London conference: Surviving the Liquidity Crisis and Ensuring Sustainable Growth Investments in Microfinance

I was invited to attend the London conference on July 8th as a member of the board of the Microfinance Club of New York, courtesy of the organizers Hanson Wade. The sessions and subsequent discussions were very professional and highly information. The event drew 120 participants from European banks (Standard Chartered, a sponsor), microfinance investment funds (Blue Orchard), and MFIs from India and Africa. The speakers were all key microfinance practitioners.

Some highlights from the presentations:

- Gavin McLean from White & Case noted that the investor base in microfinance is growing due to the social investment sector and the familiarity with microfinance as an asset class is gaining momentum. He also noted that investors are turning away from overly complicated structured products and want less complex investment vehicles. Furthermore, there are changing regulations in the EU that will make it more attractive for investments. For example, there are new capital requirements where originator/sponsor of an instrument must retain 5% sake in the transaction, and securitizations will play an important part in microfinance where most deals are in the US $100 M - $150 M range.

- Nick O’Donohoe, Global Head of Research at JPMorgan noted that benchmarking is key to determining valuations; by knowing your subsector, it can drive a premium or a discount. MFIs have a double bottom line driven by both social and financial objectives and he is skeptical the approach can optimize a risk adjusted return. While the social impact can be measured, the double bottom line may cause higher cost structures while also attracting cheaper funding. IRRs for equity funds is 15-20%. In the emerging markets they are more typically 30-35%. So, there is a need to make a tradeoff. Higher lending rates charged by MFIs vs. traditional banks explains higher margins. The top 45 MFIs charge interest rates of 24.4% on average, (except Comportamos with 68.5%), while emerging markets are at 6.1%. Comparisons also noted, as follows: Operating costs: MFI banks=14%, EM banks= 10.9%. Leverage (equity to asset ratio): Top 45 MFIs=19.4%; EM banks=10.9%. Lower default rates of MFIs (due to frequent customer contact) results in better asset quality. Valuations are determined on price/book value and price/earnings ratios, transaction size (investors pay more for higher stake) and income growth. Projected 2009 valuations for EM banks average 18x earnings, as compared with LIFI’s 14x earnings. LIFIs have outperformed traditional banks: Since Sept. 2008, LIFI Index stands at 120 vs. 66 for traditional banks.

- Christian Speckhardt of responsAbility (Zurich) has US$800 million under management, mostly in MF debt and equity; invested in 200 MFIs globally. Cost of debt has not increased much, although credit margins have widened in the fall of 2008. FX volatility can have great impact on cost of debt if not hedged. Refinancing rates are expected to be low. Many MIVs are sitting on cash (20-25%), and there are still inflows into MIVs, and can invest in 350 MFIs at present. While there are some US$30 million in redemptions, some US$100 has flowed into the fund. He noted that if MIVs can be defined as asset class, then more money will flow in.

- Chuck Waterfield, CEO & Founder of Transparency noted that some activities are now blurring the line between moneylending and microfinance. Non-transparent pricing creates a money imperfection, impeding competition and consumer choice. Should a $100 that costs $200 to operate be made to a microfinance borrower? He cited the President Obama initiative that calls for simple, transparent and accurate information for borrowers/consumers.

- David Fitzherbert, MD of Grassroots Capital Management noted the firm invests strictly in MF equity with exit projections of at least 5-7 years. They are invested in 45 MFIs in 25 countries. To date, they have undertaken 13 exits with an average return of 30% (based on Grassroots’ calculations). Their IRR target is 25% at MFI level with exit valuations of 2.5 x book value. Basic IRR model is driven by growth rate and exit assumptions; and operating costs. Also, social performance is critical to Grassroots and they monitor social indicators (e.g. running water, construction materials of house, access to sanitation. Further noted that investors want to see measurable social returns.

