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Monthly Archives: September 2010

SKS Microfinance Q2 net jumps three-fold

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Press Trust of India, September 28, 2010 (New Delhi)

SKS Microfinance Ltd on Tuesday recorded over three-fold jump in profit at Rs. 67 crore for the the quarter ended June 30, 2010. The microfinance institution had a net profit of Rs. 18 crore in the same quarter a year ago.

The total income increased 82 per cent to Rs. 314 crore, compared with Rs. 172 crore as on June 30, 2009, SKS Microfinance said in a statement.

The gross loan portfolio of the company was Rs. 4,578 crore as on June 30, 2010, it said.

Commenting on the results, SKS Microfinance chairman Vikram Akula said the true measurement of growth for SKS is the 73 lakh poor households who have been empowered socio-economically. The network expanded to 2,266 branches as on June 30, 2010, from 1,436 branches as on June 30, 2009.

Microfinace Beats Blue Chips

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Editor’s Note: Garrett Wyse co-authored a feature story in the December issue of Microfinance Focus Magazine titled: Microfinance & Philanthropy, the New Realities. The author’s (Garrett Wyse and Jerome Peloquin) predicted that, as a result of the financial crisis, an investment in a developing country would be more secure and more profitable than a traditional “blue chip,” stock. In this follow up piece, “Microfinance Beats Blue Chips” Mr. Wyse demonstrates proof positive of his predictions.

The report for the fund’s performance dropped into my mail box on Jan 13th. With all the news in the media about various funds performance, the meltdown of various financial instruments markets and the imminent recession in most of the world, I was far from confident about my portfolios performance.

Shares I had bought a number of years back had been performing exactly according to the funds predictions for the past five years, the length of time I have had the shares. Well to be perfectly honest I only have one share, in a microfinance investment fund called Blue Orchard (even this was in a bit of trouble as the fund is managed on a day to day basis by Dexia the EU bank backed by two governments and with a strong pedigree in banking. Alas they were also feeling the pinch, the government had to help prop up the bank, but my fund within the bank was solid, so there was the chance that the contagion from the toxic debts may overwhelm my fund also. Which would have been a double tragedy, because the ultimate people responsible for paying into my fund and keeping its price up are none other than the poorest people in the world).

My money is invested in 99 MFI’s in 30 countries from Argentina to Cameroon and Cambodia to Ukraine, and just about everywhere in between. Since the first of Blue Orchards funds’ inception in 1998, the fund managers stated goal was that the fund would return 200 basis points above LIBOR (six months rate), The London Interbank Offered Rate (a combination of a basket of interest rates). LIBOR itself has fallen in recent months and so I was fully aware that my return would fall in line with this, but would it be able to maintain its targeted return? I need not have worried, my 2008 return was, wait for it, 5.67%, the last three years 5.17%, and the last five years 4.99%. The particular fund I have invested in, the Euro denominated one, started in April 2003 has return 27.04% since its inception.

The Dexia Microcredit fund now invests in MFI’s with over 7.5 million clients let me say that again, 7 and one half million people have access to the funds that I invest, who otherwise would not. In short I am part of a fund facilitating access to credit for up to 7.5 million people at any given time and getting a healthy return annually on that investment, helping people to help themselves and doing very well financially simultaneously.

The original Dexia fund denominated in US$ has fared even better since its inception in September 1998 returning 5.94% per year over the past five years and 65.36 % since inception. If we consider the performance of investment funds, pension funds and property portfolios over the past year, and likely the next few years then there appears to be a compelling argument for these funds to put their client’s money where it is safest, offers a stable return and has a track record of doing so in the toughest of times.

dfe Partners and Creation Investments Establish CEE Microfinance Holdings, as a Regional Holding Company and Complete 3 Acquisitions

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Combined Talent from Financial Services and Microfinance Join to Expand Microfinance Services Throughout Central and Eastern Europe

DATELINE, September 23rd, 2010 – CEE Microfinance Holdings, N.V., a new, private equity backed, Dutch holding company owned by the Balkan Financial Sector Equity Fund, managed by the Swiss based dfe partners, and Creation Investments Social Ventures Fund I, managed by US based Creation Investments Capital Management, announced today it purchased three microfinance institutions located in Central and Eastern Europe. CEE Microfinance Holdings has a newly recruited management team which combines talent from the financial services industry both inside and outside the microfinance sector.

