home loans, and insurance. The industry now serves more than 100 million people. Yunus received the Nobel Peace Prize in 2006, and microfinance has become a hot topic in the effort to alleviate poverty. It's also come to the attention of investors, who see the potential to make profits by reaching more consumers.

Not everyone is a believer. "The main criticism of the Grameen Bank, and other institutions like it, is that it charges too high an interest rate — that they're interested in running a big program, and not so concerned about the welfare of the people," says Mobarak. "Another criticism from the left is that these programs are buying into the capitalist system, and will never fundamentally change inequality in the country." There is also disagreement over whether microfinance institutions function best as nonprofit or for-profit enterprises.

Mobarak says there isn't currently evidence of microfinance programs contributing to productivity on a macroeconomic scale. "These are small programs, but they have made a big difference to some people's lives. If a family that was in extreme poverty starts up a small business, and that allows their kids to go to school and get immunized, that might show up as growth a generation from now." And part of microfinance's appeal is the enterprise it encourages. "A lot of entrepreneurial ideas were bottled up. But now you're allowing a much wider set of minds to think about projects that they can start."

Mary Ellen Iskenderian '86

Mary Ellen Iskenderian started her new job as president and CEO of Women's World Banking about a year ago. Her organization provides support and advice to a network of microfinance institutions around the world. "I've been to five continents since I started. It's a lot of travel, but my reason for being here is to help this network of institutions cross over into the next phase for our dynamic industry," she says. From her meetings with microfinance leaders around the globe she's developed a unique vantage on the current state of this market.

Q: What are the critical issues that are coming up around the world in the microfinance industry?

Certainly, the increasing commercialization of the sector is one. And that is taking a number of forms. First, the microfinance institutions themselves are increasingly funding their operations through commercial sources; 2005 was the first year that the median number of microfinance institutions around the world financed more than 50% of their operations from commercial sources, as opposed to from donor funding.

That's a very, very big trend we're seeing. There's more commercial capital entering the market. So you're starting to see a range of socially responsible investors, or those that are looking at some sort of double bottom line, but not subsidized rates by any means.

There was a collateralized debt obligation done in April. Morgan Stanley did the transaction with a group of microfinance institutions — it was a globally diversified portfolio, including many of our network members. And it was the first time that such a transaction was rated. S&P rated the transaction.

Q: What effect does that have on the way your organization operates and how does that affect your affiliates?

Oh, in lots and lots of ways. We have one network member in Cali, Colombia, that's placed two tranches and is about to do a third tranche of debt in their local capital markets — non-guaranteed; it's all on their balance sheet. We were very involved in walking them through the rating agency process, helping them select and then negotiate with investment banks, and helping them look at what the benefits of going through the pain of capital markets transactions might be in the long run. So we had to develop a whole new service offering of this kind of transactional advisory work.

One of the best things about increasing commercialization and the way it's affecting the whole industry is the greater level of transparency that's required when you start bringing in outside investors and when you start bringing in the capital markets. It's just had a tremendously positive impact in making them think through the true costs of their loans, as well as their own financing.

The other big aspect of commercialization is that you're starting to see more mainstream financial institutions eyeing this bottom-of-the-pyramid market with interest. And I think, right now, it's a positive development, certainly in terms of increasing outreach. And I personally believe that the commercial banks will have to be a part of the answer to increasing the outreach beyond the roughly 113 million borrowers that are now involved with microfinancing. By conservative estimates, there are about three billion eligible borrowers in the world. But we are concerned that they do it in a responsible way. We do worry about the indebtedness of this very poor population, who can least afford that kind of burden.

Another set of trends with regard to commercialization that we are concerned about is that as more institutions make the switch from nonprofit status and become regulated financial institutions, and that's a trend that we very much support, we are seeing the percentage of women borrowers declining. Similarly, we're seeing the percentage of women executives, directors of the board, and loan officers declining. So we need to be very, very aware of this unintended consequence of commercialization.

Q: What are some of the factors that keep microfinance from reaching more of the people who could be helped by it?

We are in the process of doing my first strategic three-year plan since joining the organization. We've polled our own network and a somewhat broader community of microfinance institutions. Five years ago, if you'd asked the average MFI what their biggest obstacle was, they would have said financing. Now, interestingly, that's in the third position. The first is HR — recruiting, retaining, training — a huge, never-ending need for human resources and managerial skills. You've got an industry that has a compound annual growth rate over the last five years of 38%. Our network members are growing at over 70%. The human resource needs to meet that kind of growth are extraordinary.

