Foreign Affairs Committee on March 14th, 2012
Evidence of meeting #27 for Foreign Affairs and International Development in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was microfinance.
A recording is available from Parliament.
On the agenda
- Dale Patterson Member, Board of Directors, Opportunity International Canada
- Keith Weaver Member, Board of Directors, MicroEnsure LLC
- Larry Reed Director, Microcredit Summit Campaign
- Doris Olafsen Executive Vice-President, Opportunity International Canada
- Margaret Biggs President, Canadian International Development Agency
The Chair Dean Allison
I call the meeting to order.
Pursuant to Standing Order 108(2), we are continuing our study on the role of the private sector in achieving Canada's international development interests.
I want to take the time to welcome our witnesses. We have Larry Reed, who is the director of the Microcredit Summit Campaign. Welcome, Larry, and we appreciate your taking the time.
We have Keith Weaver, who is a member of the board of directors from MicroEnsure LLC. Welcome to you, Keith.
From Opportunity International Canada we have Doris Olafsen, executive vice-president. Welcome, Doris. We also have Dale Patterson, who is a member of the board of directors.
Mr. Patterson, we're going to start with you, sir. We'll go through the testimony from each of you, and then we'll have a chance for the next hour or so to go around the room and follow up with some questions. You have 10 minutes.
I'll start the clock and turn the floor over to you, sir.
Dale Patterson Member, Board of Directors, Opportunity International Canada
Thank you very much. I appreciate this opportunity, no pun intended.
Good afternoon. My name is Dale Patterson. I'm a member of the board of directors of Opportunity International Canada. I'm pleased to be joined by my colleague Doris Olafsen, our executive vice-president.
We welcome the opportunity to present our views on the role of the private sector in achieving Canada's international development interests. We commend the Canadian government for being committed to delivering international assistance that is efficient, focused, and accountable, and for focusing on sustainable economic growth strategies that resonate with our global mandate.
Opportunity International was founded in 1971. It is a leading microfinance network focused on establishing banks to provide access to savings and credit to the poor. We are currently operating in 20 countries.
Our mission is to provide scalable, sustainable microfinance services, including loans, savings, training, insurance, and other financial services, to reach the lowest echelon of the economically active, with a focus on increasing their income, improving food security and access to education, and creating jobs.
Opportunity International currently owns 15 formal financial institutions, including seven banks. It developed the first wholly owned microinsurance company, MicroEnsure. The rest of Opportunity's implementing members are non-governmental not-for-profit organizations. Opportunity International Canada is one of five support partners, along with Australia, Germany, the U.K., and the U.S. The support partners' primary role is to raise funds for, and awareness of, opportunity to invest in Opportunity microfinance initiatives.
Opportunity International Canada is a microfinance organization founded and established in 1997 by David Stiller, a Canadian businessman and former chair of a Canadian relief organization. Stiller was disillusioned with the inability of relief work to make poor people less poor and, together with a group of like-minded people, began to explore the idea of creating a Canadian affiliate of Opportunity International. In 1998, Opportunity International Canada received its official status as a Canadian registered charitable organization.
Since 1998, Opportunity Canada has supported work in five countries in Africa—Mozambique, Ghana, Malawi, Uganda, and Rwanda—and six in Latin America—Colombia, Honduras, Nicaragua, Dominican Republic, Costa Rica, and Peru.
Opportunity Canada is governed by a Canadian board of directors, which currently numbers eight individuals. The current president and CEO, who also serves as chairman for Opportunity Canada’s board of directors and sits on the global Opportunity International board, was appointed in mid-2011.
Opportunity Canada also has more than 120 ambassadors, known as the Governors Council, who serve as the public face of Opportunity International in communities across Canada. Donors and volunteers, this group invests their time, lends their name, and are spokespeople for helping to raise funds and awareness across Canada.
