The Calvert Foundation has made a second significant investment in the recently founded MicroCredit Enterprises LLC. It had also invested $3 million at the end of last year (see microcapital blog).

According to the Calvert Foundation’s press release, the funding received by MicroCredit Enterprises was just one of its recent microfinance investments. Others include $250,000 to MI-BOSPO, which provides microloans for Bosnian women; $326,396 to OikoCredit, one of the largest financiers of the Microfinance industry; and $600,000 to the Latin America Challenge Investment Fund, SA (LACIF), which provides loans to Latin American MFIs.
Continue reading “Calvert Foundation Invests Another US$1 million in MicroCredit Enterprises LLC to Fund Microfinance Investing”

The International Finance Corporation (IFC) and Citigroup (NYSE: C) have developed a credit scheme that will bolster the development of Uganda Microfinance Limited. The IFC has issued a $1,000,000 line of credit to Uganda Microfinance to strengthen its balance sheet. Uganda Microfinance will then be able to borrow local currency on commercial terms from the Citigroup subsidiary, Citibank Uganda Limited. The deal is further indication that major commercial banks are taking a growing interest in microfinance, both on wholesale and retail terms.
Continue reading “International Finance Corporation and Citigroup Extend Credit to Uganda Microfinance”

The CGAP-MIX capital markets update of the World Bank group is the only newsletter covering the microfinance capital markets.

If you have recently completed microfinance ratings, equity or debt deals, have hired a new microfinance team member or have other news or information that you would like to announce in the April issue, email capmarkets@cgap.org by Wednesday, March 29th.

1) CGAP-MIX Capital Markets Update
2) Consultative Group to Assist the Poor (CGAP)
3) The MIXMarket

As the emerging asset class of microfinance spirals slowly to the surface, MicroCapital looks at one of its main stumbling blocks: regulation and supervision. Vijay Mahajan, CEO of the BASIX Group, a micro-bank in India, refers to regulatory frameworks as one of the “triple helix” of constraints to microfinance expansion: low-quality regulation, inadequate financial resources; and the weak institutional capacity of most micro-banks, any of which may be the ruling constraint at a given time. BASIX, one of the first microfinance institutions (MFIs) in the world to attract commercial equity investment internationally and within India, has been a major influence for successful changes in Indian policy framework.

As in mainstream financial sectors, predictable regulatory standards for microfinance reduce uncertainty and increase the attractiveness of the investment. The challenge is to strike a balance between preventing abuse of markets and consumers, and encouraging industry expansion.

This paper will:

åð explore the unique challenges of microfinance regulation;
åð advocate "regualtion by risk;"
åð consider balancing financial system integrity with costly microfinance regulation that inhibits investment;
åð review the hugely positive role that rating agencies have played in facilitating transparency and risk assessment for investors and regulators alike.

We will also take you to Peru, a burgeoning market for microfinance in which regulators seemed to have figured out how to control risk while promoting investment in microfinance.

Download the paper here.

The World Bank, the Microfinance Information eXchange (MIX), and the Consultative Group to Assist the Poor (CGAP) recently published a report highlighting the performance and transparency of the South Asian microfinance industry. The report is comprehensive åö pulling data from 125 South Asian institutions and close to 600 microfinance institutions (MFIs) worldwide.

The South Asian microfinance industry underwent major advances under the United Nations International Year of Microcredit 2005 initiative and is home to several of the fastest growing MFIs in the world. Overall, this sector has achieved massive credit outreach driven by record productivity and efficiency and a wide range of financial service offerings targeted to the poor. This sector is highly efficient both in terms of cost per borrower and cost per unit of loans outstanding. “Each dollar in loans costs just fourteen cents to maintain, compared with nearly twenty-six cents (p.13) in sub-Saharan Africa. Compared with their peers to the east, South Asian MFIs spend on average twenty-five dollars per borrower, less than half the average for the Philippines, Vietnam, Cambodia or Indonesia.”
Continue reading “Should You Invest in the South Asian Microfinance Market? World Bank, MIX, and CGAP Report Highlights Microfinance Performance and Transparency in South Asia”

If there is one thing that the microfinance industry needs, it’s more and better performance indices. It looks like that is precisely what the Grameen Foundation USA (GFUSA) is serving up with a novel tool for tracking poverty alleviation called the Poverty Progress Index (PPI).

The UN Millennium Development Goals have placed a large challenge on the table: halve the number of people living in extreme poverty by 2015. In order to meet this challenge, effective means of measurement and evaluation are essential. In response to this need, Grameen Foundation USA has created this PPI measurement and management tool.
Continue reading “Another Scorecard for Microfinance Investing: Grameen Foundation USA Introduces Poverty Progress Index”

Although there has been a growing effort to improve the transparency of microfinance institutions (MFIs) over the course of the past decade, there is still much work to be done. Lack of transparency continues to be a significant barrier for microfinance investing åö how can investors make the leap when they lack the information they need to understand risk? Less information means less certainty for investors, and less certainty means fewer investors are willing to take the plunge into microfinance.

