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First published on NextBillion, 2 May 2018 This is a basic challenge facing investors seeking to “exit,” i.e. sell their equity stakes to a new buyer. The issue isn’t entirely new. It first emerged in the mid-2010s, when several microfinance investment vehicles (MIVs) were starting to reach the end of their ten-year terms, and were seeking to divest their assets. This issue was first addressed in the financial inclusion sector by a 2014 paper commissioned by CGAP and CFI, which first defined many of the key questions that socially responsible investors need to address when selling their equity stakes. With another four years of multiple exits under the sector’s belt, NpM, Netherlands Platform for Inclusive Finance, along with the Financial Inclusion Equity Council (FIEC) and the European Microfinance Platform (e-MFP) asked us to take a closer look at one particularly tricky part of the exit process - selecting a buyer that is suitable for the microfinance institution (MFI), its staff and ultimately its clients. The result is Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits - a new paper that goes beyond raising questions, and seeks to provide a template to help investors navigate the complex terrain of “responsible exits.” The research - an investor survey, several in-depth interviews and a workshop during European Microfinance Week - found a mix of approaches applied by different investors. But these nevertheless shared many common elements aimed at making sure that the buyer will honor and pursue the social mission of the institution being sold. We consolidated these elements into a “Conceptual Framework for Buyer Selection” – a flowchart representation (plus explanatory notes) of the steps and criteria inherent in responsible buyer selection in microfinance equity exits. However, there was an important dissenting view among some investors, which holds that the Do No Harm exclusionary criteria are insufficient for a social investor. After all, a commitment to a social mission is a positive one; it must do good, and not simply avoid doing harm. In effect, this view seeks to invert the process, first deciding whether the financial offer meets the selling investor’s pre-defined financial objectives, then considering its value to the institution’s social mission. That value need not be strictly mission-driven, nor is there any expectation that the ideal buyers are socially-motivated NGOs. Rather, the question is of organizational fit. Extending the medical analogy somewhat, we call this the Best Interests approach. We believe that this model, with its positive obligation on the seller(s), is better aligned with pursuing a social mission while delivering a reasonable financial return - which is at the core of the social investment value proposition. The Conceptual Framework for Buyer Selection consolidates the practices of different investors we spoke to, but also advocates an evaluation process which moves beyond Do No Harm towards Best Interests, while incorporating elements of both. It is structured so that questions are organized based on the type of transaction being contemplated: a minority or majority stake being sold, as part of a consortium of shareholders, or by a single investor. The framework is not designed to be - nor could it be - one-size-fits-all: Each exit is dependent on the investee’s mission and the context in which it operates, as well as the seller’s own objectives. The framework should be thought of as providing a rubric that each seller can expand upon themselves. It can be thought of as a three-stage process: Are there exclusionary factors which mean the potential buyer is manifestly unsuitable; and, if not, is there any reason to believe that regulatory approval for the purchase would be difficult or unlikely? If not, is the initial, indicative financial offer within a predefined range that is acceptable to the seller(s) based on the overall double-bottom line objectives of the fund? If so, how does the proposed buyer, and its strategic objectives for the MFI, align with the social mission and the other best interests of the MFI? We believe that the responsibility of finding the right buyer lies very much with those doing the selling. And if the sale means handing over control - a majority stake - this creates an even greater burden. As we argue in the conclusion, “A buyer selection practice which gives primacy to the financial offer and considers social mission and strategic value to the investee - the investee’s best interests - only to reject egregiously unsuitable buyers, fails to keep in mind that the best interests of the MFI and its clients is, for the investors who put funds into the MIV, arguably the primary reason for investing in the financial inclusion sector in the first place.” We hope this framework will serve as a resource for investors embarking on an equity sale. We hope it could also: help investors to brief external organizations that assist them in exit trajectories (investment banks, advisory firms, etc.); assist new categories of impact investors that have little experience in exits; and serve as a guide to potential buyers to help understand selection criteria and prevent interested (but unsuitable) buyers from wasting time on a futile due diligence process. We hope too that it will inspire further work on an issue which, as equity sales continue to grow, will only increase in importance. Photo by Braden Hopkins on Unsplash author: Daniel Rozas - Sam Mendelson

This blog first appeared on NextBillion April 18 Technology’s double-edged sword Surprisingly, this little axiom long pre-dates social media. In fact, it goes back at least as far as 1973, when artists Richard Serra and Carlota Fay Schoolman broadcast a short video entitled “Television Delivers People.” But whatever people have until now understood of their relationship with technology platforms such as Facebook and Google, there can be no doubt that the mood has turned. For all the Pollyanna-ish talk of liberation, efficiency and modernization, technology is increasingly seen as the proverbial double-edged sword – something not just from which to benefit, but also, as CFI’s Elisabeth Rhyne has argued just this week, from which to be protected. The protection of clients is central to financial inclusion (or, at least, it is when done well). Technology, too, becomes more and more embedded in how financial services can be offered to low-income and excluded client segments. Coming with it are the well-known opportunities to reduce costs, increase outreach, drive financial education and in particular help remote populations access information and tools to increase their income and protect themselves from shocks. The recent development of Social Performance Management frameworks in financial inclusion reflects that these vulnerable target populations, the same ones on the cusp of benefiting from the proliferation of financial technology solutions, need special protection. Cambridge Analytica, with its cynical exploitation of users’ data, may appear like some cartoon villain, but it is merely responding with a supply to meet a demand in a rapidly emerging market. For the user, protection from this, in one form or another, is necessary – and inevitable. And in the financial inclusion sector, ‘client protection’ must stand alongside ‘opportunity’ as we evaluate how financial service providers (FSPs) offer cutting-edge, technology-enabled services and solutions to their clients. This focus on opportunity and protection is the double-pronged theme that underpins the European Microfinance Award 2018 – on Financial Inclusion through Technology – that launched its call for applications on April 17. Technology as liberator The rationale for focusing on technology in this year’s award is clear. Everywhere you look in the financial inclusion sector, technology is at the forefront. Traditional microfinance is costly and human-intensive. The human touch can be important, especially for remote, vulnerable populations, but this translates into the high cost to the provider of delivering services, and, inevitably, a high cost to the client. Reducing costs while still providing the valuable products and services that clients actually need opens the door to an increasing range of technology-enabled solutions that are transforming financial inclusion. Within the sector, technology is a driver for facilitating communication, expanding enormously the access and exchange of information, and instantly interconnecting people and services beyond geographic, cultural