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Monthly Archives: June 2009

Is microfinance detached from the global crisis?

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A great editorial from responsAbility Social Investments head of research Cécile Koller…

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“Can people escape poverty through microfinance?” This was the key question which had always been raised in the past with respect to microfinance. Since October of last year, however, the focus of attention has shifted to another question: “Is microfinance detached from the global crisis?”.
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Several industry studies have addressed this issue in recent months. It appears that microfinance continues to be detached from the world markets. However, “detached” is not synonymous with “unaffected”: If the crisis reaches the real economy, microentrepreneurs will also be affected. This was confirmed by a study conducted by CGAP (Consultative Group to Assist the Poor) and published in May. It surveyed 400 microfinance institutions (MFIs) worldwide regarding the effects of the crisis on microfinance clients.
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75 percent of the respondents also assume that their business activities will remain stable or even improve over the next six months. A paradox? Not according to CGAP which views this as the willingness of the MFIs to specifically adapt their business activities to a changing environment.
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And the effect of microfinance as an instrument to fight poverty continues to be of vital importance: Poverty around the world has intensified as a result of the crisis. The World Bank estimates that the population living below the poverty line will increase by 53 million people. It is the responsibility of the MFIs, as well as investors, to increasingly shift the social objectives of microfinance into the spotlight. This fact has not gone unnoticed: various new industry initiatives demand greater transparency in the market and more responsibility vis-à-vis the microfinance clients. Efforts are also being made to move forward with a definition of standardized indicators to better measure and monitor the social effects of microfinance.
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Microfinance is an investment with potential, especially for investors seeking a social return, in addition to financial gains. The microfinance industry, which is fundamentally solid, and the millions of microentrepreneurs in developing countries and emerging markets should not have to suffer the effects of the turbulences of the global economic crisis, as they, in particular, are frequently excluded from the financial markets. In view of this, the continued commitment of private and public stakeholders to microfinance makes even more sense.
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We’re Dull, Small Banks Say, but Have Profits

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http://www.nytimes.com/2009/05/12/business/12small.html?_r=2&th&emc=th

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I saw this article in the NY Times a month ago and see many similarities with Microfinance banks.  In financial services investments broadly, this segment has avoided much of the over-leveraging and troubled asset issues that the larger banks have.  That may make them boring, but staying in business, continuing to serve customers and providing returns to shareholders is what we’re supposed to do.  It’s what we do in our portfolio companies and what the industry of microfinance is proving to the world – small, simple, profitable banks making a huge impact.  I would make one divergence from the article when considering microfinance – working with those living in poverty is NOT BORING.

Sectoral Highlight: Microfinance Investment Opportunities in an under-banked Cambodia

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From our friends at Leopard Capital, a great synopsis on the Cambodian MFI industry.

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In recent years, the Cambodian banking sector has experienced dramatic growth due to annual GDP expansion of more than 10 percent and to increasing bank penetration. Bank deposits have grown from $382 million in 2000 to more than $2.5 billion today while bank loans have increased from $310 million in 2000 to more than $2.5 billion. However, Cambodia still remains relatively “unbanked” with total bank assets less than 40 percent of GDP as compared to approximately 160 percent in Korea and 80 percent in Vietnam.

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Most Cambodian commercial banks have traditionally focused on the top 20% of the economic pyramid and have overlooked rural communities which comprise more than 80% of the overall population. This is where Microfinance institutions (MFIs) have stepped in with great success.

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The Cambodian microfinance sector is generally considered a model microfinance industry and is widely studied by academics and banking professionals. Five Cambodian MFIs are included in the MIX Global 100 Composite Rankings of the top 100 global MFIs. Only India has more MFIs in the index. At the end of 2008, Cambodia had 18 licensed MFIs, up from six MFIs in 2003. Microfinance loans increased by 61% in 2008 and are still expected to grow at a healthy 10 to 20% in 2009 although funding costs could rise as foreign investors scale back their emerging market investments and nonperforming loans will also likely increase as a result of slower economic growth. In 2008, the number of MFI borrowers exceeded one million, up from 970,152 in 2007: healthy growth across the board.

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LCF expects consolidation in the banking sector over the coming 12 to 20 months as a result of the National Bank’s tripling of the minimum capital requirement in September 2008. Capital requirements were increased for commercial banks from KHR 50 billion ($12.5 million) to KHR 150 billion ($37.5 million) and for specialized banks from KHR 10 billion ($2.5 million) to KHR 30 billion ($7.5 million). Banks existing prior to September 2008 have until the end of 2010 to meet the new capital requirements. This combination of tremendous growth and of consolidation presents investors with several exciting opportunities and at LCF we are currently evaluating several options to invest in the sector including participating in any pre-IPO capital raising by a leading MFI, acquiring an existing MFI or merging an existing MFI with a smaller commercial bank. Leopard Capital Associate Matt Magenheim has written a report in which he delves in more detail into the rather unique history of Cambodian MFIs and into their structure and he also looks at the tremendous scope for future growth.

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