The initial effort is to establish new telecommunications solutions in each of the eight African countries previously mentioned. In some nations, Opportunity will implement satellite and broadband internet connectivity that enables faster and more reliable service connections to branch banks, and further provides banking infrastructure to lower the costs of servicing small loans and savings accounts for the poor. Meanwhile, in Ghana and Rwanda, Opportunity International will use existing technology already in extensive use in the Philippines to connect to each country’s developing national payment system. This effort will improve the availability of financial services, timeliness of transaction reporting, and security of client banking, as well as reduce the overall cost of banking transactions.

Cellular phone technology is an alternative method for performing banking transactions in countries that lack a national payment system. Opportunity International is developing mobile phone banking solutions to support the electronic transfer of deposits and withdrawals for its clients. Through its work, the organization expects to enable more than 250,000 clients across five countries to conduct 36 million transactions. Moreover, loan officers will be able to carry mobile phone devices to collect payments and provide receipts and other services to clients in rural Africa.

The grant will also enable Opportunity International to share best practices with the entire microfinance industry. The organization will host technology symposia with microfinance leaders, develop white papers, and conduct speaking engagements to document the lessons learned and provide demonstrations of its work.

According to the MIX Market, the microfinance information clearinghouse, Omidyar Network is a philanthropic investment entity established by Pierre Omidyar, the founder of eBay, and his wife Pam. Omidyar Network supports nonprofit and for profit efforts that enable people around the world to improve their lives and make contributions to their communities. Since 2004, Omidyar Network has funded a number of organizations in areas such as microfinance, social media, and government transparency, and has committed more than 90 million USD to microfinance programs specifically.

Meanwhile, the MIX Market describes Opportunity International as an organization committed to solving global poverty, serving approximately 1.1 million poor entrepreneurs in 27 developing countries. Founded in 1971, it is a pioneer in offering small business loans, savings, insurance, and training in basic business practices to women and men living in poverty. In so doing, it allows poor entrepreneurs to start or expand a business, develop a steady income stream, provide for their families, and create jobs for their neighbors.

On October 8^th, 2008, MicroCapital reported that Comat, a technology company providing services to rural India, raised 12.5 million USD from the Omidyar Network and the Unitus Equity Fund (UEF).  In another story, MicroCaptial reported that Omidyar Network expands operations to Europe with appointment of Ian Callaghan as Senior Director of Investments. In December, 2008, MicroCapital published an article focused on the technology of mobile financing.

By Yanni Hao, Research Assistant

Additional Resources:

MicroCaptial Story: October 8^th, 2008: “MICROCAPITAL STORY: Indian Technology Company, Comat, Raises $12.5m from Omiydar Network and Unitus Equity Fund of the United States”

MicroCaptial Story: September 30^th, 2008: “PRESS RELEASE: Omidyar Network Expands Operations to Europe with Appointment of Ian Callaghan as Senior Director, Investments”

MicroCaptial Story: December 10^th, 2008: “TECHNOLOGY FOCUS: Mobile Finance – Indigenous, Ingenious or Both?”

Opportunity International: “Home”

Omidyar Network: “Home”

PR Newswire: “Home” “Omidyar Network Grants $4.5 Million to Opportunity International to Scale Technology-based Microfinance Services in Africa“

October 17th-20th, 2009, Ixtapa, Guerrero, Mexico 

The Opportunity Collaboration is a learning, teaching, and networking summit amongst and for foundation trustees/executives, social investors, entrepreneurial nonprofit leaders, policy thought leaders, and social entrepreneurs. The Collaboration’s focus is economic justice and poverty alleviation. The registration fee is 4,250 USD for early-bird registration, which includes: all elements of the Collaboration agenda, room and board (5 nights lodging, 3 meals per day), internet access, airport shuttle service, gratuities, etc. A delegate’s only other expense is airfare. The early-bird discount expires on March 30, 2009.

Applications for the 2009 Collaboration are now being accepted. Review the delegate application criteria and apply now. Further details regarding contact information, organizers, and sponsors have not yet been made available.

More about the Opportunity Collaboration

Confirmed delegates to date – 68 foundation trustees/executives, social investors, entrepreneurial nonprofit leaders, policy thought leaders, and social entrepreneurs.

Economic Opportunity Achievement Award – Mary Houghton, Co-Founder & President of ShoreBank Corporation and Chair of ShoreBank International is the 2009 honoree. Delegates and Mary’s friends are invited to celebrate her life and work.

Collaboration Chancellors – Calvert Social Investment Foundation, Global Philanthropy Forum, Social Venture Network, Stanford Social Innovation Review (Stanford Center for Social Innovation), Women Donors Network, Worldways Social Marketing, and Convening Coordinator Jonathan C. Lewis.

