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Archives

Monthly Archives: March 2010

SKS Microfinance Files for IPO – WSJ.com

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MARCH 26, 2010, 4:04 A.M. ET
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SKS Microfinance Files for IPO

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By JOHN SATISH KUMAR

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MUMBAI — SKS Microfinance Ltd. has filed a preliminary prospectus with the Indian capital market regulator to raise about $250 million through a proposed initial public offering, seeking to become the first microfinance company in India to tap public markets for funds in what is considered a much sought after space by private equity investors.

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A study by Intellecap, a social sector advisory firm, said Indian microfinance institutions grew at a compound annual growth rate of 96% from 2007 through 2009, attracting 25 equity deals from April 2008 to September 2009 worth a total of 12.07 billion rupees ($265.8 million).

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Two investment bankers involved in the share sale Friday told Dow Jones Newswires that the company would look to tap the market around June by issuing more than 16.79 million shares.

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“It is a fast-growing sector, (investor) sentiment will be fairly all right, but much depends on the valuations though and they could suffer if they attempt to overprice it. As a theme, it’s hot and financial inclusion is in favor politically as well,” said Saurabh Mukherjea, head of Indian equities at Execution Noble.

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He added that the timing is right since foreign funds have a preference for Indian equities at the moment, but if more than half the money raised is invested back into the business, the size of the issue won’t be a showstopper.

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According to the preliminary prospectus filed Thursday, the issue would consist of a fresh issue of nearly 7.45 million shares and an offer for sale of close to 9.35 million shares by Sequoia Capital India II LLC and SKS Mutual Benefit Trust.

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The issue would constitute 21.6% of the fully diluted post-issue paid-up capital of the company.

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It has appointed Kotak Mahindra Capital Co. Ltd., Citigroup Global Markets India Pvt. Ltd. and Credit Suisse Securities (India) Pvt. Ltd. as the book runners and lead managers to the share sale.

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Microfinance reduces poverty by helping the poor finance small businesses, from farms to snack stalls, in rural India or in urban pockets such as slums where it is difficult to obtain a normal loan.

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According to Sa-Dhan, an industry association based in New Delhi, microfinance has reached more than 20 million clients with a portfolio of 120.28 billion rupees, or $2.64 billion, in 422 districts in the country.

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Still, the total estimated demand for microfinance in India is approximately $51.4 billion, said a 2008 Intellecap report titled Inverting the Pyramid.

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The Government of India’s 2008 Report of the Committee on Financial Sector Reforms, chaired by Raghuram Rajan, known as the Raghuram Report, says only 34.3% of people in the lowest income quartile have savings and only 17.7% have a bank account.

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Factors contributing to such low savings rates and bank account participation are a lack of access to banks in rural India and cultural perceptions of risk among the poor associated with formal banking. In addition, the poor lack access to other formal sources of credit.

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Microfinance, Mega Impact – Harvard Business Review

