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Jun232015

Iranian Savings Funds to Tackle Loan Drought

Tuesday, June 23, 2015 at 8:19AM

For entrepreneurs around the world, acquiring finance to start or expand a small business has become harder and harder as the global financial crisis has bitten hard. Across the globe, people with good ideas or successful businesses that need funds to expand are finding the door closed by traditional banks.

As banks and governments have focused on reducing debt and building up cash reserves, it is small businesses and small-scale entrepreneurs – often without business or family connections – who suffer the most. Opportunities are being missed to create new jobs and enterprises and lift poor communities out of poverty.

In that climate, the search is on for alternative ways to build up wealth. In Iran, a new phenomenon has arisen to address the lack of bank loans for small businesses brought about by the economic crisis. Iran is suffering under international sanctions as well as outstanding bank loans exceeding US $45 billion, according to the Financial Times.

The domestic banking crisis this has provoked has resulted in a tightening of credit for loans.

But in response, middle class Iranians are forming their own savings clubs to help each other with loans.

The savings clubs work like this: each member buys a share in the club costing around US $2 per day (around US $620 over 10 months). Each share makes the saver eligible for one loan during the year. For example in a club of 30 Tehran taxi drivers, every month four members of the club receive US $600 each in loans. The fund lasts 10 months and each member is guaranteed one loan per share.

“It is a savings fund and doesn’t have the uncertainty of the banking system, which might or might not give you a loan,” club member Ahmad told the Financial Times newspaper. As one of the drivers, he has four shares and is eligible for four loans.

“My mother is also saving money in a fund of housewives among our female relatives.”

The fund is managed by the head of the taxi agency and a driver who is a retired teacher. Both are trusted. “The retired teacher receives the money every day and puts a check mark by the names of those who pay. He is trusted by the head of the taxi agency, while other drivers respect him as an educated, honest man.”

Savings clubs are also good for the local economy, helping people to be able to buy goods on loans they would never be able to purchase otherwise. Another driver used the fund to “buy the things we cannot afford under normal conditions, like a washing machine, for instance, for which we have zero chance to get bank loans.”

Overdue loans by Iran’s banks grew by 66 percent from last year according to Asghar Abolhassani, the deputy economy minister.

The Financial Times reported that an estimated 25 percent of bank loans are outstanding, making Iran’s banking system technically bankrupt. International sanctions are also blocking the country’s banks from accessing global financial markets for support.

“Stagnation has gripped many parts of the economy,” said Hamid Tehranfar, the central bank’s director-general for banking supervision.

Turning to savings clubs can be an excellent alternative saving and loans model, but it requires very specific trust guarantees in place to ensure the holder of the funds doesn’t just take the money. For those who can’t find somebody local they trust, there are a number of online social lending and fundraising alternatives for raising funds and borrowing money. These include Kiva (www.kiva.org), which connects poor people looking for loans with people around the world willing to lend.

As the crisis continues and banks and governments hoard wealth for their own needs to pay down debt, alternative sources of loans will become ever more important for the poor.

By David South, Development Challenges, South-South Solutions

Published: April 2010

Development Challenges, South-South Solutions was launched as an e-newsletter in 2006 by UNDP's South-South Cooperation Unit (now the United Nations Office for South-South Cooperation) based in New York, USA. It led on profiling the rise of the global South as an economic powerhouse and was one of the first regular publications to champion the global South's innovators, entrepreneurs, and pioneers. It tracked the key trends that are now so profoundly reshaping how development is seen and done. This includes the rapid take-up of mobile phones and information technology in the global South (as profiled in the first issue of magazine Southern Innovator), the move to becoming a majority urban world, a growing global innovator culture, and the plethora of solutions being developed in the global South to tackle its problems and improve living conditions and boost human development. The success of the e-newsletter led to the launch of the magazine Southern Innovator.

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Google Books: https://books.google.co.uk/books?id=RR6YBgAAQBAJ&dq=development+challenges+april+2010&source=gbs_navlinks_s

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Southern Innovator Issue 1: https://books.google.co.uk/books?id=Q1O54YSE2BgC&dq=southern+innovator&source=gbs_navlinks_s

Southern Innovator Issue 2: https://books.google.co.uk/books?id=Ty0N969dcssC&dq=southern+innovator&source=gbs_navlinks_s

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Southern Innovator Issue 4: https://books.google.co.uk/books?id=9T_n2tA7l4EC&dq=southern+innovator&source=gbs_navlinks_s

Southern Innovator Issue 5: https://books.google.co.uk/books?id=6ILdAgAAQBAJ&dq=southern+innovator&source=gbs_navlinks_s

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David South |

Cash Machines for the Poor

Friday, June 19, 2015 at 7:51AM

Access to basic banking services for the poor is weak at the best of times. Many are openly discriminated against as a ‘bad risk’ by banks, and denied the sort of banking services middle and higher income people take for granted. Yet it is a myth that the poor do not have money or do not wish to save and invest for their future or for business.