Since 1998, Opportunity Canada has raised $34 million in donations and grants, with a total of $23 million raised since 2006. CIDA has provided support to Opportunity Canada for over 10 years and since 1999 has disbursed approximately $2.7 million to leverage Opportunity Canada's programming. Of Opportunity Canada's 2011 revenues of $5.5 million, CIDA accounted for 4%, which is $212,000.
In 2011 Opportunity Canada was pleased to receive a three-year $2.5 million CIDA commitment for capacity-building that will positively impact 300,000 people in Ghana and Mozambique. The CIDA match of one-to-one will attract one-to-two in private funding.
Opportunity has a strong presence in Latin America and is pleased that as of January 2012, the Superintendent of Finance of Colombia granted Opportunity Canada a constitutional licence to establish a formal financial institution. Opportunity Canada was a catalyst in moving this venture forward and is vested as a minority shareholder, having raised $2 million of the $10 million in capital needed to establish this formal financial institution.
Opportunity Canada, with a staff of 13 FTEs, relies on an actively engaged volunteer base that spans the spectrum across the country, from elementary schools to universities, from the small business owner to a large franchise, from a corporate boardroom to public and private foundations. Individuals and community groups such as Rotary have partnered with Opportunity to spread the word, fundraise, and partner with our global programs.
Opportunity International, a faith-based organization, serves all people regardless of race, religion, ethnicity, or gender. It has committed to a triple bottom line.
The first is large-scale outreach, which is defined as “reaching the greatest possible number of the economically marginalized in both urban and rural areas”.
The second is financial profitability and sustainability, providing highly valued, quality financial services to clients that ensure an appropriate return to shareholders.
The third is transformational client impact, providing to those living in poverty the opportunities to improve their lives economically, socially, and spiritually.
Transformation reflects Opportunity's interest in changing the lives of clients using the vehicle of financial services. Opportunity's signature services include loans, savings, and insurance, with a focus on training. Through training and business growth, clients are transformed. Opportunity is currently serving two and a half million savings and loan clients, and our repayment rates stand at 95%, with 89% of our clients being women.
Opportunity has close to a million savings accounts, and the average client has $113 on deposit. In 2008, Opportunity made a strategic decision to significantly increase banking services in the rural areas of all the African countries in partnership with the Bill and Melinda Gates Foundation and The MasterCard Foundation. With the foundations' partnership commitment, Opportunity was able to develop a program to provide 1.4 million people with access to savings accounts, including 950,000 in rural areas, and loans for more than 90,000 smallholder farmers in the four countries of Malawi, Uganda, Ghana, and Rwanda, by 2014.
Opportunity's strategies to expand the number of banking outlets include deploying a range of cost-effective delivery channels, including satellite branches, kiosks, mobile vans, ATMs, and point-of-sale devices. Opportunity's unique business model is focused on integrated service and holistic transformation, in comparison to other microfinance providers that prefer financial services.
Opportunity is innovative. It has used technology and created solutions to improve the well-being of clients. Just as the range of services has been transformed, so too has the landscape of funders and of service providers. Opportunity is one of the leading Canadian organizations focused only on the core business of microfinance. In recent years, microfinance has matured into an industry funded by government, major donors, investment capital, private donations from individuals and corporations, and peer-to-peer lending, as well as by foundation grants, investments, and guarantees.
In addition to traditional microfinance institutions, other providers have also entered this market, including mainstream commercial banks. We commend Canadian parliamentarians for recognizing the immense potential of microfinance as a strategy to support the very poor. We are encouraged that in furthering its goal of growing small business, CIDA has committed to supporting activities that will strengthen and increase the availability of financial institutional products and services, including microfinance, which will result in greater job creation for the poor.
With the specific emphasis on women, microfinance is a strategic solution helping to end global poverty. We would recommend that the Canadian government continue with the strong commitment to microfinance and would suggest that additional funding be allocated for microfinance targeted at the very poor. Catalytic and highly-producing partnerships are critical to moving the microfinance agenda forward.
