Are Investors Ready to Ride the Third Wave of Indian Microfinance?

By Atreya Rayaprolu & K. Sree Kumar, Intellecap – From VC Circle

If the sector tides over the current crisis, in the next few months we could see a Third Wave of Microfinance evolving.

How things change. Less than two months ago the Indian Microfinance industry was riding the crest of a wave, and excitement was palpable among industry stakeholders. Today, the sector is under attack, the almost miraculously reliable flows of repayment down to a trickle, and that of institutional credit virtually dry. And yet, we believe – maybe we are counter-intuitive investment advisers, maybe we are simply incorrigible optimists – that the sector could be on the point of return to a better balance between its commercial and social bottom-lines: a Third Wave.

Microfinance in India has roots in decades-old structures of informal and community financing, and more recently in chit funds and the SHG-Bank Linkage programs. But the modern private microfinance institution (MFI) operating on the Grameen/JLG model has evolved primarilyin the last 10 years.The first half of the decade was an unmitigated struggle for them, dominated by not-for-profit NGOs and focused largely on social impact and sustainability via funding from Foundations and DFIs.  In the last five years, the sector – or at least the news – has been dominated by for-profit NBFCs, with a focus on rapid growth and scale, fuelled by huge amounts of capital from PEs and backed by professional management.

These phases are what we would refer to as the first and the second wave of Indian Microfinance. The current crisis, triggered by the AP Ordinance, has helped everyone realize that neither a bullock-cart nor a Ferrari is appropriate, and in the real worldone needs to find an appropriate balance.

If the sector tides over the current crisis, in the next few months we could see a Third Wave of Microfinance evolving with this balance. Investors with a deep understanding of the drivers and risks of this sector, we firmly believe, should view the current period as the second inflexion point for the sector, and as an excellent opportunity to make ‘value’ investments and ride on this Third Wave.

It is incredible how events in a few months have changed perceptions of an entire sector. A year ago, VC/PE investors who had not made an investment in the microfinance industry felt left out, and rued missing the bus. The SKS IPO – the first in the Microfinance sector – was around the corner and everyone in the financial markets was waiting with bated breath. We were fielding calls from people who had forgotten our existence, wanting to spend time understanding the microfinance business. We spent even more time meeting people at all levels from other NBFCs, the Retail Banking sector, and Business schools, all of whom were stumped by the simplicity of the Microfinance model.

A year later, the sector has become one of the most maligned and viciously attacked. The build-up to the SKS IPO saw a number of debates not only on the merits of a ‘social’ organization (with an intended mission of alleviating poverty) accessing the capital markets, but also on the ethics and morality of stakeholders who realized financial gains before the listing. Meanwhile, the growing flow of capital into the sector fuelled a seeming mania for higher valuations that overtook the customers’ needs.

The post-listing euphoria was cut short by the unceremonious firing of the SKS CEO, and threw up a host of issues around corporate governance and transparency.  Finally, the linking of suicides in AP to over-indebtedness and coercive practices led inexorably to the AP Ordinance and the current crisis.  The founding father of the Microfinance industry in India, the still redoubtable Vijay Mahajan, has spoken about ‘an imminent collapse of the industry’, ‘death of the Microfinance model in its current form’ and ‘a lot of things not [being] right about the sector’.

As an eventful 2010 draws to a close, murmurs are still audible about some of the largest companies in the sector being on their death-beds.  However, there is an increasing sense that the dust is beginning to settle, at least from a media attention viewpoint.  It may take a few more months of coordinated effort to tide over the liquidity crisis, and several months of introspection and intellectual sweat to evolve the model for the next stage, but there is sufficient evidence on the ground to suggest that Microfinance as a business is here to stay, albeit with significant changes in strategy and business models.

In the first wave of Microfinance, promoters were central to the success of the organizations (mostly NGOs) and creating a social impact on the ground was the key focus. In the second wave, the focus was on the organization, with investors infusing huge amounts of capital and professional implementation of systems and processes with the objective of achieving growth and scale. In our view, we could now see the birth of a Third Wave,with the client at the center of the model, and everything that the promoter or the company does driven by her needs.