The second challenge is technology. We thought it would be the really cool cell-phone banking. But what they need even more desperately is really basic, back-office MIS, because you just can't really grow much beyond 10,000 customers on the simplistic desktop systems that most microfinance institutions have.

Q: How do you measure a microfinance organization's impact?

We all want hard metrics. But one aspect of the microfinance industry that I'm keen to see change is that impact has pretty much always been measured in terms of numbers of borrowers, and I think we really need to get beyond that. So, just because they borrow, what does that mean in terms of the improvements in their lives and the improvements in the conditions of the household they live in?

And then, also, that gets to my other concern, that if all we're ever doing is providing credit, we're not really meeting the full financial need of these low-income households. So I think we really need to be thinking more broadly about asset-based products, asset-accumulation products, asset-protection products, in addition to all of this credit that we're providing.

Dean Karlan

Economist Dean Karlan runs randomized controlled trials to assess the effectiveness of international development programs. "After decades of projects, we have strikingly little evidence about what really works and what does not. Part of that is not really understanding why things work," he says. He founded Innovations for Poverty Action to expand the reach of such evaluations, and the organization is currently running rigorous studies of anti-poverty initiatives from the Philippines to Peru.

Q: What does the academic research about microfinance say?

There has been lots of suggestive evidence about the positive impact of microfinance, but we have a fundamental selection bias that is endemic throughout social science, and we have every reason to think that it's particularly relevant in microfinance, which is that enterprising people seeking to do something proactive to improve their business seek out the NGOs which claim to be doing things which help them improve their businesses. Likewise, NGOs seek out the areas in which they think they are going to do well.

So there are lots of reasons to think that merely comparing people who borrow to people who don't borrow is an ill-suited approach to measuring impact. Our approach is to adhere to very strict protocols in doing randomized, controlled trials.

You can categorize our projects two ways: We have plain, vanilla impact evaluations, where we're answering first-order questions: "What's the impact of credit?" And then we have the more nuanced studies, which are, frankly, the more exciting ones, academically, because they dig deeper into understanding the financial portfolio of the poor, and how they go about mitigating the risks that they have with the resources that they have.

This is where we integrate behavioral economics into our thinking about product design. Simple examples of this involve things like offering savings accounts without liquidity at no addi-tional interest relative to those with full liquidity. We just restrict their access to withdraw funds from the savings account. This results in increased savings. Another one is to give people reminders to save. A traditional, knee-jerk, touchy-feely thing that you hear all the time is that the poor save as much as they can. The problem is not behavioral. If that's the case, sending the poor reminders to save should have no effect, because they're doing everything they can. Well, we sent them reminders to save — we did this in Peru — and initial results suggest it is having a huge effect.

Q: You've looked at group versus individual liability in microfinance...

This is a relatively new project. Group liability was cited by many as one of the linchpins behind the revolution of microfinance. The problem — and this is exactly one of the reasons why we want to do carefully designed studies — the problem was, when microfinance got started, they actually changed about four or five things at once from the way credit had been offered to the poor in the past.

Projects that offered credit in the past were agricultural rather than entrepreneurial; they were offered to the men, not the women; they were done individually; they were really long loans; and they were often done by the government, where there would be political pressure for the government to forgive the loans. So there was a whole myriad of reasons why these things just fell apart.

With microfinance, all these things changed and, voila, repayment rates were really high. Now, which of these things caused the effect? Group liability was often cited as the key. But it really was never proven that this was, actually, a key component.

We did a very simple experiment. We took a bank intrigued by the idea of switching to individual liability. We took their groups, and we severed their group liability. We didn't sever the groups. They still kept going to group meetings to repay their loans, they simply were no longer liable for each other's loans. If you think about it, in some ways we didn't totally remove the group peer pressure. I might repay my loan simply because I want to appear to be a good person, because I want to maintain my reputation.

What we've found after one year is absolutely no change whatsoever in repayment rates. No drop. Just anecdotally, when we made these changes, everyone stood up and applauded. And we are seeing higher entry, and less dropout. We're continuing this, though. One year may not be long enough. It's certainly long enough to make you start scratching your head and thinking, "Gee, maybe this wasn't so important.:

It's also important to remember that everyone in that study was already part of a group. So, if you think that group liability works because it helps banks pass the screening on to the clients and makes them only allow reliable, trustworthy people in, it tells you that there are different devices you might want to think about that can capture the screening component and nothing else. A simple referral, conditioned on repayment, might actually suffice for what you need, as a bank, to figure out who to lend to and who not to.

