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Tuesday, November 15, 2005
Monday, November 7, 2005
Just recently, a group of private and public sector institutional investors and economic development agencies launched the
U.S. based Global Commercial Microfinance Consortium, a $75 Million microfinance investment fund that will provide microfinance institutions (MFIs) worldwide local currency financing for up to 5 years. The fund’s capitalization is comprised of $15 million in equity and $60 million in debt, 25% of which has been guaranteed by the U.S. Agency for International Development (USAID). Close to $30 million has already been committed to MFIs with operations in Kosovo, Peru, Nicaragua, Azerbaijan, Colombia, Pakistan, Mozambique, and
India.
Investors include Merrill Lynch, AXA Group, HP, and the Calvert Social Investment Foundation. For a full list of investors visit: “Leading Institutions Investors and Development Agencies Launch the Global Commercial Microfinance Consortium.” Deutsche Bank, a full global financial services company with å¥972 billion in assets, led the arrangements to establish the fund and also facilitated its sale.
This Consortium is “microcapital” at its best. First, expert management by Deutsche Bank’s long-established and well-respected microfinance unit provides the leadership. Second, the investor group mixes mainstream investment banks, rational development agencies, and flagship social investment foundations. Third, the role of government as guarantor uses your tax dollars to support (not execute) for-profit, private innovation. Fourth, the fund investment in MFIs is well-diversified across countries, regions and types of MFIs.
With such leadership and innovation, we might one day soon establish a secure asset class for the investing public.
Additional Resources
1) Main article discussed in entry, Thames Techwire: “Group Unveils å¥63 Million ‘Micro-Entrepreneur’ Fund.”
2) “Leading Institutional Investors and Development Agencies Launch the Global Commercial Microfinance Consortium.”
3) “Global Commercial Microfinance Consortium.”
4) U.S. Agency for International Development (USAID) Press Release: “USAID, Private-Sector Partners Create Global Fund for Small Entrepreneurs and Low-Income Families: Agency Provides $15 Million Credit Guarantee to Fund Aimed at Alleviating Poverty."
Thursday, October 20, 2005
When investment advisors talk about donations to a microfinance advocacy group as an investment, you know we have a long way to go.
The Motley Fool has this to say about its donations to the Grameen Foundation, a
US non-profit that does NOT make micro-loans: “Better still, Grameen loans are just that — loans. They get repaid, and the money is loaned out again, helping more people. As you can see, every dollar you give goes a long, long way” boasts the Fool.
What stops the Motley Fool from following its own advice? In the same breath, the Fool advocates the power of lending as wealth creation, and then tells its readers to give away their money to microfinance instead of lending it. The hypocrisy is profound.
Let’s be clear: microfinance is not charity. It is banking. Those who treat microfinance as a charity distort markets for those working to build businesses.
Additional Resources
1) “Small-Cap Charities, Huge Benefits.”
Friday, October 7, 2005
A $100 million contribution by Chairman of Cel-Tel Africa, Mohamed Ibrahim, helped create the “African Enterprise Private Investment Fund”. No other information is available beyond the announcement at the Clinton Global Initiative. Since the words “contribution” and “commitment” are ambiguous, we do not even know if this big check is a donation or an investment where a return on capital is sought.
So the greatest minds in the world got together on global poverty, but no one thought it was important to distinguish between a donation and an investment?
Let’s hope it is not just another big donation. Mr. Ibrahim is exactly the vested leadership we need making responsible capitalistic investment to fight poverty. First, he built Cel-Tel Africa, a wireless provider spanning 13 countries in
Africa. He understands large transnational operations in African markets, which is exactly what microfinance in
Africa and everywhere else requires. Mr. Ibrahim is also a man with a long held commitment to the social well being of all Africans.
Cel-Tel representatives have ensured us that information is forthcoming. Let’s hope Mr. Ibrahim sees his new fund as not only socially important, but with enough money-earning potential that he takes an active role in the Fund’s operation.
Mr. Ibrahim: It’s not just your money we want; it’s your “smarts”. Only “smart money” will turn “development finance” into wealth. Remember, good sir, your money can do great damage, so unless you bring an equal portion of market discipline, we would recommend you invest your $100 million in cell phone technology, which, unlike microfinance, is actually proven to reduce poverty.
Additional Resources
1) “Rice, Clinton Discuss Poverty, Other Global Problems.”
2) “$200 Million Pledged to Clinton’s Initiative.”
3) “Celebrity ‘hyper-agents’ Transform Philanthropy.”
4) “CelTel.”
5) “Agreement to Become Strategic Investor in Tanzania Telecommunications.”
6) MicroCapital Blog: “GrameenPhone—A Hot Stock.”