To quote one of our major partners, Reeta Roy, CEO of The MasterCard Foundation,
Opportunity International focuses on developing cost-effective and sustainable solutions that can unlock that potential to create jobs, generate profits, provide for families, and ultimately overcome poverty. That strong and core belief in the power of the entrepreneurial poor is one of the reasons we at The MasterCard Foundation are proud to partner with Opportunity as we work together to promote financial inclusion and prosperity.
Mr. Chair, we at Opportunity International look forward to continuing our partnership with the Government of Canada to ensure the development, implementation, and growth of sound public policy objectives. I'll be happy to answer questions when we have concluded.
The Chair Dean Allison
Thank you very much, Mr. Patterson.
We'll now move to Mr. Weaver, from MicroEnsure LLC.
Keith Weaver Member, Board of Directors, MicroEnsure LLC
Good afternoon. It's an honour to be present today at this committee hearing. The study is very important.
I will describe MicroEnsure's work, which I believe is a good example of how an organization is able to work together with both public and private sector partners to pursue important development objectives.
The mission of MicroEnsure is to protect the poor in developing countries against a variety of risks by using insurance. The poor do not have anything to fall back on. They don't have savings. They don't have a government safety net. A death or illness in the family—which is effectively an economic unit—or a calamity such as a fire or natural disaster can have huge ramifications. The insurance that we arrange is designed to meet their needs and is priced to be affordable and to provide value to those paying for it.
MicroEnsure has operations on site in five countries—the Philippines, India, Ghana, Tanzania, and Kenya—and we are active in others, including Rwanda, Mozambique, Malawi, and several in the Caribbean. In total, we have arranged for 1.6 million insurance policies that cover 3.3 million people.
The business model for MicroEnsure has three main components: the front office, which distributes the products; the risk carrier, which covers the risk; and the back office. For the front office, the insurance is distributed through a series of partners, including microfinance institutions, agriculture, banks, community groups, and, more recently in Ghana, Tanzania, and Kenya, mobile phone companies. Through these partners, we are able to provide low-cost access to insurance products for the poor.
Now, we're not an insurance company and we do not directly carry any of the risk. Instead, we work with insurance carriers that are licensed and regulated in the countries we are operating in. Due to the nature of the risk and the service levels we require, we also work with reinsurance companies. In some cases, we are connected through our own cell captive.
As the back office, we design products, train staff, and educate clients, but also we administer the programs and pay claims on behalf of the insurers. The five operating companies that I mentioned earlier are locally incorporated and licensed as either insurance agents or brokers and earn commissions on the insurance premiums that are generated.
Either locally or in our head office, we will fill the gaps between what our partners and insurers can do and what must be done for the products to work. As an example, we have our own administration systems that keep track of who is insured and who the beneficiaries are. We generate invoices on behalf of the insurance company and we also pay claims out of that system to those who qualify. Because we are focused on this market and have the volumes involved, we can do the administrative work more cheaply than a typical insurance company can.
We presently have a portfolio of products. However, not every product is offered in every country, depending upon what the need is, the partners we are working with, and what gaps we are able to fill. In general, though, we are delivering the products I will now describe.
We're delivering life insurance both for the primary insured and for his or her family members.
In terms of health insurance, while there are several variants, at its most comprehensive we are providing in-patient hospital coverage in both India and Tanzania.
There are many calamities that are disastrous for poor families and their small businesses. We offer property insurance packaged together with a microloan to help to offset the cost of replacing inventory if a small business is affected by a fire, a storm, or even political insurrection.
We offer weather index crop insurance. MicroEnsure is a leader in the development of this product. It insures farmers against too much or too little rainfall during a growing season. Because of our expertise in this product, we are often sought out to provide technical assistance. At present, we have technical support projects in Zambia, Tanzania, Malawi, and four countries in the Caribbean, including Jamaica, Grenada, St. Lucia, and Belize.
Funding for these projects comes from, among others, the International Finance Corporation and BMU, the environment ministry of the German government. These projects provide technical training for local staff in how to implement these products and how to develop and distribute it through small farmholders.