and language boundaries. Relatively cheap, transformational technology solutions have been made available for a growing number of users worldwide, including the key segments of women, rural communities and the very poor. Mobile money is a growing alternative to cash. The reduced costs and increased access to the Internet, especially through smartphones, enables new ways for clients to borrow, save, insure themselves and their livelihoods, and send money. But reducing the human element of the microfinance model may threaten some of the safeguards that protect clients, while moving some of the client’s interaction with the institution into the digital realm may risk increased over-indebtedness, fraud, or misuse of data. The risks and opportunities alike will depend to some degree on the service provider, and the landscape of digital and technology-enabled financial service providers is extremely wide. Traditional NGOs, MFIs, cooperatives, commercial banks, local development banks, insurance companies, Mobile Network Operators (MNOs) and Money Transfer Organizations (MTOs) are just some of those implementing technology solutions in different ways and levels of sophistication. The European Microfinance Award 2018 Each year, we at the European Microfinance Platform (e-MFP) launch the European Microfinance Award, in conjunction with the Luxembourg Ministry of Foreign and European Affairs and the Inclusive Finance Network Luxembourg (InFiNe.lu). Besides the cash prizes of €100,000 for the winner and €10,000 for each other finalist, the press exposure and investment opportunities that come from being a semi-finalist, finalist or winner of the Award can be enormous. Now that the call for applications is open, all the details of eligibility and more about the scope, deadlines and timeline of the award can be found in the explanatory note on the Award website. To profile and catalyze replication of the most promising of the technology-enabled solutions, we invite application from FSPs that use technology innovations to expand outreach, broaden product offerings, improve the client experience and increase operating efficiency, all guided by an unwavering focus on socially responsible finance. We anticipate receiving applications profiling a fascinating array of solutions, from technology-enabled credit, savings or insurance products, delivered to clients via mobile operator network, USSD, e-wallet, internet, applications, credit/debit card, ATM or other digital channels or process, to domestic or international payment and transfer facilities, or delivery-side technology solutions that increase outreach and efficiency of the delivery of financial services. We hope to see examples of technology enabling non­-financial services as well, such as financial education for clients. In previous years, the award has covered themes as diverse as access to education, housing microfinance and microfinance in post-crisis contexts. In many ways, each of these focus a great deal on the opportunities – how to best increase access to quality education; how to sustainably provide support to clients who want to build or improve a home. This time, we have sought to be mindful not just of the opportunity, but the risks of technology. For this reason, while the pace of innovation is breakneck and the opportunities virtually limitless, we hope to see applications from providers who not only focus on the benefits of technology-enabled financial solutions, but also place the protection of the client, especially the most vulnerable among them, at the core of their programs. Eligibility for the Award Eligible applicants are organisations active in the financial inclusion sector who use technology-enabled solutions to increase outreach of quality financial services to financially excluded segments. The technology must focus on socially responsible finance for low income, vulnerable and excluded groups. At least one of the technology-enabled solutions the applicant has introduced must have been fully operational for a minimum of two years. Eligible institutions also have to be based and operate in a Least Developed Country, Low Income Country, Lower Middle Income Country or an Upper Middle Income Country as defined by the Development Assistance Committee (DAC) for ODA Recipients. Various types of organisations are eligible including MFIs (all legal forms), NGOs, cooperatives, commercial banks, local development banks, leasing firms, insurance companies, Fintech companies, mobile money providers, mobile network operators and mobile transfer organizations that provide financial services to retail clients. author: Sam Mendelson

in a workshop session at European Microfinance Week 2017, Financial Education (FE) is one of the pillars of financial inclusion. Without it, microfinance clients are not able to make informed and appropriate choices; they cannot compare the costs of financial products, understand the risks of failing to repay their own loans or of taking on someone else’s risk in cases of guarantees, or accurately assess how much credit, and what type, they actually need – if any. FE may be important, but there are key challenges to its provision. First, the link between offering FE and achieving positive impacts are not always direct and clear. Evaluation of the outcomes of FE shows impact to be inconsistent – a function of that impact’s sensitivity to the content and delivery of the education. Second, it is also unclear how, even if the content and delivery to achieve impact were standardised, financial education can be provided sustainably at scale. Provision of any type of training is costly. The Microfinance Centre, working with the ACCION fellowship program, has examined this issue and suggests that MFIs with a focus on customer-level outcomes would attract cheaper funding from social investors, and reap the benefits of more loyal customers and lower default rates. It remains to be studied if these incentives work for more than a limited selection of MFIs. Why? Because empirical tracking of customer-level outcomes is expensive. For the same reason, the ILO-approach of certifying FE trainers may have limited reach. This certification uses interactive learning and training materials, developed in collaboration with Microfinance Opportunities, Citigroup and Freedom for Hunger. While it ensures quality of FE training delivery, its cost might discourage MFIs from using those trainers. New research from Uganda suggests some progress is being made on these two issues of proving impact and reducing cost. German International Cooperation (GIZ) partnered with Uganda’s Mountain of the Moon University (MMU) and the German Institute for Economic Research (DIW Berlin) to compare the impact of more typical FE training formats and the ‘Financial Literacy Ring (FLIR)’ - which is highly interactive, requiring participants to complete exercises and solve hypothetical problems about financial planning, saving, investment, credit and choice of financial institutions. The FLIR is conducted at participants’ workplaces; the more traditional format resembles a classroom lecture: it provides the same content in the same amount of time, but does not incorporate learner activities. 1,291 market vendors, 80 percent of them women, were randomly allocated between the two training formats and a control group that received no training. The study findings are encouraging for FE providers and promoters, in line with more recent literature which reports modest but significant effects of FE interventions with varying characteristics (lengths, delivery setting, etc.) These findings include: FE training, even as short as two hours as provided in this treatment group, does positively affect financial literacy. The differences between the two training formats are not statistically significant. Financial literacy is measured by a scale comprising five surveys that assess respondents’ financial knowledge, considering both whether a question was answered correctly and its difficulty. The FLIR, but not the ‘traditional’ lecture-training format, has a positive impact on investment behaviour and on savings behaviour. FLIR participants increased their average investment by US$27.71 – more than double that of those receiving the ‘traditional’ training format. FLIR participants increased their net savings by US$42.75, a 38% increase over the baseline six month earlier. Though positive trends were seen, there were no statistically robust effects of either training model in terms of behavioural change in financial planning, borrowing and understanding financial