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Monthly Archives: July 2010

With Squeeze on Credit, Microlending Blossoms – NYT

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By KRISTINA SHEVORY
Published: July 28, 2010

Amanda Keppert is convinced that she would have lost Mandy’s Korner, her hot dog stand in San Jose, Calif., if she had not received a type of loan that is more common in the third world than in the United States.

Amanda Keppert obtained a $6,500 loan that she has three years to pay back and that carries a 6.5 percent interest rate.

Last year, as fewer people ate out and layoffs mounted in Silicon Valley, sales plunged more than 60 percent at the once-thriving Mandy’s Korner. “My business was drowning and I was afraid it would go under,” Ms. Keppert said. While she picked up catering work at a local concert site, it wasn’t enough to pay her expenses. She had invested all of her savings in the business, and she did not want to see it go under.

But her loan applications were rejected repeatedly at banks in San Jose. Then she found Opportunity Fund, a local microlender that has teamed up with Kiva.org, one of the best-known international microlenders. Kiva, which has lent more than $150 million in 53 countries, had just begun a pilot program lending to business owners in the United States.

Through Kiva, Ms. Keppert obtained a $6,500 loan that she has three years to pay back and that carries a 6 percent interest rate. She used the money to buy an ice maker, a generator to save on propane costs and large signs to advertise her business.

Before the economic collapse, microfinance — the granting of very small loans, mostly to poor people — was a concept most closely associated with the developing world. But tight credit and the recession have increased the demand for smaller loans in the United States, giving microlending a higher profile and broadening its appeal. Both Kiva and Grameen Bank, a microfinance group that is based in Bangladesh and was started by Muhammad Yunus, winner of the Nobel Peace Prize for his groundbreaking work in microlending, have widened their lending to Americans.

In addition, last year’s economic stimulus bill granted $54 million to the Small Business Administration for lending and technical assistance to microlenders. Cities like San Francisco and New York have expanded or introduced their own microfinance programs. This year, loan applications at many of the country’s 362 microfinance outfits, some of which have been quietly operating since the 1980s, have more than doubled. Many of the groups expect them to keep rising as other financing streams remain tight for small companies.

“Everyone is knocking on our doors, even those with good credit,” said Galen Gondolfi, a senior loan counselor at Justine Petersen, a microfinance group based in St. Louis.

Since the recession, credit cards are harder to come by, real estate values remain low — making it harder to borrow against home equity — and banks have tightened standards. “The banking system has lots of money, but they don’t have the kinds of applicants that you want to risk someone’s savings for,” said William Dunkelberg, chief economist of the National Federation of Independent Business and chairman of Liberty Bell Bank, based in Evesham, N.J. Small-business owners need to be reminded “that banks are not venture capitalists,” he added. “We’re not in the business of funding great ideas.”

Most banks, large or small, do not bother granting business loans of less than $50,000 because there’s not enough profit to balance the risk. By contrast, microfinance programs in the United States typically lend $35,000 or less to small businesses with five or fewer employees. They charge more than traditional banks, of course, with interest rates ranging from 5 to 18 percent.

Unlike mainstream banks, which focus on an applicant’s credit score, the programs consider passion and commitment to the business. Most require that loan recipients take workshops on money management, marketing and business plans, and some have income caps.

What leads microlenders to work with some of those applicants is a distinct mission. Most are not trying to make a profit; they are trying to alleviate poverty.

“For us to make money, we’d have to charge 15 to 20 percent on our loans, “ said Jeff Reynolds, director of a program in Lyons, Neb., called REAP, which charges a maximum of 7.25 percent.

Early this year, Craig Adams, owner of a wine shop in St. Louis, Vino Vitae, tried to get a $50,000 loan to open an adjoining restaurant and event space. He was turned down first by his longtime bank, which said he had too much debt, and then by a second bank. A local venture capitalist insisted on fees that Mr. Adams was not willing to pay.

He was finally referred to Justine Petersen, and in March, he received a $15,000 loan with a 12 percent interest rate. He has 10 years to repay the loan. He has had to scale back, but he is using the money on architectural plans and inventory. “It’s not the greatest way to go,” said Mr. Adams, 43, “but it’s the only way to go.”