Earlier in its development, MicroEnsure did work on a few projects funded by CIDA through grants to Opportunity International Canada. However, since 2007 funding to develop and expand has been generously provided by the Bill and Melinda Gates Foundation. The Bill and Melinda Gates Foundation has allowed us to research opportunities and to test different approaches; some of them have been successful, while others have not worked out quite as well as we would have liked. Opportunity International is the parent body for MicroEnsure, and it has also encouraged the company to innovate in this area.
Thank you for your attention. I would be pleased to answer any questions that you might have.
The Chair Dean Allison
Thank you, Mr. Weaver.
We are now going to turn it over to Mr. Reed, who is with the Microcredit Summit Campaign.
Larry Reed Director, Microcredit Summit Campaign
Thank you very much, Mr. Chairman.
I thank you for this opportunity to speak to all of you. I understand that many of you had a late night last night and I thank you for your attention today.
This is an important matter to discuss, I think, this area of how government funding can be used to leverage private funding so that the overall impact is much greater than either the private sector or the government could do on their own. I think the field of microfinance provides an interesting example of where that has happened and also provides examples both of the success that can happen and of the dangers of public-private partnerships. I'll go into that in just a little while.
First let me explain the Microcredit Summit Campaign. The campaign started in 1996 with a goal of seeing 100 million of the poorest people in the world reached by microfinance.
At that time, when we did the numbers, there were six million people being reached by microfinance. Our goal was to see 100 million reached in 10 years. We met that goal. We met it a year late, but we did meet it.
We had a big celebration here in Canada around that goal. We had our global summit in Halifax. At that summit in 2006, we reviewed our goals and set two new goals.
The first goal was to see 175 million of the world's poorest families reached with microfinancial services. The second goal was to see 100 million of those families actually move out of poverty. As a guidepost, we're using the extreme poverty line of $1.25 per day. We want to see 100 million families move from below $1.25 per day to far above that line. As you can imagine, this is actually the much more challenging goal that we face right now.
I will talk more about how we're going into that, but let me step back to this issue of public-private partnerships and what microfinance can teach us about these sorts of partnerships in regard to how they go right and how they sometimes go wrong.
When I started working in this area in the microfinance community, I actually got my start with Opportunity International, so it's good to be back with my friends here. That was 28 years ago. At that time, the only funding going into microfinance came from governments and from private donations.
About a decade ago, all the governments of the world combined were putting about $400 million a year into microfinance. Now, I should mention here that Canada has been one of the leaders and one of the key innovators that has made all of this happen. Early on, CIDA supported the Grameen Bank and BRAC, in Bangladesh. They then were small start-up organizations and now are two of the world's largest microfinance organizations. Canada has played a lead role in this from the very start, and it's a role of leadership that I think Canada can continue to play.
I've talked about how this started with just government investments, with $400 million in government funding a decade ago going into microfinance, plus more private donations. Today there are over 100 microfinance investment funds in the world, with a combined asset base of over $8 billion. That investment by governments has helped to build microfinance organizations to a scale such that private money has now entered in. Private money sees that there are both social and financial returns to be made in this area, and they've built this large base of funding to fund the continued growth of microfinance.
Let me pause here and talk about the key role that government played. My research tells me that the historical example of a microfinance organization that goes the farthest back is the Buddhist temple loan system of 400 A.D. in China. We've had microfinance systems around for that long, for over 1,500 years.
It didn't grow to any sort of scale until the 1980s, when governments got behind this effort and helped build this concept to a scale that the private sector then could come behind and continue to support. Government played a leading role.
Lately, though, microfinance has shown that there are times when the public-private partnership doesn't work as well as it should. We've seen examples in several countries recently, such as Morocco, Bosnia, and Pakistan, and then more recently in the state of Andhra Pradesh in India, where the finance has led to a funding bubble. There has been overindebtedness happening among clients, and sometimes that has led to overly harsh collection practices, with the net result of working with very poor people who are trying to improve their lives being that they instead have become overindebted and worse off as a result of an intervention that was supposed to make their lives better.