institutions. The two models of FE provide a contrast between “active learning” and “traditional lecturing” within standardised lesson plans. The research finds that active learning has a clear positive impact on savings and investment outcomes, but weaker effects on debt-related outcomes. The outcomes suggest the active learning intervention is superior as it works via three mechanisms: increased financial literacy, self-control, and financial confidence, while lecturing only affects financial confidence. Whereas these findings do not directly address the second issue of sustainability, the opportunity to produce significant effects with a highly condensed format – just two hours training at the worksite of the customer – is encouraging: such an intervention can be efficiently integrated into the marketing campaign of any financial institution. The FLIR is comparable to the VisionFund approach, which has developed a set of very short training inputs that are delivered by its field staff as part of their usual routine of meeting groups. VisionFund combines visuals and stories with repetition. Like the FLIR, VisionFund’s approach draws on behavioural economic research. It is clear to those of us working directly in this field that FE works: it does have positive effects on financial literacy and savings and investment behaviour. However, FE is not a panacea, it is not a miracle cure, and its success depends very highly on the design of the intervention, and whether it draws on learning and behavioural theory. It seems obvious that a less learner-centred training format is less effective, and the research bears this out. However, the experiences shared here suggest that it is also less efficient. It is thus important for any MFI – or social investor – to ensure that the learner-centred concept is not watered down into a de facto traditional delivery in a short-sighted attempt at cost control, which misses the longer-term benefits of increased financial capability both for the institution as well as the clients. author: Oliver Schmidt

This latest Dialogue was written by e-MFP’s Sam Mendelson with support from Award consultants Katarzyna Pawlak and Ewa Bańkowska, and e-MFP’s Gabriela Erice and Daniel Rozas, and presents the housing programmes of the ten semi-finalists across several sections. Entitled Building New Foundations in Housing Microfinance , it looks at the innovations underway in what has for too long been a niche product, but which is growing in importance as MFIs respond to the fact that so many of their financial services are used for housing anyway. Now, they increasingly see the opportunity to innovate in providing a range of financial products and non-financial support to help clients improve their homes, addressing issues of safety, security, health and income-generation in the process. Building New Foundations in Housing Microfinance opens with ‘The Challenge of Housing’, and outlines the factors which have kept housing microfinance so relatively peripheral in the past, even in the face of immense demand, and provable positive impact on clients of access to finance for quality housing. The second section is on the European Microfinance Award itself, and outlines the selection process, the eligibility criteria, and the factors that the adjudicators would look to in evaluating the housing programmes of the applicants. The third section presents the three broad ways that the semi-finalists helped clients improve the quality of their housing: providing finance for housing (via housing microfinance loans, micro-mortgages, savings and insurance), providing support for housing (via Construction Technical Assistance, client, staff or builder training, or provision of legal support), and providing social benefits through housing (by improving clients’ security, health, safety and environment, through the vehicle of housing finance). Interspersed throughout these three categories of support, Building New Foundations in Housing Microfinance presents case studies of the ten semi-finalists and the innovation within each of their housing finance programmes. The final section of the Dialogue distils the innovations among the varied initiatives into seven factors for success, including: a genuine commitment to Technical Assistance; use of partnerships; flexibility in products; income-generation opportunities; new approaches to collateral; new approaches to calculating household income; and – especially in the case of the eventual winner, Cooperativa Tosepantomin of Mexico – a holistic, demand-driven and multi-tiered response that reflects the complexity of the challenges being addressed. Thanks from everyone at e-MFP to all the applicants, the members of the Pre-selection and Selection Committees and the High Jury who evaluated the applicants, and the consultants and e-MFP team who oversaw the Award process and this publication. And stay tuned for an upcoming multi-author book entitled Taking Shelter: Housing Finance at the Base of the Pyramid, which will build on the work in the Dialogue and provide a much-needed ‘deep dive’ into the housing microfinance landscape. author: e-MFP

Kashf was established in 1996 to provide microcredit facilities and other financial and non-financial services to poor households. It targets mostly women and aims at enhancing their incomes, savings, food security, and improving access to health and education. Kashf offers a range of products and services including microcredit, micro-insurance (health and life insurance), savings, financial education, business development services, and social advocacy interventions aiming at creating awareness about gender discrimination and social issues at the community level. Kashf’s outstanding achievement, however, is in the field of increasing access to education for children. Education in Pakistan faces immense challenges. With an average of 37 students per teacher, 18% of teachers absent every day, unsafe school environments, 58% of state schools without toilets, 64% without access to water, and 46% of Grade 5 students not able to read, it is evident that there is an endemic quality issue in Pakistani public education, mainly due to insufficient government investment in the sector. Kashf’s winning initiative was “Kashf School Sarmaya” or Kashf Education Finance Program (KEFP), a holistic credit facility providing access to finance to LCPS as well as capacity building and pedagogy training for teachers and school owners, and Training of Trainers on Financial Education for Youth. With this program, Kashf aims to support LCPS by helping them improve school infrastructure, teaching methods and school management skills. More information on the pedagogy and school owner training can be found on the 2016 Award page of e-MFP’s website. What’s happened since Kashf won the 2016 Award? Beyond the increase in programme outreach made possible by the Award prize, in order to better map the baseline data of the clients, Kashf revised its business appraisal forms for the program in 2017 to better gauge school clients’ profiles prior to disbursement. The two-page document assessment process of a school is now conducted more comprehensively, with data collected digitally via tablets. A revised process adds information on myriad other factors, such as grade level student enrolment and attendance, grade level fee acquisition, and lists of schools’ asset and quality and comprehensive details of loan utilisation. After the revision of the business appraisal process, Kashf Foundation has also conducted Training of Trainers of its existing field-based operational staff, the Business Development Officers (BDOs) responsible for loan mobilisation and disbursement. 1,210 BDOs received this training in 2017. KEFP has also addressed a significant challenge related to the supply of quality teachers faced by the sector through the provision of capacity building sessions for schoolteachers and school management. With on-the-ground experience of providing systemised financial education trainings to women entrepreneurs, Kashf had the model and expertise to conduct such trainings. To build on this, Kashf developed the Financial Education for Youth program with the goal of teaching basic financial and numeracy skills to students. Kashf Foundation has also developed an in-house monitoring tool called the Quality Monitoring Framework (QMF) to gather information on indicators related to school quality and progress in order to effectively map the impact of the interventions. Impact assessment results from the latest QMF conducted in 2017 show an increase in 68% of profits for around 77% of the schools, which has led to improved infrastructure, resource materials, healthcare facilities, teaching quality and school management. 