Conversations for Change – Four-day marketplace of exemplary projects, programs, social investments, case studies, social change ventures, and partnering opportunities that have achieved “proof of concept.” All Conversations are proposed and presented by delegates.

Colloquium for the Common Good – Senior executive seminar about the transcendent principles that drive poverty alleviation. Refine executive judgment, explore the interdependence of systems, and set the collaborative stage for sustainable social change. Delegates think realistically about the nature of economic justice and what makes a “good” society.

Delegate Application Criteria

Whether in the nonprofit or for profit sectors, successful delegates have evidenced in their actions, careers, and leadership styles the following characteristics and intangible qualities:

Passionate tenacity – The entrenched scourge of poverty will not be ended by small-thinking or starry-eyed proclamations. The Collaboration depends on delegates who are tough, determined, and intrepid.

Pragmatic vision – Change agents and social entrepreneur respect that good ideas are not enough. The Collaboration depends on delegates who are doers, administrators, businesspeople, implementers, and managers in the service of visionary ideas.

Multi-dimensional thinker – The causes of poverty are not compartmentalized and neither are the cures. The Collaboration depends on delegates who can comfortably present their parochial institutional perspective and needs without abandoning their ability to problem solve in an interdisciplinary way.

Adaptive leadership – Leadership requires, amongst many skills, the capacity to listen attentively to stakeholders and to change direction when needed. The Collaboration depends on delegates who realistically challenge assumptions and can make mid-course organizational corrections.

Team player – Sharing recognition is a cornerstone of successful team-building, yet in the quest for donor or social investment dollars, some organizational leaders adopt a winner-take-all, ego driven posture. The Collaboration depends on delegates who care more about ending poverty than in claiming credit.

Non-ideological activism – Altruism by itself is meaningless, and ideology is not an end point. The Collaboration depends on delegates who gravitate towards pragmatic, market driven, evidenced based problem solving over windy theoretical discussions.

By Yanni Hao

Additional Resources:

Opportunity Collaboration Summit

According to Bob Christen, Director of the Financial Services for the Poor initiative at the Gates Foundation: “Traditional financial services are often too costly and inconvenient for people who earn less than 2 USD a day to use, and too expensive for banks to provide.” “Technology like mobile phones is making it possible to bring low-cost, high-quality financial services to millions of people in the developing world so they can manage life’s risks and build financial security.” The MMU program will fund research efforts to help overcome some of the barriers of providing mobile banking services and demonstrate the business case for serving this market. The program also includes a 5 million USD grant to catalyze a new wave of mobile money innovation, encouraging mobile network operators to create services for previously unbanked people in emerging markets. Moreover, it will support approximately 20 projects in developing countries, focusing on Africa, Asia, and Latin America, with the goal of reaching 20 million previously unbanked people with mobile financial services by 2012.

Mobile phone operators have strong incentives to team up with microfinance companies serving untapped markets. “There are over one billion people in emerging markets today who don’t have a bank account but do have a mobile phone,” said Rob Conway, CEO and Member of the Board of the GSMA. “This represents a huge opportunity, and mobile operators are perfectly placed to bring mobile financial services to this largely untapped consumer base.” “Based on the initial findings of research conducted with the microfinance center CGAP and [private consulting firm] McKinsey & Company, we believe that Mobile Money for the Unbanked has the potential to become a 5 billion USD market opportunity over the next three years.”

The grants to the MMU program is part of the Bill & Melinda Gates Foundation’s broader Financial Services for the Poor initiative, which is working with a wide range of public and private partners to use technology and innovation to bring high quality, affordable savings accounts and other financial services to the doorsteps of the poor in the developing world.

In December, 2008, MicroCapital published an article focused on the technology of mobile financing. In October of the same year, another MicroCapital story reported that Planet Finance received a 1.7 million USD grant from the Bill & Melinda Gates Foundation to support a mobile banking project which will use an existing mobile phone platform and infrastructure to provide microfinance clients with enhanced access to banking services.

The GSMA is a promotional organization for the Global System for Mobile communications, the world’s dominant cell phone technology platform used by approximately 80 percent of the world’s market. Its membership spans 219 countries and unites more than 750 of the world’s mobile operators, as well as 200 companies in the broader mobile ecosystem, including: handset makers, software companies, equipment providers, internet companies, and media and entertainment organizations.

The Bill and Melinda Gates Foundation was founded in 1999 after changing its name from the William H. Gates Foundation. Its predecessor was created in 1994 to address both global health and community needs in the Pacific Northwest. However, the scope of its work has expanded to include broader global development in 2006. In 2007, the liabilities and assets of the Gates Foundation and the Gates Foundation Trust totaled 38.9 billion USD. MicroCapital has reported in the past on its involvement in microfinance, which can be found here and here.

