Review: FINCA
From GiveWell
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Page maintained by Brian.Smith
Cause: Microfinance (emerging world)
| Strategies & activities | Fiscal responsibility | Relevance of your dollar | Self-evaluation process | Evidence of effectiveness |
| 5/5 | 3/5 | 4/5 | 3/5 | 3/5 |
Contents |
Executive Summary
FINCA provides loans to those in the emerging world who are too poor to access traditional sources of credit. The goal is to help break the cycle of poverty by enabling people to start and expand (small) business ventures--by making loans rather than gifts, FINCA seeks to help those most capable of helping themselves. FINCA has a stated goal of lending specifically to the poorest of the poor, and its loans are generally in the neighborhood of $50-500. It charges interest, with the intent of making its operations still cheaper, and even in some cases self-sustaining (which frees up donated funds for covering the overhead associated with new operations).
We are surprised at how little information we've been able to get out of FINCA, given that it is essentially a bank. We want more information on the lives and situations of the people it's lending to. The numbers it claims for its repayment rate and interest rates don't seem plausible, for a nonprofit; we suspect that there is a currency issue. We want more details on what it's spending its money on, what the overhead costs of a new operation are, etc.--in other words, a detailed budget, beyond the basic level required by the IRS. FINCA claims to have all these materials internally, and has agreed to send them to us for our review only. We are currently waiting on this request, and also in conversation with them about what we can do to make the materials available to the general public as well.
Unfortunately, this lack of transparency and accountability is strikingly common in the area of microfinance4a, and no one else we've looked at is better. The fact remains that FINCA is an organization that uses nearly all of its budget making microcredit loans, which has independently proven effective, and its reported numbers show a real ability for operations to become self-sufficient, implying a track record of real success and highly effective use of funds. In the end, unless its claimed numbers are horribly misleading, it is fairly clear that its activities are extremely cost-effective in terms of impacting people's lives (just by the fact that it's lending so much money and getting paid back with interest). We are therefore giving FINCA our support for the time being, as we continue to seek a better understanding of the cause and better ways to evaluate the organizations within it.
Mission
FINCA aims to provide the ability to borrow to those who wouldn't otherwise have access to it. Two situations prevent FINCA loan recipients from accessing traditional credit. First, in some truly remote areas there is no functioning banking system. Second, when a banking system does exist, banks have no interest in lending to the poor, since they have no credit rating or history on which to judge potential borrowers, and the poor have no collateral they can pledge to secure the loan. In addition, the size of the loans are so small that fixed costs of loan documents are not worth the small amounts.
Without FINCA or the traditional banking system, the only credit source generally available to borrowers are local loan sharks (also called "moneylenders"). The loan sharks generally charge absurdly high interest rates,2a1 and anecdotally often use intimidation or violence.
Who Benefits and How
FINCA claims to explicitly target the poorest of the poor; its basic method for ensuring this is by keeping its loan size small, in the range of US $50-500.2b Other than this observation, however, FINCA has not yet provided us any data on the characteristics of the people it serves: how poor they actually are, whether they suffer from other problems such as disease, etc. This is particularly surprising to us since a lending institution ought to be able to survey its clients systematically (and FINCA does claim to do surveys). FINCA does note that, like most microfinance organizations, it lends primarily to women;2a4 the reasons it gives for this (that the "feminization of poverty is a worldwide trend" and that "Another worldwide trend is an increase in woman-headed households") make less sense to us than the anecdotal reasons we've heard that most microfinance organizations lend primarily to women: women are empirically more likely to pay back their loans.
The basic concept of microfinance is that by relying on repayment, an organization will naturally seek out those who are capable of helping themselves. While a health program may treat one disease while still leaving the population with a host of other problems, the fact that someone is able to pay back a loan with interest implies that they actually used the money to create some value (they would presumably have no incentive to borrow if they couldn't), generally by using it on the startup costs of a small business (an oft-cited example is that of buying a sewing machine to make and sell shirts at a local market). Whether the people borrowing from FINCA are starting ventures that can sustain them for life and even make them relatively well-off, or are simply covering temporary expenses and deriving little permanent benefit, is unknown, especially in the absence of survey data.
Strategies and activities
Village Banking
FINCA's operations consist almost entirely of lending money through village banking (Strategy 1 from the microfinance cause page). Village banking involves groups of people applying for loans together, with only a few of them actually receiving the capital at a time (the others can't get their loans until the original borrowers pay theirs back). The intent is to give the members incentive to cooperate and put social pressure on each other to pay. Beyond these basic rules, FINCA intends to minimize regulation of the groups: "members elect their own leaders, design their own bylaws, keep the books, manage the funds, and are fully responsible for loan supervision, including enforcing penalties for non-compliance." 2a2 FINCA claims to be "the pioneer of the village banking method",2a5 but many of the other microfinance organizations we've talked to make similar claims.
