Given the current global markets, the subprime and credit crisis was clearly a popular topic. Most delegates felt that the credit crisis affected liquidity and investor interest rather than the default risk of the underlying loans. Some MIVs have seen a return of clients, who earlier had graduated to more general sources of lending. Also the lack of appetite for collateralized loan obligations (CLO) has extended to microfinance. However, other MIVs felt that the slowdown in the general markets had caused some investors to turn to niche markets such as microfinance for diversification.

Many delegates believed the subprime crisis and disappearance of the CLO market would help the microfinance industry from going though an early bubble. While MFI defaults have been few and far between, many also believed defaults were good for the industry as learning tools to prevent irresponsible growth and investment in the industry. Finally, in terms of loan portfolio credit quality, participants felt that natural disasters and climate changes posed significant risk.

Another common theme given the rapid growth of microfinance was the possibility of overinvestment and excess capital in microfinance. Several panelists cautioned against the excessive concentration of funds into a few MFIs rather than excessive cash flows overall. Thus there was also an emphasis on involving responsible, quality investors who understand each MFIs’ goals and do the appropriate due diligence.

Along with MFI portfolio growth, some delegates have seen an increase in average loan sizes without a new generation of MFIs serving the poorest of poor. In addition, the concentration of funds has also been geographically, with Asia and Africa seeing little foreign investment. Several MFIs emphasized that the most important factor into entering these markets is an enabling environment, particularly the political and regulatory situation. In China, MFI MicroCred Nanchong emphasized the importance of establishing political relationships as well as subsidies for operations such as technical assistance.

In the more mature markets such as Latin America, some panelists felt that consolidation of MFIs will become a trend. This could include an increase in merger and acquisition activity and be a feasible exit strategy for equity investors. Another exit strategy that could become more popular is initial public offerings (IPOs). According to Arnaud Ventura, VP of PlaNet Finance and CEO of MicroCred, 80 percent of investments have been in debt, and thus there is opportunity and need for increased equity financing.

Finally, another debate covered in the conference was the appropriateness of new products such as consumer loans. Several delegates cautioned against the mission drift of MFIs and offering of products which could easily lead to client over-indebtedness. However, some MFI delegates felt there was a need and demand for consumer loans, which could benefit clients when administered responsibly.

The conference was sponsored by Standard Chartered Bank and present by PlaNet Finance and the American Conference Institute. Further details on conference logistics and hosting participants can be found in the following MicroCapital article.

by Jennifer Lee

Additional Resources:

Global Microfinance Investment Congress: Home, Brochure, MicroCapital Coverage

Providing a background on the subprime loan market, the paper showed how these new products allowed customers with less-than-perfect credit to become homeowners and thus follow a traditional route into the middle class. By bundling loans into pools for sale on the secondary market, the subprime mortgage market grew from USD 65 billion in 1995 to USD 332 billion in 2003.

The author emphasizes that subprime lending is not synonymous with predatory lending. However, ample supply of funding from the secondary market and high demand for home ownership led to rapid and unsustainable growth. Lenders grew despite inadequate staff training and infrastructure development. Also, technology increased the distance between lenders and clients, often creating cultures which tolerated or even provoked abusive policies toward borrowers.

In 2006 and 2007, the market began to see increasing loan defaults, as many loans were underwritten without income verification. Today, borrowers face home foreclosures, lenders are acquiring properties worth a fraction owed to them, loan servicers cannot handle the volume of defaults and investors have seen their portfolios depreciate.

According to the paper, commercial microfinance is not equal to subprime lending as microfinance loans do not rely on the value of underlying collateral. However, microfinance is a nascent, high-growth industry with several similarities to the early stages of the subprime lending industry. These commonalities are:

• Expansion of financial services to the underserved
• Influx of available funding to the markets
• Prevalence of high interest rates to offset increased risk
• Appearance of innovative new products, facilitating market penetration
• Increased reliance on technology to facilitate growth

The author concludes by recommending proper due diligence by investors and caution against careless deployment of available funding by microfinance institutions (MFIs). With microfinance breaking into the capital markets, the author believes those in the field need to learn from the mistakes of the subprime market. Finally, investors can protect against predatory lending by monitoring the following:

• Compare average yields to net income. In other words, are the interests of borrowers and investors in balance?
• Examine a sample of delinquent loans across loan products.
• Review new loan products, ensuring each is suitable for the MFI.
• Request a schedule of fees charged at underwriting and collection. Are these fees reasonable, and do borrowers clearly understand the loan terms?
• Evaluate the MFI’s character; effective lenders respect their staff and clients.

by Jennifer Lee

Additional Resources:

MicroVest White Paper: “Subprime Lending: Lessons for the Microfinance Industry”, by Cecelia Beirne, April 2008.

JULY 28-30, 2008, BALI, INDONESIA

The Asia-Pacific Regional Microcredit Summit 2008 (APRMS) is the 12^th conference in a series of global and regional summits by the Microcredit Summit Campaign (MSC). In plenary sessions, APRMS will discuss 4 commission papers and present tow Institution Action Plans. The Summit will also feature 3 sets of workshop sessions, a 5-day course on a variety of subjects, and 12 sessions organized by delegates.

The registration fee to attend the Summit depends on date and the region from which registrants come. Prior to May 31, 2008, registrants from the Asia-Pacific Region will be charged IDR 1.14 million (or USD 120), while all other registrants will be charged IDR 1.615 million (or USD 170). After June 1, 2008, the Summit will cost registrants from the Asia-Pacific Region IDR 1.425 million (or USD 150) versus IDR 2.137 million (or USD 225) for all other registrants.

In 1997, the first Microcredit Summit started a 9-year campaign to “reach 100 million of the world’s poorest families, especially the women of those families, with credit for self-employment and other financial and business services by the end of 2005.” The MSC is in its second phase with 2 new goals of reaching 175 million of the world’s poorest families and working to ensure that 100 million of these families earn more than USD 1/day adjusted for purchasing power parity.

At the end of 2007, APRMS was postponed due to unrest in Pakistan, the original location. The MCS is a non-profit microfinance support agency based in Washington D.C. As noted by MicroCapital, the MSC also released its 2007 report in January.

Co-host Gema PKM (The Indonesian Movement for Microfinance Development) is a national microfinance trade association of the government, finance institutions, NGOs, the private sector, universities, and research institutions. Gema PKM was founded in 2000 with the goal of serving 10 million poor families by 2005. It is headed by the State Minister for the Empowerment of Women and the Head of the National Family Planning Coordination Board.

One can register online at the website. The Convention Center in Bali will also be open for pre-registration on July 27^th. For questions about program sessions or APRMS in general, one can call 1-202-637-9600 or email info@inamicrocreditsummit.org. For questions about registration, sponsorship opportunities, Bali, or travel information, one can call 62-21-8004929 or email the address above.

by Jennifer Lee

Additional Resources:

Asia-Pacific Regional Microcredit Summit: Home, Registration

Microcredit Summit Campaign: Home

Gema-PKM: Home, Year of Microcredit Summary

MicroCapital: “PRESS RELEASE: Microcredit Summit Campaign Releases 2007 Report”, January 18, 2008.

The Head of the CBN’s Microfinance Division, Mr. Joes Alegieuno stated “Some of the microfinance banks, due to ignorance of the operating guidelines and lack of skilled manpower, are already derailing from their functions. Consequently, copious mission drifts have been observed in the service delivery models being adopted by most licensed and converted MFBs, as they are currently running their shops as if they were mini conventional/universal banks.”

Regarding the distribution of MFBs, there is greater penetration in the south, leading to concerns about the outreach in the north. For instance, out of the 716 Nigerian MFBs, 282 are located in the South West zone, 169 in the South East zone, and 106 in the South South zone. Whereas in the North, there are 78 in the North Central zone, 48 in the North West zone, and only 33 in the North East zone.

The dearth of skilled personnel with the appropriate experience in the sector is a trend mentioned often across the microfinance industry. The CBN’s policy stipulates that bank management and board of directors have the prescribed educational qualifications as well as relevant banking or related experience. However, many of the top MFB management do not have practical microfinance banking experience. The CBN believes this hampers their supervisory functions in the management of the banks.