By Yanni Hao, Research Assistant

Additional Resources:

Bill & Melinda Gates Foundation: “Home”

The GSMA: “Home”

KLFY: “Home” “GSMA and Bill & Melinda Gates Foundation Partner to Expand Availability of Financial Services through Mobile Phones”

MicroCapital Story: October 28, 2008 “MICROCAPITAL STORY: Gates Foundation Grants 1.7 Million to PlaNet Finance And France Telecom’s Orange for Mobile Banking Microfinance Project”

MicroCapital Story: December 10, 2008 “TECHNOLOGY FOCUS: Mobile Finance – Indigenous, Ingenious or Both?“

http://www.brecorder.com/index.php?id=890801&currPageNo=1&query=&search=&term=&supDate=

With a growth rate of 45 percent over the past three years, Pakistan’s microfinance industry has emerged as one of the fastest growing finance sectors globally, reaching 1.9 million clients as of September 2008. Product diversification has taken root, and savings and insurance uptake has surged. Microfinance institutions are moving towards financial sustainability and accessing commercial sources of funding. That is, despite its late start and therefore the relative youth of the sector, microfinance providers in Pakistan have been significantly proactive in terms of fostering innovation and channeling the development of microfinance as a whole.

One of the key steps in this direction was the establishment of Pakistan Microfinance Network (PMN), which emerged informally in 1999 out of the efforts of several microfinance practitioners who felt that a platform to share views and experience was needed. Today, PMN’s membership includes 20 entities, including: microfinance banks, specialized microfinance institutions, commercial financial institutions, multi-dimensional microfinance NGOs, and rural support programs.

The past few years have seen the microfinance industry grow to become more complex and more closely linked with the mainstream financial sector in Pakistan. The sector has grown exponentially in the number of people served, but also widened in terms of what services are made available. Competition in the sector has also increased, which should result in better services and competitive pricing for microfinance clients in the country. Yet, sometimes, competition can also lead to the use of unethical and illegal practices by organizations in order to gain a competitive advantage. This – combined with the characteristic vulnerability of microfinance recipients – highlights the increasing importance for microfinance institutions to act responsibly, and further ensure that best practices in terms of consumer protection and consumer rights become institutionalized.

However, consumer protection as an issue has historically been ignored in Pakistan at the policy level. Official legislation for the protection of consumer rights either did not exist, or was not enforced. Yet, in 2005, formal consumer protection legislation was drafted in Islamabad and at the provincial level. While this legislation seems to be a long overdue step in the right direction, there are still areas which have been overlooked. One major zone that falls into this category is financial services. The services sector in general has barely been addressed in the drafted legislation – which instead focuses heavily on manufacturing – and financial services in particular have been entirely overlooked. This can be particularly problematic for microfinance clients who are, for the most part, disenfranchised and unaware of the very existence of their rights. Otherwise, the State Bank of Pakistan has recently begun some work on consumer protection for the formal banking sector, but this does not encompass microfinance institutions.

These principles and guidelines are in line with ethical and operational norms in microfinance globally, and are structured around six core values which are fundamental to the provision of services. Each signifies a key area of concern for microfinance clients, with the Code as a whole attempting to present in unambiguous terms what clients can expect from microfinance providers. The core values around which the Code is structured are:

1) Transparency

2) Fair practices

3) Dignified treatment

4) Privacy and fair disclosure

5) Governance

6) Client satisfaction

The Code will be translated into all regional languages and distributed to the branches of the signatory organizations. The Code itself mandates that copies of it be present in all offices of each microfinance provider, and be given to a client if they so require. Although microfinance clients will be the direct beneficiaries of the Code, there could be positive spillovers for microfinance practitioners as well through increased customer loyalty.

Moreover, by helping clients understand that they have rights and responsibilities, and increasing their understanding of product pricing, the Code will help persons comprehend their true financial assets and liabilities. This could help clients avoid over-indebtedness, and thus reduce default risk for the service provider. Additionally, Pakistani microfinance providers operate in geographically diverse areas which sometimes results in a communication gap between senior management and field staff. Related measures to gauge client satisfaction would therefore provide valuable insights into on the ground, operational implementation.

Still, developing and launching the Code of Conduct is the just first part of the consumer protection process initiated by PMN. The organization notes that the next step in the process is developing a long term consumer feedback and grievance redress system. Such an outlet would provide clients with a way to file complaints over perceived violations of the Code of Conduct. The final and related step in the consumer protection process will be monitoring compliance with the Code, and presumably, ensuring equitable resolution of grievances.

By Yanni Hao

Catalyst Microfinance Investors is managed by Catalyst Microfinance Investment Company, a joint venture between ASA, one of the big four MFIs in Bangladesh, and Sequoia, a Dutch corporate finance boutique. Its fund will invest in a network of growing greenfield microfinance institutions in countries such as India, Pakistan, Nigeria, and Ghana. The fund will aim to help MFIs accelerate their expansion, and in turn provide capital to low-income groups and microenterprises located in poor communities. 

