At the core of its operation, Spes Nova helps source funds for micro-loans. By providing an interactive website on the internet, Spes Nova allows potential loan sponsors to search through databases of credit-worthy entrepreneurs in impoverished countries. The sponsors may target individual loans by country, by region, by type of venture or simply by supporting individuals or situations that speak to them. Sponsors also have the options of making non-specific loans to individual MFIs (all of which will be used to support lending activities, but on a non-designated, portfolio basis) or to support a group of loans in a designated region. The sponsors are able to provide support in increments as small as $25 or as large as they wish, becoming part of a syndicated loan or supporting a loan outright. The underlying loans are typically 6-12 months in duration. Through Pay Pal, Spes Nova collects funds from its sponsors, provides funding of the designated loans through local MFIs and collects the repayments of the loans from local MFIs. Spes Nova maintains records for the sponsors that allow them to track the progress of the loan(s) they have made and the repayment process. As they receive repayments, sponsors choose whether to get their money back or make new loans. Sponsors also have the option of donating all or a portion of their commitments to help fund Spes Nova.
Importantly, Spes Nova uses the term “sponsor” rather than “donor”. While backers who chose to support loans need to understand that they may not get repaid, Spes Nova’s objective is to source and manage performing loans. The loans will provide critical funding for the working poor, but are not intended to be outright gifts to loan recipients.
Consistent with its mission, Spes Nova does not offer its sponsors interest on their loans. However, Spes Nova will charge a modest fee, well below the market interest rates charged by MFIs or the capital markets funding MFIs. Spes Nova currently expects to cover its own expenses with this fee, along with the charitable donations from its sponsors. It also hopes to ultimately reduce the interest rates charged by its MFI partners to 8-13% to cover their expenses in identifying and administering the loans. As a result, Spes Nova is targeting total interest rates of 10-15%, less than half the 25-40% currently charged by MFIs. As Spes Nova develops scale, any surplus from the fees it charges could be used for additional educational purposes, to support local projects in the areas where it lends and/or to reduce Spes Nova’s fees in the future.
Spes Nova relies heavily on its partnerships with existing MFIs. These partnerships are vital to Spes Nova’s long-term success in at least three critical areas. First, only the MFIs have the local representation and infrastructure to efficiently manage and process the loans. Spes Nova will be leveraging the MFIs’ existing personnel and operations, all of which are vetted to ensure proper handling. Second, Spes Nova relies on the MFIs’ ability to identify credit-worthy individuals and ventures. As distant outsiders, Spes Nova and its sponsors cannot hope to have the evaluation skills to differentiate credit-worthy opportunities or to avoid outright fraud. And third, Spes Nova needs the MFIs in order to satisfy local regulatory requirements.
It is important to note that Spes Nova will not be competing with MFIs. MFIs tend to be constrained by capital, not by the ability to add infrastructure or handle increased levels of transactions. In effect, Spes Nova is simply a new form of significantly less expensive capital. Spes Nova will be working with the MFIs, not crowding them out or limiting their future development.
The roots of the microfinance movement may be found in the early 1970s with the development of micro-lending. Since those early initiatives, microfinance has blossomed into a huge movement, representing:
- at least 50 developing countries,
- over 3,000 firms,
- over 150,000 organizations,
- over 650 million savings and loan accounts (representing
about one-third of the world’s poor), and
- about $4.5 trillion of total banking assets.
The majority of the microfinance activity today takes place through microfinance institutions (MFIs), organizations specifically dedicated to providing microfinance services to the working poor. These tend to be highly localized entities, operating within a single country, often regionally concentrated. They may be for-profit or not-for-profit organizations, and are generally regulated under specific microfinance laws in their respective countries.
MFIs typically are not banks, at least not in the sense of banks in developed countries. They often have modest asset bases and are not able to turn to central banks for funding or liquidity. Instead, MFIs rely on funding from donors, borrowed funds from commercial banks or other capital providers (increasingly, syndicated loans from the global capital markets) and internally generated capital.
The MFIs have developed the means for dealing with remarkably small transactions. Average savings account balances are $275 and average loan amounts are $450. The MFIs have managed to overcome traditional expense barriers through innovative uses of local representation (typically village women, operating out of their homes) and technology (such as satellite internet connections and cell phone technology). Despite the lack of availability of traditional collateral, MFIs making loans for commercial purposes generally experience extraordinarily low default rates, almost universally below 1%. This favorable experience has been generated through unique combinations of group lending and the use of social collateral (relying on family and village commitments to strengthen the obligation to repay loans).
Despite these favorable repayment records, MFIs charge interest rates of 25-40% or more. While these high rates generally provide the MFIs with a net profit, they tend not to be excessively profitable. What appear to be out-sized margins are eroded by the MFIs' own costs of funds (often 15-20%) and relatively high transaction expenses as a result of the tiny size of the average loan. (By example, assume screening, managing and processing costs are $50/loan. Measured against a $5,000, 3-year loan, this would amount to just .33%/year. Measured against a $500, 1-year loan, administrative costs alone would be 10%/year).
It is important to note that the working poor do not have access to traditional local banking systems. They do not have assets to use as collateral, they rarely have verifiable credit histories and their transactions are far too small to be processed efficiently by commercial banks. From a traditional banking perspective, these loans are far too expensive to administer and represent default risks that banks are not able or willing to manage. MFIs fill the gaps in serving these clients. While their history is relatively short, the impact MFIs have had in serving the bottom of the pyramid is enormous. Spes Nova and our supporters will help expand that impact.