Another challenge to the CBN’s microfinance policy is ignorance on the part of both MFBs and the CBN. On the MFB side, there is an ignorance of operating guidelines, such that 9 out of the 36 MFIs in a recent CBN survey had the minimum capital requirement of N 20 million (roughly USD 169,671) for MFB licensing but had not applied for licensing due to ignorance of the procedures and incentives. On the other side, the CBN lacks general information about microfinance institutions (MFIs) such as the type of services offered, the number of clients, as well as the amount of loans and savings.

Recently, the Lagos State Government in Nigeria also announced a new microfinance bill, which requires all local governments in the state to contribute at least 1 percent of their allocations to MFB operations. Further details of this government regulation can be found in the following MicroCapital article. Also, as noted by MicroCapital earlier this year, the Nigerian Government also launched a USD 426 million microcredit development fund, administered by the CBN.

by Jennifer Lee

Additional Resources:

AllAfrica.com: “Nigeria: Microfinance Banks are Derailing From Core Functions”, by Babajide Komolafe, April 30, 2008.

Central Bank of Nigeria: Home

MicroCapital Story: “The Lagos State Government (LSG) in Nigeria Announces New Microfinance Legislation”, by Anthony Busch, April, 29, 2008.

MicroCapital Story: “Nigerian Government Creates a $426m Microcredit Development Fund”, by Jake Keller, February 22, 2008.

GV is also looking to increase its client base to 585,000 by 2009 from its current 250,000. For the year 2008-2009, the company has also set a loan outstanding target of Rs 15 billion (roughly USD 360.3 million) and a credit target of Rs 5 billion (roughly USD 120.1 million).

GV’s expansion will be aided by a capital increase of Rs 147 million (roughly USD 3.5 million). This funding was provided as a private equity investment from the Unitus Equity Fund L.P. and Vinod Khosla. Mr. Khosla is a venture capitalist and the former general partner of Silicon Valley-based venture firm, Kleiner Perkins. With this addition, GV’s capital will total Rs 174 million (approximately USD 4.2 million).

Other investors have included Citibank India. As reported by MicroCapital, Citibank supplied a Rs 45 million (roughly USD 1 million) loan to GV in late 2006.

GV started its operations in 1993. According to the microfinance information clearinghouse the Mix Market, GV had 224,108 borrowers all of which were woman as of March 2008. It also had a gross loan portfolio of USD 28.7 million, total assets of USD 31.3 million, and portfolio at risk > 30 days of 0.20 percent. GV was also ranked fourth in the MIX Global 100 list of top MFIs in December.

by Jennifer Lee

Additional Resources:

Business Standard: “GV to launch 155 branches by Dec 09: Non Banking Finance Company plans expansion”, May 1, 2008.

Grama Vidiyal Microfinance: MixMarket

Bloomberg: Currency Calculator

MicroCapital Story: “Press Release: Microfinance Information eXchange (MIX) Releases Second Annual ‘MIX Global 100: Rankings of Microfinance Institutions’”, January 21, 2008.

MicroCapital Story: “Grama Vidiyal gets USD 1 Million Loan from Citibank India”, December 8, 2006.

To reposition the Indian Small Industry in the changing global scenario, respondents felt the top three key issues were the simplification of labor laws, the promotion of innovations, and regulatory changes. However, the three most important financial obstacles to the growth of the Small Industry are high interest rates, collateral requirements of financial institutions, and bank paperwork or bureaucracy.

Regarding financing, 43 percent respondents of the Small and Medium Industry foresee non-traditional sources replacing the traditional banking sources. Moreover, 10 percent of respondents use the capital markets as an alternative source of financing; 8 percent use venture capital financing; while 12 percent use credit guarantee schemes. The Credit Guarantee Fund by the Small Industries Development Bank of India guarantees loans for up to Rs 5 million (roughly USD 123,563). In addition, 52 percent of those surveyed viewed the guarantee as a substitute for collateral security, while 82 percent felt that the limit of RS 5 million was not sufficient.