Continue reading “Who Turned Out the Lights? Lack of Transparency Continues to Hinder Investing in Microfinance”

"Self supervision" has virtually never been effective in developing countries, and external audits of MFIs – even by internationally recognized audit firms – seldom include adequate testing to provide reasonable assurance of the soundness of the MFIs loan portfolio, which is by far the largest risk area for microlenders.

Continue reading “How Important is Regulation and Supervision of Microfinance to Your Investment Decision?”

The Google Foundation’s $5 million gift to the Acumen Fund goes to show that "making a philanthropic investment" in international small/sustainable business development is fashionable. Google would never do anything out of fashion. The Google Foundation is the “philanthropic arm of google.”

The Rockefeller Foundation, Cisco Systems Foundation, and individual philanthropists established the Acumen Fund in 2001. The Acumen Fund is an international non-profit venture fund that provides loans, equity investments, grants and “intellectual capital” to enterprises that support progress in health, housing, and water. At the end of 2004, the Acumen Fund had total disbursed loans of $2.964 million. The Fund aims to achieve approximately a negative -20% return on investment.Additional Resources
1) “Google.org Partnership.”
2) “Acumen Fund: Our Mission.”
3) “Acumen Fund: Investment Approach.”
4) “Acumen Fund: Investment Report August 2005.”
5) “Google”

CFO.com Magazine’s generalist article on microfinance reports microfinance institutions (MFIs) "maintaining an astonishing 100% payback rate."

Why do MFIs report "100% payback" when this number is so obviously cooked?
So many MFIs practice misleading reporting because donor agencies expect to see these impossible repayment rates. Back in the early days of microfinance, when that first grant officer with an advanced degree in sociology approved a high-profile donation to a 100% perfect MFI, the standard was set, and the vicious cycle began. MFIs that truthfully reported delinquency and default rates of 1-5% were pushed to the bottom of the grant application pile. MFIs soon learned what it takes to compete for donor funds. Yes, your tax and charitable dollars at work encouraging cooked books around the world.

How do MFIs hide delinquency? Most frequently, MFIs just write off bad loans, then only report "delinquency" or "repayment rate" without reporting write-offs/defaults. Another frequent tactic: to simply not categorize a loan as delinquent, leaving bad loans on the books for months or years. The fact that most MFIs receive grants facilitates the obscuring of income statements missing revenue from non-performing or written-off loans.

The fact that CFO.com Magazine reports "100% payback rate" without the skepticism proudly displayed by CFOs demonstrates the entrenchment of misinformation in microfinance. How do we undo this? Invest in professionally managed microfinance investment funds that offer you a return, thus enforcing accountability down the line. Please see our ROI QuickList for information on these funds.

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.

1) “Small-Cap Charities, Huge Benefits.”

Bai Tushum, a Kyrgyzstan microfinance institution (MFI), was recently provided with a $2 million loan from the European Bank for Reconstruction and Development (EBRD)—the “largest single investor in the region” between central Europe and central Asia. Member countries, the European Community, and the European Investment Bank own the EBRD, which has “subscribed capital totaling å¥20 billion.” The bank finances its loans by borrowing funds in international capital markets, and subsequently providing loans to public and private enterprises including banks, industries, and businesses. In 2004, the EBRD had invested over $1.37 billion in financial institutions supporting local enterprises.

In 2003, loan recipient Bai Tushum received an “A” rating for financial and economic performance standards designed by the World Bank’s microfinance unit (CGAP). The Microfinance Centre for Central and Eastern Europe and the New Independent States, states that as of 2004 there were 11 Kyrgyz MFIs; and Bai Tushum was the first MFI in the country to receive such a rating. Since its inception in 2000, Bai Tushum’s loan portfolio has grown from approximately $646,500 to $4.717 million in July 2005, and its total assets have increased from close to $1 million to $6.385 million. Bai Tushum directs its financial services to farmers and small and medium size entrepreneurs.

1) Consultative Group to Assist the Poor (CGAP): “Microfinance Capital Markets Update” is the best source for monthly updates on debt and equity deals in microfinance.
2) “About the EBRD.”
3) “About the EBRD: Ownership and Funding.”
4) “USAID Success Stories Archive: USAID Supported Microfinance Insitution First in Kyrgyzstan to Receive ‘A’ Rating.”
5) MIX Market: “Bai Tushum: Financial Information.”
6) MIX Market: “Bai Tushum: General Information.”
7) “EBRD: Annual Report 2004.”
8) “MFC Spotlight 12: Overview of the Microfinance Industry in the ECA Region in 2003.”

