Better personal guarantees

Better personal guarantees

Finland
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

For economic progress, to increase volume of lending by enhancement of personal guarantees applying technology (mobíle phones with cameras/ code readers) and better guarantee institutions/notaries.

(I hesitated to join as my innovation is a concept rather than a functioning model. But in respect of Open source, eligibility is not most important)

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Banking/Financial Services

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Positioning of your initiative on the Mosaic of Solutions™ diagram:
Which of these barriers is the primary focus of your work?

Lack of access to markets or products

Which of the principles is the primary focus of your work?

Turn hidden value into alternative markets

If you believe some other barrier or principle should be included in the mosaic, please describe it and how it would affect the positioning of your initiative in the mosaic

In my proposal, we have recognized the problems of micro-finance and general conditions of finance availability and seek to address them in a manner that is supplementary to microfinance:
1. Microfinance is democratic, well known for high rates of loan repayment. But repayment is often guaranteed by coercion: property may need to be sold to honour this obligation. Peer pressure in replacement of collateral, proves that a physical collateral is not exclusive.
2. Micro-finance has other problems, too: As 'everyone' in the society can access it. At least we learnt in Tanzania, relatively wealthy people who really do not need it, take the loan anyhow. 'Unnecessary' borrowing is somewhat demoralising, particularly if the money goes to welldoing individuals. But micro-finance upgraded, the real needs are for MESO-level financing, to develop and expand small enterprises!
3. A general problem of lending (in Tanzania) is that the guarantors seem to disappear somewhere. This is because there are no proper credit rating records kept, i.e. referencing agencies and related systems are lacking. Our approach makes disappearance more difficult. Yet in rural societies, both people and their properties are well known (but unregistered) 'to everyone' .
4. 'Cold' external funds topping up local micro-funds seem to dilute repayment rates.

Other issues but microfinance:
5. A general problem in borrowing with (typically) a house/land as a collateral is that very likely it is of much more / multiple in value than the loan required by a potential beneficiary (borrower). Contrarily, at a personal guarantee, a limit of responsibilities can be set. The house needs not be registered (no title book).
6. A general problem of lending and repaying (in Africa) is that both are affected by overall timely needs as well as availability of money: one who has (a windfall of) money, needs to give to those who do not have - whether they need or not. In reality, repayment is not tied to the schedule agreed.
7. In Tanzania (perhaps Africa in general) less than ten % of people have bank accounts. Accordingly the family is the bank and intra-family money transfers are very important. A loan (procedure) is two transfers! We need to recognise that in a typical extended family, there are those who have and those who do not have. That means there are those who are able to act as guarantors of loans.
8. Mobile phones are now used in Kenya/Tanzania. Anything that promotes "family banking" is more important than normal banking. People in Africa are quite familair in using mobile phone in innovative ways. This proposal is another way of using mobile phone and existing hardware (camcorder phone) and the inherent charactrersitics of GSM networks.
9. We may assume from the above (7) that rather than giving money, people may wish to guarantee as no immediate transfer is required! Personal guarantees will be encouraged in our proposal as 'short of cash' problem is thus overcome.
10. In Africa, many social projects are funded by grants. Grants is absolutely free money, sometimes associated with projects of poor managment. Demand for grants is unlimited while supply is obvioulsy limited. We propose more lending vs. grants.
11. Seemingly easy availability of grants nevertheless, deprives funds from many targets as the governments/ central banks do not allow external loan financing to targets that do not generate forex. But as a matter of principle, borrowing under transparent terms (see 'Afrodad' for better borrowing terms) also from abroad should be encouraged to improve discipline and to fill the current financial gap (Including the gap between industrially advanced and poor countries).
12. Institutions do not have access to borrowed funds for purposes that are considered neither investment nor operations (like building toilets to schools) as they cannot issue guarantees that anyone respects.

Innovation
What is your signature innovation, your new idea, in one sentence?

For economic progress, to increase volume of lending by enhancement of personal guarantees applying technology (mobíle phones with cameras/ code readers) and better guarantee institutions/notaries.

(I hesitated to join as my innovation is a concept rather than a functioning model. But in respect of Open source, eligibility is not most important)

Describe what makes your idea unique—different from all others in the field.

This is a departure from the principle of micro-finance. It is not alternative but supplementary. It makes use of the framework provided by mobile phone technology. But it may eliminate the need of the society of peers that microfinance uses for (savings and) allocation of funds and for pressure at repayment.

I propose recording a videoclip as a loan guarantee ( http://ideaexplore.com/ February 2008 ). Next it will be sent to new type of notaries. The second aprt of my proposal calls for institutional development (including better regulation) for essentially better enforcement of personal guarantees.

Personal guarantees when duly registered, should in principle be enforceable. The property as a collateral needs not be 'taken' in the first place. It is not necessary to pawn a house. Guarantee rules / regulations need to be changed so that guarantee's registration allows AND calls for selling the house (or any other known to everyone property) routinely in the second place.

So instead of developing land registries and title books we develop loan registries and referencing.