In this model, we expect to see many client-centric innovations.  Organizations are likely to develop a product portfolio that consists of a far wider offering than the “any-color-as-long-as-it’s-black”Grameen product (Customizations to cash-flows of the client? Partnerships for non-financial products?). Operating and delivery models should see plenty of redesign (JLGs and centers giving way to individual lending? Banking Correspondents operating with MFIs?), and credit-appraisal systems will be strengthened and formalized. All of this will eventually lead to a range of services being offered to the client (both financial and non-financial), based on a more complete understanding of the needs of the end-customer, and more sophisticated service offerings and transaction types. Delivering these improved services will require significant changes in the way data is captured and mined.

The current transition period presents, we believe, a tremendous opportunity for those investors who wish to come in at attractive valuations and ride on this Third Wave. Investors in the sector during this period are likely to reap rewards that provide a far more equitable balance between generating financial returns and having a real positive social impact on the client, her communities and the country.  Now that is something worth investing in.

(Atreya Rayaprolu is a Vice President at Intellecap and K Sree Kumar is the CEO of Intellecap, a leading Indian social business advisory firm that has intermediated over $120 million investment in the social sector.)

Twenty-Five Reasons why one should not invest in Micro Finance Companies

By K. A. Prasanna -

1. Micro financing started as a social cause enterprise is turning out to be   blood-sucking business of the poorest of the poor and hapless sections of the society.

2. There is no concern for the poor. The management is very much concerned about their chair, salary, benefits, ESOPs and wealth creation for themselves. The recent rumblings in SKS, which removed its managing director in an unprofessional manner, speak volumes about its corporate governance.

3. Seventeen borrowers of SKS micro finance committed suicide in Sept 2010, in Andhra Pradesh.

4. MFIs have come into existence as a financial intermediary for the poor; they have actually led to further impoverishment by adopting unethical practices, resorting to multiple lending without due diligence, usurious interest rates and coercive methods of recovery, as per the survey by A P government.

5. The RBI governor has suggested the state governments were the best agencies to regulate the coercive interest rates. This will happen soon.

6. According to the new regulation, the MFIs in A P must register themselves with district rural development authorities, indicate their areas of operation, employees, number of members and credit status. It also asked MFIs to display the interest rates, among other things. Dubious methods followed earlier wont work any more.

7. The proposed ordinance is likely to insist on MFIs being registered with district rural development agencies, apart from imposing a three-year imprisonment and/or Rs 1, 00,000 fines on erring MFIs.

8. The A P government is working out a policy to put a ceiling on interest rates charged by MFIs.

9. Unsustainable business model: The business model will not sustain in the    end.

10. No commitment from the promoters: SKS’s founder and chairman sold his shares to Tree Line Asia Master Fund (Singapore) Pte for $12.9 million in Feb. this year.

11. Look at the salary of top executives:

Suresh Gurumani (now sacked) – Managing Director of the Company. The total monthly salary is Rs. 12, 50,000. In addition to the above, Mr. Suresh Gurumani was paid onetime bonus of Rs. 10,000,000, in April 2009.

Dr. Vikram Akula – chairman Rs 70.00 lacs p.a. In addition, ESOP amounting to Rs10.97lacs, totaling Rs 1.79cr p.a. These people are trying to eradicate poverty. LOOK AT THEIR MIND SET.

12. Mohd. Yunus says (The father of micro finance) – “I get very worried when investment funds come to microfinance,” said the founder of Bangladesh’s Grameen Bank, which pioneered the industry by giving small loans to rural women to start their own businesses. “I don’t want to excite businessmen that there is profit to be made here,” And the promoters in India says the business is exiting (exploitation of the poor).

13. The IPO of SKS micro has already made the promoters and other venture capitalists including some P/E funds that have stakes in these companies’ millionaires. The hapless borrowers continue to live in abject poverty and are committing suicide.

14. Government /RBI will not be mute spectators to the exploitation.
They are bound to regulate the segment further. This will make the business un- attractive.

15. Financial inclusion initiatives taken by the public sector banks will marginalize the micro finance business.

16. The average cost of acquisition of shares by promoters of SKS promoters is less than Rs50/-

17. RBI has constituted a sub committee to look into the functioning of MFI sector. Basing on the recommendations of the committee further stringent measures is expected.

18.  Most of the favorable research report on MFIs is paid research report. DO NOT BELIEVE THEM BLINDLY.

19. The A P goverment is examining loan swap of MFIs with other banks, thus giving no    room for scale up of operations by MFIs.