Q: And you've also done studies on interest rates...

Yes. We've finished one, and we have five underway right now with support from CGAP. These are exciting, because interest rates are a big issue in microfinance from a policy perspective. The whole premise behind raising your interest rate in order to maintain sustainability, basically, is banking on the idea that you won't lose incomers, or not too many, meaning demand is more or less inelastic. And this is a fundamental question that we should know the answer to, but we actually don't. So that's why we not only did it once, but want to do it five more times.

This is a good example of what we really want to get to when it comes to forming policy — multiple sites of very, very similar, if not identical, experiments. Where we really can start saying something deeper about the underlying reasons why a program works.

Tony Sheldon '84

Tony Sheldon and a colleague developed Microfin, which has become the leading software program for business planning and financial projections in the microfinance industry. "My background was on the financial management side of things," says Sheldon. "I'd been the CFO for a couple of small businesses, and I brought that experience to bear." In 17 years as a microfinance consultant, he has also coauthored a number of publications and advised microfinance institutions, donors, and social investors.

Q: Is your work in the area of financial management primarily bringing standards that were established elsewhere and applying them to microfinance?

It's taking the standards and the frameworks that are applicable elsewhere, and then adapting them somewhat, because microfinance is kind of a hybrid between financial services and social services. It has the mission side, but it also has the rigors of being run like a business. For example, you structure its financial statement format like a bank's, but you also have to factor in flows of grants. One crucial question is: what ratios are most appropriate to capture the different aspects of the business?

The field has developed fairly widely accepted metrics for how you gauge the financial performance of microfinance institutions, and those have been taken as proxies for the social side. So if you have a high retention rate, that's taken as a proxy that your clients are getting something that they value.

That's okay, to a point, but the next horizon is social metrics that could be looked at on a par with financial performance indicators to gauge an institution's overall contribution. There's a real dearth of solid information on what microfinance does in terms of sustained economic development and poverty alleviation. With the success on the financial side of microfinance, we have to also be able to speak intelligently and accurately about what it is and is not able to do on the social side. Because some of the hype is hype.

Q: You advise both donors and investors. How different are the approaches that people take to either giving money or investing money in microfinance?

I would say that the difference isn't as much between donors and social investors as it is between well-informed analysis and less-informed analysis. I have donor clients who are much more rigorous than some social investors, because they understand the field, they understand how a subsidy can be constructive in some contexts and very destructive in other contexts. And there are some social investors who just want to jump on the microfinance bandwagon, and don't really think it through.

The difference really has to do with an appreciation of the complexities of the field, and an effort to make sure that the subsidies flow towards constructive kinds of activities, like product development or reaching new markets or providing ancillary services, rather than less constructive uses, which might be subsidizing inefficient operations or passing on a subsidy to the end borrower in a way that creates a dependence on an unsustainable service. I'd say we're mostly past that. But there are always new iterations of "The poor are poor, they can't afford this, so we should give it to them at a subsidized rate." In the end, that's actually a disservice to the client, because when the subsidy is withdrawn, the services are no longer available. The wonder of microfinance is that, with a degree of subsidy over the start-up period of five to seven years, you can then create an institution which is there for the long term and doesn't need subsidies. That's the appeal of the so-called double bottom line.

Q: If you're advising a potential donor or social investor, what characteristics do you look for in a microfinance institution?

I would say a recognition of the complexities of economic development. The institutions that I prefer to work with, and that I support, tend to start at the client level.

For example, there's a development finance institution in India called BASIX. They did an internal evaluation after five years of operations and found that, of their clients, a significant proportion were definitely doing better than beforehand. But then there was maybe a quarter who were more or less the same, and there was a percentage that were actually less well off than before they came to BASIX.

A lot of institutions would say, "What's the profile of the people who are doing better? That's what we'll do more of." Your straight business model would say that. What BASIX said is, "Why are some people still no better off, and why are some actually worse off?"

So they tried to develop an approach that would serve the people who had not been as well served by them. For example, in one particular region, they were doing a lot of loans for dairy cows. And the dairy cows were not doing well. They found that what was needed – beyond credit – was better practices of taking care of the cows and, even more importantly, a market to sell the milk in. It was being consumed very locally, and the market tapped out.

