The Popping Point

The growth of the microfinance industry worldwide has led to measurable improvements in the standards of living of millions of individuals. A A recent blog post in Newsweek , however, questions exactly how measurable or drastic these improvements have been. Critics suggest that the social impact claims of many MFIs around the world hyperbolize the true impact, and that the worldwide popularity of this $25 billion industry brings back eerie memories of the recent housing and dotcom bubbles. The post fails to recognize, however, what really is at the core of microlending: A high touch approach, upward mobility, and value creation through economic inclusion.

Behind the numbers

Defining social impact is something the Capital Good Fund and its partners have devoted significant energies to in recent months. An important part of our social impact evaluation development has been placing an emphasis on the qualitative feedback of each borrower. Nobel Prize winning economist Paul Krugman in his book, The Return of Depression Economics, describes the current economic crisis as self-fulfilling phenomenon rooted in the confidence—or lack of confidence—of consumers and investors. Both the bank runs of the 1930’s and the demise of shadow banking, particularly investment banking, today share a common element: Severity attributed to the deteriorating confidence of consumers and investors. Sure, sub-prime mortgage backed securities were not a totally sound investment for many banks, but at the root of this crisis, and many of the bubbles of recent history, has been the amusement park roller coaster that is consumer confidence.

The point of this seeming apparent digression is to highlight something fundamental about microfinance: Confidence matters. The numbers themselves often do not provide an accurate or fair depiction of the impact that a small loan is having on the life of a borrower. Quantifying changes in household income, total value of assets, and number of total dollars borrowed are simpler than quantifying an increase in self-confidence, belief in one’s own ability to communicate, think, and act effectively, or an increase in individual empowerment and self-efficacy. Moreover, it is difficult to measure these qualitative changes at a given point in time. One can set up a system of equations with x amount of constrained variables and y amount of free variables to ultimately conclude that borrower q has seen a z dollar increase in household income. However, it’s much harder to extrapolate, based on data alone, what a small loan or technical assistance today may mean for a borrower tomorrow. Just as much as microfinance is about changing the world, it is also about changing realities, inspiring people one by one so that each individual or family has the opportunity to take part in a system that many of us already have access to and benefit from.

Bubble or no Bubble?

The thought of a bubble immediately brings volatility to mind, the notion of an ungrounded, baseless phenomenon with a weak foundation and subsequently weaker overlaying structure. This was the case with the recent housing bubble, an unreasonable inflation in residential prices based on valuations correlated to the enthusiasm with which speculators bought up mortgage-backed securities. This was also the case with the dotcom bubble, an increase in stock prices based on speculation of value instead of actual company worth or ability.

Microfinance, however, has a strong foundation. Its borrowers are people whose commitments to their homes, businesses, and families significantly outweigh the amount of borrowed capital. Walking away from the market—as many homeowners did during the housing bubble as well as during the dotcom bust—is much less of an option. Sure, borrowers may choose not to repay loans. Consistently high repayment rates for MFIs (under 3% for many organizations such as Grameen Bank), however, indicate the stability of the industry. The microfinance industry is based on worth rather than speculative value—The worth and ability of each client to use small capital infusions, added value from technical assistance, and renewed confidence to work towards a better standard of living for themselves and their families. The tremendous growth of the industry, then, is not unreasonable or ungrounded. It is rooted in the idea of value creation and skills development, of making ends meet and people with the confidence to better their qualities of life.

The Capital Good Fund’s approach

Helping clients create long standing, grounded value is at the core of what CGF means by building an inclusive economy. Inclusivity is not only number of dollars lent out or number of loans helped to leverage from traditional financial institutions. Mobility is not just percentage change in household income or number of employees. These measures are extremely important in thinking critically about the impact that MFIs are having on their target populations as a whole. However, CGF believes that equally important is the perceived impact from borrowers themselves, the qualitative changes in the skills and confidence that clients arrive at over time, starting with the small loans we provide. There’s no telling how many people a borrower may inspire to start businesses or become more involved in their communities because of his or her own renewed self-confidence. It is this kind of value CGF also tries to create. These changes may be hard to model with equations, but there’s nothing bubble-like about them.