Friday, September 16, 2005
There are about 300 commercially viable microfinance institutions (MFIs) worldwide. The total investment portfolio for these institutions is estimated to be $3.5 billion and is growing at a rate of 20-30% per year. Those MFIs, however, are rarities among the 10,000 MFIs operating today. So what separates the few commercially viable MFIs from the huge host of laggards?
MFIs are hindered by internal and externally constraints. Internally, microfinance institutions must overcome:
Lack of professional capacity: MFIs are located in developing countries, and
recruiting experienced management staff and loan officers can be challenging.
Lack of expertise: While the World Bank’s microfinance research organization has developed best practices standards for MFIs, the vast majority of MFIs lack the wherewithal to access and implement these standards.
Inherent challenges of serving the poor: There is a large demand for financial services in rural markets, which are difficult to serve because of transportation costs and a lack of infrastructure. Rural residents rely heavily on agriculture for income, which can be unpredictable and make lending risky.
Lack of portfolio diversity: When MFIs focus on providing one type of service—for example, a focus on loans for agricultural development to the rural poor—they are more exposed to risk. To protect themselves from risk, MFIs must provide a wide variety of services.
Externally, MFIs are constrained by the following factors:
Abundant donor capital: MFIs have little incentive to become profitable if donations sustain them. Donations eliminate the incentive to abide by best practices standards and become more efficient. When MFIs receive funding from outside donors, their focus shifts to catering to what the donors want, not what the customers want.
Government Regulations: Interest rate regulations prevent MFIs from recouping their costs and force opaque reporting.
Unfair Competition: Donor-subsidized MFIs and government programs often charge below market rates and undercut those striving for profitability.
Corruption: When local and national governments suffer from corruption and bureaucratic incompetence, it hinders the ability of all businesses—including MFIs—to run efficient operations.
Inherent challenges of emerging markets: An absence of ‘soft infrastructure’ in the developing world such as credit bureaus, human resources agencies, and market research firms severely complicates doing business.
Additional Resources
1) “Commercial Microfinance: The Right Choice for Everyone?”
2) "The Impact of Interest Rate Ceilings on Microfinance." CGAP. May 2004
3) “Expanding Commercial Microfinance in Rural Areas: Constraints and Opportunities.”
4) “Microcredit Interest Rates.”
5) Subscription only: "Strategies That Fit Emerging Markets." Harvard Business Review: June 20056) “The Influence of Donors on Microcredit Sustainability: A Case Study of the Three Microcredit Programs in Vietnam.”
Monday, September 12, 2005
The Ugandan market for microfinance services has over 1,300 microfinance institutions (MFIs) in operation. While one would hope that such a glut of MFIs would necessarily ensure the market was being served, this is unfortunately not the case.
According to the Bank of Uganda (BoU), the industry suffers from an urgent shortage of licensed deposit-taking institutions. However, this does not mean that deposit services are not being offered illegally. Among Uganda’s many MFIs, just 3 are licensed to take deposits, while many more offer such services, even though unlicensed.
The scarcity of formal ways to save comes at an enormous cost to poor people, who have limited access to formal, regulated financial services (p. 3). They are generally left with no alternative to the non-regulated MFIs that accept deposits illegally. In
Uganda, 99% of clients saving in the informal sector report having lost some of their savings (p.3), with losses averaging 22% of the amount saved in the past year.
If non-regulated microlenders follow the letter of the law, that is, they do not accept savings deposits, they forego valuable capital for their loan portfolios. Prospects are dim for small operations that may serve as few as 10 people (which make up the majority of MFIs in
Uganda). The government’s effort to weed out unlicensed deposit-taking institutions includes setting minimum asset holding requirements in order to be eligible to legally take deposits.
In an ostensibly inclusive move, the Bank of Uganda is encouraging all microfinance institutions to apply for licenses to take deposits. This is far harder than it sounds. Smaller microlenders will not be able to meet this regulatory burden for many reasons, including taxes, onerous paperwork, and of course, reserve and capital requirements.
We have yet to see a government launch a wholesale attack on microlenders who illegally accept deposits. Will
Uganda be the first? Probably not, as Ugandan government officials would be hesitant to take any action that might upset the misguided donors who have created this problem by subsidizing microlenders outside the law.
Additional Resources
1) Subscription only: "Central Bank to Crack Down on Unlicensed MFIs."
2) "Central Bank Warns MFIs On Deposit-Taking."
3) Consultative Group to Assist the Poor (CGAP): "Regulation and Supervision of Microfinance."
4) The Monitor: "Register or Close Down, MFIs Told."
Monday, July 25, 2005
You may have heard the hype about the eBay fortune being on its way to revolutionizing philanthropy through for-profit investing, but the numbers tell a different story.
Why so much attention to Pierre Omidyar? High stakes: he is estimated to be worth $10 billion, only 1% of which he plans to retain. The rest will be given away or invested with a social purpose. In June, he demonstrated his commitment to microfinance with a $4 million grant to the nonprofit Grameen Foundation USA (GFUSA).