So they worked with the local government-supported dairy cooperative, which ran milk processing plants, to improve the quality of the collection and processing, as well as to provide veterinary services and training to people. The uptake on their loans skyrocketed, and the change in livelihoods was greatly enhanced. By taking this approach that said "What's needed from the clients' perspective?" it actually became very profitable for BASIX and for its clients.

Q: Could developing better measures of social impact potentially affect the market?

Yes, I think it does. It's often the social investors who are really pressing the question of what's the social return. Being able to demonstrate social performance may well attract those investors to a microfinance institution. But, perhaps more importantly, having a good understanding of what's going on in clients' lives and responding to that gives you a comparative advantage in a competitive marketplace, and allows you to tailor your products and services to what's actually needed by your clients. So, in that sense, there's a market motivation for it, as well as the social motivation.

Nelun de Silva Wijeyeratne '87

Nelun de Silva Wijeyeratne has been working with financial market intelligence provider Standard & Poor's on a project to create consistent metrics for microfinance institutions —part of an effort to help mainstream investors make better-informed decisions in microfinance. While she looks forward to opening microfinance to the capital markets, she also thinks about her country of origin, Sri Lanka. "Microfinance really makes sense to me, as a personal commitment, to bring my knowledge and learning and education back to the region where I came from."

Q: What difference would ratings make for microfinance?

There has been a big concern in the industry about the fact that microfinance was ready to become a mainstream investment, but there have been no standardized, globally accepted metrics to compare, for instance, investments in emerging markets with microfinance. With S&P coming into the picture, if they create standards based on their already existing criteria for financial institutions, adapted as appropriate for MFIs, it will be easier for investors to assess the strengths and weaknesses of these organizations.

Q: Is this activity a sign, in and of itself, that microfinance is becoming more integrated in the capital markets?

Yes. There have been securitizations that have been well received in the marketplace, even without a rating, but they have been very small in number. S&P, in fact, recently rated the first-ever rated CDO [collateralized debt obligation], and that was also very well received.

The key is building an infrastructure that will make it comfortable for investors to go into this market, because while microfinance institutions do a very wonderful job in what they have done so far, there are no globally acceptable standards. And that is a lack that investors always comment on.

Q: Is part of the challenge in developing metrics that microfinance institutions have always had a goal in addition to the financial criteria, which was the mission?

That is a very hotly debated topic, in the sense of how that should be incorporated in these types of evaluations. I think the key, here, is that any rating always reflects a review of the management. And this would be similar in these microfinance institutions. Such a rating is really commenting on how well management has met the goals that they have set for themselves. It's not how good the mission is. What is in the purview of the rating agency would be to discuss how well management is doing at the task it has set itself. That would become a part of the overall rating, much like we would look at any other organization's management. If the organization is not accomplishing its mission, then its success and survival also will be in question, so it is, in a way, part and parcel of this.

But mission is a secondary factor because I think investors very much want to know that, if they put their money into these organizations, that the risk is very clearly defined.

Q: What kind of financing vehicles could be used by microfinance institutions that aren't being used now?

Volume is more important. Right now, volume is still very small, though the number of transactions has definitely grown significantly in the last two or three years. In fact, there are now microfinance funds that have been functioning for a couple of years. But one of the things that is preventing microfinance from becoming a larger investment opportunity is that when these transactions happen, since they're not public, people don't know the pricing and other factors. If you have more information publicly available, where people can compare and contrast, then more people are apt to get involved. There was an IPO that was recently done that was very successful, so everybody knows what types of instruments can be used. More of the same is needed.

And then there's the other side of the coin, which is the organizations themselves and whether they're ready to do this kind of work, because it is a lot of information that needs to be put together to do a securitization. There is a lot of paperwork. And then, they have to be consistent in how they report information. The organizations need to be able to beef up their internal controls and management systems to be able to provide the kind of information that is necessary from an investment perspective.

Q: The advantage for a microfinance institution of having an IPO seems to be to increase the scope of their operations, but are there also risks for them or difficulties?

The recent IPO that was completed by the Mexican microfinance institution Compartamos is a hotly debated development in the microfinance arena. The major question raised is, do high profits earned by an MFI creating the environment for a successful IPO (13 times oversubscribed) compromise the social mission of an MFI?

My personal take on that is more to do with how you use the money being made. If you are using it effectively to expand the number of people that you can serve, I think it's a worthy cause, and, therefore, a profitable situation is not necessarily a bad thing.