Discussion: The MFI industry has a balance sheet of US$200 billion, which will grow. There will be more IPOs; commercial banks will start investing in MFIs (MIVs) as will other financial players. Reinsurance players are interested in MF, they are already selling insurance products. Nick noted that concern for investors is whether industry can grow and credit quality as well as political risk addressed to mitigate investor concerns. Xavier noted tat valuations have not gone down since the financial crisis started, but credit quality and incomes at MFIs are declining. There are pools of money which are interested in investing in MFIs. Valuations are still good in Tier 2 & Tier 3. While no dividends are paid, MFIs can generate cash in years 5-7; but they should re-invest in accordance with their social mission.

The conference also afforded good opportunities to speak with other participants, such as Brian Cox of MFX Solutions who noted that the firm has secured $13 million to manage global currency risk for the microfinance industry, using modern hedging instruments. I also spoke with Inci Yalman and Hande Yazman of Stand Chartered, which is actively supportive of microfinance, adding value to both investors and MFIs, especially given its reach in developing markets. Ms. Yalman and Yazman would like to connect with the MFCNY for possible future collaboration.

The organizers will be holding Microfinance for Institutional Investors conference in Washington DC on September 21-23, 2009.

Clara Lipson
Indepedent Consultant and Board Member, Microfinance Club of NY

Note: More information on conference available at: http://www.hansonwade.com/events/investments-in-microfinance/index.shtml

The truth about living on $2 a day

Caitlin Weaver is the Deputy Managing Director of the Financial Access Initiative.

Billions of people around the world live on less than $2 a day—an amount most of us could likely dig out of our couch cushions. It’s hard to imagine what it would be like to scrape by on so small an income, and easy to assume that it would be nearly impossible to put food on the table every day, much less save and plan for the future.

In 1999 Stuart Rutherford began research in Bangladesh that challenged this assumption. Rutherford met with families in villages and slums every two weeks over the course of a year and creating detailed “financial diaries” that tracked penny-by-penny how these families managed their money. Orlanda Ruthven and Daryl Collins replicated his approach in India and South Africa.

What Rutherford and others found is that poor families were managing to put food on the table, keep a roof over their heads, plan for medical emergencies, and even save for retirement. His work in Bangladesh, along with the financial diaries from India and South Africa, are featured in the new book Portfolios of the Poor: How the World’s Poor Live on $2 a Day. (Full disclosure: I work for the Financial Access Initiative, led by Jonathan Morduch who is one of the book’s co-authors.)

The stories and data from Portfolios of the Poor offer new thinking about how the world’s poorest communities manage their financial lives. The financial diaries show that the poor are not living hand-to-mouth, but that most of them save and borrow with an eye to the future, and maintain complex financial lives because they are poor, not in spite of it.

The households also demonstrate that being poor isn’t just about living on one or two dollars a day, but about dealing with the fact that these are just averages—on some days you have more and some days much less. Coping with the ups and downs is an overlooked but fundamental challenge for poor households. And above all, it becomes clear that the real tragedy of poverty is not just that the poor have limited resources, but that they lack the financial tools to squeeze all they can from what they have.

The researchers got to know Hamid and Khadeja, a Bangladeshi couple who are active money managers despite their limited income of $70 per month; Nomsa, an elderly South African woman who cares for her four grandchildren on a limited government stipend; and Sandeep from Delhi, an outgoing fellow who uses his huge acquaintanceship to develop a host of informal financial partnerships, borrowing from friends and neighbors.

While many of the households in Portfolios of the Poor use microfinance, the overall evidence from the book suggests that it’s time for new vision for the sector —one that includes microloans for a range of purposes beyond starting or investing in a business. A sample of the households who are customers of Grameen Bank divert half of their business loans to things like putting food on the table, paying down debt, and paying schools fees and medical expenses. The diaries also reveal how households create self-discipline devices (like rule-bound savings clubs) to protect their savings strategies in the face of temptation, an insight that aligns with new research at the overlap of psychology and economics.