Fund Opportunity Russia (FORA), “the largest non-bank microfinance organization in Russia,” recently received a $2 million loan from the Swiss ResponsAbility Fund, $1.8 million from Netherlands based Oikocredit, and $2 million from U.S. MicroVest. FORA’s total assets were $16.39 million as of December 2004 and it was founded by Opportunity International Network, a US non-profit “network.” Opportunity has 48 member MFIs that post a combined total loan portfolio of $241.55 million. FORA is therefore larger than the average Opportunity member with a total loan portfolio to microentrepreneurs of approximately $15.28 million. Founded by Swiss financial service companies Credit Suisse, Raiffeisen Banking Group, Baumann & Cie Banquiers, and the Andromeda Fund, the Swiss based ResponsAbility Fund seeks investment opportunities with both financial returns and social benefits. The fund’s assets in April 2005 were about $11.44 million. The ResponsAbility Fund typically provides loans from $50,000 to $1.5 million for a maximum of five years and at a rate equal to “LIBOR plus full cost plus full risk” to MFIs.

FORA’s second investor, Oikocredit, is an investment fund seeking “social investment opportunities in the South”. Oikocredit’s assets were at $304.66 million at the beginning of 2005, and it provides loans at a minimum of $50,000 and a maximum of $5 million to microfinance institutions (MFIs) for a maximum of ten years. Its “near market rates are equal to LIBOR plus partial cost plus partial risk.”

The third investor into FORA, MicroVest, is an investment firm that provides debt and equity capital to MFIs. With total fund assets at $14.4 million as of July 2005, MicroVest’s loans go from $500,000 to $3 million for a maximum of 30 years. No guarantees are required and its rate terms are “LIBOR plus partial cost plus partial risk, or LIBOR plus full cost plus full risk.”

1) Consultative Group to Assist the Poor (CGAP): “Microfinance Capital Markets Update” is the best source for monthly updates on debt and equity deals in microfinance.
2) MIX Market: “FORA: Financial Data.”
3) MIX Market: “FORA: General Information.”
4) MIX Market: “ResponsAbility Fund: Fund Description.”
5) MIX Market: “ResponsAbility Fund: Fund Instruments.”
6) “Oikocredit: About Us.”
7) MIX Market: “Oikocredit: Fund Instruments.”
8) MIX Market: “Oikocredit: Fund Description.”
9) MIX Market: “MicroVest I: Fund Description.”
10) MIX Market: “MicroVest I: Fund Instruments.”
11) MicroCapital Blog: “Microfinance Networks (wholesale transnational): Defined and Listed.”
12) “Opportunity International Network: What We Do.”
13) “2004 Annual Report: Opportunity International.”
14) “ResponsAbility: Founding Institutions.”

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.

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.”

The Tanzanian government recently sold 49% of its shares in the National Microfinance Bank (NMB) to a consortium led by Rabobank of the Netherlands for $29.4 million. Rabobank is a financial institution with numerous global branches, and total assets in 2004 at approximately å¥475.09 billion. The sale initiates NMB’s privatization while the future sale of 21% of the remaining 51% of the government’s shares in NMB will be sold to the Tanzanian public.

Since its partial acquisition, Rabobank has expressed interest in providing management services and training and technical assistance to NMB. It also plans on broadening access and services to the poor, especially in rural areas. The NMB, which has countrywide branches, primarily serves the underprivileged.

1) Consultative Group to Assist the Poor (CGAP): “Microfinance Capital Markets Update” is the best source for monthly updates on debt and equity deals in microfinance.
2) “Government Approves Sale of 49% Stake in NMB
to a Consortium Led by Rabobank Nederland.”
3) “First Phase of NMB Divestiture Concluded.”
4) “Key Figures.”
5) “Rabobank around the World: Offices.”

Downsizing of commercial banks, greater number of partnerships, increasing amount of local currency deposits, and the integration of the commercial and microfinance sectors—all current trends—are tightly linked.

As commercial banks have realized that poor people’s finance can be profitable, an increasing number have gone down market to tap lower income clientele. The World Bank’s microfinance unit, the Consultative Group to Assist the Poor, estimates that there are currently around 225 commercial banks “engaged in microfinance”— a figure that is increasing.

The main reasons for the emergence of commercial banks at the low-income level are: 1) Competition in existing markets driving banks into new ones, 2) Excellent repayment rates by micro-entrepreneurs, and 3) Technology allowing the poor greater access while transactions remain cost-effective. Though governments in some developing countries have required commercial banks to work in certain sectors, banks are increasingly lured in by the low risk, stability, and potential growth opportunities in the microfinance market. They are entering either directly by utilizing their own resources such as an internal microfinance unit, or with existing providers through partnerships.