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Microfinance, Mega Impact

11:21 AM Tuesday March 16, 2010  by Vijay Govindarajan

Microfinance is more than an innovative scheme to provide loans to poor people. At its core, it’s about individual empowerment and dignity.
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This January, I took 50 senior executives from global corporations to India. As part of their learning experience, I invited Pankajam, one of the beneficiaries of Kudumbashree, the innovative microfinance program in South India, to tell us her story. Pankajam comes from tribal India. Tribal people are truly at the bottom of the pyramid — extremely poor and illiterate. Pankajam is no exception. She got a $15 loan ten years ago and Kudumbashree gave her training to start a micro enterprise, lease farming.
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In a flurry of entrepreneurial activity over ten years, Pankajam moved from lease farming into dairy, then poultry, and then expanded her operations in all three. She put one daughter through college; that daughter later became a teacher. Another daughter is now in college, studying to become an accountant, and a third daughter is in high school, with aspirations to be a doctor. Though her initial loan was tiny, Pankajam successfully transformed the lives of her daughters.
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But what was most impressive was how Pankajam herself was transformed.
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In the U.S., we consider an income of $2 a day or less “poverty.” But I define poverty as marginalization: powerless, voiceless, not free. Microfinance gave Pankajam a voice. Pankajam answered all the questions of the executives with a great deal of confidence. I confess she made better eye contact with the participants than do our Tuck MBAs! No doubt Kudumbashree gave Pankajam financial freedom, but it did much more. The last question that participants asked Pankajam was, “You have been in microfinance for 10 years. If you were to pick the number one good thing that happened to you, what would that be?” Pankajam hesitated and then said, “Perhaps the best thing is, without microfinance, Professor Govindarajan would not have invited me to come and address all of you today.” Microfinance gave Pankajam an identity.
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There are many Americans who make much more than $2 per day and still feel marginalized. That is the reason Dr. Muhammad Yunus, the “father” of microfinance, won the Nobel Prize — not because microfinance is an ingenious finance scheme, but because it gave dignity and voice to poor people.
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Since its beginning with Dr. Yunus in Bangladesh, the microcredit banking model has spread to more than 100 countries. Today, it has gained a foothold in the U.S. among poor neighborhoods in New York City. This is reverse innovation: innovations from poor countries that can transform people in rich countries.
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I asked participants to consider the following: Had Pankajam’s father received a $15 loan, could she be a doctor, an accountant, or a teacher? Whose fault is it that Pankajam is illiterate? Is it her fault? She’s plenty smart. She was certainly able to handle all the questions from senior executives from Fortune 500 companies with a great deal of ease.
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Who causes poverty in this world? Poverty is not caused by poor people; it is imposed on them. It is an institutional failure: we deny poor people access to education, finance, and health. In some sense, therefore, all of us are collectively responsible for building institutions that will bring marginalized individuals into the mainstream.
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Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business at the Tuck School of Business at Dartmouth. He writes a blog and a newsletter on innovation and execution.
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Aravind: How low-cost eye care can be world-class

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India’s revolutionary Aravind Eye Care System has given sight to millions. Thulasiraj Ravilla looks at the ingenious approach that drives its treatment costs down and quality up, and why its methods should trigger a re-think of all human services.  Aravind Eye Care case study is one of the best case studies that can be applied to solve many the problems from education, nutrition, shelter, employment for those living at the bottom of the economic pyramid.

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The Girl Effect & The Nike Foundation

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The Girl Effect: The powerful social and economic change brought about when girls have the opportunity to participate in their society.
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WHY GIRLS?
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Because when adolescent girls in the developing world have a chance, they can be the most powerful force of change for themselves, their families, communities and nations.
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But while those 600 million girls are the most likely agents of change, they are invisible to their societies and the world.
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From the Nike Foundation
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Microfinance Shows Strong Equity Valuations Despite Crisis

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Microfinance Shows Strong Equity Valuations Despite Crisis