Understanding how the poor manage their financial lives provides the foundation upon which to build policy agendas that meaningfully confront persistent inequalities. The insights gained from the financial diaries also provide a starting point for imagining new business models that serve those living on one or two dollars a day. Policymakers and financial institutions should take note: Portfolios of the Poor shows that the poor can and do use financial tools, and that they are willing to pay for them if they are well-designed and delivered.

Peer to Peer Lending

Our recent event focused on two different models of online platforms that enable individuals to invest in microfinance. The revolutionary nature of retail investing platforms is difficult to overestimate. For a long time the only way for an individual to invest in economic development was via a more sophisticated structure, such as a large size private placement transaction, or through charitable donations that might or might not be applied directly to the poverty alleviation cause in the area of interest or concern to the donor. Aside from issues of portfolio allocation and due diligence, there just weren't that many investment opportunities available unless the investor was actively seeking them and had unusual access to opportunities. Most financial advisors still do not have poverty alleviation related investments in their inventory at any given time. This is a new area. Enabling not only ultra wealthy individuals to invest in poverty alleviation has been one of the most significant advancements in the industry lately. We were thrilled to hear that $100 can change someone's life. It is even more inspiring that the average person now has the opportunity to be more directly involved in being agents of change, even if the person has a small amount to invest, which reduces barriers to entry.

Microplace and Kiva explained their business models and shared their insights on the industry and its future. The core difference between two models makes me curious. Each targets the average American, but through a different model. When one compares (a) the personal connection experience of selecting an individual borrower to make funds available for, to whom a loan through a microfinance institution would be made with (b) an investment in notes issued by Calvert (or another entity) through an SEC - cleared, due diligence performed structure: Does one or the other model have more capability to advance the industry further?
The economist in me says: our investment pockets are larger than our charity pockets, but it's important to recognize that we as a society have a lot of educational work to do. Aside from a relatively small group of those who have been converted for life when they learnt of the transformative power of microfinance, most people still think microfinance is "small loans, whatever that means...if I "give" you 100K, is that microfinance?"....There is definitely room for both models of retail investing. Time will tell us whether one model has the power to attract more investors and transform the way we see investing in the better world .....
I look forward to hearing your thoughts.

April 6: Angel Investing in Start-Up MFIs Featuring Greg Casagrande

Greg Casagrade is bullish on launching new microfinance institutions and investing in the microfinance sector, as he advocated as MFCNY’s guest speaker on Monday April 6.

Founder and President of South Pacific Business Development Foundation (SPBD), Greg also founded MicroDreams, a microfinance acceleration fund working with emerging microfinance institutions, and serves on the boards of the International Association of Microfinance Investors, Microfinance Pasifika and Planet Finance.

After a senior career with Ford Motor Company in Asia, Greg got his start in microfinance after learning about it from his brother; and he was quickly hooked on the dynamism and social impact of the business. He launched SPBD, the leading and first successful microfinance institution in the Pacific Islands region, despite discouragement by regional and development experts. Since then, he has bucked donor-funded approaches by focusing on commercial business practices.

From his experience as an owner-investor in the microfinance and high-tech fields, Greg sees great potential for growth in the microfinance field and advocates for industry development to support growth of microfinance investment vehicles. (Greg is also a founding director of the Ice Angels, Australasia’s largest angel investor group.) Among his recommendations are:
• Increase primary market development – Greenfield MFIs are very transformative, whether funded by family and friends, angel investors ($100K-5M), or venture capital ($4M-100M). Angel (or mentor) capital offers the benefits of helping with management and strategy and offers higher rewards (while more often can lead to busts). Starting up a new MFI is not difficult, he says, if you find the right talent and manage the venture well.
• Develop secondary market to increase liquidity. The industry needs:
o A centralized microfinance exchange
o Increased M&A activity for consolidation. New M&A specialty firms can help.
o Standardized term sheets to provide increased leverage to local owners and to provide greater confidence and efficiency through standardization
o Standardized data reporting metrics for increased confidence and improved equity rating methodologies like S&P’s instead of operationally oriented models
• Greater angel capital for greenfields and scaling up. This can be done by gathering 20 committed investors with a minimal investment of $250K and following traditional angel capital procedures.

