The management of innovation - Final Report -

Frugal innovation

Sofie Holm Yi-ting Wang Ching-Yun Ting

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 Do poor people need financial services? Poor people don't have the access to use formal financial services. So what do they do instead? For example poor people save money by investing in jewelry, gold, domestic animals, building materials or other things that easily can be exchanged for cash. To save money they might bury cash in the garden or stash it under the mattress. Some is participating in informal saving groups where a small amount of cash is contributed every day, week or month or asking neighbors to hold or pay local cash collectors to keep the money safe. But these informal savings is not a very dependable and a safe way to rely on. For example can it be difficult to get fast money if they suddenly needs a small amount of cash. In-kind savings is in the risk of fluctuations in commodity prices, destruction by insects, fire, thieves and illness. Informal rotating savings groups tend to be small and rotate limited amounts of money. This is why the formal financial institutions also play an important role for the poor people. About Microfinance 1. What is microfinance? Microfinance is a provision of different basic financial services to individuals with low-income or who lack access to traditional formal banking services. These basic financial services is usually small loans and savings. The amount of money is small (micro) because the ability for poor people to handle and pay back larger loans is a risky business both for the lender as for the borrower. Especially since poor people often have the lack of knowledge and no assets to fall back on. 2. What is microcredit? Microcredit is a financial service in the category of microfinance and means small loans, microloans. These loans are often given to support entrepreneurship (like Kiva does). 3. History: The concept of modern microfinance and microcredit was developed in the 1970s by Dr. Mohammad Yunus. He was a
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professor of economics in Bangladesh who was experimenting with lending money to poor women. Yunus later founded the institution of Grameen Bank in 1983, which provides microcredit and in 2006 he won the Nobel Peace Prize. 4. MIcrofinance Institutions: Organizations that provides microfinance services is called Microfinance Institutions (MFI). It includes both non-profit organizations like Kiva and commercial banks like Grameen Bank in Bangladesh and Bancosol in Bolivia. Although it is very few formal banks which provides this kind of service, since the possibility to make more money is greater on large loans than on small ones. 5. Cost and Interest Rates: When providing a microcredit, the Microfinance Institution needs to be sure that the cost of the loan is covered, as for any kind of loans. This leads to a much higher interest rate than when taking a larger loan. The reason is the different kinds of costs that needs to be covered when a microloan is made. The costs can be devised into three types: 1) the cost of the money that it lends 2) the cost of loan defaults and 3) transaction cost. The first two are proportional with the amount of lent, since the cost of money and the cost of loan defaults both increases with a larger loan. The third one, the transaction costs, is not proportional. Transaction costs include costs for the staff for handling the appeasement, the disbursement, the repayment and the follow-up monitoring for the loan. These costs are basically the same no matter how large or small loan it is. It still take the same amount of time to make the transaction, and that is the reason for why the interest rates for microcredit gets higher - to return the cost of the loan. 6. Target market: The target market for microfinance has become to be directed to women. The reason for that is evidence from studies show that women more often manage to default on the loans than men. This also send a strong message to households and to communities to
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empower women`s position. 7. Benefits: The benefits with microfinance can be many. The purpose is to help poor people to get a better and more secure life. The reason for people to lend money can depend on different needs. For example lend money to be able to handle everyday crises, so called lifecycle needs such as weddings, funerals, childbirth, homebuilding, widowhood and old age. It can be needs because of personal emergencies, such as sickness, injury, unemployment, theft, harassment or death. Other types of incidents that might cause a need of money can be disasters, such as fires, floods, cyclones and man-made events like war or building of dwellings or investment opportunities like expanding a business, buying land or equipment, improving housing or securing a job. The microfinance can help getting started with a business and support it, which in the long run can get the borrower out of poverty. As mentioned before, saving money or taking a loan from an Microfinance Institution is also a more safe way than lending money from people in your neighborhood or to dig down the savings in the garden. Another benefit can also be that it's easier and quicker to take a microloan instead of selling possessions, like a goat or jewelry, to a buyer who is willing to pay the right price. This therefore contributes to increasing people's well-being. Another benefit that microfinance can induce is as mentioned before to empowering women. Since microfinance institutions wants to provide the service through women, it increases their status when playing stronger roles in decision making, both in the family but also in the community. Women now own possessions like land and housing which makes them more powerful than before. And for the global- and long-term goal, studies shows that microfinance helps people get out of poverty. 8. Disadvantaged/Problems: Microfinance can only be provided for those who are most likely to repay the loan under the terms that is required. Therefor
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people or populations with high level of diseases, like HIV/AIDS, or geographically scattered or nomadic may not be approved microfinance services. Unable to repay a loan does not only affect the lender but also the borrower who then also have debt problems and is getting pushed into even moor financial problems than before. Other factors that have an impact on the decision of approving a microfinancial service are the country's situation about hyperinflation, law, order and regulations. About Kiva 1. The Kivas background : Basically Kiva made a website platform to connect the people who need help and the people who willing to help. Through local microfinance institution, the Kiva gets the information of clients (the people who need help) and post it on the website, we can see every basic data on it and decided who we are going to donate. The whole how Kiva works will be introduce later. The Kiva is an non-profit organization with a mission to connect people through lending money, that helps people can release some difficulty for the life. They use the internet and a worldwide network of microfinance institutions, Kiva lets individuals lend as little as $25 to help create opportunity around the world. There headquarters is in USA, Kiva have Field partner in all over the world, located in 60 different countries. For exampleAfrica, South Africa, Asia, Central America, North America , Middle East, Eastern Europe. There are 81.35% of Kivas loan women entrepreneurs