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WASHINGTON, March 3 /PRNewswire-USNewswire/ — Sustained demand for microfinance equity, in the face of the worst financial crisis in decades, continued to propel valuations in this sector higher throughout 2009 and the medium-term outlook remains positive, according to a new report by CGAP, a microfinance group based at the World Bank, and J.P. Morgan.
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“Microfinance institutions encountered the harshest market conditions in more than a decade during 2009, with most showing a clear deterioration in asset quality and profitability,” said Xavier Reille of CGAP, co-author of the report. “And yet most MFIs continued to maintain strong reserve and capitalization levels, and investors continued to show faith in the sector.”
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The CGAP/J.P. Morgan report shows that equity valuations continued to rise across all regions in 2009, with MFIs in the private equity market trading at a median of 2.1 times book value – a 62 percent increase since 2007. Public investors significantly increased their commitments to microfinance last year, and the private sector continued to establish new microfinance equity vehicles, including new funds from Blue Orchard, Triodos, and Developing World Markets.
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“The investor community, both public and private, continues to be interested in microfinance, though we think that they are becoming more selective,” said Nick O’Donohoe, Global Head of Research for J.P. Morgan and co-author of the report.
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The relative youth of the microfinance equity market means there are few established performance benchmarks, making assessments difficult. However, the CGAP/J.P. Morgan report is bridging this gap by drawing on analysis of 200 private equity transactions between 2005 and 2009 and trading information on eight publicly-listed low-income financial institutions to assess the strong performance of the microfinance equity market.
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Indian MFIs are continuing to attract the strongest investor interest, comprising 30% of all microfinance equity transactions in 2009. Indeed, equity valuations for Indian MFIs are trading at nearly six times their book value, or three times the global median, a performance the CGAP/J.P. Morgan analysis suggests is not sustainable over the longer term.
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The strength of MFI equity valuations masks the impact of the global financial crisis on the sector. The CGAP/J.P. Morgan report shows that loan portfolio quality began to deteriorate rapidly after January 2009, with past due loans over 30 days jumping to a median of 4.7 percent from 2.2 percent over the first five months of 2009 although it has moderated since then and thus far remained stable in 2010. The effects of the downturn were far from uniform however, with MFIs in South Asia and South America showing few signs of impact, while others in Eastern Europe and Central Asia particularly were more affected. However, very few MFI failures have been reported and most institutions remain well capitalized with equity ratio unchanged in the 18 to 20% range.
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Judging by the performance of listed low-income financial institutions, the most comparable listed vehicles to MFIs, investors believe the sector will emerge from the crisis in good shape. These stocks have strongly outperformed emerging market banks (as measured by the MSCI Emerging Markets Bank Index) and by the end of 2009, had rebounded to pre-crisis levels or new historical peaks.
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The CGAP/J.P. Morgan report argues that the decline in asset quality at MFIs will likely slow, but not curb, growth in their asset base, while placing a focus on improved risk management. Valuations likely will continue to be underpinned by continuing public and commercial sector demand in the medium-term, further buoyed by local bank acquisitions of MFIs and an expected initial public offering by SKS, India’s largest MFI – in 2010.
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About CGAP
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CGAP (The Consultative Group to Assist the Poor) is the world’s leading resource for the advancement of microfinance. CGAP provides the financial industry, governments and investors with objective information, expert opinion, and innovative solutions to effectively expand access to finance for poor people around the world. More information:  www.cgap.org
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About J.P. Morgan
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J.P. Morgan is the investment banking arm of JPMorgan Chase & Co. (NYSE: JPM), a leading global financial services firm with assets of $2.0 trillion and operations in more than 60 countries. JPMorgan Chase is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management and private equity. The firm serves millions of consumers in the United States and many of the world’s most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands. Information about J.P. Morgan is available at www.jpmorgan.com.
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Compartamos Banco, a Mexican Microfinance Bank, Reports 33% Increases in Net Income and Total Loan Portfolio for 2009

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MICROCAPITAL BRIEF: Compartamos Banco, a Mexican Microfinance Bank, Reports 33% Increases in Net Income and Total Loan Portfolio for 2009

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Posted by Eric McKay in Category: Latin America at 12:25 am

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Compartamos Banco, a Mexican microfinance bank, reports that both its net income and its total loan portfolio increased by 33 percent in 2009. Fernando Alvarez Toca, the CEO of Compartamos Banco, reflected upon 2009 as “one of the most challenging years in Compartamos’ history” due to the global downturn.
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In an interview with the Wall Street Journal, Mr. Toca said that Compartamos Banco plans to continue to grow organically within Mexico, but it also has an internal team evaluating other microfinance institutions in Latin America as potential acquisition targets. Patricio Diez de Bonilla, Compartamos Banco’s director of treasury and financing, said that the bank hopes to expand its loan portfolio by MXN 1.8 billion (the equivalent of USD 140 million) in 2010 to 9.4 billion (the equivalent of USD 740 million).
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About Compartamos Banco
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Compartamos Banco is a microfinance bank based in Mexico. It was founded in 1990. It offers both group and individual loans in rural and urban areas. Compartamos Banco provides small loans to low-income Mexican individuals and business owners, such as craft manufacturers, food vendors and other small businesses. It also offers voluntary savings, insurance, and loans specifically for home improvement. The company made its initial public offering (IPO) in 2007 on the New York and Mexican stock exchanges in a transaction worth USD 467 million, and, as of December 31, 2009, has a total loan portfolio of MXN 7.6 billion (the equivalent of USD 591 million). For more information see the MicroCapital Profile on Compartamos Banco linked below.
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By Eric McKay, Research Assistant
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Microfinance’s Midlife Crisis – WSJ

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Microfinance’s Midlife Crisis

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MARCH 1, 2010
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Companies that provide banking services in developing countries are attracting private investment. But is the industry losing sight of its mission to alleviate poverty?

