The Stern Opportunity

What do an ultra-rich Manhattanite and an ultra-poor Bangladeshi woman have in common? They both still receive personal attention from their banker. According to Citi Microfinance’s Global Director Bob Annibale – speaking at Stern on Friday March 5 for the New Challenges in Microfinance conference – while most clients today rarely meet face to face with someone from their bank, these disparate income segments remain in constant contact with their bankers, though for vastly different reasons.

Annibale stressed the importance of the banking community's contact, or "touch," with the poor in order to best serve their needs. When it comes to understanding and solving issues of extreme poverty, it is only through careful knowledge of the customer that the financial and development communities can hope to design appropriate products that help lift people out of poverty.

This theme of knowing the customer resonated throughout the Microfinance conference, presented by Stern's Business & Society Program, the Citi Leadership & Ethics Program, the Citi Foundation, and additional coordination from Stern's Social Enterprise Association. Stern's 2009-'10 Distinguished Citi Fellow in Leadership and Ethics and President of Women's World Banking Mary Ellen Iskenderian, who spoke during SEA's Speaker Week in the Fall, started off the morning with an emphasis on building deep relationships with the poorest customers of the world - not only to understand how to serve them but also to recognize impact. For instance, Iskenderian pointed out, even nuanced improvements in the lives of poor women do not often appear until a minimum of three loan cycles. Even after several more, progress is not necessarily dramatic by traditional measures, particularly for women,

Still, loans can have a profound impact on an individual's life, as demonstrated by Iskendarian's example from southern India. There, 49% of women who do not own property or their homes experience household violence. However, this figure drops to 18% with female land ownership and 10% when the women's name appears on the house title. Properly designed microcredit and loans can enable such ownership.

Referring to some high-performing microfinance institutions in Eastern Europe, Iskenderian quipped, "You know the story about teaching a man to fish … well, in many cases, these women already know how to fish." Despite a few recent reports questioning the social impacts of microfinance, Iskenderian remained adamant: "Access to financial services has a profound impact on the lives of the poor, and particularly [on] women." However, this only occurs if their needs are fully understood and the microfinance institution (MFI) does not assume to know what they need.

 By knowing the customer and building relationships with the very poor, banks uncover the need for innovation across a variety of financial services, not just traditional microcredit. Nuanced customer surveys, interviews, and anecdotal listening can lead to the development of innovative savings products, life and health insurance, and property-focused loans, to name a few. These multi-interventional product portfolios begin to respond to the complex needs of the poor, matching their equally complicated financial lives.

 Over lunch, Professor Jonathan Morduch - NYU Wagner's world famous microfinance expert - continued to drill down into the multi-faceted financial lives of the poor. Based on work for a recent book he co-authored, Portfolios of the Poor, Professor Morduch offered the results of intensive weekly interviews conducted for an entire year with hundreds of microfinance customers from throughout the third world. The research team constructed weekly balance sheets and income statements for each MFI customer household, uncovering a complicated array of income sources, expenses and savings mechanisms.

The poor do not lack money-handling or savings skills, Morduch said. On the contrary, they obsess over their finances. Rather, it is the irregularity and unpredictability of cash flows and expenses that devastates their lives. Remember those heart-wrenching numbers development experts often cite? One billion people in the world live on less than $1 per day, and almost 40% live on less than $2. Morduch painfully reminds us that these figures represent averages. The erratic variance, month to month and day to day, in the financial lives of the poor creates little opportunity for upward mobility, let alone a reasonably human existence.

The research also identified the high level of innovation that poor communities develop to establish informal income and savings mechanisms. Some include complex savings clubs, neighborly no-interest loans, and family member wage advances. Learning from the poor themselves, the financial and microfinance community can find ways to better serve them.

Much of the need to more deeply understand the microfinance customer stems from the intensely local nature of banking for the poor. Annibale noted that while the financial crisis has not undone microfinance, it has thrown into sharp relief a varying topography of MFI performance, particularly geographically. This is, in part, a problem of unsophisticated segmentation - across geographies, and across a variety of demographics for the poor in particular regions. From this view, the traditional microfinance approach appears blunt, following a paternalistic and unsophisticated strategy of simply increasing case loads. As the MFI community begins to show weakening and varied signs of lowered repayment rates and social impact, Annibale stresses the importance of innovation to develop new tools and products, driven by a closer relationship with the customer.

Nejira Nalic, the only MFI manager and microfinance practitioner speaking at the conference, corroborated Annibale's observations. Nalic founded Mi Bospo, now one of the best performing MFIs in Bosnia. In the beginning, Mi Bospo incented its loan agents to drive up case loads, while maintaining acceptable levels of portfolio-at-risk. Meanwhile, as other MFIs in Bosnia and Herzegovina sprouted and grew, customers began to take multiple loans from different sources. No one really knew what their customers needed or what they were doing with the money. Loan officers underestimated portfolio-at-risk levels, failing to take into account the crowding risk of multiple MFIs.

Changing loan officer incentive structures and establishing internal controls to encourage, in part, a greater level of customer intimacy has enabled Mi Bospo to grow more appropriately, with better risk assessments and products more attuned to customer needs. Only through a deep and intimate understanding of the poor, how they live their lives and the challenges they face can the microfinance community properly develop the health care, life insurance, savings and credit products desperately needed by billions.

-Afterword- After the conference I offered to walk Mary Ellen Iskenderian out. Given the nice weather, she accepted and we continued our conversation with a walk up to Union Square. On the way, I asked her if the move toward understanding the lives of the poor came in part from a cognitive shift that purposefully humanized the poor, stepping away from the paternalistic and patronizing practices of the past. So much of global development's past history, and even some of social entrepreneurship's recent history, suffers from a lingering heritage of presumptuousness on the part of the "educated" West telling the poor what's good for them - recalling Iskenderian's point about fishing.

She pointed out that things are getting drastically better with more and more young professionals increasingly focusing on social values in their work. The great challenge remains, however, to identify and develop highly proficient professionals with skills in finance, banking, operations, management, and marketing who also bear a sophisticated and critical analysis of issues of social importance.

 A wise word of advice for those of us MBAs looking to enter microfinance and other social enterprise related fields: Knowing one's customer appears to be such a straightforward, business school concept - but the data and history show a remarkable lack of proficiency within fields attempting to respond to the needs of the poor. In these lines of work, a great task remains for us to hold a marketing book and business plan in one hand, and tomes of cultural and inequality dissertations in the other.

More about NYU Stern's Seventh Annual Conference in Leadership & Ethics, "New Challenges in Microfinance," from Friday March 5 can be found at http://w4.stern.nyu.edu/bspa/events.cfm?doc_id=941.

Adam Gromis is a dual MBA/MPA at Stern & Wagner, and SEA's VP of SEA Speaker Series. For more information on upcoming speakers and materials from past events, visit https://nyustern-sea.campusgroups.com or email Adam Gromis (apg275) or MBA1 VP Sheldon Maye (sm3443).

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