Heavy demand for loans persuaded the Grameen Bank, which has lent $9.4 billion through more than 2,500 of its branches worldwide, to open four new branches in New York and one in Omaha in the last two years, under the name Grameen America.

It also has plans to open offices in San Francisco, Boston, Washington, and Charlotte, N.C. Grameen, a nonprofit, tries to help people who fall below the poverty line and do not have access to mainstream banking, offering first-time loans of as much as $1,500 with an interest rate of 15 percent on a declining balance. In the developing world, established businesses generally receive loans of about $380. Obviously, loans of $1,500 can only go so far in a developed nation, but they can fix up a delivery vehicle. They can also buy a street cart for a vendor, a sewing machine for a tailor or hair dyes for a hairdresser.

Unlike other microlenders, Grameen requires its borrowers to join a group of entrepreneurs that meets weekly. Borrowers are also required to save a percentage of their weekly income — at least $2 — and to pay a portion of their loan’s principal and interest.

Kiva, the organization that backed Ms. Keppert’s hot dog stand, works much like a middleman. It teamed up with microfinance groups that upload profiles of individual entrepreneurs and their loan requests to www.Kiva.org. People browse the profiles, decide which ones, if any, they would like to lend money to, and then Kiva disburses the money through the microlender (the Opportunity Fund in Ms. Keppert’s case). The individual lenders get their money back when a business owner repays the loan.

The pilot program that Ms. Keppert took part in has been available in California and New York since last summer. “It seemed very timely,” said Premal Shah, president of Kiva. “People talk about buying local — why not lend local? It’s a personal stimulus package if you’re the working poor.”

Overseas, Kiva borrowers can seek loans of up to $3,000, while in the United States, borrowers can take out loans of as much as $10,000. Since its American debut, Kiva has helped lend $900,000 to 137 American companies. The average American loan is about $5,600 and has a term of about two years and three months.

“People are compelled to do something in their backyard,” said Gina Harman, president and chief executive of Accion USA, a microlender and partner in Kiva’s American pilot program. “Suddenly, giving $1 to someone in Ghana isn’t as important as giving to someone here.”

A version of this article appeared in print on July 29, 2010, on page B7 of the New York edition.

State of Microfinance Investment Summary: The MicroRate 2010 MIV Survey

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Executive Summary

MicroRate’s 5th annual Survey of microfinance investment vehicles (MIVs) measures the
development of a relatively new category of funds and other intermediaries that mobilize investments in rich countries and channel them to microfinance institutions (MFIs) in the developing world. (These MIVs provide debt to Microfinance Institutions, with equity funds generally not experiencing these market conditions.)

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It is one of the little noticed triumphs of development that large amounts of money are by now flowing from investors in Europe and the USA via MIVs to microfinance institutions in countries like India, Peru or Uganda, to name just a few. Ultimately these funds reach millions of poor people as microcredits, allowing them to become productive and earn a livelihood.
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In 2009, the assets of MIVs grew by $1.2 billion to $6 billion. MIVs thus account for a significant share of funding flows from rich countries directly to the poor. The 2010 MIV Survey shows that investor interest in microfinance funds and similar intermediaries remains strong despite the worldwide recession. MIVs grew by 22% in 2009. But strong interest in microfinance from investors is meeting much weaker demand for funding from microfinance institutions themselves. Microfinance assets – the part of a Fund invested in MFIs – grew only 11% in 2009, which left MIVs with rapidly increasing and ultimately unsustainable levels of liquidity.
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By the end of 2009, too many MIVs were chasing too few investment opportunities; rates had once again dropped to levels where they no longer compensate fully for the risks associated with lending to some of the world’s poorest countries.
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Lending to MFIs by government-owned development institutions (DFIs) is not covered by this Survey, but Microrate has observed, that they strongly increased their lending for microfinance in 2009. DFIs are once again crowding out private funding for microfinance as they did before the global crisis of 2008.
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Survey Overview

