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Monthly Archives: July 2009

Mexican microfinance bank Compartamos posts 31% rise in net profit

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July 22, 2009: Banco Compartamos, the Mexican microfinance bank, on Tuesday announced its second quarter results which show net profit rose 31.3% totaling 327 million pesos ($24.7 million), up from 249 million pesos recorded in the corresponding quarter of 2008, in a statement filed with the Mexican Stock Exchange.
The bank’s active clients reached 1,317,472 or a 40.1% increase compared to 2008 and its total loan portfolio reached 6,729 million pesos or a 40.4% increase compared to second quarter in 2008.
Earnings per share or EPS, excluding shares repurchased, reached 0.79 peso versus 0.58 peso in second quarter of 2008, representing 35.2% growth. Equity to assets was at 40.1%, while ROAE reached 41.3%.
Carlos Danel, the Bank’s Executive Vice President, said despite a challenging macroeconomic environment, the bank said it achieved 40.4% growth in the total loan portfolio driven by a 40.1% growth in the number of active clients being served with 1,841 more employees than a year ago. “Another important aspect of our strategy is to improve efficiency; to achieve this, we implemented a key measure of using our existing infrastructure, therefore, during 2Q09, we did not grow the number of offices, thus focusing on controlling costs. This was not only evidence of our commitment to gain efficiencies but also to grow in a manner that is aggressive yet controlled,” he said.
Tha bank’s statement said both rating agencies, Standard & Poor’s and Fitch Ratings, affirmed counterparty credit ratings of Compartamos at ‘mxAA-’ / ‘mxA-1′ and ‘AA-(mex)’ / ‘F1+(mex)’, respectively. The outlook remains stable and the total number of employees reached 7,130, a 34.8% growth.
The ratio of non-performing loans rose to 2.26%, from 1.38% a year earlier which was better than the general banking sector. Danel was confident to reach 2009 goals too. “With half of the year behind us, we are on track to fulfill our goals for 2009,” he said.
Earlier this week, the bank raised $500 million pesos through the public issuance of bonds in the local debt capital markets for a tenor of 3 years. The bonds obtained a credit rating from Standard & Poors of “mxAA-” and “AA- (mex)” from Fitch Ratings.
Banco Compartamos, S.A., is the largest lender to microbusiness owners in Latin America. Established in 1990 and headquartered in Mexico City, Compartamos provides small loans to low-income individuals and business owners, such as craft manufacturers, food vendors and other small businesses. Banco Compartamos’ shares began trading on the Mexican Stock Exchange on April 25, 2007. It is in the process of establishing a 6-billion pesos bond program to issue long-term debt over the next five years.

Walk, Don’t Run: Low-Income Countries Make Small, Local & Microfinance Banks the Mainstay of Their Financial Systems

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Walk, don’t run
Jul 9th 2009
The Economist

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In a guest article Justin Lin, the chief economist at the World Bank, argues that low-income countries need to make small, local banks the mainstay of their financial systems

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FIXING finance is easier if you have a clear idea what it is for. What matters most is setting up a financial sector that can serve the competitive sectors of an economy. In many poorer countries, that means focusing on activities dominated by small-scale manufacturing, farming and services firms. The size and sophistication of financial institutions and markets in the developed world are not appropriate in low-income markets. Small local banks are the best entities for providing financial services to the enterprises and households that are most important in terms of comparative advantage—be they asparagus farmers in Peru, cut-flower companies in Kenya or garment factories in Bangladesh.
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The experiences of countries such as Japan, South Korea and China are telling. Those countries managed to avoid financial crises for long stretches of their development as they evolved from low-income to middle- and high-income countries. It helped greatly that they adhered to simple banking systems (rather than rushing to develop their stockmarkets and integrate into international financial networks) and did not liberalise their capital accounts until they became more advanced. The experience of the United States is also instructive. Hulking national banks and equity markets become important only when a country becomes more advanced and when large capital-intensive firms dominate the economy. The rise of the New York Stock Exchange occurred only after the creation of large-scale industrial firms at the close of the 19th century. For the early labour-intensive phase of America’s economic development, local banks were dominant.

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Governments and the international financial institutions that help them should resist the temptation to strive for “modern” stockmarkets in the early stages of a country’s development. Efforts to create African stockmarkets, for example, have not yet borne much fruit. There are relatively few listed shares in the stockmarkets of sub-Saharan countries. Excluding South Africa, the annual value of traded shares relative to GDP in Africa is below 5% (see chart). In Latin America and the Caribbean the figure is less than 10%; in the former communist countries of Europe and Central Asia it is less than 15%. The comparable figure in 2007 was 79% in Denmark, 207% in Spain and 378% in Britain.
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Stockmarkets are unlikely to be a major force in poor countries in the near future. Microfinance companies and other non-bank financial institutions will play a more important role in financing poor households. And stockmarkets are not the best conduit for providing finance to the small- and medium-sized businesses that characterise the early stages of countries’ economic development. Instead, the banks will be much more critical when it comes to financing companies.
But gigantic banks are not the way to go. In Africa and other parts of the developing world, relatively large foreign banks that were set up in the colonial era have long played a role. But these institutions tend to serve relatively wealthy customers. Smaller domestic banks are much better suited to providing finance to the small businesses that dominate the manufacturing, farming and services sectors in developing countries. There is evidence to suggest that growth is faster in countries where these kinds of banks have larger market shares, in part because of improved financing for just these kind of enterprises.