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2. The objective of Kiva : They hope the people all over the world - even in the really far away areas - have the power to create opportunity for themselves and others. They believe providing safe, affordable access to capital to those in need helps people create better lives for themselves and their families. 3. How Kiva funded : 100% of every dollar the people lends on Kiva goes directly towards funding loans; Kiva does not take a cut. Furthermore, Kiva does not charge interest to their Field Partners (Microfinance). The major funded through the support of lenders making optional donations. They also raise funds through government, corporate sponsors, and foundations. There are many famous corporate sponsors like Face book, Starbucks, Googleetc.

What Kiva get from their sponsors ? Google Kiva gets free advertising through Google. This partnership allows Kiva to attract new lenders by promoting the website, and this help Kiva continue their success. Microsoft Microsoft helps Kiva's Field Partner when they are facing software problems. Also they do R&D to fund some useful software which is used in Kiva. Loan officers in Uganda are currently piloting the use of camera phones with Multimedia Messaging Service (MMS) protocol to relay field information instantaneously to Kiva's website. Facebook Kiva partners with Facebook to reach
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thousands of Kiva community members through Facebook Causes and Beacon. Causes allows Kiva supporters to connect with each other on Facebook; Beacon gives Kiva lenders the option to spread the word about Kiva and their activities on Kiva to their Facebook network. StarbucksAs Community Partner of the Starbucks store at Bay & Taylor, San Francisco, Kiva holds regular in-store awareness events to share Kiva with Starbucks customers. The Starbucks partnership is Kiva's first venture into the retail space and we look forward to building communities and networks of lenders, facilitated by Starbucks' Community Partner events and promotions. 4. How does Kiva function? Helping the poor has become every citizens rights and responsibility, therefore, after new ideas generated by an Indian professor who won Nobel Price, organizations such as KIVA show up quickly. In our opinion, numerous amount of people and communities pioneer and advocate in investing their fund to the small enterprises in the third world, which has dramatically improved the world to be a better one. As we learn from the website, communities such as Non-religions, Christians, Team Europe, Team Obama, and GLBT (Gay, Lesbian, bisexual, Transgender) etc., have found another way to express their willingness to help the world, and also gain their publicity. Here with steps to describe how it functions: 1. Kiva Partners with a Microfinance Institution 2. Field Partners Disburse Loans and Upload Stories 3. 4. 5. 6. Lenders Browse Profiles and Lend Kiva Disburses Lenders' Funds to the Field Partner Entrepreneurs Repay Their Loans Kiva Provides Repayments to Lenders