34% of the school loans have been used for infrastructural improvements, 33% for furniture, 12% for stationery and resource material provision and around 8% for acquiring computer systems for students and the school administration. With respect to the indicators on education access, 71% of schools have observed an increase in their enrolment of around 28 students on average. On the quality side, 15% of schools have upgraded their first-aid facilities; 23% have developed libraries, which provide a more conducive environment for students to read and learn. Around 20% of schools have also understood the importance of better organising their classroom sessions and responded with the introduction of lesson plans and timetables. Kashf Foundation was an outstanding candidate for the 2016 European Microfinance Award. The evaluation teams were struck by the innovation and vision in Kashf’s program, and everyone at e-MFP was proud to be able to highlight their achievements as they went on to win the Award. We are thrilled too to be able to see the concrete improvements that have taken place in the last year, a clear result of the Award prize being productively invested, and the access to global expertise and support that Kashf has been offered on the back of its profile as a European Microfinance Award winner. We look forward to providing another follow-up down the track. For more information on the 2016 Award, see also the European Microfinance Award website author: e-MFP

The opening one was on the European Microfinance Award – this year on Housing – which gave representatives from the three finalists’ organisations the chance to present their programs. This kicked off with a keynote address from Sandra Prieto from Habitat for Humanity’s Terwilliger Center for Innovation in Shelter during which she laid out the key challenges in increasing access to affordable housing: lack of collateral, lack of guarantees, a relative lack of funding for housing finance, the need for Technical Assistance to help clients either build homes from scratch or expand or otherwise improve their homes, and the problem of land tenure. Despite these challenges, housing microfinance has massive potential for social impact and diversification of MFIs’ portfolios. The three Award finalists, Sandra said, have common elements: first, they all address not only access to housing, but also other housing-related social needs such as water, sanitation, health and energy; and they each put client needs at the centre of their interventions. Augusto Paz-Lopez Lizares-Quiñones from Peru’s Mibanco, focused on the ‘ecosystem’ approach of Mibanco’s housing initiatives and products. As he put it, Mibanco’s housing finance goes beyond products, but is seen as a business model which creates and leverages commercial alliances to address other needs such as sanitation. Frank van der Poll of The First MicroFinance Bank – Afghanistan emphasized the bank’s adaptation of its products to its rural clients, with seasonal re-payments (so as to accommodate harvest periods), and with a TA component which addresses earthquake resistance and water/sanitation needs of clients. And Álvaro Aguilar Ayon of Cooperativa Tosepantomin in Mexico said that Tosepantomin believes housing is key to improving the quality of life of its members – the cooperative’s core social mission. It offers services according to members’ needs, engaging cooperatives in various activities such as the production of bamboo (a local material used in the construction of the houses) and works according to a Sustainable Household model, thus collecting and using rainwater, solar energy and organic composting. Pursuing empowerment, the panellists said, “requires understanding women and their needs within the environment in which they live…and considering them not as individual clients, but…as members of households”. A deeper look at the data, they argued, demands a multi-dimensional and nuanced response, that goes far beyond just how many women can receive microcredit. There still is a long way to go. In some regions, very few women have access to credit or a bank account. Even when they do, it may be husbands who truly make financial decisions, making women’s access to finance a mirage. Anna said that MasterCard takes a systemic approach to women empowerment, determining what the gaps in the ecosystem are and how they can overcome these. They also determine how they can leverage technology to provide opportunities and innovative solutions. Bdour said that Microfund for Women defines women empowerment as requiring material, cognitive, perceptual and relational change. Of these four levels, financial services have not yet been successful in relational change. Bobbi of Grameen Foundation adds a fifth level to work on: structural change – the anthropological barriers that keep women from feeling empowered to be financial actors. Imran of Innovations for Poverty Action said that the current challenge for women empowerment is intra-household dynamics, and how to measure this. More details on the discussion in this intriguing session are covered by Bob Summers in MicroCapital. The third and final plenary of European Microfinance Week was the closing session: Microfinance: positioning ourselves for the next decade. Moderated by Paul DiLeo of Grassroots Capital Management, the panel included John Alex of Equitas Small Finance Bank, in India; Tim Ogden of the Financial Access Initiative; and Renée Chao-Béroff, of PAMIGA. How will the sector position itself in the next decade? Who will be the new providers? What client segment will be reached? How will technology enable outreach without compromising social mission? There is a need for investors that have objectives aligned with this task. Neither banks nor FinTechs nor profit-driven business models “cloaked in impact jargon” will tolerate the trial and error, costs and sub-optimal profits required to address the intractable challenges facing the poor in all its dimensions. FinTech remains the elephant in the room whenever these discussions reference ‘impact jargon’ or ‘lip service’. The challenge, as Tim said, is that while FinTech has provided great contributions to microfinance, digital finance in itself is not committed to high-quality services that have a social impact purpose. “FinTech’”, he said, “is no silver bullet.” (Or rather, it is, because the proverbial silver bullet is itself a myth). Renée argued that MFIs that see themselves as a means and not an end in impact value chain will be able to innovate, while the others will ‘miss the train’. John argued that reaching “massive demand” such as in India “will require specialisation and sychronisation of products”. Tim was relentlessly contrarian: “The microfinance movement began with group of institutions that cared about customers; the current digital providers expressly don’t…they care not about providing value but about extracting value”. But the increasing involvement of commercial banks “will be an amazing thing”, he said. It will mean that microfinance is really achieving its role of bringing the unbanked into the formal financial system. This, itself, will be about more than just extending access to microfinance clients. Or as Paul has since written after the plenary: “Eliminating poverty is hard and will require continuous innovation and openness to new products, business models and strategies. This will likely require new thinking about how microfinance can combine with other services to the poor to form an “ecosystem” of support rather than being seen as an end in itself”. See NextBillion's video recording of Friday's plenaries here author: Sam Mendelson