Throughout his presentation, Greg’s pure passion and vision for the microfinance field was palpable. He believes the field has the potential to grow exponentially to meet the needs of the unbanked globally. And he exhorted attendees to take action to realize this potential.

Angel Investing in Start-Up MFIs - Featuring Greg Casagrande

The Microfinance Club of New York presents:
Angel Investing in Start-Up MFIs
Featuring Greg Casagrande

The discussion will focus on starting and growing new
microfinance institutions, greenfield investing and using
equity capital to scale up operations.

WHEN: Wednesday, April 8th, 2009; 6:30-8:30PM
WHERE: NYC Seminar and Conference Center, 71 West 23rd Street

This event is free for MFCNY members. There is a fee of $15 for non-members. RSVP to mfclubny@gmail.com. Please be sure to include the event title in the subject of the email to confirm your attendance.

Speaker Bio:
Greg Casagrande is the Founder and President of South Pacific Business Development Foundation (SPBD) of Samoa, the leading and first successful microfinance institution in the Pacific Islands region. He is also founder of MicroDreams, a microfinance acceleration fund working with emerging microfinance institutions in Africa, Latin America and the Pacific.

Greg also serves as a director on several microfinance industry boards. He serves as a director on the boards of the International Association of Microfinance Investors (of New York), Microfinance Pasifika (of Vanuatu) and Planet Finance (of Paris), and as a fund advisor to Plebys – a for-profit "Base of the Pyramyd" investment fund based in Irvine, California. He also served on the United Nation’s Board of Patrons for its International Year of Microcredit – 2005.

In addition to his microfinance activities, Greg promotes hi-tech entrepreneurship. He is a founding director of the Ice Angels, Australasia’s largest angel investor group. He also serves as Chairman of three New Zealand headquartered software firms: Biomatters, Calcium and English-To-Go. Prior to his involvement in microfinance and angel mentor capital, Greg recorded significant achievement with Ford Motor Company, Mazda Motor Company and Coopers and Lybrand in product development, manufacturing, marketing and financial management positions. He led teams in the U.S., Japan and Europe and was honored to be the youngest-ever Buchou (Division General Manager) of any major Japanese corporation. Greg has an MBA in Finance and Marketing from Kellogg School of Management, a MS in Accounting from NYU Stern School of Business, a BA in Economics with high distinction from Colgate University and is a CPA.

1st Joint Happy Hour --- Microfinance Club of New York, Microfinance Working Group at Columbia University, New York University Microfinance Initiative

When: Thursday, February 26, 2009; 6pm – 8pm

Where: Slate, 54 West 21st Street (btw 5th & 6th Avenue) http://www.slate-ny.com/

The Microfinance Club of New York, Microfinance Working Group at Columbia University and New York University Microfinance Initiative invite you to our 1st Joint Happy Hour! Come network, exchange ideas and learn about upcoming events at MCFNY! $4 local beers, $6 martinis and some light appetizers will be served.

RSVP: Please RSVP with keyword “Happy Hour in NYC” to mfclubny@gmail.com to confirm your attendance.

January 29, 2009: Socially Responsible Investing (SRI) panel held by NY Women Social Entrepreneurs & Columbia University Multicultural Business Assn

Diverse non-commercial capital sources for social enterprises in New York City were introduced at the SRI panel last week by panelists from the NYC Venture Philanthropy Fund, the Fast Forward Fund, Givology, the Acumen Fund, and Microlumbia. SRI takes the form of grants, loans, or equity investment and is the latest wave of financing for social enterprises today. Regardless of the form, SRI is characterized by its focus on the double bottom line (financial as well as social impact) and accountability for results – not only output or services rendered, but also the impact of these products or services upon individual lives and communities – an even higher standard than commercial enterprises must meet. As traditional financial investors show an increasing acceptance of social as well as financial returns, the non-profit sector is innovating new mechanisms to invest in social enterprises with financially sustainable business models that offer payback to investors (e.g. through loans or equity investment with a limited return).