In 2008 and 2009, MIV growth has slowed drastically compared to growth rates before the recession. In these two years MIVs grew at the slowest pace since the start of MIV Surveys in 2005. In 2009, investment in Latin America and the Caribbean (LAC, 37% of microfinance assets) eclipsed Eastern Europe and Central Asia (ECA, 35%) as the largest MIV investment region.
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This change indicates that investors moved away from ECA during the financial crisis towards the more mature LAC market. The share of investment in South Asia remained constant in 2009 (9%). East Asia and the Pacific (EAP) showed the highest growth (124%), but the Region only represented 7% of microfinance assets. Sub-Saharan African investment, with 6%, of microfinance assets, also grew at an astonishing rate of 45% in 2009.
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MFI Demand

Growth of MFIs has slowed, but it continues to be quite strong. A sample of MFIs tracked by MicroRate grew by 22% during 2009, compared to 49% in 2007 before the financial crisis erupted. MicroRate has observed that MFIs tend to borrow first from local sources; they resort to MIV funding to cope with peaks in growth. When MFI growth slows as it has in 2008 and 2009, demand for MIV funding decreases disproportionally.
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Investor Demand

Investors’ willingness to place their funds with MIVs remained strong in 2009, despite the effects of the global recession. MIVs raised more money from investors than they were able to place with MFIs. Investors remain optimistic about microfinance compared to other investments.
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Liquidity & Development Institutions

In 2009, MIVs held over $1 billion in liquid assets (17% of MIV assets) compared to $459 million in 2008 (10% of MIV assets). While a certain level of liquidity was prudent to cover redemption requests, the rapid build-up of liquidity in 2009 was unprecedented and reflects weak demand for loan funding from MFIs. A special liquidity facility (the “Microfinance Enhancement Facility-MEF”) announced by two
large DFIs in late 2008 achieved its goal: to assure the microfinance industry that funding would not dry up as a result of turmoil in financial markets. But though well intended, because of poor timing it added to the difficulties of MIVs. By the time the Facility began disbursements in 2009 the feared funding shortage had given way to an oversupply of funds.
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Conclusions & Future Implications

MicroRate believes the current cooling off period could be considered a blessing in disguise: in 2007, just before the crisis erupted, MIVs had grown by nearly 100%. This was not sustainable. The drop in demand for MIV funding in 2009 could be seen as an opportunity for MIVs to strengthen their organizations, and focus on delivering the products and services that microfinance institutions truly require. The main danger posed by excessive liquidity is that it could push some MIVs into relaxing their lending standards. Even though many MIVs expect demand to recover rapidly, it is likely that growth will continue at a slower, more sustainable pace in 2010 than in the past.
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About the MIV Survey

The 2010 MIV Survey marks MicroRate’s the fifth annual MIV Survey tracking the evolution of the sector. The Survey covers 78 of the 88 MIVs (89% response rate) with data collected as of December 31, 2009. The 2010 MicroRate MIV Survey will be released at the end of July 2010, please visit, www.microrate.com to view the presentation when it is published. To receive and advanced copy of the 2010 MIV Survey, please contact Becca Waskey (Becca@microrate.com)
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MicroCred Sells Mexican Operations to Fig Tree/Aspire/Creation

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The MicroCred Group, an investment division of the French PlaNet Finance Group, has completed the sale of its Mexican operations, including assets valued at the euro-equivalent of USD 5 million, to Fig Tree Ventures, a microfinance management company based in the US.
MicroCred Chairman Arnaud Ventura says that, “The completion of this agreement is an important step in our strategy to focus our resources in Africa and in China.” Fig Tree and its investment partner, Creation Investments, will combine MicroCred Mexico with their Mexican
microfinance company, Aspire. As of April, MicroCred Group had 32 branches, 626 staff members, 54,063 active borrowers and an active loan portfolio of USD 33 million. Fig Tree does not report data to the Microfinance Information Exchange (MIX). June 17. 2010

IPO Pits Profit vs. Altruism – WSJ.com

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Indian Microlender Sees Scale in Capitalism; Industry Pioneer Has His Doubt