However, in the present environment, MFIs have to pay careful attention to the perceptions created by the drive to be commercially successful enterprises that can attract capital market investors.

Q: How good an opportunity is microfinance for investors?

I think that it is potentially a big opportunity, because there are strong institutions already out there that have been doing this for a long time, and there is interest in building up some of the institutions that are not quite ready for it. Also, investors want to do something about these problems. There is a real search for effective ways to invest money, because poverty leads to other problems. It's not just that people are poor and can't afford to have a decent life, but it creates frustration and political unrest.

Andrea Levere '83

As part of its goal of expanding economic opportunity, CFED (Corporation for Enterprise Development) runs programs that help Americans start and grow small businesses. What might be called microfinance in other countries is often referred to as microenterprise in the U.S. Andrea Levere, the head of CFED, says that the semantic distinction reflects real differences, as the social and political environment in the U.S. creates significantly different market dynamics.

Q: Is there microfinance in the U.S.?

CFED was founded in 1979 by Bob Friedman based on the idea that, given the appropriate training and financial opportunities, a select group of low-income people could move themselves out of poverty through self-employment. To prove this to the many skeptics, CFED organized the first of several policy demonstrations that combine testing an idea on the ground, documenting the outcomes, and seeking policy change to bring a successful idea to scale. CFED worked in five states with women on welfare who demonstrated a desire to be self-employed, provided them with entrepreneurial training and access to capital, and helped them to start businesses. It was discovered that about 10% were able to do this successfully, increasing their income enough to move off of welfare. This rate is roughly similar to the percentage of people in the U.S. who start businesses. This demonstration — the microenterprise support organizations it spawned, the policy change it promoted at the state and federal levels, and the minds that it changed — proved to be a major force in advancing the microenterprise movement in the United States.

We have come to understand that in the United States the market gaps for capital are different than those that exist in the developing world, particularly given the dramatic changes in the financial services industry that we have experienced over the past decade as technology, credit scoring, and the growth of securitization have increased access to capital in low-income communities — for better and for worse.

The first major adaptation is that many practitioners in the field integrate microentrepreneurs into the broader framework of entrepreneurship. Too often "microentrepreneurship" has become a code word for "the poor people," and when you're trying to pass policy, we've found that's not effective.

The second thing that CFED has done is to launch an initiative that provides products and services at much greater scale than is possible through current programs. Called the Self-Employment Tax Initiative (SETI), it views the tax code as the single most important portal for the self-employed to move into the mainstream economy. And, sadly, it is highly dysfunctional, leading many entrepreneurs who cannot figure out how to file a Schedule C to stay in the underground economy. This leaves them prey to predatory lenders, excludes them from valuable products and services delivered by the public and private sectors, and penalizes our economy.

We have been working with a number of other nonprofit organizations that offer volunteer tax preparation services to do a series of pilots that assist entrepreneurs to file Schedule C tax forms while providing financial literacy training, and connecting them to mainstream financial institutions. We also are researching ways to promote state and federal policies to provide a tax credit to encourage entrepreneurs to enter the formal economy, thereby creating a job, just like the large corporations that receive huge tax incentives.

Q: What are the qualities of a successful microenterprise program?

It depends on how the program measures success, given the diversity of program models throughout the country. Program design varies by geography, target markets served, and the realities of the financial markets in that community. It varies a lot if you're in an urban community versus a rural community. And it also varies by what kind of cultural or ethnic communities you're working with.

In the United States, microenterprise development is primarily a human capital development strategy, while in the developing world it has focused on the delivery of financial products and services. While it is a relatively cost-effective approach compared to other social-service initiatives in the United States that help people become financially self-sufficient, it has been criticized as too labor-intensive to become "scaleable" when compared to more conventional business development and financing programs.

Q: It seems like a huge part of the task in the United States is dealing with very well-established institutions, like the tax code.

We're operating in an economy with much more formalized markets and systems. If you're growing tomatoes in rural India, who are you competing with? If you're growing tomatoes in rural Arkansas, you're competing with Wal-Mart. It's a completely different economic equation.

Q: How big a piece of the effort to reduce poverty is this kind of approach?

I think this is an important element of a comprehensive strategy. One of the greatest weaknesses in the field of public policy — and something that the microfinance and microenterprise fields have suffered from unfairly — is that we look for a silver bullet to solve poverty. Poverty is very complex, and can only be effectively addressed through multiple strategies. In addition, what people need to build wealth and economic security changes over their lifetimes, and our approach must recognize this reality.

