Month: November, 2010
Gambling to Save
| November 10, 2010 | 11:49 pm | Microfinance | Comments closed

Gambling to Save

The Only One Stall

The Only One Stall

The Haitian lottery stalls are indeed fascinating (see Amin post). They are still going strong despite the earthquake, cropping up like weeds throughout the tent cities.

Their popularity is understandable.

Borlettes are a pretty good place to save, when you look at the alternatives. In Haiti, the poorest people were fleeced by credit unions in 2004. Depositors had sold their assets – cows, goats, and bicycles – to put their money into the Caisses Populaires, which were promising ridiculously high and unsupportable returns. Huge numbers of Caisses collapsed from fraud, leaving depositors with nothing. No wonder playing the borlette seems like a good option. A 20% negative return is better than a 100% negative return.

Turning Thrill-Seekers into Thrift-Seekers

Understanding gambling impulses is key to designing safer financial services. Many financial institutions (BRI for example) look at the prize aspect of the lottery and incorporate elements of chance into their savings products. But, product design is only a piece of the puzzle. Savvy businesses and banks might make dull products sizzle if they paid heed to what their shadier cousins down the street were doing. For example, in Haiti, an entire value chain has sprung up around the borlette culture, which involves paying for the divination of lucky numbers. It’s big business and shows how engaged users are in choosing their bets.

But, I digress. Here are some ground rules for banks and MFIs whose savings services are just a bit too bland:

Rule 1 – Take your cues from culture. If people are using dreams to help them win the lottery, then market savings product that ask users to chase their dreams. If they are consulting astrology experts to win, then offer them astrological consulting your savings product. If lottery stalls are painted in bright colors, then paint your branches in bright colors.

Rule 2 – Make your product crystal clear. If users like the transparency of the lottery (and they do because they know ahead of time exactly how the numbers are drawn and what they payout will be), then make your incredibly complicated savings product incredibly simple. Forget compound interest. Offer them something better – airtime minutes, lottery tickets, whatever is easy to calculate.

Rule 3 – Be ubiquitous. If people like the ubiquity of the lottery (they can get rid of any loose change frequently) then find a way to make your product ubiquitous. Sell savings through savings resellers. We know people will pay to save, and M-PESA is proving this.

And It’s Not Just Haiti

It turns out that Haiti is not the only country where local gambling stalls are chock-a-block. For example, in Ghana, more newspapers are dedicated to the lottery than to any other topic, catering to masses of players. The Dominican Republic has an estimated 35,000 stalls equivalent to that of Haiti. The Fahfee in South Africa is ever popular and in India private lotteries are spreading like wildfire. Even Bhutan – yes Bhutan – has lottery kiosks in shopping malls. So get out there and see why people would rather put their coins into games of chance and not into safer savings. Then make and market a more exciting product. Convert a few punters headed for the gambling stall into a few depositors headed for the savings stall.

What do lotteries and savings have in common?
| November 10, 2010 | 7:26 am | Microfinance, Savings | Comments closed

Not much, at face value. One could even claim that lotteries are quite antithetical to the spirit of savings – how could one, in good conscience, compare potentially reckless and addictive gambling with the perseverance and self-discipline that savings demands?

Funny thing is, it turns out that in some cases, they are not very different mathematically at all.

Haitian borlettes


NY Lottery Numbers Displayed Outside Borlette (Courtesy: Kim Wilson)

I recently read this fascinating paper titled Savings and Chance: Inclusive Finance and The Haitian Lottery on the Haitian lottery institution surrounding borlettes. Participants bet on the numbers drawn in U.S. state lotteries at kiosks, and payouts are made based on some combination of two to five digits.

Operators add their twists to this, but here’s how one of the simplest forms of this works – choose three numbers between 1 and 100, bet $1 (or 1 gourde, the local currency) on each, and wait for the radio to announce the U.S. state lottery numbers. If your first number corresponds to the lottery, you get a $50 payout. If your second number corresponds, you get a $20 payout. And if its your third number, its a $10 payout.

