Why the Big Banks are Investing in Microfinance

Microfinance institutions are garnering attention from some of the world’s leading commercial banks. Citigroup, ABN AMRO, Barclays, and more are all seeking direct and indirect exposure to the microfinance market, and with good reason- there’s money to be made there.

Retail Microfinance

Some of the large banks are partnering with or acquiring microfinance portfolios to expand their existing book of business. In a recent notable acquisition, Grupo Aval purchased Megabanco of Colombia for US$358 million. The sale of Megabanco at auction was consummated primarily on the strength of its microcredit loan portfolio. At 6 times the book value of the company, this was the most expensive bank sale ever in Colombia. In contrast, U.S. bank stocks tend to trade at multiples between 1x and 2x to book value.

The premium paid for microfinance portfolios comes largely from larger banks’ desire for access to new markets. Citigroup’s 2005 annual report shows significant revenue growth in both Mexico and Asia, regions in which the company provides retail microfinance services. Microfinance is a means by which large corporations can expand into the untapped, informal economies of the world; and these markets are by no means small. According to the Population Reference Bureau, the population of the “Less Developed” world (i.e. potential microfinance customers) numbered over 5 billion people.

Wholesale Microfinance

Commercial banks are also taking a less direct approach to the microfinance market, offering wholesale loans to microcredit lenders. This approach lessens the risks to the commercial bank, particularly if the loan is not made in the local currency. This practice allows the banks to participate in the informal markets without the burden of a volatile emerging market currency. In addition, the commercial banks do not have to cope with the difficult daily operations of a microfinance institution.

Goodwill

Beyond the tangible benefits of increased market share, the microfinance business can generate “goodwill,” which can carry over to the firm’s other enterprises. “As microfinance is regarded as a positive and laudable cause by most governments, large development organizations and the general public, the involvement of banks may enhance their reputation.” (12)

Involvement in the microfinance industry by commercial banks is a logical economic choice, both for its direct revenue-generating potential, and as “advertising” for other business lines. Those banks that can successfully shepherd their microfinance arms into mature businesses stand to get a piece of the world’s last untapped markets.

Additional Resources

1) ING: “A Billion to Gain? A study on global financial institutions and microfinance,” February, 2006.
2) MicroCapital Blog: “
Citigroup Leads the Way in Microfinance Investing for Commercial Banks,April 3, 2006.
3) MicroCapital Blog: “
International Banks and Their Expanding Role in Microfinance Investing,
March 30, 2006.
4) MicroCapital Blog: “
London-Based Barclays Bank Expands Reach into Microfinance Investing Through Partnership in Ghana,
April 4, 2006.
5) MicroCapital Blog: “
Colombian Financial Group Banks on Microfinance Investment: Banco de Bogota Wins Auction for Megabanco and its Microcredit Portfolio with $358 Million Bid,
March 20, 2006.
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U.S. Securities and Exchange Commission