20. Look at this irony – the wealthiest and the richest industrialists/business men in the country have access to the cheapest credit, around 8% p.a. from Banks and Financial institutions. Where as the poor, the down trodden and the and other unfortunate sections of the society pays the highest interest, anywhere between 30%-40%p.a. when they borrow from the Micro Financial Institutions (MFI). This cannot go on for very long.

21. The multiple lending (the same borrower taking loans from several MFIs), is very rampant, and this bubble will burst one day. Servicing multiple loans every week is not easy, particularly when they are disbursed under group guarantee, creating peer pressure not to default.

22. The poor are vulnerable to emergencies like flood, drought, illness and marriage.  So the claim of near 100% recovery by MFIs are either farce or the figures are fabricated.

23. Private equity and the global financial crisis have brought in senior managers from the financial world at what is considered exorbitant salaries to the world of microfinance. This is temporary phenomena.

24. Thus, there is a danger of microfinance not only being unable to remove poverty but end up as debt enlarging institutions.

25.  MFIs clarification that their rate of interest is lower than the rate charged by the local moneylenders holds no water. The truth is, in the name of helping poor, the poor is being exploited by these MFIs.

Emerging Market Microfinance Firms Prove to be Viable Investment in 2010 and Beyond

From Microfinance Gateway -

In the fall of 2008 when the Global Credit Crisis erupted and threatened to take down the global economic system, a degree of fear and uncertainty gripped financial markets that had never been seen in modern times. The stock market crashed, the property market crashed, and wild volatility unfolded in the foreign-exchange market. For a few months in the fall of all 2008, it appeared that a financial Armageddon was upon us.

Then, just a few months later in March of 2009, The Great Recession appeared to bottom out in the developed world, and economic growth resumed. Equity markets began to rebound and recover, property markets stabilized, and unemployment slowly began to fall. It seemed that a complete financial disaster had been averted, and in the late spring and summer of 2009, it appeared the global economy was well on its way to a stable economic recovery. However, the story did not end so happily. In fact, the story has yet to end!

In November of 2009, it became evident that Greece was going to suffer a sovereign default. This fear of a meltdown in the EuroZone caused another round of fear and hysteria to grip financial markets as investors became assured that a double-dip recession was upon us. After nearly 6 months of speculation and uncertainty, the European Central Bank and International Monetary Fund bailed Greece out and promised to back any other countries in danger of default.

Then, in the summer of 2010, right after the EuroZone bailout, the United States economy hit a major wall of resistance, and economic data throughout the months of June and July began to paint a very dreary picture concerning the economic recovery in the U.S. Federal Reserve Chairman Ben Bernanke has said the economic outlook for the 2nd half of 2010 is “unusually uncertain.” In other words, the Fed does not have a clue what’s going to happen. The U.K. and EuroZone are in a similar situation.

The current uncertainty in the global economy, however, is largely relegated to developed nations. Developing nations have proven to grow at very strong rates during 2009 and 2010. India, China, Brazil, Russia, and many Central American, South America, and African nations are growing at incredible rates. This phenomenon is quite fascinating. This scenario is causing many investors to reconsider emerging markets as a viable vehicle for investment growth.

The current economic recovery in the U.S., U.K. , and EuroZone is expected to be very long and challenging. It is estimated by some economists that it may take another 5 years at least for the United States to return to normal levels of economic growth and employment. This stagnated economic outlook for the U.S. and other developed nations means that most of the economic growth over the foreseeable future will be in emerging markets. Two ways to take advantage of the huge growth potential in emerging markets is to trade currencies at a forex broker, or invest in companies and funds that are heavily exposed to microfinancing.

One of the fastest growing and most stable emerging markets is India. India is increasingly becoming a player in the world economy, and its presence is expected to grow tremendously over the next 10 years.
Entrepreneurs in India, however, still face major difficulties in obtaining credit that is necessary to start a small business and expand existing ones. That is where microfinancing comes in.

In August, SKS Microfinance, India’s largest microlender, underwent an Initial Public Offering. In fact, SKS Microfinance is India’s first microfinance institution to go public, and the incredible success of the IPO communicates several important truths. First of all, investor interest regarding microfinance in India is huge. Second of all, due to the incredible success of the offering, many other microfinance firms may go public.

SKS Microfinance raised $358 million and received bids for 13.7 times the 16.8 million shares on offer in the IPO. SKS currently has nearly 7 million clients and has disbursed nearly $3 billion in credit.