The so-called Bottom of the Pyramid (BOP) – the four billion people around the world who live on less than US $2 a day – are being targeted by a wide range of businesses. Indian business consultant and professor CK Prahalad, the man who coined the term BOP, has gone so far as to claim this is a market potentially worth US $13 trillion, while the World Resources Institute puts it at US $5 trillion in its report, The Next 4 Billion.

And contrary to popular perception, the poor do have buying power, as has been documented by Massachusetts Institute of Technology (MIT) professors Abhijit Banerjee and Esther Duflo in their paper “The Economic Lives of the Poor”. Surveying 13 countries, they found those living on less than a dollar a day, the very poor, actually spent 1/3 of their household income on things other than food, including tobacco, alcohol, weddings, funerals, religious festivals, radios and TVs. The researchers also found that the poor increasingly used their spending power to seek out private sector options when the public sector failed to provide adequate services.

India, where 63 percent of the BoP market is rural and 304.11 million people are illiterate (Human Development Report), makes for a particularly tricky market to reach with bank machines: the average transaction is just 100 rupees (£1.25).

But a Madras-based company has come up with the Gramateller – a low-cost, blue-and-white bank machine custom-designed for the poor and illiterate. Vortex received funding of 2 million rupees (US $48,000) from an investment company, Aavishkar, that specializes in micro-venture capital — small sums for new business ideas. The advantage of micro-venture capital funding is its longer payback time: a young company does not get driven out of business by having to pay back the cash before the idea has been realized. Normally, venture capital helps a business to grow quickly but the venture capitalist wants to see an immediate profit on the investment.

Vortex’s chief executive officer, V.Vijay Babu, said: “The idea was conceived by Prof. Jhunjhunwala of IITM (Indian Institute of Technology Madras) in the course of an exploratory project focused on using ICT to deliver modern banking services to rural India.”

“It was found that branch-based banking is too expensive to be extended to remote rural locations where the volume and size of transactions are small. Using conventional ATMs (automatic teller machines) as a channel posed many difficulties because these ATMs were not built to operate in [illiterate] environments. Hence the need for developing an ATM specific to this context.”

Costing just a 10th as much to build as an ordinary cash machine, Gramateller has a fingerprint scanner for the illiterate, and is able to accept dirty and crumpled bank notes. Vortex came up with an ingenious solution to do this, said Babu: “Vortex developed a beltless dispenser design that in many ways mimics the way a human teller would pick and count notes.”

Vortex hopes to massively expand access to cash machines: at present, India has just 30,000 machines, or one for every 43,000 people (the US has a machine for every 1,000 people). These machines are being piloted with India’s biggest private bank, ICICI, and they have garnered interest from Indonesian banks as well.

“We are running pilots for two leading banks with about 10 ATMs,” said Babu. “Though it is still early, the initial response has been very encouraging – rural users find fingerprint authentication intuitive and simple and the ATM convenient and easy to use. A few users also gave feedback that our ATMs look less intimidating, maybe because it is placed in a non-air conditioned room with easy access and also is different in shape from a typical ATM.”

Furthermore the cash machines have taken a beating to see if they are robust enough for rural India: “The ATMs were tested for extended operating cycles under the harshest of environments that would prevail in the rural context — using soiled currencies, operating in non-air conditioned and dusty environments, subjecting the machine to typical fluctuations in line voltages and power outages. User-acceptance was tested by enlisting the participation of rural and semi-urban people to carry out test transactions.”

As for thieves getting their hands on the cash before the poor, Vortex maintains the machines will not become the victim of thieves: each machine will only carry a fifth of the money of city-dwelling bank machines.

Elsewhere in the South, a South African research and analysis company BMI-TechKnowledge (http://www.bmi-t.co.za/) in its latest report identifies a boom in banking services across Africa. In particular, South Africa, Botswana, Namibia, Angola, Mauritius, Tanzania, Kenya, Ghana, Nigeria, Egypt and Morocco – all have seen surges in profit and services as a result of improving banking regulations and political conditions. Maybe future markets for the Gramateller to reach Africa’s poor lie ahead?