The survey also showed that 32 percent of respondent companies are rated by an external credit rating agency. This generally led to improved loan conditions. Out of the 32 percent, 4 percent received lower collateral requirements, 7 percent availed simplified lending norms, and 11 percent gained reduced interest rates.

Another policy addressed was the Procurement Preference Policy for MSMEs. This policy assist in the procurement of goods and services produced and offered by micro and small enterprises by the Central Government, its aided institutions, and Public sector Undertakings. 81 percent of respondents supported making the policy mandatory. Earlier the policy was non-statutory and thus not enforceable by law.

The CII is a non-government, not-for-profit, industry led and managed organization. This business association was founded over 112 years ago and has a direct membership of over 7000 organizations, including SMEs and multinational companies. Its goal is “to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes.”

by Jennifer Lee

Additional Resources:

Machinist.in: “CII Business Outlook Survey for micro, small & medium Enterprises”, by Viswanath, April 25, 2008.

CII: Home, MSMEs

Government of India: Procurement Policy

Although not one of the 20 largest global finance institutions by market value, DB is a large global investment bank which operates in over 75 countries. In 2007, DB had a net income of EUR 6.5 billion, total assets of EUR 2.0 trillion, and a ROE of 18.0 percent.

Regarding its microfinance activities, DB arranges and manages 6 funds for a total of roughly USD 500 million in social investments. The first fund was launched over 10 years ago, and the bank is now active in 45 countries, lending money to roughly 100 partners. DB also has a 13 member Community Development Finance Group, of which 8 are dedicated full-time to microfinance investments.

With USD 5 million in assets, the DB Microcredit Development fund supplies credit to nearly 50 microfinance institutions (MFIs) in 27 countries. The fund was the first commercially-oriented microfinance fund by a global bank and gives loans ranging from USD 25,000 to 250,000. In 2005, DB launched the DB Start Up Fund, which focuses on MFIs in the earliest phase of development, complementing private equity stakeholders with loans. This fund offers loans of USD 25,000 to 100,000 and has USD 1.5 million in assets, a third of which was invested by DB.

DB also coordinates and manages the Global Commercial Microfinance Consortium (GCMC), which was launched in 2005. GCMC is a partnership between three development agencies, philanthropists, and 13 institutional investors. The fund assists commercially-focused MFIs access capital in locally-demanded currency via loans of up to USD 4.5 million. Currently, GCMC has USD 80.6 million assets, USD 1 million of which was invested by DB, and has approved over 40 deals in 21 countries. MicroCapital covered the fund’s initiation, and more articles about the fund’s deals can be found here.

In 2006, DB invested EUR 34 million in the European Fund for Southeast Europe, part of which went to an asset securitization deal for a large Bulgarian MFI. In September 2007, 21 German investors funded the DB German Fund for Microfinance with USD 83.3 million. The first sub-debt fund rated by Fitch, it provides loans of up to USD 6.9 million to MFIs in 15 countries. DB also invested USD 5.5 million in the fund. For further details, please see the following MicroCapital article.

Aside from funds, DB also invested in the Indian microfinance private equity company Aavishkaar Goodwell in 2007. Other investors were the Netherlands Development Finance Company and the IFC, a member of the World Bank Group. The combined investment was USD 8 million and was covered in the following MicroCapital article.

Aside from microfinance, DB also has two grant-based funds: the Eye Fund and the Enterprise Social Fund. With USD 20 million in assets, the Eye Fund supports sustainable eye care in the developing world. Click here for MicroCapital coverage of the Eye Fund. The second fund helps create low-cost housing for poor families in the United States. Finally, DB is expanding a technical assistance program in which treasury risk employees from DB and MFIs exchange places for a given period.

In 2008, DB plans to initiate 4 new funds: a Rain Forest Preservation Fund, an Education Fund, a Technology for Microfinance Development Fund, and a USD 200 million Multi-Issuer Rated Deal similar to GCMC. DB is also working on a multi-facility investment vehicle which includes grants, debt, and equity for single-country investors or donors.

by Jennifer Lee

Additional Resources:

ING Microfinance: “A Billion to Gain? The Next Phase”, by Matthijs Boúúaert, March 2008.