Companies such as SKS are seen by many analysts as a great investment opportunity for investors who want to expose capital to emerging markets. Microfinance has exploded over the last 20 years, and as emerging markets continue to grow over the next 10-20 years, microfinance firms will most likely do quite well.

Industry estimates claim that about 400 microfinance institutions in India are currently serving about 70 million, but there are an additional 50 million homes that still have credit needs; thus, the outlook for microfinance growth in India is quite strong. Although investing in emerging markets always carries significant risks, they will most likely be the place that shows strongest economic growth over the next 10 years, and exposing a portion of one’s portfolio to emerging markets may be a sound investing decision.

One may also want to learn currency trading as the volatility in the currency market will most likely be very strong for years to come.

Nigerian Capital Development Fund (NCDF) Raises Fund to Save Micro-Finance Banks

By Isaac Aregbesola – Businessday Online -

In its efforts to provide quality standards as a platform for efficient management in micro-finance banks in the country, the Nigerian Capital Development Fund (NCDF) has said it will support the Central Bank of Nigeria (CBN) in creating profitable institutions that will have recurring impact on poverty alleviation. To achieve this, the NCDF has advocated for support from both private and public institution to ensure that micro-finance institutions operate efficiently and effectively in tackling poverty in Nigeria . Abubakar Ibn Umar Garba, Shehu of Borno and President of the Advisory Board of NCDF who made this known in at the National Economic Development Awards in Abuja, Thursday, said the fund is determined to make an impact, working closely with the CBN and other relevant agencies to attain the goal Garba, who was represented by the Zanna of Borno,i Zanna Hassan Bokuma, said “the fund will ensure steady and easily accessible micro-financing to the grassroots in rural parts to the overall economic emancipation of Nigeria.

HNI wealth management firm invests in micro loans

By Sanjay Vijay Kumar, Financial Chronicle -

For the first time in the Indian micro finance industry, a wealth management firm has invested in this fast growing sector. Avendus Capital, which offers services to ultra rich clients, has participated in a micro loan securitisation transaction worth about Rs 37 crore with three Indian micro finance institutions.

Chennai-based non-banking finance company, IFMR Capital, was the arranger for the transaction and also closed its eighth micro loan securitisation transaction on Friday through Mosec III, the special purpose vehicle (SPV) created for this purpose.

The SPV created for this purpose, issued two tranches of securities backed by 45,951 micro loans worth Rs 37 crore that were originated by Sahyata Microfinance, Asirvad Microfinance and Satin CreditCare Network.

Securitisation is the process through which financial institutions will be able to pool the receivables from loans and sell the same to third parties in the form of banks, mutual funds and insurance companies. This is the most common practice by which non-banking finance companies raise money.

So far, micro finance institutions have been raising money via securitisation through banks and off late mutual funds have been showing interest in the sector. By diversifying their source of capital, micro finance institutions would be able to bring down their cost of funds.

The multi-originator securitisation structure means pooling the assets of three different entities, which increases the size of the total transaction and reduces the cost of accessing capital markets allowing even small high-quality MFIs to take the capital markets route to debt-financing. The same pooling feature provides greater diversity of assets to the investors without compromises on the asset quality, returns or size of investment.

“We crossed two important milestones with this transaction. For the first time in the multi-originator structure, Crisil has rated the second loss tranche even with lower cash collateral proportions for each MFI. Secondly, this transaction has brought for the first time, a private wealth management firm, namely Avendus Capital,” Sucharita Mukherjee, chief executive officer of IFMR Capital said.

sanjayvijay@mydigitalfc.com

Foreign micro investment firm explores Nigeria’s market

By Tola Akinmutimi, Nigerian Compass -

German incorporated consulting firm, Micro Investment Consult Limited has begun discussions with umbrella bodies of the micro finance institutions with a view to collaborating with them on key areas that would help in leveraging their efficiency in micro financing in the country.

The company, whose representatives, led by the Mr. Franklin Odoemenan, the Investment Manager for the West African sub-region, met with some leaders of  the various micro-credit finance providers penultimate week in Lagos and expressed the hope of commencing business next month.

It was revealed that the consulting firm intends to add-value to micro financing services delivery and capacity building that would help in linking performing microfinance institutions to rating and investment agencies as well as initiating projects that will be beneficial to the good institutions.

Odoemenam stated that the firm provides technical assistance to Microfinance institutions.