CFED's strategy is to look at a continuum of interventions. Our core focus is asset building. You're not going to move people out of poverty by income transfer alone. But you're going to move people out of poverty through asset development and asset protection, as part of a broader web of social protections.

Cher Jacques '08

Yale Management student Cher Jacques knew she wanted to work in the economic development field in Africa. "I've spent a few summers in West Africa, and that's an area I'm really passionate about," she says. In her first year of business school, she became interested in microfinance and decided to take an internship with the Grameen Foundation. "I've learned so much about microfinance, which has been exciting."

Q: Had you seen any microfinance institutions before you started business school?

I actually did, the very first time I went to West Africa. I didn't fully understand what it was, at that point. I was 18, taking a development class. We went to one of the group meetings of an organization which utilized the group lending model. So, once a month, all the women of the village got together to repay that month's installment.

I remember thinking that it was really neat, because of the group element. Obviously, it's used by the lending institution as a hedge against risk. But the group element also produces a strong sense of community. If one of the women has a hard month or something happens in her family and she can't pay, the group covers her, and the next time she pays back, which is how they're able to have low default rates. But I just remember that I didn't really understand default rates or any technical things about loans at that point, but I liked the sense of community.

Q: Can you tell me about the projects you're working on in your internship?

I'm working with the sub-Saharan Africa team. It is the smallest and newest team at Grameen. They're just beginning to expand into a number of countries in the region.

I am working on one of their big goals in sub-Saharan Africa, which is really to support rural microfinance. It's hard to reach into the most rural areas. So I'm creating a strategic plan for how they can support rural microfinance efforts as they expand in sub-Saharan Africa.

It means a lot of research, a lot of reading, a lot of interviews with experts in the field. People from the World Bank and USAID and development consulting companies. That, actually, has been one of my favorite parts of the internship, just to meet these really experienced people who have done pretty noteworthy things and spent 20, 30 years doing this kind of stuff, before it was getting all the attention it's getting now.

Q: Why is rural microfinance challenging?

It's a lot of the usual suspects. The problems are pretty well documented. The one problem that I've seen over and over and that everyone I spoke with has reiterated is high operational costs. The poor infrastructure and the dispersed population make it really, really difficult for it to be profitable to go into these areas. If there's one person per square kilometer, how do you find that person and bank them? That's the challenge.

There's also a problem in really rural areas of product diversification. It's great if people can get loans and start a business, but they're selling the exact same three products as the person next to them. The challenge is to find innovative products and more diverse types of businesses.

Q: What are your ideas for solving these problems?

It's funny. The first meeting I had when I sat down with my boss, she told me this was the project. Because I had so little guidance, I felt like I was being told: "Solve rural microfinance. Go." I thought, "You know I'm only here for 12 weeks, right?" My friends tease me. They say, "Have you solved rural microfinance yet? What's taking so long?"

I've looked at a number of things, and a lot of it is technology solutions. The front-end technology is the big, splashy, sexy stuff that people are talking about now, but there really is a lot of potential in terms of mobile phone banking and point-of-sale devices and smart cards. Now that commercial banks have seen microfinance is profitable, they are trying to get in. But the technology solutions often require huge up-front costs, and I think that people are still hesitant to make that kind of investment before they see the possible results.

Risk mitigation techniques are another part of it. In a lot of the rural areas, it's largely agricultural. The group lending model doesn't protect against agricultural shocks. If you have 10 people in a group and there's a drought one year, all their crops are going to suffer, so you have to think of new ways to hedge against that risk. And there are devices like weather-based index insurance and different risk-management products.

I'm also looking at delivery models that have been effective in rural areas, such as savings and credit cooperatives.

Q: Do you see markets as generally being a solution to poverty?

Honestly, I think markets can be the solution. But the piece that is missing in many countries is the regulatory framework. For example, one of the financial technologies is called the warehouse receipt system. It's not a new financial technology, but it's relatively underused in Africa. It's a way that farmers can store grain or other crops, and be issued a receipt, and then get a loan against that receipt. They need certification, grain standards, so that they can put the grain in, and the lender can know that it's not lower quality and can loan against it. In a lot of countries, financial institutions don't recognize stored grain as collateral. How do you collateralize that stuff?

Until a lot of countries' regulatory frameworks are in place, market-based solutions are going to be difficult.

Interviewed by Jonathan T.F. Weisberg