Deutsche: Home, Microfinance, Microcredit Development Fund, Global Commercial Microfinance Consortium

MicroCapital Story: “Deutsche Bank Leads New Global Commercial Microfinance Consortium, a $75 Million microfinance Investment Fund”, November 7, 2005.

MicroCapital Story: “Deutsche Bank Places a EUR 60 million (USD 84 million) Securitization of Subordinated Microcredits, the First to be Given and External Credit Rating”, by Amy Rennison, September 28, 2007.

MicroCapital Story: “The International Finance Corporation, Netherlands Development Finance Company, and Deutsche Bank Invest Jointly in Indian Microfinance Private Equity Company Aavishkaar Goodwell”, August 1, 2007.

MicroCapital Story: “Deutsche Bank Expands on its Microfinance Platform through the Creation of Eye Fund I”, March 9, 2007.

Although not one of the 20 largest global finance institutions by market value, CA is the largest bank in France with 25 percent of the market share in banking and is the country’s second largest life-insurer. With 41 million customers around the world, CA operates in over 70 countries, employing 157,000 people. In 2007, CA reported a net income of EUR 4.5 billion and ROE of 12.2 percent.

Currently, CA does not have a centralized microfinance group, but a 5-person team is in the process of establishing a coordination center, which would overview all activities. To date, the microfinance activities in developing countries have been conducted by Crédit Agricole Consultants, the consultancy arm, or on a voluntary basis by regional banks.

One venture of CA Consultants is assistance to ACBA Bank, a full-service Armenian microfinance bank. This partnership includes transferring technical assistance, financial banking, joint venture, and equity stake. For instance, CA Group acquired 28 percent of ACBA Bank, while CA Leasing owns 28 percent of ACBA leasing. Founded in 1996, ACBA had total assets of USD 143 million, earned USD 4 million in net profits, and served 694 village association farmers by 2006.

In Madagascar, a consortium of 8 CA regional banks known as ICAR supports 3 trade associations of microfinance institutions (MFIs): CECAM, TIAVO, and FIVOY. ICAR owns a minority stake in these associations and committed USD 1.46 million in grants or technical assistance for 2007 to 2009. These associations are agricultural cooperatives which offer micro loans to farmers in the country. CA subsidiary and local bank, BNI Madagascar, also supplies special loan facilities to CECAM members and has 15 percent ownership in SIPEM, an MFI servicing Madagascar’s urban areas. By the end of 2006, SIPEM had given loans to 1,384 borrowers for an average loan size of USD 1,135.

Other microfinance activities include a Technical Assistance Contract with the IFC through CA Consultants. The IFC is a member of the World Bank Group. CA Solidarité et Dévelopment funded microfinance projects focused on restoring the local economy in Southeast Asian regions hit by the tsunami on Christmas 2004.

In Bangladesh, CA Asset Management, Danone, and the Grameen Group manage the EUR 100 million Danone Communities fund, to which CA entities gave EUR 20 million. The fund is dedicated to supporting social businesses. While in 2008, CA announced it would contribute EUR 50 million to establish a non-profit foundation with Grameen Bank. For more details on this partnership, please see the following MicroCapital story.

In France, CA is a founder of the French Foundation FARM, committing almost EUR 1 million per year to support agricultural development in developing countries. CA also supports French microcredit initiatives such as the NGOs ADIE and France-Active.

Going forward, CA intends to solidify its interest in microfinance with a dedicated central team. The group also looks to give special attention to rural and agricultural sectors of microfinance.

by Jennifer Lee

Additional Resources:

ING Microfinance: “A Billion to Gain? The Next Phase”, by Matthijs Boúúaert, March 2008.

Crédit Agricole: Home, Financial Snapshot, Consultants

MicroCapital: “Crédit Agricole Contributes €50m for the Creation of a Non-Profit Foundation in Cooperation with Grameen Bank of Bangladesh”, by Anthony Busch, February 20, 2008.

