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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.

Follow @SouthSouth1

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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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Kenyan Bank Helps the Poor and Gets Rich

Sunday, June 21, 2015 at 4:07PM

Good quality banking services are a basic building block to rising incomes. Yet the poor across the South are often overlooked and denied access to savings accounts and loans.Many low-income people are openly discriminated against as ‘bad risks’ 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 4 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 (http://en.wikipedia.org/wiki/C.K._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” (http://www.nextbillion.net/thenext4billion).

A Kenyan commercial bank has proven it is possible to target the BOP and become successful doing it; so successful that they have seen off foreign rivals and were voted Kenya’s third most respected company.

By offering Kenya’s poor people savings accounts and microloans, Equity Bank (http://www.equitybank.co.ke/) has captured 50 percent of the Kenyan bank market. It now has more than 3 million customers and 2.8 million account holders and opens 4,000 new accounts a day.

Its chief executive officer, James Mwangi, said Equity Bank built its success by doing the opposite of what other banks have done – it doesn’t target the middle and upper classes, but the “the watchmen, tomato sellers and small-scale farmers”.

The Kenyan banking sector in the past was dominated by foreign banks. But by investing in the 46 percent of the population who still live below the food poverty line, Equity has become the third most profitable bank in the country. Its approach was once considered odd. Most of the bank’s borrowers work in the informal sector and have few assets to use as collateral for the loans. So Equity uses what it calls ‘social collateral’. This includes a mix of measures: in some cases, account holders join together to guarantee a person’s debt. Even more unusually, women offer their matrimonial beds as security – it would be shameful for a woman to admit her bed has been taken to pay for the debt.

“For us it’s psychological security. Nobody wants to be excommunicated and lose their inheritance,” said Mwangi.

“By focusing on the previously excluded, Equity has revolutionized the banking sector,” James Shikwati, a director of Kenyan think tank the Inter Region Economic Network (http://www.irenkenya.com/), told The Guardian newspaper. “It has forced the multinational banks to change their business strategies.”

Started in 1984, the bank was still insolvent by 1994, when Mwangi joined as an accountant. Things were looking grim as Kenya’s economy was in a slump and foreign banks like Barclays were closing branches outside big centres.

Mwangi and other Equity Bank managers realized there were millions of low-paid poor in Kenya – all BOP – but who wanted to save and borrow but had nowhere to go.

“Banking was the only industry in Kenya led by supply rather than demand,” said Mwangi. “There was no ‘bottom of the pyramid bank’.”

While absolute poverty in Kenya has declined in recent years, inequality remains high. The population of 37 million people make on average a per capita income of US $580.

By 2003, as the economy picked up, Equity Bank gained 256,000 account holders. It now has 100 branches across the country and 500 automatic teller machines (ATMs). It uses armoured trucks to go into rural areas so that the people can receive banking services. While traditional banks require pay slips and utility bills as proof of a person’s address before letting them open an account, and charge high monthly fees, Equity only requires an identity card.

Within just one year, the bank saw the number of account holders jump to 600,000. Mwangi likes to say that the bank’s competition is the bed mattress, since most people have never had a bank account before. Most savers have around US $148 in their savings account.

The bank’s micro credit operation makes loans of less than US $7 and gives borrowers a few months to repay them.

The bank claims loan defaults are less than 3 percent on 600,000 outstanding loans – the banking industry average is 15 percent.

It keeps its transaction costs down by using the latest in information technology. These efficiencies enabled the bank to earn pre-tax profits of more than US $40 million in 2007.

Equity does face competition, as its success attracts mainstream banks into the BOP market.

In Africa these days, banking is hot: a South African research and analysis company BMI-TechKnowledge (http://www.bmi-t.co.za/) in a 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.

Mwangi isn’t worried, however, since the number of people still without bank accounts is huge. Equity Bank is expanding its operations into Uganda, Rwanda and Sudan.

Elsewhere, mobile phone banking in Kenya is proving highly successful. Equity has a service, but so does Safaricom with M-PESA (http://www.safaricom.co.ke/index.php?id=745). Customers can deposit, transfer and withdraw money using their phones. Over 4 million are now using the service.