Personal guarantees can have denominations (=limited responsibility like a Ltd firm). One guarantee (from the point of view of the lender) can be 'stiched' by a notary from many individual guarantees. Priorities ('senior' or 'junior' guarantor) may be stated, if so required.

I believe, personal guarantee system fits well into the practice or pattern of personal overseas loans by organisations such as myC4.com and those like. The guarantee then perhaps partly replaces local peer organisations, which I consider being the heaviest cost burden.

How do you implement your innovation and apply it to the challenge/problem you are addressing?

1. Better loan guarantees is an institutional issue. The question is how enforceable personal guarantees are! We propose to enhance them by legislation that in a second place allows for personal property to be sold if the guarantor fails to repay a loan.
2. Videoclip recordings using mobile phones are proposed. The guarantor will state "I shall undertake to guarantee my nice's personal loan for [the purpose] up to a maximum of xxxxx shillings".
3. The video may be sent and / or stored in specific public notaries or credit rating offices set up for the purpose. Guaranteeing becomes separate from the banks. (This is by no means necessary in my opinion, but just in recognition of the tardiness of the banks).
4. The notary accordingly has the original recording AND it may prepare a paper document if the bank so demands. The videoclip is likely to address the problem of people disappearing. Thus the default rate improves - and less people disappear!
5. Location data is among GPS metadata.
6. To connect the notary, we shall also seek to make use of www.upcode.fi - every camera phone has a mobile code reader to trigger any computer process.

Do you have any existing partnerships, and if so, how did you create them?

We do not have but expect to partner with mobile phone service providers, lawyer firms and even banks will see the benefit of better records eventually. It serves direct overseas lending particularly well ( www.myC4.com ?)

If tied up to M-Pesa ( http://www.safaricom.co.ke/index.php?id=228 ) type of service providers/ networks, instead of sending money as SMS (yes, this is an option for discussion only), a guarantee only may be sent.

Local groceries may take up a guarantee instead of a transfer from selected mobile phone users as per agreement. Informally they are probably already doing so?

In which sector do these partners work? (Check all that apply)

Citizen sector (nonprofits, NGOs) , Private sector .

Impact
Provide one sentence describing your impact/intended impact.

Overall economic development following increased lending and lower interest rates made possible by improved (better enforceable) loan guarantees.

Please list any other measures of the impact of your innovation.

1. Better guarantees and, as we believe, there will be less defaults, the banks will be able to give loans at lower interest rates. Thus on the level of national economy, interest level will decrease. Loan (vs. grant and vs. Sharia-termed / zero-interest loan) financing becomes more competitive

2. There should also be many people who take a loan under a family member's patronage rather than under the "neighborhood watch" and peer pressure of a village tyope of a society.

3. From the point of view of the guarantors, "the influential guys" in the village, they are likely to enjoy the prestige linked to opportunity of guaranteeing. Their wealth, like Hernando de Soto writes, is perhaps 'dead capital'. Proper notaries can convert the dead capital into being alive - for the purpose of lending only - as their wealth is 'well known to everyone' (better than personal loans anyhow). The houses, albeit unrecorded, thus serve as a collateral, but only in the second place.
4. This practice is well suited to meso-financing needs and SME enterprise development. In particular so, the potential guarantors are better able to assess risks related to business operations outside the society. Micro-circles are notoriously impotent to assess business related risks outside of the village!
5. People do not get lost anymore!

Does your innovation address and/or change banking regulations?

Banks do not need to take possessions of real property as the notaries shoulder this role. It is likely that there is need to change banking regulations to justify real property collaterals in the second place, the guarantor failing to repay.

This and other changes as needed, should be addressed while leapfrogging various aspects of mobile phone transactions (like M-Pesa) into the renewed banking regulations to include mobile transactions in every way possible.

I have learnt that a video as a proof at court as such is acceptable in the legal proceedings in some countries (but do not know how common).

Likelihood of changes needed in banking regulations is indeed, best demonstrated by the West where we do not have access to money transfers by mobile phones (vs credit cards); yet we have the technology. This is probably due to resitance by the banks and card service providers.

How many people does your innovation serve or plan to serve? Exactly who will benefit from your innovation?

This innovation serves all people outside of the banking services (over 90% of populations in developing countries), ranging from those who consider they are not in need of an account to those who are truly un-bankable. Likely, those who give/read guarantees are among banks clientele. But anyone can lend, once the loan is guaranteed.

In the second phase, once guaranteeing without physical collateral becomes popular/institutionalised, further institutions (schools & other utilities) may enter the group of beneficiaries. Volume of borrowing will increase and there will be a strong impact as loans will replace grants.

This, of course is not a consequence of the use of mobile phones but of the second aspect of institutional development and respective laws' enforcement.

Sustainability
Financing source
How is your initiative financed (or how do you expect your initiative will be financed)?