According to him: “We do this through network of more than 40 consultants that are specialized in different fields of microfinance. We support MFIs such as credit unions, cooperative organizations, NGOs and fully regulated Microfinance banks. While providing capacity building to MFIs we concentrate mainly on the provision of credit scoring, institutional evaluations, social performance appraisals, risk management facilities and improvement of the management information.

“The core of our work lies on linking good performing microfinance institutions to rating and investment agencies. Micro Investment Consult also aids MFIs in sourcing for grants in order to improve operational standards. In other words, we serve as link between the MIFs and investors” he added.

He stressed that the company had been licensed to operate in Nigeria in addition to Ghana where it is currently operating and will commence operations in the country this month if current discussions with the leaders of the microfinance institutions are consummated in concrete terms.

However, attempts by Nigerian Compass to chat with the team leader on phone was unfruitful but one of the leaders of the MFIs confirmed that his group met with the team but did not clarify whether or not the accompanying representatives of United States of America-based Briera Dale and France-based Gaelle Bonnieux both from Planis Investment France were part of the meeting held in one of the MFBs located in Victoria Island, Lagos.

He said: “We got a letter from them and we prepared for their coming. Yes, I can tell you that we had some useful discussions which both parties are expected to appraise and work on before another meeting would be held to consolidate on the gains achieved at the maiden meeting. It was a very useful meeting and we hope the consummation of our discussions would offer a new investment window for MFIs in the country to explore.”

Although many stakeholders believe that effective credit scoring, which depends largely on creditors’ history, a strong national identity database for the citizenry and other relevant information on Nigerians, may pose a major hurdle to many investment consultancies that are currently trying to bring foreign experts into the country as none of these vital components of credit scoring and risk management are available in Nigeria.

Hedge Funds Gamble on Poor in `Simpsons’ Farce

By William Pesek, Bloomberg -

Betting on the poor has never been this profitable or this tasteless.

Just ask the good folks at George Soros’s Quantum (M) Ltd., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Nomura Holdings Inc. Funds they control stand to make a bundle on SKS Microfinance Ltd.’s initial public offering.

Never mind that bankers’ disregard for the poor necessitated the creation of microfinance. Wall Street investment banks and hedge funds alike now see value in the poor of India, where about 120 million households have no access to banking. All’s fair in love, war and finance, right? Wrong.

This is a sad day for a grass-roots phenomenon that has altered the lives of millions. Be it the widow in Bangalore seeking $100 to buy a cow, the man in Lagos eyeing $75 for a used motorbike or the family in Jakarta looking for $30 for a mobile phone, microfinance is changing the face of development.

The Nobel Peace Prize committee underlined the point in 2006, when it honored Muhammad Yunus, founder of Bangladesh’s Grameen Bank. Conceived in 1976, Grameen inspired countless copycats to provide credit where it is most needed.

It’s strangely fitting that Yunus plans to star in an episode of “The Simpsons” later this year. His life’s work risks being turned into a farce in the name of shareholder value. Yunus has been vocal in concerns that micro lending is about to morph into just another money-making business.

$353 Million

Yes, I know what the investment set thinks of all this. The IPO by India’s largest microfinance lender could bolster credit in Asia’s third-biggest economy. SKS is seeking to raise as much as $353 million, money that could be deployed widely among India’s 1.2 billion people — perhaps at lower interest rates.

Nice theory, but good luck making it real. Over time, you can bet shareholders will wonder why profits and dividends aren’t higher. Oh, they’ll say, why did we make this massive block of less-than-lucrative loans in Goa or Kolkata? Microcredit was supposed to be about alleviating poverty and reducing dependency on an inefficient state.

Capitalism certainly plays a role. Bankruptcy helps no one, and money should always go to productive purposes. It’s wrong, though, to subject microcredit to irreconcilable objectives.

When you meet with microcredit officials in Asia, Africa or Latin America — most often, they are women — they stress a key element behind their success: peer-pressure.

Intimate Lending

If you borrow money from your community, it’s not so easy to renege. When you are late on a loan to Citigroup Inc., you can dodge phone calls. It’s a different story when you have to slink past neighbors to whom you are indebted as you make your way home from work — or to the pub. Microcredit works and default rates are low because of its local and intimate nature.

Institutionalizing the process runs counter to those tenets. Once bureaucracy, metrics, credit scores and computer models take over, the process loses its soul. The utter depersonalization of the movement will kill its effectiveness.