Although not one of the 20 largest global finance institutions by market value, Commerzbank is the second largest bank in Germany, with a consolidated balance sheet of EUR 620 billion. With over 8 million customers around the world, Commerzbank operates in 40 countries, employing 36,000 people. In 2007, the bank reported an operating profit of EUR 2.5 billion and an operating ROE of 18.7 percent.

Commerzbank is the only German financial institution with direct participation in microfinance institutions (MFIs) and focuses its equity investments in Southeast Europe. In addition, the bank has one relationship manager for microfinance at the corporate banking level and has minority equity stakes in ProCredit banks. ProCredit is a group of 22 banks operating in developing countries in Africa, Latin America, and Eastern Europe. These banks are for-profit (target ROE of 15 percent after tax), provide credit to micro and small enterprises, and supply average loan sizes of EUR 3000.

Commerzbank began acquiring equity stakes in 2000 and currently has equity holdings in 7 ProCredit microfinance banks (MFB). These MFBs are located in Kosovo, Serbia, Romania, Albania, Bosnia, and Bulgaria. Commerzbank’s equity stakes range from 7.6 percent to 21 percent, the smallest being in Bosnia and the largest in Romania. The bank also sold its 2 percent stake in ProCredit Bank Georgia to ProCredit Holding. Further details on Commerzbank’s investments in ProcCredit Banks can be found in the following MicroCapital article.

Most recently, Commerzbank founded a MFB in Belarus with KfW Bankengruppe, the European Bank for Reconstruction and Development, and the IFC, which is a member of the World Bank Group. According to a New Europe article, the MFB will have a total charter capital of EUR 10 million, target small and medium business, and is expected to cost EUR 35 million. Other equity investors will include the Netherlands Development Finance Company and Shorecap International.

Going forward, the bank continues to seek equity investment opportunities in MFIs in and outside of Europe. Commerzbank is also considering launching a private investor fund which consists of business loans to “poor” people.

by Jennifer Lee

Additional Resources:

ING Microfinance: “A Billion to Gain? The Next Phase”, by Matthijs Boúúaert, March 2008.

Commerzbank AG: Home, 2007 Annual Report

ProCredit Holdings: Home

MicroCapital: “German Commercial Bank Commerzbank AG Continues Microfinance Investment in ProCredit Bank”, April 10, 2006.

New Europe: “Commerzbank, KfW to hold stakes in microfinance bank”, November 10, 2007.

The financing will go to the Financial Sector Development Program, which is part of the wider business reform plan, the Rwandan Competitiveness and Enterprise Development Project. The grant is expected to enhance the capacity of the microfinance industry via better supervision. The National Bank of Rwanda (BNR) believes there are 150 MFIs and NBFIs, many of which are unregistered.

This follows the closure of 8 MFIs in mid 2006 by the BNR for mismanagement of funds and large losses from poor credit management practices. At the time, the Rwanda Microfinance Forum blamed the problem on the lack of a microfinance sector policy. Further details on the BNR shut down of MFIs can be found in the following MicroCapital article.

The Rwandan government also brought in an IFC team, which also stated that reforms are necessary. The IFC is a member of the World Bank Group and the first inter-governmental organization with the goal of promoting private enterprise. The team also recommended that the BNR immediately establish a credit registry, which is a publicly accessible database of each person’s credit history. This database should help financial institutions identify known loan defaulters.

Finally, the government will use the grant for two other functions. First, the national pension fund and Caisse Social du Rwanda, the national social security fund, will use the grant to help modernize their payment systems. Second, the grant will quicken the move of the government’s auditing and accounting methods to international standards. This includes the introduction of the Automated Clearing House and a Real Time Gross Settlement system.

by Jennifer Lee

Additional Resources:

AllAfrica.com: “Rwanda: Financial Sector Gets World Bank Boost”, April 25, 2008.

MicroCapital: “The Microcredit Investment Legacy of Plundering Poor People’s Savings: National Bank of Rwanda Shuts Down 8 Local Microfinance Institutions (MFIs)”, June 24, 2006.

National Bank of Rwanda: Home, Financial sector Development Program, Competitiveness and Enterprise Development Project