The three microfinance institutions involved in the transaction are located in Albania, Poland, and Russia and purchased from, U.S. based Opportunity Transformation Investments Inc., UK based Opportunity Microfinance Investments Ltd and FORA Fund (Russia).    The first institution, Opportunity Albania is a non-bank financial institution currently serving more than 16,000 clients from its 23 branches, with its headquarters in Tirana, Albania.  The second, Inicjatywa Mikro is a non-bank financial institution currently serving more than 2,000 customers, with its headquarters in Krakow, Poland. The third, FORUS is a registered bank in Russia currently serving more than 10,000 customers, with its headquarters in Nizhniy Novgorod, Russia and a 42 branch network.

“The successful completion of this transaction opens a new chapter for our customers, our employees, our businesses, and our investors and lenders.” said Pieter van Groos, the chief executive officer of the newly established CEE Microfinance.  “We are convinced that these businesses have tremendous potential to expand accessible and affordable financial services to both current and new customers that are underserved by traditional commercial banks and finance institutions. These acquisitions also provide a starting point for further acquisitions and create scale in the region.” Pieter van Groos was previously CEO of GE Money Bank in the Czech & Slovak Republics, and prior to this worked for McKinsey and Exxon. In addition, Koen Wasmus joins as COO of CEE Microfinance. Wasmus was previously CEO of ProCredit in Kosovo and held other management positions within ProCredit. Further appointments to the CEE Microfinance team will be announced.

Clive Moody, Managing Partner of dfe partners, who negotiated and led the transaction said, “The challenges for success in the maturing microfinance sector in Central and Eastern Europe have and will continue to change. What we see as critical to the future of CEE Microfinance is fresh vision combining the capabilities of experienced management with active shareholders who promote strong corporate governance and provide much needed access to capital. We believe there is much to be gained through developing a common business model across the three institutions that will then serve as a template for further country acquisitions.”

“The formation of CEE Microfinance with presence across three territories, including the banking license in Russia, allowed us to recruit a level of expertise to manage these operations that combines the best practices not only from the microfinance world, but also from the wider financial services environment,” said Patrick Fisher, CEO of Creation Investments. “Pieter and Koen individually have extensive experience, that combined provides a management strength that is the essential ingredient of a successful microfinance business in Central and Eastern Europe for the next decade”.

About CEE Microfinance Holdings, N.V.

CEE Microfinance Holdings, N.V. is a Dutch public limited liability company.  CEE Microfinance is involved in the business of owning microfinance and small and medium enterprise lending institutions in unbanked and underbanked markets and client segments in Central and Eastern Europe.  CEE Microfinance is owned by a Dutch Coöperatief formed by the Balkan Financial Sector Equity Fund CV and Creation Investments Social Ventures Fund I.  The Balkan Fund is a Netherlands investment fund, managed by Development Finance Equity Partners AG, Switzerland.  The Creation Social Ventures Fund is a U.S. investment fund, managed by Creation Investments Capital Management, LLC.

For more information, visit http://www.dfe-partners.com/ or http://www.creationinvestments.com/.

Or contact:

Clive Moody, Managing Partner, dfe partners AG
Phone:   +44 1962 850736
Mobile:  +44 7866 565588
cmoody@dfe-partners.com

Patrick Fisher, Chief Executive Officer, Creation Investments Capital Management, LLC

Phone: +1.312.784.3980
Mobile: +1.773.960.8520
patrick.fisher@creationinvestments.com

Reframing the Poverty Problem

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Marketing can help address social ills

Based on the Research of Bobby J. Calder , Richard Kolsky And Maria Flores Letelier

With billions of people living at the bottom of the income pyramid, some on less than $2.50 a day, the problem of poverty is as widespread as it is pressing. There are nearly as many plans to tackle poverty as there are charitable organizations addressing the problem. But one of the latest is so vastly different that is has some real possibility: What if poverty could be approached as a marketing opportunity rather than a social problem? Bobby Calder and his colleagues argue that it should.

“Companies often approach issues like poverty as social problems more than as marketing opportunities,” says Calder, a professor of marketing at the Kellogg School of Management, “but the so-called bottom of the pyramid provides a vast marketing opportunity for innovative, socially-minded companies.”