Hywel Rees-Jones, Managing Director for alternative investments at CDC, commented that, “Catalyst Microfinance Investors will be using the expertise of ASA, a renowned Bangladeshi NGO which has an impressive track record having been involved in microfinance since 1991.” He continued, “Microfinance has played a vital role in boosting development in Bangladesh by increasing the range of financial services available to poor people traditionally excluded from the mainstream. We hope and expect that this success can be applied to other emerging markets.”

Caspian Capital Partners, meanwhile, is an independent microfinance adviser based in Hyderabad, India. The fund provides growth capital and strategic support to existing and start-up MFIs. The fund focuses solely on India, with an emphasis on towns in rural areas with low microfinance penetration. According to a report from VCCircle, India Financial Inclusion Fund is aiming at a final close of 100 million USD. In this vein, it has raised 15 million USD from Global Microfinance Equity Fund and 8 million USD from Switzerland’s Social Investment Services. Its current investments include two India microfinance banks, Ujjivan and Equitas, as well as A Little World, the developer of ZERO, India’s first domestic payment system with specific focus on reaching out to masses with the lowest available communication infrastructure.

“Around 400 million people do not have access to formal, affordable financial services in India. The India Financial Inclusion Fund will improve funding to microfinance institutions, bringing improved credit opportunities in much needed regions,” remarked Hywel Rees-Jones.

Based in England, CDC is a private equity fund of funds that makes investments in firms holding an investment portfolio of social enterprises. CDC particularly targets those firms that invest in Asia, Africa, and Latin America. Per its investment policy, 50 percent of CDC’s portfolio is allocated toward investments in Sub-Saharan Africa and South Asia. CDC operates as a government-sponsored, privately-managed enterprise. Registered as a Public Limited Company (PLC), 100 percent of CDC’s equity is owned by Britain’s Department for International Development (DFID). According to CDC’s website, as of December 2007, the organization held total assets of 4 billion USD, and a return on assets of 33 percent (p. 34).

In August 2008, MicroCapital reported on CDC’s investment on Luxembourgian Venture Capital Firm Advans SA, which specializes in microfinance ventures. CDC Group is also one of the biggest limited partners of India-focused private equity funds, according to VCCircle. In 2008, it announced a 250 million USD investment into one infrastructure and two real estate funds in India. 

By Yanni Hao, Research Assistant

Additional Resources:

ASA: “Home”

A Little World: “Home”

Britain’s Department for International Development: “Home”

CDC Group: “Home”

Caspian Capital Partners: “Home”

Catalyst Microfinance Investors: “Home”

Equitas: “Home”

MicroCapital Story: August 18, 2008, “MICROCAPITAL STORY: British Government-sponsored CDC Group to Invest $10.5m of Equity in Luxembourgian Venture Capital Firm Advans SA”

Sequoia: “Home”

Ujjivan: “Home”

VCCircle: “Home” “CDC has invested $15 million in India Financial Inclusion Fund, which is aiming at a final close of $100 million“

“Looking at business models in other countries including Indonesia and Mexico, we see that microfinance holds a lot of promise both as a profitable financial venture and as a means to assist in the development of small businesses.” “These are some of the reasons why we have decided to finally take this first crucial step in RCBC’s own foray to the microfinance business,” said president and chief executive officer Mr. Lorenzo V. Tan.

At the end of 2008, there were nine microfinance-oriented rural and thrift banks in the Philippines. There were also 221 regular banks with microfinance operations, presenting a combined microfinance loan portfolio of about 138 million USD, according to BSP data (p.11).

RCBC is currently the country’s fifth largest private, local, full service bank in terms of assets and capital. It is a major player in the remittance business for the estimated 11 million Filipinos living abroad, with an overseas presence through subsidiaries and tie-ups in North America, Europe and Hong Kong. As of December 2007, RCBC has total consolidated assets of about 5.1 billion USD. According to the bank’s financial highlights, the organization reported a return on equity of 12.4 percent and a return on assets of 1.4 percent. Its net interest margin increased from 4.8 percent in 2006 to 5.0 percent in 2007.

JP Laurel Rural Bank does not report to the MIX Market, the microfinance information clearinghouse, nor do they maintain a web presence.

By Yanni Hao, Research Assistant

Additional Resources

Business Mirror: “RCBC Ventures into Microfinance”

Bangko Sentral ng Pilipinas: “Home” “2008 Year End Report”

The Manila Times: “Home” “RCBC Plans to Acquire Batangas Rural Bank“ 

RIZAL Commercial Banking Corporation: “Home” “financial highlights“

According to the EBRD, there remains a large demand for microfinance in Poland, with only 3 percent of registered micro and small enterprises financed by the formal financial sector. Inicjatywa Mikro is focusing on this vital portion of the economy to help bridge the gap. In particular, Inicjatywa Mikro plays a major role in the microenterprise sector of Southern Poland, a region still suffering from the decline of the large state-owned mining and steel sector. For many former employees in these industries starting up their own business is the only way forward, but access to finance has become even more difficult given the current global financial crisis.