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By JULIAN EVANS

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From humble beginnings, microfinance—a system of providing tiny loans and savings accounts to the poor—has grown into a global industry attracting the interest of large multinational banks.
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But the commercialization of the industry has sparked a fierce debate. Profit advocates highlight improved access to foreign capital and expertise; traditionalists say microfinance companies are in danger of becoming little better than predatory moneylenders.
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There is little doubt that microfinance is now big money. In 2008 it attracted $14.8 billion in foreign capital, up 24% from the previous year. For the first time, the majority of the money came from private investors—including pension schemes and private-equity funds—rather than governments, according to the World Bank.
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Deluge of Money

This deluge of private capital has freed many microfinance institutions from their reliance on donor funding. As a result some have switched from a not-for-profit strategy to a money-making business model. But there are concerns that such institutions are becoming distracted by the need to reward investors. Some microfinance banks have generated returns on equity of 50%; others have flooded the market with poorly structured debt.
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[MICROFINC_PHOTO] Hand in Hand

Indian sculptor Padmavathi received microloans from Hand in Hand to develop her and her husband’s businesses.

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Maya Prabhu, head of philanthropy at U.K. private bank Coutts & Co., who advises wealthy clients on investments in microfinance, says: “There’s a definite risk of new shareholders switching microfinance institutions’ mission from alleviating poverty to chasing volumes and profits.”
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Marilou van Golstein Brouwers, the head of microfinance investments at Triodos Bank, says the influx of so much private capital into microfinance is a mixed blessing.
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On the one hand, private capital helps finance the growth of the sector and expand its reach. “At the same time, if the mission of microfinance institutions is only to maximize profit, then the social goal of helping people out of poverty is not reached,” Ms. van Golstein Brouwers says. “The problem is that a lot of the new private investors in the sector see it mainly as a way of making a lot of money.”
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Nowhere is investors’ appetite for high, quick returns more apparent than in India. Between 2003 and 2008 the Indian microfinance market grew at a compound annual rate of 90%. It attracted around $200 million through 27 private-equity investments in 2009 alone, according to consultancy Venture Intelligence. This included money from blue-chip names such as Silicon Valley Bank and Sequoia Capital.
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In January this year, U.S. private-equity fund Sequoia Capital paid just under $10 million for a 10% stake in Equitas, a leading Indian microfinance institution. Kalpathi, a local private-equity firm, bought the same stake only two years earlier for $750,000.
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Here Come the IPOs

Some microfinance banks, typically backed by venture capital, are considering stock-market entry. SKS, the largest microfinance company in India and the fifth-largest in the world, is expected to be the first Indian microfinance institution to launch an initial public offering.

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[MICROFINANCE]

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Paolo Brichetti is chief executive of MicroVentures, a fund that invests in the equity of microfinance institutions around the world, including five in India: Equitas, Sahayata, Grameen Koota, MV Microfin and BSS. “We’re helping to prepare some of them for initial public offerings in the next few years,” he says. “They are all growing on average by 50% to 70% a year, and some of them are doubling their clients every year. They could each raise $100 million through initial public offering.”
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Investors are attracted by they fact that returns on microfinance investments are reasonably uncorrelated to other asset classes. They have also produced positive returns even in volatile times.
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According to the World Bank, funds have enjoyed average annual returns of 6.3% for investing in the debt of microfinance institutions and 12.5% for investing in their equity. (However, most private-equity funds have a short track record in this area and have made very few exits.)
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On average, funds even managed to produce positive returns during the height of the credit crisis in 2008 when emerging-market bond funds fell in value by 12%. Globally, microfinance also has an average non-performing loan rate of just 1%.
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Trouble in Morocco