Partnerships between MFIs and commercial banks have enabled each to leverage their competitive advantages. While MFIs are more knowledgeable at the community level for instance, banks have the advantage in greater access to capital and existing infrastructure. The meeting of the commercial and microfinance sectors has come about through their collaboration. MFIs have scaled up to “access higher levels of credit, augment their portfolios, and strengthen management and efficiency levels,” while commercial banks have purposely scaled down to profit from this emerging industry. Both types of institutions “scale-up and scale-down” by redesigning their financial products to suite the clientele they are targeting.

Integration between these sectors leads to another current trend in microfinance—the increase in deposits as a source of funding. It is important for MFIs to turn from foreign debt investment, which is vulnerable to foreign exchange risk, to their own domestic and regional markets so that domestic savings can be transformed into “productive loans for the poor.” Due to limited knowledge and a lack of trust beyond the community, the local poor may therefore be more inclined to make deposits into local savings accounts. Within the last year for instance, the number of accessible savings and loan accounts among the poor has gone from 750 million to 1.4 billion. Furthermore, and importantly, foreign currency risk can be avoided when MFIs borrow and lend in the local denomination.

One of the main links between these trends is technological advancement. Efficient technology has allowed smaller and simpler banking transactions to become more cost effective, motivating commercial banks to scale down and reach a greater number of people. Low cost ATMS with picture and voice prompts for example, are bringing in rural and illiterate clientele. An in-country example is the State Bank of India, which is reaching out to whole villages through 10,000 personal computer kiosks with ATMs. Regional MFIs that are scaling up on the other hand, are able to link into international ATM networks, forcing greater integration of the two sectors. Local currency deposits have the potential to increase further from an expansion of service machines and phone banking systems. Such progress in physical banking and financial services infrastructure poises microfinance to emerge as an asset class.

1) Main article discussed in entry, United Nations Capital Development Fund (UNCDF): “Microfinance—Where We Are Now: And Where We Are Headed.”
2) The Consultative Group to Assist the Poor (CGAP): “Commercial Banks and Microfinance: Evolving Models of Success.”
3) “Microfinance Sustainability through Private Sector Partnership.”
4) Inter American Development Bank (IADB): “Savings Becomes First Source of Funding for Microfinance.”
5) “Managing Foreign Exchange Risk: The Search for an Innovation to Lower Costs to Poor People.”
6) “Microfinance: Facts and Figures.”
7) “Financial Institutions with a ‘Double Bottom Line’: Implications for the Future of Microfinance.”
8) “WSBI’s Contribution to the Collection of Data on Accessible Finance: Telling the Supply Side of the Story.”

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

Is ‘philanthropic investment’ just a contradictory term to make charity sound business-like? In the US, Program-Related Investments (PRIs) have served as a way for foundations to earn a return on their grant-making dollars since 1969. Such investments made by foundations to support charitable activities offer the potential return of capital within an established time frame, and are well codified in US law. PRIs are the perfect way for foundations to capitalistically and responsibly support microfinance.Of the 66,000+ grant-making foundations in the United States, only a few hundred make PRIs. Giving by the nation’s grant-making foundations increased by 7% in 2004, to $32 billion (pg. 1), but PRI financing makes up a negligible proportion. Why such dismal numbers?

The answer turns out to be the cultural inertia within foundations and non-profits. A return on capital requires a different sort of rigor than social work. And this is just the tip of the iceberg. In 2004, US foundations granted $32 billion, but they held $476 billion in assets. Imagine 1% of this principle corpus invested in microfinance, this would open the door for commercial capital investment. Whereas most huge chunks of capital (pension funds, insurance companies, mutual funds, hedge funds) fall under the ‘prudent man’ US law that obliges the prioritization of profits, foundations (and universities) enjoy leeway under the prudent man rule to invest per their missions.

The irony of course is that microfinance may well out-perform the market, so ‘prudent man’ would be irrelevant. But, we are not an asset class yet, so to get there, we look for leadership not just in your grant-making, Mr. Omidyar, but in your asset management. PRIs are an opening for you to introduce Wall Street to our emerging asset class.

Again, to give Mr. Omidyar and his group the benefit of the doubt, maybe his asset managers and his grant-makers do eat lunch together regularly, maybe they are just “ramping up,” and will fulfill his righteous vision one day soon.

Additional Resources

1) The Foundation Center: Foundation Growth and Giving Estimates: 2004 Preview
2) Although dated, the best document discussing PRI trends is still the Foundation Center’s PRI Financing: Trends and Statistics 2000-2001
3) MicroCapital Blog: Mr. Omidyar’s Philanthropic Vision: a Work in Progress, Part 1