Repayment rate
FINCA reports that its loans to these village banks are repaid on schedule more than 97% of the time 2a3. This rate seems impossibly high to us, and we suspect there is some sleight of hand involved in the definition of "on time repayment." When presented with this concern, the FINCA representative we spoke to agreed the number was shocking at first, but continued to tout its accuracy. The FINCA representative argued that because there is diversification and cooperation in the village bank, repayment is more likely than with conventional loans.
The statistics FINCA sent to us9 do not include any numbers on how many loans were paid back vs. defaulted on, or the time frame in which loans were paid back. The fact that annual loans disbursed numbers are generally 2-5x higher than loans outstanding numbers (see "FINCA" sheet)9 implies that the average loan term is somewhere around 3-6 months, but beyond that and the reported repayment rate, we have no detailed understanding of who is paying back their loans and when. FINCA has agreed to send us more statistics to clarify these issues; we are waiting on this request as of now.
FINCA's reported repayment rate is slightly lower but generally in line with other microfinance organizations (others we reviewed report 98-99%). Because we are skeptical of the true meaning of these repayment rates, we've chosen not to assign too much importance to small differences in them.
Interest and self-sufficiency
FINCA aims to use funds for starting up operations, but charge enough interest so that they can ultimately sustain themselves. We were unable to get a good sense of how much interest this is: the number they cite is an average of 3-4% per month,2a6 but we presume that this is in a mix of local currencies and we have no sense of what the dollar equivalent is (if that number were a dollar number, and both it and the reported repayment rate were correct, FINCA would be hugely profitable and we don't see why it would need donations). As for whether this interest does enable FINCA's operations to become self-sufficient, the representative we spoke with claimed that on average, FINCA programs reach self-sufficiency in about 3 years, and its annual report claims that more than half (13 out of 21) of its operations had reached self-sufficiency by 2005.1 Its statistical report indicates that 16 out of its 21 operations had net profits in 2005, the losers were Afghanistan (established in 2003), El Salvador (1990), Haiti (1989), Tajikistan (2003), and Malawi (1994).9 The representative we spoke with indicated that 2005 was a particularly succesful year, and FINCA has generally not been as profitable as those numbers imply (though their 990s from 2002-2004 indicate that they were profitable in 2 of those 3 years as well)11; we are waiting to receive more information on FINCA's profits over time. Nevertheless, last year's numbers are consistent with the idea that many of FINCA's operations are self-funding.
Overhead
We asked why, with high repayment rates on interest-bearing loans, FINCA remains a nonprofit in need of donations. The response was that FINCA's activities require far more overhead than traditional banking, because whereas traditional banks wait for borrowers to apply for loans, FINCA is extremely active in spreading information, working with its borrowers, etc. We asked for a more detailed breakdown of what these costs are, which will also hopefully give us a better sense of exactly how much good is accomplished per dollar. We are waiting on this request.
Leverage
It's worth noting the specific way that FINCA is using donations: it borrows money for its operations in capital markets, using its donated funds to cover the interest and associated expenses. Thus, for each dollar of expenses, it's borrowing/lending about $5 (according to its claims, which we backed up with rough calculations off the budget from its annual report).1 FINCA is more levered (i.e., borrows more per dollar of expenses) than other organizations we looked at, which presumably allows them to do more good per dollar, as long as it doesn't create a significant risk that they will hit a rough patch and find themselves unable to pay, which would be a disaster.
Other Services
FINCA has begun to expand into other financial services such as microinsurance, but this remains a small part of its activities. FINCA's website says "While many anti-poverty organizations provide a broad range of services, such as education, medical attention, and relief services, FINCA has chosen to be a specialist in the area of providing financial services to poor families." 2b The FINCA representative we spoke with assured us that 99% of FINCA's activities are making loans. GiveWell would be more satisfied if these claims were backed up by a breakdown of the program expenses in FINCA's annual report or any other document they provide the public.
Fiscal responsibility
FINCA's annual report contains no budget beyond what is required by the standard tax form.1 It provided us with a statistical report, after repeated requests, that breaks down its activities by region, showing loans outstanding, people served, total loans disbursed in a year, total revenue and expenses, and derivatives of these numbers.9 However, we still don't have a detailed budget of exactly what FINCA spends its money on (salaries, infrastructure, etc.), and no sense of the costs of starting up a new operation.