However, the market was not totally immune from the credit crisis. In Morocco, which was one of the fastest-growing microfinance markets, the percentage of loans for which a monthly payment was missed increased from 1.9% in 2007 to 10% in June 2009.
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At Zakoura, one of Morocco’s biggest microfinance banks, the rate shot up to over 30% and it was forced to merge with a state-owned microfinance institution, Fondation des Banques Populaires, in the middle of last year.
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The microfinance market in Bosnia and Herzegovina has been growing at rates of around 60% a year. The average percentage of loan portfolios for which a monthly payment was missed rose from 2% in 2008 to 8% in 2009. But as yet, no Bosnian microfinance institutions have gone bankrupt, missed payments on their debt or sought support from the government.
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Xavier Reille, an analyst at Consultative Group to Assist the Poor, the World Bank’s microfinance analysis division, says problems were caused by over-lenient lending policies and poor information systems. But he adds that the microfinance industry is improving and a credit bureau is being set up to share information.
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Fears of Overheating

The rapid growth in India is also fueling fears that the market could overheat. Both the profits and loan volumes of the biggest firms are growing rapidly. The loan book of SKS, for example, grew from $21 million in March 2006 to $790 million in September 2009, while return on equity went from 3% to 15%.
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Ms. van Golstein Brouwers of Triodos Bank, which has around $200 million invested in microfinance institutions, says: “Over the past year, particularly in India, there’s been a real focus on strong growth, so loans have been extended very easily. There’s a risk of making too many loans and getting people over-indebted.”
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Some parts of India are in danger of becoming over-saturated with microloans. Balali Iyer, vice-president of microfinance at HSBC, says: “Indian microfinance institutions are aware that over-heating could become a problem, but they are working together to ensure it doesn’t.”
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Prashant Thakker, global business head of microfinance at Standard Chartered, which has lent over $500 million to microfinance institutions in Asia and Africa in the last three years, acknowledges that some of the larger players in India are growing very fast.
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But he also notes that microfinance has still only penetrated 10% of the Indian market. He believes there is a long way to go before demands for financial access are met.
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“A lot of the growth is into new regions,” says Mr. Thakker. “And having access to private debt or equity capital helps make microfinance institutions more sustainable, rather than relying only on donor finance, which is unpredictable.”
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Losing Their Focus?

Nonetheless, some experts fear that microfinance institutions lose track of their purpose when they become beholden to institutional investors.
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One area of contention is interest-rate charges. Compartamos, the largest microfinance institution in Mexico, raised $400 million from an initial public offering in 2007. It charges interest rates of around 85%, while making a return on equity of around 40%. The average interest rate charged by microfinance institutions globally is 26%.
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Compartamos’ co-founder and executive vice-president, Carlos Danel, accepts that rates are higher in Mexico than in other countries but says this is because the loans are typically much smaller.
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“We could push people to borrow bigger loans, but we don’t believe in doing that,” he says. “In the four years since we’ve gone public our rates have gone down 10%, and we offer by far the lowest rates in the Mexican market. Taking the company public raises the bar in terms of performance, transparency and accountability.”
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The Revolution Has Gone Mobile

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The Revolution Has Gone Mobile

New York Times
Published: February 19, 2010

By mid-2010, there will be 6.8 billion humans on this planet. According to United Nations estimates, there also will be five billion cellphone subscriptions. These are astonishing numbers. What is still more astonishing, and hopeful, is the breadth of change this number reflects.

The United Nations says that right now 80 percent of the world’s population has available cell coverage. The fastest adoption of cellphone use is occurring in some of the world’s poorest places.

Cellphones are cheap, their batteries can be easily recharged with solar power and they are creating nothing short of a revolution: knitting rural communities together, sowing information, and altering the most basic assumptions about health care and finance. Anyone who has traveled to Africa recently can vouch for these changes.

In nearly every sizable town or city, there are dozens of tiny kiosks where phones can be rented or repaired and subscriptions can be purchased. In regions where communications used to be nearly impossible, cellphones are essential to social innovation. This means everything from microfinance and electronic credit, via SMS, to better networking among health care workers and their patients.

Another revolution is following close on the heels of the cellphone revolution. This year, the number of mobile broadband subscribers — people who access the Internet via laptops or mobile phones — is forecast to pass one billion, up from 600 million at the end of 2009. That number will almost surely skyrocket, too — and the developed world should be doing everything it can to encourage it.

That means increasing the reach and lowering the cost of broadband and pressing for political and commercial openness across the Internet. Mobile communication and access to digital information are powerful development tools and aids to self-sufficiency. And we, in turn, have a lot to learn from the innovative way those tools are being used around the world.