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Kiva partners with existing microfinance institutions around the world (Field Partners). These organizations that have expertise in microfinance and a mission to alleviate poverty facilitate Kiva loans on the ground. Field Partners know their local area and clients and do all the leg work required to get Kiva loans to the entrepreneurs posted on Kiva.org. And after that, Field Partners disburse loans as soon as they are needed. They can do this up to 30 days before the loan request is posted on Kiva's website or 30 days after. The Field Partner collects entrepreneur stories, pictures and loan details and uploads them to Kiva. Volunteer editors and translators review the loan requests and publish them to Kiva.org. Many Field Partners require mandatory savings as part of the loan cycle in order to ensure that borrowers represent a good lending risk and can build up cash reserves. 5. KIVA risk and Due Diligence which takes in account when choosing clients: Kiva has a repayment rate of 98,75%. One reason for this high repayment risk may be that Kiva take three different risks into account before lending money to its customers: 1) Entrepreneur risk, 2) filed partner risk and 3) country risk. The risks are similar to the ones we went through before. The entrepreneur risk includes factors like past loan history, village or group reputation, feasibility of business idea etc. However, a number of factors can result in entrepreneurs defaulting: business issues, health issues and other issues like paying for school. The second risk is the partner field risk, which means that kiva lenders still could loose money due to bankruptcy (the field partner go out of business and is unable to collect your loan), fraud (staff or members of a field partner may embezzle the funds) or poor operations (poor metrologies for screening entrepreneurs or collecting repayments). For this reason, Kiva assigns each field partner a risk rating from a 1-star (high risk) to 5-star (low risk). The third risk, the country risk, includes the macro-level risk. For example the economical factor including the currency devaluation or the
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institution exchange controls by local governments. The political may change regarding funds repatriation or natural disasters like tsunami may reduce the repayment. For this Kiva has a limit of no more than 10% of total loans can be target in a country. This to balance the portfolio.

I. Two cases of What Kiva have done We are going to share two success cases in Kiva and these people have already repaid their entire loan. 1. Grace's Peanut Butter Grace Ayaa is a mother of 13 kids who lives in Uganda. She cares for 13 children, 7 of whom are not her own but orphans of the civil war, and now adopted into her family. Grace tried to support herself and her family making peanut butter using a mortar and pestle. The process was so slow, and batch of produce so small, that it was very difficult to make the peanut butter fast enough to earn enough money to cover living costs for her and her family. Grace knew she had to change her processes for her business to be successful, so she saved enough money to purchase a processing machine, no longer grinding with a mortar and pestle. With her new investment she was able to make much larger batches of peanut butter more quickly than before, but she had no way of storing her peanut butter and therefore could not make more until her current batch had sold. Grace took a loan of $475 through Kiva, administered by Life in Africa, a Kiva Field Partner. Grace intended to spend 50% of her loan to purchase a refrigerator to store the larger batches of peanut butter, 25% on packing materials and an additional 25% as working capital for her business.

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Within six months Grace had employed an additional person to help her with her business. She was also able to save enough money with her increased profits to acquire a small piece of land, so that she could better care for her children who were growing up quickly. Grace has become an example in her community of a successful woman, despite the difficulties she has faced. Grace is no longer forced to decide which children she can send to school each semester as she can afford to send them all, and she is now building a home for her family on the land she was able to purchase. 2. Angel's Bicycle Repairs Angel Asenov is 30 year old young man living in Sliven, Bulgaria, where he had worked in a bicycle repair store for 15 years. Like many young men he dreamed of running his own business, but every one of the six banks in Sliven refused him a loan to start his own bicycle repair store. Angel received a loan through Kiva. Angel spent the $850 loan on equipment he needed to buy (welding tools, wrenches, screwdrivers, saws, hammers and some bike-specific tools), inventory for the store (rubber, spare parts) and a modest renovation on the part of his house he converted into a shop front. To advertise his new business he organized a bike race within his community, which 100 children attended. When the cold months came Angel recongized that he could do much more with his welding tools than just fixing bikes, and he became the metalworking man-about-town. Angel fully repaid his loan within 12 months, and with his success he has been able to hire his brother part-time, perform some simple renovations on their home and invest in his supplemental metalworking business. Angel's success - as a Roma - was so astounding to the public that his story made the Bulgarian national paper.

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