Lucyna Stanczak, EBRD Country Director for Poland, said, “the loan to Inicjatywa Mikro will lead to increased availability of finance for a crucial sector of the economy.” “The difficult market environment makes this more important and timely than ever. We are confident that the loans will help Poland’s entrepreneurial spirit blossom.” Meanwhile, Lan Townsend, CEO of Inicjatywa Mikro, added, “This loan will enable us to reach out to the microfinance sector from our seven offices in the south of Poland.” “The funds will ensure that finance is available to assist small businesses develop especially in the current financial climate.” “All of us at Inicjatywa Mikro are pleased to be working with the EBRD and the EU to develop the economy of cities, towns, and rural areas in which we operate.”

According to the MIX, the microfinance information clearinghouse, Inicjatywa Mikro is a microfinance organization established in 1996 with the help of Opportunity International (a network of microfinance institutions active in the EBRD regions of Macedonia, Montenegro, Poland, Romania, Russia, and Serbia) to support enterprise development and job creation in Southern Poland. To realize this goal, Inicjatywa Mikro enables access to capital for very small companies which do not qualify for a bank credit. As of the end of 2007, the organization reported a debt to equity ratio of 117.28 percent, a return on assets of 0.83 percent, and a return on equity of 1.73 percent.

The EBRD was established in 1991 on the heels of the Communist collapse across Central and Eastern Europe, on the assumption that ex-Soviet countries needed support to develop competitive private sectors. Today, the EBRD uses the tools of investment to help build market economies in 27 countries from Central Europe to Central Asia. Indeed, the EBRD is the largest single investor in the region and mobilizes significant foreign direct investment beyond its own financing. Headquartered in London, it is owned by 61 countries and two intergovernmental institutions. Despite its public sector shareholders, the EBRD invests mainly in private enterprises, usually together with commercial partners. It provides project financing for banks, industries, and businesses, both new ventures and old. It also works with publicly owned companies to support privatization and restructuring of state-owned firms, as well as the improvement of municipal services.

In January 19, 2009, MicroCapital reported that the EBRD signed agreements on two syndicated loans which would be used for Micro and Small Entrepreneurship (MSE) development with the AccessBank (formerly Microfinance Bank of Azerbaijan, MFBA). According to another report from MicroCapital in October 2008, the EBRD held a conference in Azerbaijan focusing on the progress of its six years of microfinance initiatives within the country.

By Yanni Hao, Research Assistant

Additional Resources:

European Bank for Reconstruction and Development: “Home” “Supporting micro businesses in Poland”

European Union: “Home” “European Commission”

MICROCAPITAL STORY: January 19, 2009, “NEWS WIRE: EBRD signed one of the two syndicated loans with Access Bank”

MICROCAPITAL STORY: October 7, 2008, “MICROCAPITAL STORY: The European Bank for Reconstruction & Development (EBRD) Reflects on Six years of Microfinance in Azerbaijan“

According to a report from Reuters India, the collaborative account, which will be managed by VMEM, is targeting a final close of 5 million USD. It has already mobilized 2 million USD from other institutions, including the Small Industries Development Organization and Industrial Development Bank of India (IDBI), with initial support of 700,000 USD from IFC.

BYST has entered into a memorandum of understanding with VMEM. VMEM will execute all management functions including both identification and placement of investments. It will also inculcate financial discipline, improve systems within enterprises, as well as enable entrepreneurs to face future organizational and market challenges.

Anil Sinha, General Manager of IFC Advisory Services, commented that the initiative aligns well with IFC’s strategy to help create opportunities for inclusive development. “This is India’s first micro equity initiative to finance socially disadvantaged entrepreneurs,” remarked Sinha. Meanwhile, VMEM’s Mr. Sarath Naru expressed similar sentiments, “the key to managing the fund successfully lies in balancing the concerns of multiple investors and partners while ensuring important social impacts at the grassroots level.” Finally, Lakshmi V. Venkatesan, BYST’s Executive Vice President and Founding Trustee, added that the fund may also help, “develop a model that can be replicated across India, which has a large segment of the world’s unemployed youth.”

BYST, launched in 1992 by HRH Prince Charles and the late industrialist J.R.D. Tata, now operates in six regions throughout India and works with disadvantaged Indian youth. BYST since its inception has assisted this demographic in transforming business ideas into viable enterprises under the guidance of a mentor, with a core goal being to make job creators out of mere job seekers. In this vein, BYST has financed and advised over 1,500 entrepreneurs creating employment directly and indirectly for 15,000 people.

