How Fintech Is Transforming Microfinance

Knowledge@Wharton: Microfinance has been around at least since the 1970s. But often, it is not well understood. Could you explain what it means and how it has evolved in recent years?

Robert Dunn: Microfinance is usually thought of as microcredit. When people say microfinance, many think of it as a small loan, often to a woman. In Asia, where I’ve spent a lot of time recently, the way this works is that a number of women co-guarantee each other’s small loans. We’re talking about loans of around $200 to $300 to set up or to grow a small business. This loan is repaid over, say, six to 12 months. Typically, around five women cross-guarantee each other’s loans.

This model has worked well for a number of decades in Asia, sub-Saharan Africa and Latin America. It has its roots in Grameen Bank [founded in Bangladesh by Nobel laureate Muhammad Yunus]. But many others also invented that model around the same time that Muhammad Yunus did, including the founders of Opportunity International. In more recent times, the model has changed because of the availability of digital tools. Mobile phones, in particular, are making a big difference in the way microfinance products, not just credit, but access to How Fintech Is Transforming Microfinance remittances, savings, insurance and pensions, are able to be distributed. And that is dramatically changing the way microfinance is operating and who is doing the microfinance.

Knowledge@Wharton: How big is the market now and which parts of the market are evolving the fastest?

Dunn: It’s a multi-billion dollar market and it’s evolving fast in developing countries across the world. Latin America and southern Asia are particularly fast growing areas. There’s been tremendous growth in mobile banking in sub-Saharan Africa also in recent years. Microfinance was started by people who were focused on helping people out of poverty but now it is mainly run by commercial players. Most players now are focused on providing financial services to what’s often called the “bottom of the pyramid.” That doesn’t mean that there aren’t socially focused players in the market. Opportunity International is one of them. We focus more on marginalized people, people who are left behind, and we make sure that the excluded have access to responsible financial services.

Knowledge@Wharton: What impact has financial technology or fintech had on microfinance?

Dunn: The World Bank recently released a report on the state of financial inclusion. In the past three years there’s been tremendous growth in access to financial services, particularly in India, which has been the fastest growing area. By and large this [increase in access] is being driven by government policy and that’s been the case in India also. The Indian government has decided that everyone should have access to banking and it has put in place mechanisms to make that happen. But this doesn’t mean that people are actively using these facilities.

In countries like India, for instance, there are a lot of people with bank accounts but not many people use them. But that has been the biggest change in financial inclusion — giving people access to financial services. Through bank agent networks people can now operate bank accounts through cell phones. You don’t need smart phones; you can do this even with feature phones. All you need is access to an agent network and a cell phone. The bank agent network has been the fastest growing development in microfinance in the last five years.

The concept of fintech is very exciting, particularly with respect to credit scoring and figuring out what products are needed by different people. But it is at an early stage. The exciting development, I believe, will be the use of credit scoring algorithms based on social media footprints for lending to small- and medium-size businesses. This is not microfinance as we [typically] think of it, with $100 loans or $1,000 loans. It is about approaching the “missing middle” — people who are employing other people but can’t get access to finance.

Knowledge@Wharton: How is your strategy evolving in response to this transformation in the competitive dynamic that you just described?

Dunn: Our strategy is to move from a narrow focus to a broader focus. We focus on specific target client groups, look at what is their pathway out of poverty, what are the blockers on that pathway and what can we do about it.

Ten years ago, Opportunity was more into microfinance products. We raised money from donations in countries like the U.S., Canada, Australia, the U.K., and Germany and we had a limited set of products that we would apply that money for. We would also raise money to fund small loans. We have a broader approach now. Instead of only working through a microfinance solution, we look at all solutions that are needed for a family to move out of poverty. Our aim is not to be the provider of all the solutions. We partner with other specialist providers.

In northern rural India, for example, we partner with health providers and organizations that build toilets and provide access to clean water because that’s a major issue for people in these areas. It’s no good having a small business if you can’t operate your business because of sanitationrelated health issues.

Another problem is access to good schools. We often tell the story that a microfinance client is doing a particular activity in order to educate her children, especially her daughters. But if there are no good schools around, if there is no good education service being provided, then that’s a problem. We try to solve that issue. So we are partnering with different types of organizations, education providers, health providers, water and sanitation providers. We are looking to not only raise donations, but working on how we can raise impact investment funds to help finance this.

Opportunity doesn’t finance small loans. We provide technical experience to financial institutions like microfinance organizations to help them become stronger so that they can provide these services, which is a much more leveraged approach. Sometimes we put equity into these businesses in order to strengthen them so that they can grow their operations.

Knowledge@Wharton: What led you to focus on educational finance? What’s the nature of the market need and how did you develop your approach to serve that need?

Dunn: There’s a lot of linkage between education and poverty, particularly with girls. The longer girls stay in school, it’s less likely that they will have children early and continue in poverty and have their children continue in poverty. Opportunity International is primarily concerned with seeing people in livelihoods and jobs. And educating children is an important circuit breaker to the continual cycles of poverty.

Currently, there are around 620 million children of school age who aren’t learning. Some 350 million of them are in schools, but they’re not learning anything. The rest are not in schools at all. We have some alarming statistics. In India, for example, only half of grade five students in primary school or elementary school can read at a grade two standard.

Opportunity International has developed an educational finance program that has two objectives. One, help more children get into schools where they can learn. Two, help those schools become better. We do this initially through financial services, but also through educational consulting. There are two approaches in terms of financial services. One is to ensure that parents of school-aged children can afford to have them in school. This is primarily through making school-fee loans that suit the needs of the parents and their income and cash flow patterns.

Second is to provide finance to the schools so they can build classrooms or a dormitory or a toilet block or get a school bus or train teachers, and thereby become better schools.