Regardless of our profession, most of us like to think we know what we’re talking about - especially during this Financial Inclusion Week. But how much do we know, really? Assumptions and heuristics (‘rules of thumb’) dominate more than most of us would readily admit. And why not? Usually they’re good enough. Before Galileo upended astronomy, existing models, regardless of how wrongheaded, were still good enough to maintain calendars, predict agricultural seasons, and support navigation. Since the beginnings of modern microfinance in the 1970s, we have likewise relied on similar orthodoxies: that take-up of microcredit was a demonstration of its inherent value to the clients; that on-time repayments were evidence that clients were not over-indebted; that competition would inevitably lead to lower interest rates. And, perhaps most importantly, that targeting specific groups of clients would inherently create social benefits: lending to the poor would alleviate their poverty, lending to women would strengthen their roles in society, lending to farmers would improve their yields, etc., etc. Starting in 2010, a new type of research methodology not previously attempted in the sector - the Randomised Controlled Trial (RCT) - began to upend many of those notions, most importantly that microfinance loans have on average a statistically significant and positive impact on either the incomes or quality of life of clients. With their large samples, longitudinal timeframes, and randomised treatment and control groups, RCTs are able to isolate correlation - and sometimes causation - from external variables, subject to the boundaries of confidence intervals. A compendium of six such RCTs in 2015 appeared to put the earlier notions to rest (although there is, as David Roodman observed in his book on the impact of microfinance, Due Diligence, some nuance required here: “The absence of proof is not the proof of absence”). Yet as Timothy Ogden later pointed out in his Case for Social Investment in Microcredit, these studies do highlight an important point - the focus on the average misses a great deal of variation among clients. Some do well, others do poorly. In principle, if lenders were better placed at identifying the clients most likely to benefit, the outcomes of their loans would be more positive. That’s where another research innovation comes in: financial diaries. Although used as far back as the 1990s, this approach gained attention at the same time as the RCTs, with the publication of Portfolios of the Poor in 2009. The Diaries take a diametrically opposite approach from RCTs; with small samples, they make more modest claims of providing a statistically representative measure of client outcomes across a large population. Instead, through regular enumerator meetings over months or years, complemented by daily household diary-keeping, they seek to paint a deep picture of the true lives of financially excluded families. By doing so, they are able to uncover details that primarily survey-based techniques like the RCT cannot capture. For example, Portfolios raised a key aspect of poverty that had not been widely understood previously - that the ups and downs of income and expenditure over time, or ‘cash flow volatility’, was as much a challenge to poor households as their overall low income. And that many poor households were using a wide range of formal and informal financial tools, including microfinance, to ‘smooth’ this volatility. Portfolios spurred a host of other financial diary projects. Some, like the US Financial Diaries, have been widely read and have made major contributions to understanding the precarious financial lives of poor and middle-class American families, who face similar challenges of cash flow volatility as the much poorer families in Bangladesh, India and South Africa described in the earlier Portfolios. Meanwhile, other studies have had a narrower focus, but have nevertheless made important contributions to understanding clients and their needs. One of us was a program lead on the Energy Diaries, which tracked 90 Indian households’ acquisition and use of different energy sources (such as kerosene, charcoal, wood, grid electricity, or LPG) as well as use of distributed renewable energy products (such as a portable solar lights or improved cookstoves) and other economically-productive and energy-dependent assets (such as a mobile phones, motorcycle, kerosene lamps or mud stoves). The result was a richer understanding of how families combine different energy sources into a special type of “portfolio” to meet diverse needs, and the role of culture, cost, and government subsidy in guiding energy use. Other studies have looked at a specific segment. The Garment Worker Diaries is studying the lives and wages of garment workers in Cambodia, Bangladesh and India. Other Diaries projects have highlighted the role of remittances, credit, and other financial products in making business investments, paying for education and other family needs in countries around the world. Each has produced a wealth of quantitative and qualitative data to highlight previously poorly understood aspects of low-income people’s lives. The spate of RCTs in the last few years was the best thing that could have happened to microfinance. There is an inherent honesty in the well-designed RCT. Moreover, their sober findings put much-needed brakes on the hype of microfinance as a one-size-fits-all solution to poverty, and the lazy virtuous circle of donors, practitioners and observers endlessly repeating anecdotes of women leveraging fifty-dollar microloans into thriving community businesses. Yet like microfinance itself, RCTs are no panacea. Aside from their methodological limitations and high cost, there is more to client-centric financial inclusion than can be revealed through the lens of quantitative impact measurement alone. Fleming discovered Penicillin not by iteratively double-blind testing variations of a medication on large groups, but by diligent and close observation of small samples, leading to an unexpected insight. There is, obviously, a place for both approaches. Diaries (though not cheap, either) can fill the gap left by a singular focus on randomised studies. But too often, Diaries research exists in a vacuum, and it is difficult to identify the practical application of the wealth of client household and business data they produce. Beyond conference presentations, where is the identifiable effect on product design, on SPM, on regulation, on how financial institutions work with low-income and excluded segments to bring them into the formal financial ecosystem? There will of course be examples of how this has worked well, and we welcome any retorts to this that wave the flag for the in-practice outcome of Diaries. Our simple point is that, while the impact of RCTs on financial inclusion has been considerable, and overwhelmingly positive, too often it’s hard to identify how Diaries translate theory into practice. These broad approaches are complementary, and the sector would do well to actually use the results of both as it innovates in the years to come. Photo: Direct Relief via Flickr author: Daniel Rozas - Sam Mendelson

Today, as our friends and colleagues across the continent mark European Microfinance Day, we would like to offer a view from the South. After all, e-MFP occupies a distinct place – we’re a platform for Europe-based microfinance actors who are specifically focused on working in the South as their core objective. Like an astronomer atop a lonely mountaintop, we find ourselves in the heart of Europe, yet our minds are focused on the world beyond. So what does European microfinance look like when seen from the South? Well, it is a bit like looking at the stars – the light shines bright yet comes from a distant past. Microfinance institutions (MFIs) in Europe look remarkably similar to the global MFIs of the 80s and 90s -- small, local organizations with a deep focus on lending to micro-enterprises while maintaining basic financial sustainability. They're treading the paths laid by MFIs in countries like Bangladesh and Peru. MFI clients in Europe and in the South share one key thing in common: these are people to whom banks aren’t interested to lend. In the South it usually means that their enterprises are informal, without proper documentation and thus no paper trail. In Europe it often means they are too new to have built up a history and the same paper trail banks like to see. In both cases, they rarely have collateral they can provide. Above all, microenteprises everywhere are often simply too small to bother – the combination of time required to understand the business and its operations juxtaposed with the (relatively) small amount of funds they need is a formula that just doesn’t fit within the traditional banking model. That leaves room for a specialist lender that can spend the time with the borrower, understand her business needs, and perhaps offer some business training or other non-financial services. In short, a microfinance lender. But there are also large differences. The places where MFIs operate in the South are not just dealing with a lack of credit. Poor families, often in rural areas, have little access to any financial services – current accounts, savings or insurance, the ability to make payments or send money without using cash. That is