It is no coincidence that Wall Street bigwigs and hedge- fund moguls chose now to bet on microfinance. They are looking for income streams less connected to turmoil-ravaged markets. The desire to diversify is leading them to unfamiliar places.

Tiny lending in India may surge by about 40 percent annually over the next few years, Sanjay Sinha, managing director at Micro-Credit Ratings in New Delhi, said in June. Such growth presents Vikram Akula, SKS’s founder and chairman, an opportunity to edge closer to Wall Street than to slums in Mumbai or Hyderabad, where SKS is based.

Sub-Subprime Crisis?

Perhaps the poor pumping up profits for billionaires is a natural next step in an out-of-whack world where growth in developing nations supports the richest. After all, we live in a moment when private-equity firms go public so they can raise money to take other companies private.

As competition heats up between micro lenders, salespeople may hit the slums to drum up business and make lots of ill-fated loans. Would bankers repackage these loans and sell them as AAA rated securities? A sub-subprime crisis, anyone?

Microcredit going up-market would pull these loans into the broader system, making the industry more vulnerable to the whims of markets. Also, SKS’s size means it could encourage major players to follow.

Amid the excitement over rapid growth, it’s easy to forget that more than 600 million Indians live on less than $1.50 a day. If you believe India’s bureaucracy is nimble enough to spread the benefits of 8.6 percent growth, then go ahead and let those offering credit to the poor get co-opted by bankers.

There’s a reason India has more mobile phones than toilets. It has benefited greatly from private-sector solutions to hurdles that confound an inefficient public system. Microcredit has plugged many holes in an economy bleeding potential.

It’s understandable why investors see this as a nifty way to plug their own holes. Too bad it may come at the expense of the bottom half of the economic pyramid.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

Ananya Finance For Inclusive Growth to sell 20% stake to IFC

India Microfinance -

Ananya Finance is a microfinance NBFC being promoted by Friends of Women’s World Banking (FWWB) which was founded by Ela Bhatt (SEWA) in 1982. FWWB created Ananya in March 2010 with the intent of reaching out to a larger section of microfinance institutions and building a large lending portfolio

The International Finance Corporation (IFC), a part of the World Bank Group , is planning to pick up a 20 per cent stake in Ahmedabad based Ananya Finance For Inclusive Growth, a non banking finance company (NBFC) that provides financial and non-financial services to microfinance institutions (MFIs) in India. Market sources reveal that IFC could pay upto US$10 Million to acquire the 20% stake in Ananya Finance For Inclusive Growth

Ananya currently provides a channel to reach out to the large number of under-served and poor microfinance clients, as it works across 17 states in India with more than 122 partner organisations, who have a collective outreach of more than 14 million people.

According to information provided by IFC, Ananya is expected to raise about Rs 150 crore in equity to strengthen its capital adequacy and to lend a larger amount in the new entity. IFC’s proposed investment in Ananya consists of an equity investment of up to Rs 50 crore for up to 20 per cent stake in the company.

The firm would be a microfinance institution and will start with a portfolio of Rs 400 crore transferred over from the trust, resulting in transfer of active borrower relationships. The main promoter of Ananya would be Indian Foundation for Inclusive Growth (IFIG) Trust. Vijaylakshmi Das, Jayshree Vyas, Anjali Bansal,Brij Mohan and Girija Srinivasan are the present directors on the board of Ananya, with Vijayalakshmi Das as managing director.

Other Posts You Missed !

1. Financial inclusion is key to inclusive growth: Finance Minister
2. Microfinance Jobs- Chief Financial Officer, Ananya Foundation
3. Aavishkar Goodwell acquires significant minority stake in Shre Pathrakali Finance
4. Princess Máxima of the Netherlands named new UN advocate on inclusive finance

We are investing $50m in microfinance institutions

State of Microfinance Investment – Summary

by abhay, Microfinance India -

State of Microfinance Investment:2010 MicroRate MIV Survey is the 5th annual survey evaluating trends in microfinance investment and has been released by Microrate.

MicroRate’s 5th annual Survey of microfinance investment vehicles (MIVs) measures the development of a relatively new category of funds and other intermediaries that mobilize investments in rich countries and channel them to microfinance institutions (MFIs) in the developing world. (These MIVs provide debt to Microfinance Institutions, with equity funds generally not experiencing these market conditions.)