That's a challenge we need to look at now, and look at honestly. What did we do wrong? How did our good intentions lead to this negative impact, in some countries, on the clients we were seeking to serve?
I think government and the private sector working together can make a market. They can create a market where none existed before, or where none existed at a scale the private sector could involve itself in. The partnership can also break a market, if it's not done right.
The challenge, I think—especially from the government side, when it is investing—is to shape the market such that the incentives and the rules of the game are set up so that the public good for which the government was investing continues to happen, even as private sector players come in and begin to become the dominant funders in the market.
I want to provide a few lessons from my experience in microfinance. What could we have done differently and how could we have shaped this market better, with cooperation between civil society, government, and the private sector, to avoid some of the difficulties we've had?
The first lesson, I would say, is to make sure early on that you establish the rules for standards of behaviour. Because of these problems in the microfinance community, we've established a basic ethical code that all microfinance providers should follow. It's called the client protection principles. It's promoted by a group called the Smart Campaign, and it has been adopted widely in the community.
In my opinion, we should have done this two decades ago. It makes sense. We more or less assumed everyone's good intentions back then and didn't do the work to make sure that this code was put in place and that everybody was trained in it from the very beginning, when they started working. We're having to go back and do that work now. Establishing a code of behaviour is very important.
Second, and this is an area where government funding can be very important, is to establish metrics for the social side of the investment. Is the social good the government is investing for actually being accomplished? In our work, poverty alleviation is one of the main targets, but until recently the microfinance community hasn't had in a way of measuring whether that is being accomplished. We could tell stories about individuals who have moved out of poverty, but it has been difficult to say whether our client base overall has moved out of poverty. Because there was no social measure, financing decisions were made around financial performance measurements: who had the lowest arrears rate? Who had the highest growth rates? Who was generating the highest levels of profit?
All the money started to flow to the same small number of institutions. We have that $8 billion in investment. We also have international financial institutions making investments in microfinance organizations, and we have governments making direct investments. They're all flowing to the same institutions. In fact, 50% of the investments from the international financial institutions go to the same top 10 institutions in the field.
There should be a metric that those institutions with a social purpose can use to measure who's doing the best at accomplishing the social purpose, and the money should flow there. The purely private money can flow to the areas that have the best financial performance. Without the metric, all the money stacks up in the same places, and funding for innovation, funding for people doing the most difficult part of the work, is not available.
What we're doing in the Microcredit Summit Campaign is establishing a seal of excellence for poverty outreach and transformation. What the seal will do is recognize those institutions that, working with the very poor, can show that over time their clients are moving out of poverty. By awarding the seal, we hope to direct more funding in this direction and learn from the best practices of these institutions.
Again, I think government support in developing these indicators, in developing the metrics used, can help direct private and social capital in a way that creates the greatest good for the people you're trying to serve.
I appreciate this chance to talk with you. I encourage this group to continue looking at these public-private partnerships and the potential for them, but also, as you look at them, to look at ways in which the government can establish the rules of the game, can establish incentives and metrics that help that money flow in the direction of creating the public good that you are investing for.
Thank you very much.
The Chair Dean Allison
Thank you, Mr. Reed, for those concrete, specific examples for us.
We're going to start with the opposition. Go ahead, Ms. Sims. You have seven minutes.
Jinny Sims Newton—North Delta, BC
Thank you very much.
I want to thank all of you for coming and making presentations. They were very informative. I always appreciate getting those perspectives.
I think a couple of you can have a go at my first question—Larry touched on it in his presentation—which is about some of the downsides of having microfinancing without the checks and balances.
Earlier this week we had Scotiabank here at the committee, and they made a presentation as well. They told us about the work they are doing around microfinance, just as you have. We agree today, as we did on that day, that microfinance can play a powerful role in elevating people out of poverty, especially for women. We've seen some evidence of that out there, albeit anecdotal evidence.