Olga Serhiyevich (an Associate and member of the Microfinance Forum Steering Committee at Morgan Stanley and board member of the Microfinance Club of New York moderated the event with provocative questions and analysis.

The NYC Venture Philanthropy Fund's chair, Heather Rees, explained the fund’s goal to make philanthropy accessible to all individuals by opening membership to individuals who commit to contribute $1 per day, i.e. $365 per year. The fund, run by volunteers, pools individual contributions to make a larger grant and technical contribution to a New York City social enterprise in a democratic selection process.

Diana Ayton-Shenker is developing a youth philanthropic or social investor movement as President and CEO of the Fast Forward Fund. The fund, to launch in several weeks, will empower youth, normally taught to wait until adulthood to have a financial impact upon society, to invest in other youth social enterprises to create global change.

Givology is another new organization in the field of microphilanthropy which enables individuals to contribute to the education of youth in the developing world, a key driver of economic development. Launched by its President Jennifer Chen, Givology recipients provide evidence of the impact of the investment in their education to their investors through their own reporting on this experience.

Molly Alexander, Business Development Manager at the Acumen Fund, described how the fund invests in enterprises in the developing world that solve critical issues in health, water, housing, and energy through its philanthropic and investment funds. An outstanding leader in the field of social venture capital, Acumen supports sustainable business models with capital and management assistance to produce financial and social returns and broad scale social impact.

Microlumbia, represented by Danielle Noto, is a non-profit that enables Columbia Business School students to provide consulting services to microfinance institutions (MFIs) in the developing world, to conduct due diligence on MFIs for investment, and provide education and marketing services. Sustainable due to its volunteer student staff, it is preparing for potential debt investment into selected MFIs.

The panel was unanimous in affirming that SRI is a fast growing field with new opportunities for funding appearing constantly.

Hosted by:
New York Women Social Entrepreneurs
Columbia University Multicultural Business Association

Microfinance East

My personal favorite moment from Day One of the Microfinance East Conference was a reprise of Damian von Stauffenberg's spirited critique of mainstream rating agencies S&P, Fitch and Moodys. (He took a similar tack at a November MFCNY Ratings event.) The MICRORATE founder joined Emmanuelle Javoy of PlaNet Rating, and Gary Kochubka of S&P on the panel and made some important (perhaps somewhat contradictory) points. He rightly pointed out that the mainstream raters have relatively little involvement in the industry. S&P, von Stauffenberg pointed out, has rated approximately 20 MFIs in all (compared to the over 400 ratings done by MICRORATE). And certainly, for those familiar with the industry, MFIs are far more likely to engage MICRORATE, Microfinanza, PlaNet Rating or other specialized microfinance raters over the mainstream agencies. And this, for von Stauffenberg, is a wasted opportunity. If mainstream raters were to enter in earnest it would provide an enormous boost of investment into the sector.

His second point was that the mainstream raters simply don't know how to rate MFIs. Microfinance is different and complicated. It requires a deep evaluation of assets, in the field, at the branch-level, with a good look at overindebtedness in the particular market, and not simply a desk review using mathematical models. (Moreover, he stated, given their role in the financial crisis, perhaps the mainstream raters don't know how to rate anything properly.)

Kochubka defended himself stating that S&P did not do "quickie" ratings, as von Stauffenberg called them, nor were the ratings model-driven. But aside from this denial, von Stauffenberg's remarks were not substantively responded to.

Von Stauffenberg also touched on the very important issue of conflict of interest. There is a fundamental conflict built into the current microfinance rating business model in that MFIs pay for their own rating. Its unclear what a different model would look like and the issue was avoided by Javoy and Kochubka. Another troubling potential conflict is the fact that some raters are affiliated with investment managers (the PlaNet group, for instance) and more should have been spoken about how those conflicts are managed.