Presently, an important objective for BYST is to create a more sizable growth fund with institutionalized avenues tying BYST directly to recipients of resources, through such means as long term equity ownership and royalties on sales and profits. Consequently, International Finance Corporation has backed a current project to identify and pull together potential sources of funding for BYST entrepreneurs who have crossed the threshold of successfully running a venture but cannot yet access formal finance, with the caveat that any plan should be scalable to serve a large number of persons. In theory, in the long term the growth fund will lead to mainstreaming of these entrepreneurs, whereby they can eventually become legitimate clients of the commercial banking system or larger venture capital funds.

IFC, a member of the World Bank Group, aims to foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments. According to the organization’s 2008 Annual Report (p.12), IFC made investments of 16.2 billion USD in fiscal year 2008, a 34 percent increase over the previous accounting period.

In December, 2008, MicroCapital reported that IFC signed an agreement with Jordan to support the Middle Eastern country’s efforts to establish a legal framework for credit bureaus, institutions that will help individuals and smaller businesses access finance, in an attempt to bolster the overall economy. In another article, MicroCapital reported on IFC’s efforts to support the expansion of Colombia’s Corporacion Mundial de la Mujer Medellin (WWB-Medellin).

By Yanni Hao, Research Assistant

Additional Resources:

Bharatiya Yuva Shakti Trust: “Home”

International Finance Corporation: “Home” “2008 Annual Report”

Industrial Development Bank of India: “Home”

MICROCAPITAL STORY, December 16, 2008, “NEWS WIRE: Jordan: International Finance Corporation (IFC) to Help Jordan Introduce Credit Bureau Legislation, Support Smaller Businesses”

MICROCAPITAL STORY, December 2, 2008, “MICROCAPITAL STORY: International Finance Corporation (IFC) Provides $2.1m to Corporacion Mundial de la Mujer de Medellin (WWB Medellin)”

Reuters India: “Home” “IFC, BYST & VenturEast to launch a $5 mln Micro VC Fund“

What follows is a summary of the first two major sections of the report – an introduction to the key issues at hand, and then an overview of alternative valuation methods. A second report at a later date on MicroCapital will cover the final two sections – specific microfinance valuation issues in the private equity sector, and then securities markets. While technical terms are utilized in as limited a fashion as possible, the subject matter requires some familiarity with financial statement analysis. 

Introduction to Issues

As of 2007, there was a 5.2 billion USD aggregate equity base in the microfinance sector, with an increasing flow of equity capital coming from organizations lacking explicit poverty alleviation goals. That is, while multinational and governmental institutions such as the World Bank and the United States Agency for International Development (USAID) have injected 900 million USD globally, and another 1.5 billion USD have been provided by specialized, development oriented entities, there has been sizable growth in interest towards microfinance from traditional asset managers. Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIAA-CREF), one of the largest financial services companies in the United States, and Stichting Pensioenfonds ABP, a state pension fund for government workers in the Netherlands, have made equity allocations of over 100 million USD, while prominent private equity shops Sequoia and Legatum have placed 200 million USD. Consequently, the authors of the paper felt it was vital that a better understanding be cultivated about how the accounting statements of MFIs are actually analyzed by prospective investors, especially in the context of today’s highly turbulent capital markets environment.

They begin by emphasizing that MFIs are fundamentally sound from an operational perspective, despite the broader woes gripping major banks. MFIs were largely divorced from markets for complex financial vehicles such as mortgage back securities and credit default swaps, which have decimated the balance sheets of full service financial institutions. Nevertheless, a major threat to MFIs in the near term is that their access to wholesale capital, which is then lent on by staff to microentrepneurs, has contracted sharply due to a major decrease in worldwide supply. Already, a 2-5% interest rate hike appears to have made its way on to MFIs, many of which are unable to pass along the full increase to borrowers as such changes undoubtedly price some microentrepreneurs out of the market. Fortunately, many MFIs remain predominantly deposit driven, with leverage of just 19% for those above 150 million USD in book value, and are hence are generally better insulated from interbank loan risk. However, a capital structure dominated by deposits should not be seen as a savior per se for MFIs, as handling a large number of small depositor accounts is often an expensive proposition, especially so for those institutions that lack the advanced information technology infrastructure that has greatly curtailed costs in the mainline commercial banking industry.

At the same time, despite its relative health, the flow of equity funds has nevertheless targeted certain subsectors of the microfinance industry over others. Eastern Europe and Latin American account for almost 2/3^rd‘s of equity holdings. Meanwhile, 85% of the equity investments are concentrated in the largest 100 MFIs. These flows then beg the question: what separates recipients from those passed over?