1. Guaranteeing initially is also an alternative to sending money by the realtives and requires little funds.
2. But there is a risk: institutional build up and associated costs (of guaranteeing) by the notaries. This point must be discussed!
3. What comes to the mobile phones, many have them already; it is a matter of using the built in camera (including the meta data provided by the GSM network). In Africa, there are already many innovative ways of using mobile phones (for market information, money transfers, fishermen safety, etc.) Some of the service providers may have to upgrade their facilities to be able to send videos and pictures besides SMS.
4. Better loans and transparency in the target market implies that more loan financing can be made available by the donors: loans = financial discipline in the form of recycled money!

If known, provide information on your finances and organization:

We can only play with composite figures:
Our objective may be reduction of interest rates from a typical (high) 30% to a reasonable 20%. This has a significant welfare impact. 20% (costs to be deducted) still should attract western financial markets seeking better yield.

A ten percent decrease should increase lending dramatically, taking market from grants and from micro-finance.

What are the main financial barriers and how do you plan to address them?

The banking sector, always conservative, may not fully integrate in this system? Largely to address this anticipated problem, we propose independent guarantee offices/ notaries.

More important, better enforced guarantees is likely to attract capital from abroad. It is likely that some Central Banks will (maintain or) put a stop on foreign borrowing by operators who are not able to generate foreign exchange? As a rule broad social sectors are not financed by foreign loans but by grants. There is unlimited demand for grants. As there is huge imbalance between supply and demand of grants, only needs assessment can be applied. Needs assessments unfortunately, are not always transparent procedures.
But more loans means funds' recycling and better financial discipline.

Aside from financial sustainability, how do you plan to grow the initiative?

I hope the mobile phone service providers will cash on this service after their SMS money transfer system was fully deployed (and their networks can carry video data).

In the first place, I hope providers like myC4.com attempt to test the model and apply to their needs.

In an attempt to increase better borrowing, I would like to propose a study on Central Banks
borrowing priorities and plans for increased borrowing as well.

In an attempt to serve illiterate people into using banking services, I propose to deploy www.upcode.fi . This is smart technology using the mobile phone camera in the same manner as you use the barcode reader (only that it is cordless and operates everywhere you have GSM). Pointing out your phone under their programme to a code supplied triggers any kind of computer process: either in search for more information on the object where the code is or a security system, fighting fraud for instance. An appropriate application be developed to make the guaranteeing process semi-automatic? There are other applications (credit referencing, document validity check up, etc. ). So we may ride on their succes as well.

The Story

What was the motivation or defining moment that led to the creation of this innovation? Tell us the story.

15 years ago, I worked for several years as a fund economist, providing loans mainly to SMEs in Africa. Among the borrowing conditions there was one characteristic thing: our fund did not take property as collateral. Alternatives, such as personal guarantees (but many others as well) were acceptable. The rationale (of the consequently weak collateral) was that at default, the borrower had no fear of losing one’s house, while our lender-Fund did not have to engage in managing odd properties around Africa.

Despite these two advantages, our fund did not benefit from personal guarantees. Our notion was ‘personal guarantee is just a piece of paper’. But could it have worked better, had each party worked hard to make it work? Could the value of paper been better had there been sanctions and legal enforcement? In the long run, could personal guarantees (and credit referencing if necessary) have a role and sustain separated from lending business and without support from land registries, if the latter just do not exist?

After all, it is always people who for various reasons are willing to engage in guaranteeing. Titles to land or premises by the borrowers or guarantors are pawned in. Sometimes the properties are oversized vs. the loans. My presumption now (while I was back working in Africa) is that for lending here, personal guarantees could to a degree substitute land registries and title books and thus bring some parts of the ‘dead capital’ (in Hernando de Soto’s terms) alive? If properly recorded and registered, to a degree, the personal guarantee from chiefs, local businessmen or patrons would be adequate, without assets traded in? That is, if they were willing and if the banking system would cope?
The story is at at Community Development Banking site: http://www.runonthebank.net/cdblist.htm

Please provide a personal bio of the social innovator behind this initiative.

I am a believer in the open source concept, not only in software.

1991-95 I was a fund economist. The fund by-laws required that collaterals are disallowed, any other guarantee was OK.

Subsequently (and also earlier), I have worked in several trade, education and environment related projects, almost exclusively Long Term, in the field.

a) Please identify the individuals that your innovation benefits (Please check all that apply)

Producers , Consumers , Holders of assets.

b) Do you help the people you serve to buy goods or services using financial innovation? If so, how?

This serves the same market as micro-finance.

When better enforceable guarantees, given by institutions or utilities like towns and schools are honoured / enforced they will benefit a lot: schools can build toilets under borrowed funds rather than benefiting grants (that are not available). But those institutions are willing but not allowed to do so, because the poor countries governments prefer grants for those purposes. And there is a huge imbalance in demand and supply of such grants!!!!

Thus there will be increase in the supply of particular public services.

c) Do you help the people you serve to sell goods or services using financial innovation? If so, how?

This serves the same market as micro-finance which is often used in this purpose.

Nowadays increasingly funds to microfinance organisations are supplied from overseas: myC4.com, kiva.org and Calvert Foundation adn of course various donors and development banks.

The model serves Mezzo financing for the SMEs.