the reason why MFIs in the South have over the years broadened their focus, providing opportunities not just to borrow, but also to save, buy insurance, send money to their family in the village. The evolution of social missions and terminology, from microcredit to microfinance to financial inclusion, has mirrored a sector’s increased understanding of poor clients and their financial needs. Meanwhile in Europe, MFIs have little need to broaden to such services. Most of their clients already have a bank account. Nearly all use card payment services to process client payments. Their need for the type of insurance that’s so critical in the South is much reduced – basic health care is nearly always assured one way or another, regardless of personal means. Children’s education isn’t dependent on personal savings or loans. That leaves the European MFIs to focus on the one critical thing their clients need that others cannot or will not provide them – credit. So it is both peculiar and also completely proper that while the MFIs in the South that created and perfected microcredit have been shifting and broadening their services in all sorts of ways, European MFIs are firmly rooting themselves in the core lending practices perfected decades ago. The two share a name and a common origin, but their paths are diverging. And as they do, both South and North will continue to share and exchange experiences and get better at their missions. We look forward to watching and supporting these developments as they unfold. Photos: Johan Fantenberg/Flickr, Vicente Diamente/Flickr author: e-MFP

Mennonite Economic Development Associates). “Empowering youth is vital to see the change in Nicaragua that we seek” Mrs Herrera says. “I believe education, in addition to microfinance, is a powerful tool to <…> empower youth” she adds. MiCrédito is one of few MFIs today in the country to provide student loans at very low interest rates, enabled through Kiva – the San Francisco-based not for profit. While the Sandinista government managed to reduce the illiteracy rate in the country dramatically in 1980 (from 50.3% to 12.9% within only five months<1>), which earned it the UNESCO Literacy Award, today’s education level in the country is relatively low compared to the rest of Latin America, with around 45% of the population attending secondary education, versus an average net enrolment rate of 74% in 2011 across Latin America<2>. In what could be her motto, Mrs Herrera adds: “How does one get out of poverty? It is through education”. Daughter of micro-entrepreneurs, Mrs Herrera has been involved in microlending since the 1990s through Fundación CHISPA, which successfully pioneered the first microfinance programmes in Nicaragua through the support of MEDA. After establishing the first regulated MFI in the country, CONFIA, in 2000, MEDA and the management team later founded MiCrédito to specifically target the underserved rural market of the country. Today the company counts 116 employees and 12 subsidiaries spread across Nicaragua. MiCrédito successfully survived the global financial crisis in 2008, which also hit the Nicaraguan microfinance sector. During this time, several clients defaulted on their debt and the microfinance payment culture deteriorated significantly, thus igniting a social Non-Payment Movement (“Movimiento No Pago” - MNP) composed mainly of farmers who protested the high interest rates and encouraged their followers to stop honouring their payments. Within this context, a number of microfinance institutions and NGOs defaulted, while many donors left the market: in less than three years since 2008, total microcredit portfolio in the country dropped 52%<3>. Questioned about the factors behind the endurance of her organisation throughout the tough MNP years, Mrs Herrera lists four key factors. The first one is “creativity”: the introduction of innovative services such as microinsurance which served the same customer segment. “These were like the heroes of the story because they increased and sustained the turnover” she explains. She emphasises the importance of a committed team – especially at the managerial level - that is willing to cut its pay to help bring down costs, like she did together with two other senior managers during this time. Another key factor was the presence of a long-term partner like MEDA, as well as a committed donor like Kiva, which supported MiCrédito during the MNP. Finally, Mrs Herrera mentions client loyalty: although the company experienced default rates as high as 15% between 2009 and 2011, MiCrédito managed to maintain a loyal client base whereby the majority of the clients honoured their payments: “I tried to encourage my team <…> we need to keep fighting for the 85% that is still paying ” she added. The MNP prompted significant changes for the broader financial services sector in Nicaragua: “the crisis is the mother of innovation”, she points out, “much of the industry reinvented itself”. Historically, the country has relied heavily on public remittances and international donors. Starting in the late 90s when private banking was legalised, several microfinance institutions (MFIs) emerged with the support from international donors, which viewed microfinance as a tool to reduce poverty: between 2000 and 2008 the microfinance industry experienced exceptional growth, especially in the regulated segment (42% annual growth) which received the bulk of the multilateral support<4>. At its apex, the Nicaraguan MFIs disbursed a total of US$ 560 million<5> loan amount to over half a million clients, i.e. about 10% of the total population. <6>, focuses on the microfinance sector. The databases of the credit bureaus are fed by data delivered independently by regulated and non-regulated financial institutions in Nicaragua. The microfinance sector in the country today is primarily driven by consumer credit: nearly half the loans registered in 2016 by the microfinance institutions adhering to CONAMI – the National Microfinance Commission (Comisión Nacional de Microfinanzas) - are used to finance consumer credit (48%), followed by commerce (22%)<7>. Consumer credit has gained considerable ground since the financial crises, and it grew by about 26% per annum since 2014. However, Mrs Herrera argues these data do not necessarily signal overindebtedness due to the fact that today’s financial institutions providing consumer credit are regulated and therefore their practices are more transparent. “I believe that if we teach people to have an appropriate consumption, we can help generating jobs in other areas” she adds. This is particularly true if directed toward the productive sectors of the country, including the agricultural sector and the small entrepreneurs, which are at the core of microfinance institutions like MiCrédito, she stresses. Nicaragua today has progressed from one of the poorest and most heavily indebted countries of Central America in the early 2000s<8>, to the second fastest growing economy of the region after Panama, registering a 4.5% growth in 2016<9>. Public debt shrank from the heights of 117% of GDP in 2003, to nearly 30% of GDP in 2015<10>. Social development followed through: the number of people below the poverty line also decreased from 20.5% in 2001 to 6.2% of the population of 6.1 million in 2015<11>. However, social disparities persist, with the richest 20% detaining over 52% of the resources<12>. If on the one hand the Léon-born mother of three demystifies consumption credit, she also emphasises the importance of enabling people in the bottom of the pyramid to save money. According to Mrs Herrera, Nicaragua lacks a “financial democracy”, given that the banking system is dominated by five banks which impose minimum requirements for clients to access a savings account. Therefore, a proportion of the population today is still excluded from the banking system, and thus from any savings products. Through her presence on the board of ASOMIF, Mrs Herrera is pushing to change the current law 769 of promotion and regulation of microfinance introduced in 2011, by enabling microfinance institutions like MiCrédito to provide saving services in addition to credit services. She believes this would allow MFIs to reduce interest rates to their clients through a reduction in financial costs, as well as benefit the whole economy through the inclusion of about half million people (i.e. those currently served by the institutions registered in ASOMIF) which today are excluded from the macroeconomic statistics of the country. Mrs Herrera, who speaks softly and persuasively, is very determined