The authors note that five principal characteristics differentiate MFI from traditional banks. Positively, MFIs on average exhibit stronger asset quality, have a high net interest margin, and access to longer term, complementary funding from development mandate investors. Negatives include high operating costs, and somewhat controversially, the presence of a double bottom line that could in theory promote suboptimal lending in pursuit of social goals.

Specifically, in 2006, the average inflation adjusted worldwide microfinance lending rate stood at 24.8% – well above single digit long term rates of interest earned in mature markets such as the United State and Europe – while the default rate of the top 45 MFIs runs at just 3.7%. Certainly, MFIs interest rates are driven up by higher operating costs related to the detailed monitoring of borrowers, but there is also undoubtedly true profitability in sector given the quality of loans, further enhanced by oftentimes limited competition. Such numbers, when coupled to the fact that MFIs are more durable to economic downturns (two studies to date suggest little link between their performance and overall GDP growth), heighten interest in using microfinance equity as a hedge against risk associated with other asset classes. Yet, successful investments all start with successful valuations, and so the article turns to most popular methods in the field.

Comparing Valuation Methods

Consensus on MFI worth is mixed. Private equity valuations run from 1.3-1.9 times historical price-to-book, and 7.2-7.9 historical price-to-earnings. Such spreads are in part engendered by information shortages: there are serious transparency issues both in terms of accessing private data and due to the frequent lack of uniform accounting standards akin to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Moreover, an efficient markets paradigm offers little help, as primary security issuances are limited by the small pool of potentially eligible MFIs and the absence of an organized secondary market (where day-to-day trading of stocks would help, in theory, reveal the correct valuation). Rather, the vast majority of transactions are in the form of opaque private placements, where a single firm is responsible for the underlying analysis without reference to competing valuations from other organizations.  

Nevertheless, some common threads emerge across placements. First, net income growth and transaction value are the main drivers of appraisal. In other words, investors consider not only the track record and potential growth of profitability of an MFI unto itself, but also how their own capital infusion will enhance its performance. Second, there appears to be a uniform penalty applied to MFIs for the lack of liquidity associated with any capital injection. For investors looking to take their funds out of even profitable endeavors, the lack of secondary markets means time and costs will inevitably be associated with finding a party to take over a position. Third, concerns loom about exchange rate risk associated with MFIs wholesale borrowing, given that local currencies can sometimes depreciate rapidly, markedly driving up the cost of repaying USD or Euro denominated loans.

The study goes on to find that relative valuation methods, while common in the microfinance industry, are somewhat analytically flawed, and that absolute valuation methods such as the discounted cash flow and residual income approaches are more sound. Specifically, the price-to-book value approach is the most widely used method, in large part because of the lack of intangible assets or goodwill reported by MFIs. At the same time, comparing book values of MFIs tells one little about differences in future profitability if they do not share underlying, comparable characteristics. Meanwhile, the less popular price-to-earnings multiple is plagued by issues of how profits are reported, as well as the volatility in profits that MFIs may earn. Consequently, because of widespread differences across MFIs, the authors suggest relying on the discounted cash flow (DCF) and residual income approaches, subject to certain criteria.

Unlike a pure DCF technique, which forecasts future cash flow values and then discounts them back to the present, the residual income model is a hybrid that starts with the current book value and then adds the present value of the expected residual income. Residual income is defined as the difference between net income and the opportunity cost to shareholders to invest in an MFI’s equity (calculated as the cost of equity multiplied by book value). A main advantage of this method over the DCF approach is that any projection about terminal value represents a smaller part of the total valuation. Hence, in the case of a young, fast-growing MFI, the residual income model may prove more useful, as accurately projecting future cash flows can at times be difficult. Meanwhile, for established MFIs with a stable earnings stream, the DCF model is often more appropriate. Nevertheless, an inherent problem with absolute methods vis-à-vis relative ones is that detailed assumptions must be made about both future profitability and the discount rate, which if incorrect, can significantly bias the ultimate valuation.

Setting aside the final valuation number, the authors then discuss how the discount rate is determined. The cost of equity is predominantly computed via the Capital Asset Pricing Model approach, which accounts for both the risk-free rate of return plus additional remuneration for risk associated with holding the specific asset (beta). The paper argues that beta is lower for MFIs, and hence they can be valuable to investors looking to bring down overall portfolio risk through diversification. Reasons include sustained operational success, lending to entrepreneurs who are themselves divorced from trade and exchange rate risk, and favorable duration mismatch with funds maturity.

The Authors

The authors of this report are Nicholas P. O’Donohoe and Frederic Rozeira de Mariz, both with JP Morgan, and Elizabeth Littlefield, Xavier Reille, and Christoph Kneiding of CGAP.

CGAP is a policy and research center dedicated to advancing financial access for the world’s poor. It is supported by over 30 development agencies and private foundations who share a common mission to alleviate poverty. Housed at the World Bank, CGAP provides market intelligence, promotes standards, develops innovative solutions, and offers advisory services to governments, microfinance providers, donors, and investors.