However, as you know, microfinance and microcredit have been the subjects of growing criticism. You touched on that again today.
In February the Winnipeg Free Press published a story, and perhaps it's the same one you were referring to. Here it just says “Indian state”; I'm not sure if it was Andhra Pradesh.
It says, “Indian state pushes microfinance prosecutions after revelations of lender links to suicides”. The government there blamed a spate of suicides on aggressive lending and collection tactics. If you were at a really deep level of poverty and then on top of that you got into some microfinance debt that you were struggling to pay back, you can imagine what kind of psychological pressure that could place on you.
You've touched on it, and I'd like you to expand on it a little bit more for me, but I want to give others the opportunity as well.
How would you respond to these criticisms? Do they have a sound basis? What can organizations like yours do to prevent predatory lending practices?
Sometimes I think we could almost ask the same question of our lending institutions here in the western world. This situation is not unique to the developing world, but what's unique in the developing world is that it's very fragile. Members of society become the targets and the victims.
Director, Microcredit Summit Campaign
Thank you very much for the question. As I said, this is a challenge we face, which was fuelled in part by financial institutions that wanted to grow and had access to large amounts of capital, but had to keep growing. The discipline of lending broke down in some areas, so they weren't checking repayment capacity. Sometimes the same client received four or five different loans from different microfinance organizations and was basically using one loan to pay off the last one.
That this has happened is a black eye for the industry. The suicides have been widely reported. As I understand, the suicides in India tend to follow the agricultural production levels, but I think in many cases microfinance organizations made pressures on clients worse when they overindebted them, and then they were using techniques that caused more embarrassment to the client when they were trying to collect the money.
I can't figure all the reasons that go into it, but I do know that if any of those suicides were in part caused by these sorts of pressure tactics, it's something we have to make sure doesn't happen again.
In the microfinance industry we have a set of client protection principles. They include things like checking on the client's ability to repay, knowing what are acceptable and unacceptable collection practices, and making sure that the client has the right sort of product for their need. I've been involved with a group that is training microfinance organizations on how to implement and be assessed against these practices. We would like to see them codified in the regulations in a country. That's one area in which we want to make sure this doesn't happen.
The other is to balance the financial incentive with the social incentive, as I was saying before. If organizations are rewarded not just for financial performance but also for social performance, then they will focus more on making sure their clients are better off and making sure they can demonstrate that their clients' lives have improved.
Jinny Sims Newton—North Delta, BC
Thank you very much.
Doris Olafsen Executive Vice-President, Opportunity International Canada
I can speak to that directly for Opportunity Canada.
We acknowledge that risk has increased, because microfinance has evolved and now includes consumer loans and non-microfinance purposes. That increases the risk. Just as in Canada, as you have mentioned, irresponsible borrowing is more likely when a client borrows for consumption or to meet an immediate need.
At Opportunity International we have addressed this issue. We've looked at the client protection policies. We've adopted them. We have our own code of conduct that calls for responsible and affordable products to be delivered to our clients. Accordingly we ensure every client goes through a screening process to ensure loans are indeed being used for enterprise development. If there's credit scoring in the country, we check to make sure the client is not encumbered with other loans, because our mandate is always to ensure we are not overindebting our clients.
We conducted a survey over the last three years, surveying 60,000 clients, and only 5% of those clients had another loan. We police ourselves to ensure that our practices are living up to some of the principles Larry spoke to. We're trying to get better at it constantly all the time. It's continual improvement.
Jinny Sims Newton—North Delta, BC
Thank you very much.
Do I have time for a follow-up question?
The Chair Dean Allison
You have time for a very quick one.
Jinny Sims Newton—North Delta, BC
I'd like an answer from both of you, if possible.
Microfinance does play a role, but it's not the answer to the eradication of poverty. It's one tool, and it's only one tool, that can be used out of a myriad of tools and strategies.
Would you agree that it is not the magic pill for the eradication of poverty?
The Chair Dean Allison
Just give a quick response, Mr. Reed.