in pursuing her goals within the microfinance sector. “I think this is a matter of justice” she says. <1> UNESCO, 2006. Nicaragua’s literacy campaign. Retrieved from: http://unesdoc.unesco.org/images/0014/001460/146007e.pdf <2> UNESCO, 2014. Regional Report about Education for All in Latin America and the Caribbean. Retrieved from: http://www.unesco.org/fileadmin/MULTIMEDIA/HQ/ED/ED_new/pdf/LAC-GEM-2014-ENG.pdf <3> J. Bastiaensen et Al., 2013. After the Nicaraguan Non-Payment Crisis: Alternatives to Microfinance Narcissism. Distributed by Development and Change 44(4): 861–885. DOI: 10.1111/dech.12046 <4> CGAP, 2005. Country-level effectiveness and accountability review (CLEAR). Nicaragua. Retrieved from file:///C:/Users/uko/Desktop/research%20papers/CGAP%20review%20Nica_2005.pdf <5> J. Bastiaensen et Al., 2013. After the Nicaraguan Non-Payment Crisis: Alternatives to Microfinance Narcissism. Distributed by Development and Change 44(4): 861–885. DOI: 10.1111/dech.12046 <6> ASOMIF is a network counting 23MFIs today <7> CONAMI, 2016. Statistics. Retrieved from: http://www.conami.gob.ni/index.php/estadisticas-consolidadas#menu-04 <8> CGAP, 2005. Country-level effectiveness and accountability review (CLEAR). Nicaragua. Retrieved from file:///C:/Users/uko/Desktop/research%20papers/CGAP%20review%20Nica_2005.pdf <9> The World Bank, 2016. Data, Nicaragua. Retrieved from: https://data.worldbank.org/country/nicaragua <10> Ibid <11> World Bank, 2016. Data, Nicaragua: Poverty and Equality. Retrieved from: http://povertydata.worldbank.org/poverty/country/NIC <12> Ibid author: Marina Iodice - Kiva

A few weeks ago, headlines covered former U.S. President Jimmy Carter’s health while building Habitat for Humanity Homes in Canada. For the 34th year, Jimmy and Rosalyn Carter brought hundreds of volunteers to construction sites where donated materials and contributions from donors were used to build homes for low-income households. That image of volunteers coming together to build a home is what people expect from Habitat for Humanity. But some are surprised when they find out we also sponsor a US$100 million investment fund for housing microfinance that finances work around the globe. Why do we do that? Some of Habitat’s history with microfinance and markets traces back to an accidental discovery. Typically a Habitat for Humanity house comes with a zero percent home loan to the family. Nonetheless, regulations on non-profits in Egypt prevented Habitat from lending out any funds; and a microfinance institution (MFI) offered to help. So a partnership formed whereby our funding was lent to households via an MFI partnership. Soon after, the MFI began lending its own money for housing. At first Habitat did not pay much attention to this – it wasn’t our program nor was it being done with our funding, after all. But eventually we realized how powerful this was. The MFI went on to lend much more for housing than our program ever could, and competing financial institutions responded with similar products. This was the beginning of a change in the market that would result in much more widespread access to housing finance than any of our non-profit programs could have on their own. And, indeed, unmet demand for finance for housing is massive. Penetration of housing finance around the world is extremely limited – the World Bank’s FINDEX report (Demirguc-Kunt, Klapper, 2012) shows, for example, that just 2% of adults surveyed in India had housing finance products for the purchase of a home, with similar low figures in Uganda (1%) and Mexico (3%). Access to less formal construction loans were equally low in all three countries with less than 6% of households reporting access. Sometimes without knowing it, microfinance was already involved. Evidence showed that people were already using enterprise loans to improve their homes. So we asked ourselves, “What if we could get the microfinance market to embrace housing as an intentional product?” Estimates showed that housing products comprised about 2 percent of microfinance portfolios worldwide. If we could work to raise that to 10 percent, an estimated 15 million families would gain access to over US$4 billion of capital for housing. We took on the challenge. We began by offering technical advice – providing product development expertise to leading institutions to develop housing microfinance products. Investors, however, were often less sanguine. Doubts emerged about whether housing was a “productive investment” for a household and whether a quality housing loan portfolio could be sustained. It was clear that housing needed to be better understood by investors. So we launched the MicroBuild Fund in 2012 as the first microfinance investment vehicle dedicated to housing. MicroBuild’s goal is to create a portfolio of investments from which institutions and investors in the industry can learn and better understand housing as both a product and an investment opportunity with the ultimate goal of attracting other investors to the sector through MicroBuild’s demonstration. Habitat for Humanity and its Terwilliger Center for Innovation in Shelter brought OPIC, Omidyar, and Metlife together as the sponsor investors of the fund, and hired Triple Jump B.V. to be the fund manager for MicroBuild. Triple Jump was immediately interested in partnering with Habitat for Humanity to make the MicroBuild Fund a reality, because of the clear need to help local financial institutions offer dedicated housing products to their end-clients. Having analyzed hundreds of MFIs over the years, offering both investment capital and advisory services, we were aware how powerful a combination of technical assistance and funding can be. With Habitat for Humanity’s Terwilliger Center providing technical assistance to financial institutions on both the institutional as well as end-client level, and Triple Jump looking at the investment angle, the complementarity was there from the start. I am convinced MicroBuild is a change-driver and will have a lasting effect on the industry. Patrick Since housing finance products were new to many of the investee institutions, Habitat’s Terwilliger Center for Innovation in Shelter engaged with institutions to support them in the product development process and in gaining insight into local housing market conditions and construction methodologies. Though it is still early, the business case for housing microfinance is beginning to emerge. For 93 percent of MicroBuild investees, their housing product is performing better than the general portfolio of their institution. Interest rates are generally comparable to enterprise loans, with a few investees offering rates one or two points lower (APR). Evidence also suggests that the housing product is being used to attract new clients as much as it is to incentivize proven clients to stay with a particular financial institution. Steven Offering a housing loan product is clearly a good addition to the product portfolio of the financial institutions with whom we work. On the one hand, end-clients benefit from tailored products that fit their underlying financial needs in terms of loan size and repayment terms, while they often also can benefit from advice regarding technical issues. The institutions, on the other hand, profit from a generally well-performing portfolio, and since housing is often a source of growth, the institutions are able to cross-sell to existing clients as well as attract new clients. From an investment perspective, we deem financial institutions that are able to build a well-structured housing portfolio next to their general loan book to be less risky. Patrick Close to US$76 million has now been invested by MicroBuild in housing microfinance products in 43 institutions across 26 countries. MFIs have directed an additional US$167 million of capital to housing as they take risks to finance the growth of housing products to keep up with client demand. More encouraging yet, a vast majority of financial institutions we’ve worked with see housing as outpacing the growth of other product lines. But all that pales in comparison to the capital needed to adequately finance the third-highest spending category for the base of the pyramid. Many more investors and stakeholders are needed. As MicroBuild grows, we’ll continue to share information and knowledge to help provide insight into what’s working—or isn’t. We ask you to join us. As practitioners, investors, and donors we ask you to look at housing as a foundational issue for development and as an opportunity for market-based intervention and investment opportunity. author: Patrick Kelley - Steven Evers