JPMorgan Chase & Co. is the United States’ largest banking institution by market capitalization and deposit base, with assets of 2.3 trillion USD, or approximately 1/6 of the nation’s annual GDP. It operates in every major segment of financial services, and maintains a global footprint.

By Yanni Hao

http://www2.cgap.org/gm/document-1.9.9021/OP14v3.pdf

What follows is a non-technical overview of key findings of the report. MicroCapital will run a two part “Paper Wrap-Up” series (I & II) with a considerably greater level of detail regarding the specific financial models commonly used.  

Investor Interest and Constraint

Equity investment in MFIs, whereby the organization injecting funds takes an ownership stake in the future profits of the MFI at hand, has been limited to date compared to debt financing, whereby an investor extends a loan to a MFI that leaves no ownership claim after repayment. At the same time, interest has been growing markedly in the former approach. There were 24 specialized microfinance equity funds with total assets of 1.5 billion USD under management by the end of 2008, while institutional investors such as pension funds Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIAA CREF) and Stichting Pensioenfonds ABP, a European pension fund for government workers in the Netherlands, have made microfinance equity allocations of over 100 million USD as part of their socially responsible investment strategies. Likewise, well known private equity houses Sequoia and Legatum have made meaningful forays. 

However, a major limitation to drawing in equity to MFIs has been the lack of organized secondary markets (i.e. stock exchanges) for microfinance securities, meaning that an investor who places money into an MFI cannot then sell their ownership claim on to another party with relative ease. Indeed, only two MFIs are actively traded in secondary markets. Equity Bank of Kenya is listed on the Nairobi Stock Exchange, while Mexican bank Compartamos is traded over-the-counter between stock dealers based out of New York and Mexico City.

Consequently, most equity investment in MFIs has been undertaken through direct / private placements – investors going straight to the receiving institution and negotiating an ownership claim on future profits in exchange for a fixed sum of money. The study therefore principally looks at how the valuation process works in these instances, although it offers some insights into public MFIs as well.

Core Findings

- Microfinance Institutions will be affected by the global financial crisis, but remain fundamentally sound. Specifically, MFIs will be hurt by higher interest rates on funds that they borrow from other financial institutions to lend on to micro entrepreneurs, and in turn, their valuations by outside investors looking to provide equity financing will be diminished as MFI profitability temporarily declines. Nonetheless, their robust performance will keep operational credit flowing, and in the long term, raise their valuation numbers once the temporarily high cost of such capital comes down.

- There is a lack of consensus over the value of MFIs amongst private equity firms looking to make equity placements. The need to project highly volatile streams of future profits, especially for up and coming MFIs, along with occasionally weak or non-standard accounting practices is a major contributor to this valuation diversity.

- Publically listed low-income finance institutions (LIFIs) – which in many ways mimic the goals and operations of MFIs – were aggregated into a securities index. It outperformed a broader index of global financial institutions by 238 percent since 2003. However, since September of 2008 when investment bank Lehman Brothers collapsed, the difference has been just 8 percent.

- Investors should consider five factors which differentiate MFIs from traditional banks when making valuations, namely: a double bottom line approach (painted as potentially distracting from profitability), high net interest margins, excellent asset quality, high operating costs (due to greater lending scrutiny), and longer term funding available from development investors.

- The authors argue in favor of absolute valuation methods which include, to some degree, a projection of an MFIs future income, rather than more simple relative valuation methods that only consider the present performance of an MFI. 

- MFIs, when added to broader portfolios held by investors, can hedge against market risk as their performance is strongly robust to economic cycles. At the same time, inability to easily sell microfinance equity holdings on to other parties means the value of such investments should be marked down for liquidity risk.

- Net income growth and transaction size are the main drivers of valuations. That is, investors consider both how fast an MFI is generating new profitability, as well as how their own equity injections will help an MFI achieve its strategic goals.

The Authors

The authors of this report are Nicholas P. O’Donohoe and Frederic Rozeira de Mariz, both with JP Morgan, and Elizabeth Littlefield, Xavier Reille, and Christoph Kneiding, with CGAP. This report is the result of a collaboration between CGAP and JP Morgan.

CGAP is a policy and research center dedicated to advancing financial access for the world’s poor. It is supported by over 30 development agencies and private foundations who share a common mission to alleviate poverty. Housed at the World Bank, CGAP provides market intelligence, promotes standards, develops innovative solutions, and offers advisory services to governments, microfinance providers, donors, and investors.

JPMorgan Chase & Co. is the United States’ largest banking institution by market capitalization and deposit base, with assets of 2.3 trillion USD, or approximately 1/6 of the nation’s annual GDP. It operates in every major segment of financial services, and maintains a global footprint.

By Yanni Hao