It is one of the little noticed triumphs of development that large amounts of money are by now flowing from investors in Europe and the USA via MIVs to microfinance institutions in countries like India, Peru or Uganda, to name just a few. Ultimately these funds reach millions of poor people as microcredits, allowing them to become productive and earn a livelihood.

In 2009, the assets of MIVs grew by $1.2 billion to $6 billion. MIVs thus account for a significant share of funding flows from rich countries directly to the poor. The 2010 MIV Survey shows that investor interest in microfinance funds and similar intermediaries remains strong despite the worldwide recession. MIVs grew by 22% in 2009. But strong interest in microfinance from investors is meeting much weaker demand for funding from microfinance institutions themselves. Microfinance assets – the part of a Fund invested in MFIs – grew only 11% in 2009, which left MIVs with rapidly increasing and ultimately unsustainable levels of liquidity.

By the end of 2009, too many MIVs were chasing too few investment opportunities; rates had once again dropped to levels where they no longer compensate fully for the risks associated with lending to some of the world’s poorest countries.

Lending to MFIs by government-owned development institutions (DFIs) is not covered by this Survey, but Microrate has observed, that they strongly increased their lending for microfinance in 2009. DFIs are once again crowding out private funding for microfinance as they did before the global crisis of 2008.

Survey Overview
In 2008 and 2009, MIV growth has slowed drastically compared to growth rates before the recession. In these two years MIVs grew at the slowest pace since the start of MIV Surveys in 2005. In 2009, investment in Latin America and the Caribbean (LAC, 37% of microfinance assets) eclipsed Eastern Europe and Central Asia (ECA, 35%) as the largest MIV investment region.

This change indicates that investors moved away from ECA during the financial crisis towards the more mature LAC market. The share of investment in South Asia remained constant in 2009 (9%). East Asia and the Pacific (EAP) showed the highest growth (124%), but the Region only represented 7% of microfinance assets. Sub-Saharan African investment, with 6%, of microfinance assets, also grew at an astonishing rate of 45% in 2009.

MFI Demand
Growth of MFIs has slowed, but it continues to be quite strong. A sample of MFIs tracked by MicroRate grew by 22% during 2009, compared to 49% in 2007 before the financial crisis erupted. MicroRate has observed that MFIs tend to borrow first from local sources; they resort to MIV funding to cope with peaks in growth. When MFI growth slows as it has in 2008 and 2009, demand for MIV funding decreases disproportionally.

Investor Demand
Investors’ willingness to place their funds with MIVs remained strong in 2009, despite the effects of the global recession. MIVs raised more money from investors than they were able to place with MFIs. Investors remain optimistic about microfinance compared to other investments.

Liquidity & Development Institutions
In 2009, MIVs held over $1 billion in liquid assets (17% of MIV assets) compared to $459 million in 2008 (10% of MIV assets). While a certain level of liquidity was prudent to cover redemption requests, the rapid build-up of liquidity in 2009 was unprecedented and reflects weak demand for loan funding from MFIs.

A special liquidity facility (the “Microfinance Enhancement Facility-MEF”) announced by two large DFIs in late 2008 achieved its goal: to assure the microfinance industry that funding would not dry up as a result of turmoil in financial markets. But though well intended, because of poor timing it added to the difficulties of MIVs. By the time the Facility began disbursements in 2009 the feared funding shortage had given way to an oversupply of funds.

Conclusions & Future Implications
MicroRate believes the current cooling off period could be considered a blessing in disguise: in 2007, just before the crisis erupted, MIVs had grown by nearly 100%. This was not sustainable. The drop in demand for MIV funding in 2009 could be seen as an opportunity for MIVs to strengthen their organizations, and focus on delivering the products and services that microfinance institutions truly require. The main danger posed by excessive liquidity is that it could push some MIVs into relaxing their lending standards. Even though many MIVs expect demand to recover rapidly, it is likely that growth will continue at a slower, more sustainable pace in 2010 than in the past.

About the MIV Survey
The 2010 MIV Survey marks MicroRate’s the fifth annual MIV Survey tracking the evolution of the sector. The Survey covers 78 of the 88 MIVs (89% response rate) with data collected as of December 31, 2009. The 2010 MicroRate MIV Survey will be released at the end of July 2010.To receive an advance copy of the 2010 MIV Survey, please contact Becca Waskey (Becca@microrate.com)

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