In 2010, Omtrix, a microfinance fund manager based in Costa Rica, saw that the greatest barriers to higher education for low-income youths was lack of access to financing. Omtrix wondered if this need could be met by microfinance institutions. Serving this sector would certainly meet their mandates, and MFIs already knew how to reach and serve low-income people. Omtrix hypothesized that under the right conditions, and with the right approach, student loans could be a viable product for MFIs. They decided to create a new fund to promote higher education. The new fund, called The Higher Education Finance Fund (HEFF), would lend to MFIs so that they could in turn on-lend to bright young people whose aspirations lay beyond their financial reach. HEFF’s funding would be accompanied by a technical assistance program to train MFI staff in how to appraise, monitor, and collect on student loans, as well as offer other tools to launch a new product. Additionally, HEFF would serve as a pilot program to be replicated by other MFIs or funds in the future and across the globe. Over the past six years, HEFF’s original assumptions have been tested, and the innovative program has experienced some growing pains. Omtrix has begun the process of capturing lessons learned and best practices to disseminate those lessons to anyone who may want to replicate or build on HEFF’s model. In 2016, Omtrix published Cross Fertilization Workshop in Student Lending: Lessons Learned, a paper which captures the experiences, challenges, and best practices of HEFF’s FIs. In 2017, TAF funders commissioned a business case study to analyze the viability of student loans as a double-bottom line product.<1> Most lessons learned challenge HEFF’s original assumptions. When HEFF’s student lending methodology was conceived, it was geared towards full-time students who recently graduated from secondary school. The loans would be long term, double the length of years of study. During higher education enrollment, students would only pay interest rates. After graduation, borrowers could opt for a grace period of up to six months between graduation and employment before starting to amortize the loan. It was also expected that FIs would market to children of existing clients in their portfolios. In practice, the bulk of the methodology was sound, and adopted as-is. HEFF’s portfolio FIs were enthusiastic about the lending method, but soon after implementing the product discovered some snags in product launch. For example, credit officers were reluctant to experiment with the new student loan product, and busy managers couldn’t give student loans the attention necessary to grow a new portfolio. On the IT side, student loans required new forms and processes, and banking software wasn’t always readily modified. As for the clients, few were recent graduates or full-time students. The average age of HEFF’s student borrowers is 24, not 19, and most of them work full time and study nights and weekends. Often, clients struggled to adapt to the long terms of student loans, and preferred short, renewable loans without grace periods, preferring to begin paying back the loan immediately upon signing it. Market penetration proved a challenge as well. MFI’s initial expectations turned out to be optimistic and institutions had to penetrate a new market segment, but their traditional marketing methods failed to engage tech-savvy millennials. When reaching young adults, MFIs had to invest in social media marketing, and snazzy online videos that engage young people, while also educating them about the product. A real launch point for many institutions came when they formed alliances with popular universities and institutions so that prospective students were exposed to the MFI’s marketing materials while visiting the schools. HEFF helped MFIs meet these challenges by expanding TAF’s services to include funding for new marketing methods, and on-going consultant visits past initial training. These consultants had exposure to the solutions devised across HEFF’s MFIs, and shared those ideas with other MFIs facing the same challenges. With the wisdom of hindsight, these adjustments seem obvious, but in practice, MFIs have fixed operational routines. The theory that a new product may seamlessly glide into place within that routine was quickly disproven. Developing and launching a new product is disruptive and requires focused attention, fresh approaches, a lot of experimentation, and a distilling and dissemination of the best solutions, which is what HEFF plans to do. <1> For a copy of Cross Fertilization Workshop in Student Lending, email info@omtrixinc.com. The business case analysis will be published later this year. Photo credit home page © World Bank/Dominic Chavez via Flickr author: Anais Concepción - Omtrix

As part of that change in the international microfinance scenery, we have witnessed many MFIs around the world expanding beyond micro loans to include SME loans. Such decision, many times deemed as a “natural growth path”, is caused by more competitive markets that make it more difficult for MFIs to retain traditional clients, higher costs for regulated MFIs, and a natural pursuit of continued growth. Under those circumstances, many MFIs have considered the possibility of “crossing over,” offering loans in higher amounts to their own clients and seeking to enter a new market segment: small and medium enterprise loans (SME loans). The rationale for crossing over as a way to follow a path of “natural growth,” is often times based on the premise that to serve this new market segment, it is not necessary to make major changes to the current methodology, processes, and products, and that MFIs hold a competitive advantage in this market because they already have an infrastructure and a broad knowledge of the microenterprise market. Such reasoning is true up to a certain extent, since by the time most institutions formally decide to serve the SME loan segment many of them already had relatively large loans in their portfolios, which had been “naturally” acquired as they grew and developed. However, some MFIs that decided to go beyond microloans to SME loans, have acknowledged that they underestimated the challenges and overestimated their capacity to serve the SME loan segment. Over time, these organizations have had adverse results on the portfolio, significantly affecting their financial health, and that of the financial market in which they do business. A recent study sponsored by Calmeadow entitled “Crossing Over: The Experience of Microfinance Institutions that Entered the SME Loan Market”, was conducted with the aim to learn about the experiences of MFIs that made the transition. The study was based on a small sample of MFIs in Latin America that were surveyed and visited to learn about their experience. The authors of the study found that MFIs invariably learned, sometimes the hard way, that SME loans were not simply bigger microloans, and that they required a new and different approach. The impact of not managing SME loans correctly could be significant, not only for the institution (that may either take losses on that portfolio or abandon SME loans altogether) but also for the borrower. Therefore, it is fundamental to acknowledge that each SME loan represents a greater risk to the organization given that increasing the amount of the loan also increases its risk. In principle, a microfinance institution can withstand the impact of losing a small loan without major problems. However, that does not apply for loans of significantly larger amounts. An SME portfolio in arrears can significantly affect a microfinance institution’s net worth, compromising its sustainability. Consequently, any microfinance institution that decides to serve the SME segment should establish clear methodologies and set up a specialized department for the management of higher amount loans. The study concludes that the difference between microenterprise and small enterprise goes beyond the purely semantic. The success of “crossing the border” will depend on whether such decision is framed in an appropriate strategy for the SME loan segment. Moreover, the likelihood of success for a microfinance institution serving that market will depend upon the institution’s preparation and adjustment prior to the experiment. The good news is that if done correctly, serving the SME market can successfully expand the product offering of the MFI, and will contribute to strengthening the market and financial position of the organization. author: Georgina Vázquez - Calmeadow