On any given day, for every $1 coming in, the expected payout for a kiosk is therefore ($1 x 0.5 + $1 x 0.2 + $1 x 0.1) = $0.80. This is also the expected return for folks who play the borlette over a long enough period of time (and many do – they play a small amount with a high degree of regularity). That’s a -20% return, on average.

In what universe does a -20% return seem like a good ROI on savings, you may ask – mathematically, at that. Surely folks would save better if they simply saved under their mattress?

Paying to Save

This is where the caveat, “some cases,” comes in. Sure, the plain vanilla ROSCAs where n members save $m per meeting and hand $(n x m) to one member each meeting has a 0% return, ignoring time value of money. And savings groups that have the luxury of depositing their funds in a bank will actually make a positive return.

Many other savings setups that are common do have a cost element though. Consider the following two types that are widespread:

Organizer takes one payout: Groups often need a promoter who shepherds a complete payout cycle or two. As remuneration, the promoter takes one payout, often the first. Thus, if there are n members, the savers will save for (n+1) cycle. The return in these cases will be -100%/(n+1).

This example  from a Women’s World Banking Report is a bit dated, but the general thrust holds true across regions of the world where savings groups are formed via promoters:

On February 26th, 2003, Bethania finished a ROSCA which had five participants, each of whom contributed RD$100 for 60 days, equivalent to RD$6,000 each or RD$30,000 for the entire ROSCA. The payout was RD$5,000 every ten days and the pay out sequence was determined by lot. Bethania, as the ROSCA organizer, was entitled to the first payout, so she was able to gather this lump sum just ten days after she had organized the ROSCA. She received this without contributing any money to the ROSCA. This was her fee for organizing and managing it.

Bidding ROSCAs: In these ROSCAs, members submit sealed bids for the right to receive money in every meeting. This effectively serves as an interest payment on the savings of others, since the member gets the pot minus his or her bid amount. There are various ways of running this, and here is one example outlined in a recent paper by Tanaka and Nguyen that looks at Vietnam:

A winning bid turns into a discount to the other bidders who have not received the pool. In each meeting, the one who submits the highest sealed bid wins the pot, and the members who have not won the pool pay the full fixed amount minus the winning bid. Those who win the pot in earlier meetings get no discount, thus contribute the full amounts. The winner receives the pot, and pays a commission to the host. The cycle ends when the last member receives the pool. The winning bid of the last receiver is zero since he/she is the only bidder. Thus, the last member receives the full amount of contribution from each of other members.

Since members in such bidding ROSCAs determine their own price for the pot, and it varies from round to round, the cost varies quite a bit. In one of the examples cited in the paper above, they found that “the daily interest rates of the first receivers in these ROSCA are 0.90%, 0.88%, 0.56%, 0.17% and 0.10%, respectively” (p.g. 6).

There are other examples of where people will pay a premium to save. Yes, it denotes a negative return on investment, but it is still better than no return at all. Lest we forget, saving is hard, specially when one is talking about small amounts of income that is often uncertain, or irregular.

So how are they similar again?

The borlettes essentially function like a ROSCA with multiple payouts that occur in a random sequence, where the organizer charges a fee.

The borlettes also allow participants to mobilize small amounts of funds into a transformational amount of 50x.

One crucial element here is the frequency of payouts. If these functioned as the NY Lottery that they draw their numbers from, where the player has a bat’s chance in hell of getting a payout, this would not work. Participants actually count on these payouts to undertake costly projects, such as home repairs.

And finally, borlettes re-direct funds away from under the magic mattresses which often simply make savings … disappear.

“Micro-lotteries” ahoy!