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It is true that bigger banks can exploit economies of scope and scale that make them more diversified, thus enhancing systemic stability. But local banks are stable in a different way. In America the country’s 7,630 community banks have so far been only mildly affected by the financial crisis as they have continued to deal with the same small, local clients that they have had for years.
Governments in low-income countries should recognise the strategic importance of small, private domestic banks. They should also carry out some fundamental reforms. On the demand side of the equation, entrepreneurs in developing economies need to be able to signal more easily that they are creditworthy.

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Sustained efforts to improve credit and collateral registries offer large pay-offs. Credit registries enable first-time entrepreneurs to document their personal credit histories and share them with lenders. Collateral registries enable lenders to verify that assets such as property and vehicles have not already been pledged by the borrower to secure past loans. Transparent and efficient court procedures allow lenders to seize collateral in the event of loan defaults.

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Step changes
On the supply side, underachieving banks, be they large or small, should be rooted out through merger or liquidation. In many developing countries, supervisory authorities find it difficult to intervene and dispose of troubled banks’ assets quickly. Supervisors in some countries face legal challenges from the owners of such banks, sometimes long after they have left office. All this impedes the efficient exit and entry of institutions that make for a vibrant local banking sector. Failing local banks should be acquired by stronger local banks or liquidated if no such purchaser can be found. After liquidations well-capitalised new banks should be allowed to enter the sector.

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Facilitating the creation of new local banks and improving the methods for intervening to deal with troubled banks will encourage competition and provide healthier incentives. That will help banks promote the private-sector-led growth that will be crucial to recovery from the current financial crisis. Leave the developed markets to worry about how to reform their highly evolved financial systems. To make sustained progress in lifting the weight of the extreme poverty that will remain after the crisis has subsided, low-income countries need to make their financial institutions small and simple.

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VCs and PEs Bet On Microfinance

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CHENNAI: Venture capitalists/PE (private equity) funds are now looking at investing in micro in India. According to industry observers, around Rs 1,000 crore is expected to be invested by venture capitalists/PE funds in the Indian micro finance space (MFIs) this year. In fact, of the 50 private equity deals worth $1 billion in banking and finance in the last 18 months, MFIs alone accounted for 20 deals amounting to $200 million. There are some funds like Aavishkaar and Bellwether Microfinance Fund that primarily invest in MFIs in India.

“Apart from MFI focused funds, other venture capitalists and PE funds who consider opportunities in the space are now adding micro finance to their portfolio,” says Mona Kachhwaha, director, Bellwether.

According to Sameer Mehta, director, Atlas Advisory, “Many venture capitalists are excited about investing in this space now. Many MFIs especially south-based ones have the right professionals and processes in place.”

Early stage investors are keen to enter this space. “We are actively looking at the MFI space and if there is a suitable opportunity, we would invest in this sector,” says Harish Gandhi, executive director, Canaan Partners. The venture fund does early stage investment and primarily focuses in healthcare and technology.

“While each investor has set certain benchmarks, the IRRs (internal rate of returns, which is used to measure and compare the profitability of investments) in the MFI space is 25%-30%,” says Vineet Rai, chief executive officer, Aavishkar. The company recently pumped in equity financing of Rs 45 million into Suryoday Microfinance, a Pune-based NBFC.

Many MFIs have also demonstrated scalability of the business and also boast of a good management structure, essential elements for VC/PE funding. “Micro finance is a high growth sector and there is also a social angle to the business. Plus, investors also have an opportunity for exit,” says Arjun Muralidharan, chief executive officer, Grama Vidiyal.

How 24 Fund Categories Fared

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The Wall Street Journal posted 2009 YTD results for several fund categories.  While microfinance was not named here, it would rank in the top half of investment returns for 2009, and is a clear winner for 2008 (with an exception of the black swan fund).  Click on the link below to see the chart.

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http://online.wsj.com/article/SB10001424052970203872404574264303869260752.html#mod=djemITP

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The first half of 2009 has been a whirlwind of events: unprecedented government efforts to rescue a financial system on the brink, skyrocketing unemployment, dismal corporate earnings and a housing market plagued by defaults and foreclosures.

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Yet even as all those detrimental factors played out, the market started staging a comeback in March. According to Lipper, the average Standard & Poor’s 500-stock index fund gained 15.7% during the second quarter and is now up 3% through June 30.

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Education & Microfinance

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An excellent post from our VP, Caroline Allen.

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http://capturedperspective.com/2009/06/30/to-teach-or-not-to-teach/

Emerging Markets Propel Global Rebound

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A research report from Citigroup Inc. during the quarter forecasted economic growth, not adjusted for inflation, of 5.8% in 2009 in emerging markets, compared with a decline of 4.7% in developed markets.

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“There may be values in developed markets, but they look less attractive, because the growth profile of many emerging-market countries is higher and valuations are similar or cheaper,” said Rob Lutts, chief investment officer at Cabot Money Management in Salem, Mass.

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Microfinance investments are at the forefront of these trends, with low entry valuations, high growth and strong cash flow. An excellent allocation for those looking for emerging market exposure.

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http://online.wsj.com/article/SB124640492586176565-email.html