Trust in Lending

There’s something amazing about a picture. The fact that one can capture simultaneously a single moment and the culmination of years of hard work, struggle, passion, commitment, and dedication with a simple button click is unique. When I saw the pictures of the daycare center of our first business borrower, Nina, I realized this powerful duality of a photograph. Nina’s business, a daycare center for children, was equipped with a number of playhouses, some depicting city police stations and others suburban homes. These playhouses, financed by the Capital Good Fund, were now Nina’s—rather, now belonged to the children that have begun to, and will continue to, attend Nina’s daycare center. By extending to Nina—a woman with little collateral, minimal financial resources, and without access to loans from commercial banks—a loan of $3,000, Nina could now live her dream of opening up a daycare center to guide, inspire, and encourage those children seeking her services.
It’s one thing to read the stories of Grameen Bank borrowers or to hear of the successes of a struggling family in a low-income urban environment. It’s a totally different feeling, rather, a totally different realization to begin to see these successes yourself, to feel the happiness of the struggling urban resident, to be a part of that story. I think that as the Capital Good Fund has begun to give out loans and begun to receive repayments from borrowers, I’ve developed in my ability to trust. Not that I was ever a cynic without any hope for the future or trust in humankind, but witnessing first hand what a small loan means for a low-income woman—mother—that wants to start her own business has elicited in me a sort of trust in our ability as human beings to collaborate, cooperate, and effectively pool resources to realize what individually seems much more impossible. Moreover, watching repayments roll in, even if they are only the first or second of the 12-month term, has strengthened my trust in our ability to establish reciprocal, mutually beneficial relationships with the residents of Providence. While we have wrapped up our pilot lending phase, delivering 6 loans totaling approximately $11,000, I’m sure that as this summer progresses, so will the trust I have that CGF and our clients will be able to work together for the betterment of Providence. It is my hope, rather, my trust that we will continue to help realize dreams ranging from civic engagement to the establishment of daycare centers to substantiating existing business to support families and households.

Capital Good Fund – Elevator Pitch

The Capital Good Fund

by Nabeel Gillani

The word “hope” has thus far characterized my first year at Brown, due in large part to the hope that many hold for the new Presidential administration and to the personal hope I have to maximize my four years at school.  Working with my fellow classmates, the Swearer Center, and the community of Providence to develop the Capital Good Fund, however, has made me aware of a hope I always assumed existed but never experienced firsthand.  I have learned that low income families in Providence have an ever-prevalent hope to better their own lives and the lives of their families.  In our focus groups with potential borrowers, I saw this hope for a better life present in one elderly woman’s idea to start a small sewing business, and another woman’s disdainful recollection of how a loan shark had charged her 300% on a loan of $1,000.  I saw hope for a lending institution that cared less about maximizing profits and more about working towards the capital social good.

It is the hope of our future borrowers that is the backbone of Capital Good Fund.  I understand that giving people money is easy but that providing these borrowers with ongoing support and training will be difficult. I understand that incorporating as a 501 c 3 will be simple compared to establishing an organization that has a solid plan for sustainable growth.  I recognize that during the process of creating and scaling the Capital Good Fund, obstacles will arise that seem insurmountable, and motivation will be as difficult to find at times as money for our loan pool or support for our programs.  However, I know the one thing that will continue to inspire me will be the hope that our borrowers hold in our organization- a hope that propels these individuals day by day and therefore is enough to propel me, too.

I want to be the computer science student who walks a path different from the one between the CIT and Pembroke Campus.  I want to be the Brown student who “gets off the hill,” who comprehends the existence of an entire group of people who struggle to put food on the table while we as students complain about dinner at the Ratty.  I want to be the human being who holds the hope of the working poor, who takes this hope and works towards its realization, who serves those who dedicate their lives to serving their families, friends, and communities.  My inspiration to help establish the Capital Good Fund, then, comes from nothing extraordinary, but instead simply what I am indebted to offer, what I am responsible to do with the educational and material opportunities I’ve been blessed with thus far in life:  To make sure that all people, starting with the working poor of Providence, have the opportunity to create the best possible existences for themselves and their families.