Knowledge@Wharton: Do you finance initiatives focused only on children? Or, do you also try to educate grassroots entrepreneurs?

Dunn: In the area of education, we focus only on primary schools and high schools and children in this age group. But in our microfinance services, there are financial literacy training programs and other training programs for adults.

Knowledge@Wharton: How do you measure impact in the educational finance space? More importantly, what have you been able to achieve and what are your goals for the future?

Dunn: Our approach of assisting a financial institution to make the school-fee loans and the school-improvement loans requires them, and also the schools that they are funding, to report to us. So we keep abreast of the progress, not only of the schools but of the loan products as well.

We have made around 5,400 school-improvement loans totaling approximately $62 million. This has impacted around 1.3 million students. This program has largely been in Africa, but it’s now in Latin America and Asia as well. Similarly, there have been 180,000 school-fee loans totally around $48 million. This has impacted about 560,000 children.

Since our main focus is to get children to learn, the impact has to be around the quality of education being provided. We have developed a program with global education experts whereby we can assess and also help the schools assess the quality of their education. This program looks at 31 characteristics of a school like its curriculum, discipline, facilities and so on. There are five levels of performance from the most basic to the most advanced. For each of these 31 characteristics, we have a pathway and the tools to help the schools move to the next level.

We are talking here about affordable private schools. For example, consider a school somebody started with just 20 or 50 students. Over time, it grows to a couple of hundred students and they need some classrooms. So we help finance the classrooms. Often, these schools are isolated. The leaders of these schools are not in any system. We cluster together all these local schools that are getting financed by financial institutions. After that, we help them work together to improve the quality of their education. And then we track those improvements.

Typically, in developing countries the governments know around three data points about a school. One is where the school is located. We have hundreds and thousands of data points on schools as we track their education journey over time. We now have more than 800 schools that are working together with other schools to improve their quality of education.

Knowledge@Wharton: What are the main lessons you have learned in this journey?

Dunn: Well, it’s almost the same lesson as in microfinance. When people set out to do something like wanting their children to have a proper education and they’re disappointed with what’s available, they start home-schooling their children. Then the neighbors’ children also start coming to them for studies. And all of a sudden, a mother or a father becomes a teacher, becomes a school entrepreneur. If there’s a real passion to help their children lead a different life, to become educated, then there’s no end to possibilities.

We have seen ordinary people do the most extraordinary things. Some of them now run schools with 1,000 to 2,000 children. We’ve helped them over 10 years with finance to build schools and have hooked them up with other education consultants and experts who can help them in their venture. This is what we see in microfinance as well. An entrepreneurial person starts a business and down the road she starts employing other people. These people now have jobs and their lives are changed. Their children also see them — their mothers or fathers — in a new way.

Going forward, the possibilities for Edufinance are huge. So far, we have helped some 2.3 million children through our work. Our aim is to grow this number to over 15 million children by 2022. Within the next four or five years we expect to expand from 16 countries where we operate at present to 45 countries. We currently work through 26 financial institutions and we plan to increase this to around 90. Currently there are just over 800 schools that are working in our education quality program. We think that this can grow nearly 10 times.

Knowledge@Wharton: Before you joined Opportunity International, you worked at PricewaterhouseCoopers and Patrick Corporation. What led you to join Opportunity International in 2006?

Dunn: I actually joined it for a break. I started my career in accounting and ended up as CFO of an industrial company. In 2006, we had a very tough and busy year. We were subject to a hostile takeover and my colleagues and I left that business. When I was thinking of what to do next, the chance of working with Opportunity came up. It was very different to where I’d been and I thought I could refresh myself by using my business skills for social good.

I liked the idea of making a difference in the world using a set of business skills. I found Opportunity International appealing because it cared about sustainable development. It was about a hand up, not a hand out. It was about helping people get on with their lives and work their own way out of poverty. This approach appealed to me as a businessman and I thought it would be a good thing to do for a little while.

So that’s how I started. But the more I got into it, the more it resonated with me that this is an important thing to do. We were making a difference in the world and we could see the change. When I joined around 12 years ago, we were just starting a program in India. That program now serves more than 4.5 million families. It has aggregate loans of a billion dollars through our partners. We put in about $50 million and the rest has been leveraged and provided by others. We also helped socially responsible microfinance organizations.

It’s been a difficult road. I had to apply everything I learned in business about resilience and staying the course. It’s been difficult, but it’s been satisfying. The heroes are always the local people. They’re the ones who are doing the hard work. We just come alongside and help them.

Knowledge@Wharton: In the 12 years that you’ve been at Opportunity International, what has been the biggest leadership challenge you have faced? How did you deal with it and what did you learn from it?

Dunn: The biggest leadership challenge is you don’t always see the way ahead, but as a leader you need to be able to inspire people to come with you on the journey. If you can’t tell people how it’s going to play out, that makes it difficult.

We live in this complex environment where it’s not always clear how the journey will unfold. Sometimes, the complexity is around regulations. In the countries in which we operate, we appear as foreign investors or foreign financiers, and foreign investment regulations are continually changing. Also, we don’t look like the normal investor because we have a social focus. So we can be confusing to regulators and that can be difficult for us.

We have a commitment towards impact investment. That is a long and difficult journey. Taking people along with you on that journey when we don’t always know how things are going to play out is a challenge. It’s worked at Opportunity because almost everyone here is passionately committed to the mission of helping people out of poverty. Because of this focus on the mission, they are willing to come along on the journey even if they don’t know how it’s going to unfold.

Knowledge@Wharton: How do you define success?

Dunn: We’re very passionate about measuring impact. For us, the impact is this: Are the poor getting out of poverty? It’s easy to measure success around fundraising or growing the number of clients. But ultimately, it is all about getting the poor out of poverty. That’s the way we measure success.