(Omidyar.net extends the commitment to microfinance with an online discussion board with a microfinance focus.)
The Omidyar Foundation undertook a facelift when it was transformed into the newly christened Omidyar Network in 2003, now housing both a foundation and an arm that makes investments.
The news that the Network would revolutionize philanthropy by no longer purely donating to nonprofits "shocked the philanthropic community," as reported in Business Week and Newsweek. However, despite his belief that "for-profit companies can have a big impact on society," most of Mr. Omidyar’s activity is grant-making. In the second half of 2004, less than $5 million was invested in social-mission for-profits, while a prorated $91 million was granted to nonprofits. From these numbers, we have to wonder what’s stopping Mr. Omidyar from giving this revolutionary idea a chance to get off the ground.
That said, the Network reporting on its site is not clear. So, we are using some guess work here.Omidyar Network uses the terminology “non-profit investment” and “pro-profit investment” as its two super-categories when reporting on its website. What does this mean? For instance, the donation to the Grameen Foundation was a “non-profit investment.” How is this different than a grant? After our inquiries to Omidyar Network, we have guessed that there is no difference.
In the Omidyar Network’s defense, the language has indeed gotten quite muddy around the new field of ‘social enterprise,’ where organizations with a social mission can either be non-profit or for-profit.May we suggest a clear distinction: is a return on capital expected? If yes, then it is an investment. If no, it is a grant.
In other words, our critique may be misplaced if Mr. Omidyar’s group is making ‘program-related investments’ (PRIs) to non-profits instead of grants. A PRI is the legal term describing when a foundation expects a return on its grant-making capital from a nonprofit.
So, let’s hope we are wrong about Mr. Omidyar’s group. Let’s hope he really is expecting a return on his philanthropic dollars to in turn create more philanthropic dollars. But current giving patterns and opaque reporting make us doubt they are actually pursuing the sophisticated philanthropic strategy their press proclaims. Too bad. We could use some visionary leadership in microfinance to model market discipline for all the other players on the investment side.
More on PRIs in the next entry
Additional Resources
1) Omidyar Network: "On Microfinance" discussion forum
2) Omidyar Investments
3) "Grameen Foundation Receives $9 Million to Finance Micro-Loans."
4) Press Release: "eBay Founder to Create Organization to Fund Social Change."
5) Omidyar Network record of news coverage
Wednesday, June 15, 2005
Jean-Philippe De Schrevel of BlueOrchard Finance, a microfinance asset management company, has hit the bull’s eye when he explains in the current Asian Development Bank newsletter how the financing of microfinance institutions (MFIs) should be left to the capital markets, rather than donations or public funds. Public and charitable funds should be re-directed to:
1) Auditing and regulatory standards 2) Strong financial infrastructure such as supervisory authorities and research institutions 3) Credit rating agencies and standards
4) New financial products, such as those that hedge foreign exchange or political risk
5) Subordinated tranches of investment funds, while leaving the senior tranches to private investors.
Overall, governments and non-profits should not give away their money to MFIs, but responsibly fund the infrastructure for an emerging market and asset class.
Additional Resources
1) Newsletter: “Finance for the Poor," Kathryn Imboden2) Subscription only: "Building Inclusive Financial Sectors: the Road to Growth and Poverty Reduction." Journal of International Affairs. Spring 2005. Vol 58, Issue 23) Subscription only: “Crawford’s Minifund for Microlenders.” Institutional Investor. Feb 2004. pg. 14) Subscription only: “Microfinance Break.” Latin Finance. Feb 2005. pg.1
Saturday, June 4, 2005
"….it may be better to direct money [rich country aid] to charities or to schemes such as microcredit, which loan people money to help themselves, than to governments."
Rich countries re-directing their ‘aid’ from African governments to microfinance organizations is not a solution, but rather, part of the problem. Indeed, most of the money already in microfinance originates from government funding. What would be the point in diverting money from inefficiently-run governments to inefficiently-run microfinance institutions (African Business). A more effective use of this ‘aid’ would be to invest it into private sector intermediaries such as the funds MicroCapital lists, in which investors hold fund managers accountable. Indeed, it is the sad performance of government bureaucrats picking and choosing which microbanks to fund over the past 20 years which has created the current situation: 10,000 micro-banks around the world, but less than 300 that are financially viable. When will it end?
Additional Resources
1) Games, Dianna. "Mobilising
Africa‘s untapped potential." African Business.
London: May 2004. Issue 298. pg. 18
2) "Micro Loans, Solid Returns; Microfinance Funds Lift Poor Entrepreneurs — and Benefit Investors." Business Week. May 2005. Vol. 3932, pg.100. Uhlfelder, Eric and Ilma Ajanovic
3) Article referenced above: African Business. Issue 298. Pg. 18
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