The general vagueness and sloppiness (for example, stating that they charge a certain interest rate without specifying the currency) we've encountered is unacceptable for what is essentially a bank. Unfortunately, other organizations we've reviewed are no better. We are in the process of reviewing what FINCA has sent us and figuring out what questions still need to be asked, as well as of looking for better organizations we may have missed.
Relevance of your dollar
FINCA already operates in 21 countries, but would like to grow both by expanding its current programs and starting programs in new countries. FINCA's likely next programs (where your dollar will be used) are in Brazil, Turkey, Pakistan, and China. The FINCA representative we spoke with said that money is a critical constraint preventing FINCA from expanding its programs. He told us FINCA is always ready to start new programs if the money is there to fund them. GiveWell suspects there might be other constraints on the growth of FINCA, such as lack of personnel or infrastructure in new countries.
FINCA's strong bottom line numbers raised the question to us of whether it should be seeking charitable donations at all, rather than investment capital, of which generous amounts are available.10 FINCA says it has tried to take advantage of this investment capital, and the investors aren't interested; despite some strong regions and some strong years, the claim goes, FINCA's overall model and overall budget isn't sustainably profitable, and it continues to work off of charitable donations.
Self-evaluation process
FINCA's self-evaluation process is lacking, and certainly not transparent. It does track, at the broadest level, the amounts of loans and people by region.9 It claims to do field surveys among borrowers for demographic information, and to find out how they are using the loan money, even to do limited impact assessment based on the relationship between loans made and personal expenditures in a given region. However:
- Not only has it not provided these surveys to us (despite continually saying it will), but it hasn't even provided a summary to answer some of the more specific questions we've asked (such as what it knows about its own impact).
- It does not appear to use survey data to assess the success of individual ventures or the ultimate impact on people's lives.
We found a few papers on FINCA's website, but they are focused on more narrow issues (whether microfinance disproportionately impacts the extremely poor vs. the very poor,6 the specific case of Haiti,7 and possible complimentary financial services8). These papers show us that FINCA is making some attempt to evaluate themselves, but not in the comprehensive and systematic way we'd like to see, especially in this highly quantifiable area.
GiveWell is not alone in calling for microfinance self-evaluation. Even the academics who study microfinance cite the lack of evaluation by institutions themselves as a critical barrier to the improvement of programs. 4a USAID has funded a project resulting in an extensive guide to microfinance institutions regarding impact evaluation.5
Evidence of effectiveness
FINCA's basic model implies that it would be relatively clear if it weren't getting paid back at a reasonable rate (i.e., it would be losing money fast), and the general academic evidence supports the activities it is doing. If its numbers are accurate, it seems that it must be making loans to those in extreme poverty and getting paid back with interest, which suggests that it is helping people to help themselves. We would like to see this shown more tangibly, but we still think it is a good bet that FINCA is doing good.
Unanswered questions
- GiveWell would like to understand better the effect that the ability to borrow has on the lives of the extremely poor. Do these people benefit tremendously and grow enough wealth to substantially impact their standard of living, or is impact to small to overcome all of the other hurdles of their situation.
- What is the interest rate that FINCA charges, in dollar terms?
- Can we get a breakdown of what FINCA spends its money on and how much it costs to start a new operation?
- Can we get a breakdown of when loans are repaid (i.e., X% repaid within Y months, etc.), and interest rates and default rates by region?
Sources
- 1. FINCA's 2005 Annual Report
- 2. FINCA Website
- 2a. FAQ
- 2a1. Loan sharks
- 2a2. Village banks
- 2a3. Repayment rate
- 2a4. Lending to women
- 2a5. Lending to women
- 2a6. Charging interest
- 2b. FINCA's position, loan size and focus
- 2a. FAQ
- 3. FINCA's 2005 990 filing
- 4. Buss, Journal of Microfinance
- See page 6 of the above on the call for program self-evaluation
- 4a. For more on self evlauation, see: Copestake, Journal of Microfinance
- 5. USAID funded project on assessing impact
- 6. FINCA Paper: The Varying Economic Impact of Village Banking
- 7. Measuring the Effectiveness of Village banking in Haiti
- 8. Identifying Complementary Programs to Maximize the Impact of Microcredit
- 9. Currently unavailable: FINCA statistics by region as of Oct 2006
- 10. Pierre Omidyar's Microfinance Fund
- Generous funds are available for profitable microfinance operations.
- 11. FINCA 990s from 2001-2003
- In 2001 and 2003, total revenues exceeded total expenses.