Well, not exactly – it is somewhat unlikely that “micro-lotteries” will follow in the footsteps of micro-credit, micro-savings, micro-insurance, micro-mortgages etc. and be transplanted to other countries and settings. Borlettes are a very Haitian institution, and are a unique product of the need for a way to mobilize funds where there are very few options, disenchantment with savings schemes which turned out to be just that – schemes, and the juxtaposition with dreams and aspirations. (If that last bit seems like a non sequitur, check out the paper – its very relevant.)

Nevertheless, these and other practices arise from the desire of individuals and communities to put aside small amounts of money at regular intervals to receive a lump sum payout at a future date – a service for which they are willing to pay a premium. Borlettes make for a fascinating case study of a locally-relevant, highly scalable response to that desire.

Wo m e n ’ s Wo r l d B a n k i n g
F r o m t h e D o m i n i c a n R e p u b l i c
SKS Microfinance: Poor Prospects
| November 1, 2010 | 4:58 pm | Microfinance | Comments closed


Formerly seen as the golden child of microfinance, SKS Microfinance has recently suffered from a plight of bad press.  In July 2010, SKS became the first Indian microfinance institution to go public.  The deal was oversubscribed by 13 times at the top of its price band.  Since this time, several events have called into question its future success such as the unexpected firing of its CEO, a rash of suicides by loan holders, and pending government regulations.  Throughout this time, SKS’ stock has seen large price swings.  Given this situation, it seemed appropriate to reevaluate that company’s stock price.

Growth Potential

A number of factors support SKS’ high stock price.  First, SKS is the clear market leader within India and established a model that is easily scalable.  Second, the Indian market has only begun to be tapped.  Currently, microfinance demand is estimated at US$51.4 million with only US$4.3 million supplied, representing huge market potential.  Third, SKS’ operating expenses, while low internationally, are high in the Indian environment and could be reduced to increase margins.

Investment Concerns

Yet, several investment concerns are also present.  First and foremost, SKS’ initial valuation was widely considered high.   This overly optimistic valuation means that SKS’ extraordinary growth will have to continue to support its high price.  If growth slows or does not meet expectation, the price will fall.  Second, the company already has a high leverage ratio and could be incentivized to over leverage to meet its growth expectations.  Lastly, SKS’ management has made some questionable decisions raising concerns about its capabilities and bringing negative publicity to the organization.


SKS’ operations may be impacted by two important risks.  First, leadership risk is significant.  Vikram Akula is the face of the organization, but should something happen to him it is unclear if the organization could maintain its fast paced growth.  Second, regulatory risk is an immediate and pressing issue.  Access to priority sector lending is a key funding source, which may be made off limits to for-profit institutions such as SKS.  Any forced reduction in interest rates would also be damaging.

Comparative Analysis

In valuing the company, comparative analyses were used, specifically price to book value (P/BV) and price to earnings ratio (P/E).  In both instances, the ratios appeared high even with SKS’ phenomenal past success and future prospects.  Looking first at P/BV, this ratio is used to compare a stock’s market value to the book value of equity.  Utilizing FY2010 financial information, the P/BV was 6.27 and 7.53 post-dilution on October 15, 2010.  Several analysts felt that this high ratio was inconsistent with SKS’ return on equity and that it should be in line with private sector banks (P/BV of 2.5 – 4x).  P/E is used to compare a stock’s market value to the per-share earnings.  With the same financial information, the P/E was 34.53 and 41.45 post-dilution.   Looking at Compartamos (the only other public MFI) with a P/E of 26, these multiples appear unrealistic, especially considering Compartamos’ ROE is nearly double SKS’.


An updated stock price of Rs. 855.82 was calculated, representing a 24% decrease from the current stock price.  This valuation was calculated with a P/BV of 4.75, which is in line with private banks with a slight increase to represent SKS’ potential growth, and a P/E of 26, which is Compartamos’ current ratio.  While this valuation may be disappointing for current stock holders, it too may be high given SKS’ uncertain future.

For a full analysis, please refer to the “SKS: Poor Prospects ” report attached.

SKS: Poor Prospects