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By ERIC BELLMAN
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Hyderabad, India
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SKS Microfinance Ltd. moved a step closer to bringing Wall Street to the slums of India. But that also will bring more criticism from microfinance experts who say profits and initial public offerings have no place in the industry.
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SKS won approval from the Securities Exchange Board of India to proceed with an IPO, according to people familiar with the situation. The company and its early investors expect to raise more than $250 million from the deal, which is likely to happen within 30 days and would make SKS the first microlender in India to go public.
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Only a handful of microlenders around the world have made it to the global stock markets, so the SKS deal could encourage other companies in the sector to follow. SKS is the largest microlender in India, with a portfolio of about $1 billion. About $5 billion in microloans were made in the country last year, and the IPO would help SKS borrow money to fuel expansion.
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“The only place you can get the amount of money that is needed to help the poor is in the capital markets,” Vikram Akula, founder and chairman of SKS, said in an interview. “That’s why we are doing this IPO.”
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But as SKS’s executives and investment bankers went on a roadshow to stir up interest in the shares, they stressed how little profit the company makes. The strange sales pitch reflects sensitivity to accusations that SKS is gouging borrowers even as its makes millions of tiny loans to poor families.
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Pioneer of Microlending

Mr. Akula has a decades-long relationship with Nobel Prize winner Muhammad Yunus, the founder of Bangladesh’s Grameen Bank, who is credited with sparking the microfinance revolution. The two men now stand on opposite sides of the question of whether altruism and capitalism can coexist.
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Lending in India’s Villages

Eric Bell/The Wall Street Journal – Women sat in a circle in a weekly meeting of the SKS borrowers in one village in Andhra Pradesh.
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“Microcredit should not be presented as a money-making opportunity. It is an opportunity to make an impact on poor people’s lives,” Mr. Yunus said in an interview. “An IPO gives a wrong message.”
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Mr. Akula, a 41-year-old U.S. citizen and Yale University graduate, launched SKS in 1998 after working in nonprofit organizations in India that tried to help the poor. Even the best-run groups lacked the capital or the organization to meet the needs of the world’s poor, so he decided to build a new kind of microlender that wouldn’t have to depend on government money, grants and charity.
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Before launching the company that would become SKS, Mr. Akula went through the training program at Grameen Bank, telling Mr. Yunus that he wanted to tweak his model to reach more people. “If I remember correctly, he just smiled,” Mr. Akula said.
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Mr. Akula started on his own with a small team that went from village to village in the southern state of Andhra Pradesh. He used the Grameen model, which sets up groups of poor women and lends them as little as $50 to help with small businesses like growing vegetables or running a tea stand.
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He also took cues from McDonald’s Corp. and Starbucks Corp., standardizing training and lending procedures to cut costs and accelerate growth. Employees were paid a decent wage so that Mr. Akula wouldn’t have to rely on volunteers and regional managers from top, rural business schools. And he built in enough profit to make the business appealing to institutional investors.
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The debate about profit’s place in the microlending market exploded in 2007 when Mexican microlender Banco Compartamos SA listed its shares. Its original investors and founders took home millions, sparking accusations that they were profiteering from the poor by sometimes charging more than 80% annual interest.

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Mr. Yunus contends that any microlender charging borrowers more than 15 percentage points above its cost of capital needs to cut costs or profits—and pass the savings on to the poor. SKS charges around 18 percentage points above its cost of capital.
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“Vikram is a very capable young man,” Mr. Yunus said. “But he took a wrong turn when he decided to use microcredit for making money.”
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Mr. Akula said he needs to build in around five percentage points of profit to expand, adding that Mr. Yunus’s expectations are too high because his experience is in markets likes Bangladesh, where he didn’t have to deal with the high costs of reaching remote villages.
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A Subprime Crisis?

Some analysts and investors are worried that the growth being fueled by healthy profits could result in a subprime crisis as competing microlenders give too many loans to poor borrowers who can’t repay them.
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SKS has seven million borrowers, up from 200,000 five years ago. In the same period, the company’s profit growth has averaged more than 200% a year.
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Mr. Akula said SKS could charge interest rates of more than 40%, instead of its current average of 28%, but doesn’t the company needs only enough profit to attract investments and lending for its rapid rollout.
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Even after the IPO, a majority of SKS’s investors will be committed to sticking with the lower-profit model, he said.
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Earlier this year, Mr. Akula sold part of his SKS stake for more than $10 million. He said he isn’t ashamed of the money, adding that rewarding microfinance employees with benefits closer to those in the conventional finance world is part of his business strategy.
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—Arlene Chang contributed to this article.
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