It is not breakthrough technological innovations that are needed to penetrate such markets, but rather novel marketing approaches that turn social problems on their head, allowing companies to make money while improving people’s lives and helping them rise out of poverty, explain Calder and his co-authors Richard Kolsky, a lecturer at the Kellogg School, and Maria Flores Letelier, a Kellogg School MBA alumnus.

The so-called bottom of the pyramid provides a vast marketing opportunity for innovative, socially-minded companies.

Over the past decade, many companies have taken a stand to address social problems such as poverty. Typically, such initiatives unfold in the form of corporate social responsibility (CSR) programs. “CSR programs can take many different forms, but they are all based on the idea to make money while doing good by engaging in altruistic initiatives” Calder says. Thus, most of the time CSR programs are executed with a hands-off approach, by simply providing monetary funding to socially worthy initiatives such as Pepsi’s Refresh Project. Less frequently, CSR practices are embedded in a company’s core business operations, such as Nike’s audits of contract factories overseas. Either way, CSR programs typically operate only on the sidelines of a company’s business.

“By actually changing its business model,” Calder argues, “a company can bring CSR initiatives to the next level,” opening up markets where price, distribution challenges, or other barriers have made entry difficult if not impossible. Most CSR programs are executed in a top-down way, whereby a company offers a standardized solution to a social problem without altering its business model. However, by marketing to the bottom of the income pyramid like any other promising sector, companies can create new consumers which in turn allows for profit and improves people’s standard of living.

Patrimonio Hoy
Cemex, a Mexican cement manufacturer with a $15 billion market capitalization, developed an innovative CSR program named Patrimonio Hoy (Patrimony Today). The program aims to reduce the Mexican housing deficit—which has left more than twenty million people with inadequate shelter—while also benefiting CEMEX by stimulating consumer demand for housing materials in the low-income urban slums of Mexico. The families in these communities generally cannot afford to build a house all at once, but rather construct their own homes piecemeal by adding a room at a time.

At first CEMEX attempted to market smaller bags of cement to low-income urban families as a more affordable solution. When the product failed to catch on, CEMEX realized that it needed to drastically rethink its business model, rather than its products. To do so, it needed to understand not only how people were living but also how they thought about construction. For more than a year, CEMEX employees and consultants immersed themselves in the urban slum of Mesa Colorada in the state of Jalisco, where they converted a tortilla shop into a garden office and conducted a series of learning experiments and in-depth interviews.

They discovered that a significant barrier to building homes in the area to building was the inability to save enough money to collect all of the materials required. The families explained that committing to long-term projects was difficult because of unstable employment in the area. They would “rather not tempt fate” by undertaking a large financial commitment. Moreover, even when they tried to purchase construction materials, Patrimonio Hoy participants had nowhere to store them. Theft is common in such impoverished neighborhoods, and weather conditions often spoil the products before they can be used.

Additionally, some residents acknowledged that even when they received larger sums of money, such as year-end bonuses, they often spent the money preparing for festive celebrations or other, more immediately gratifying things.

The ultimate barrier to home construction, however, seemed to reside in one of the most deeply rooted values of these people: their communal culture. Given their traditional values involving tight communal relationships between extended family members and friendship circles, the families generally thought first of using their money for more social activities. CEMEX came to understand that this cultural barrier was the key to changing people’s attitudes toward home construction.

Reframing the Task of Homebuilding
CEMEX recognized the practical and cultural barriers that were preventing families from building homes and developed their business model accordingly. The company framed the goal of building a home as building a sturdy, long-lasting patrimony that can be passed down to the next generation. To create a sense of partnership in the construction process, CEMEX organized low-income families into self-financing cells where members were able to share frustrations and successes with other members of the community while at the same time receiving much needed social support. Finally, to overcome the practical barriers, CEMEX implemented a structured system that provided both products and expertise, allowing families to quickly add a room.

Participants in Patrimonio Hoy pay about $14 a week for seventy weeks. They receive consultations with CEMEX architects and scheduled deliveries of materials that coincide with the building phases. All building material prices are kept stable for the life of the project. This shields consumers from sudden price hikes and supply shortages that are common in free markets. Moreover, if work becomes scarce, consumers can store their materials in a secure CEMEX facility. Consumers found that the program enabled them to build homes more cheaply and three times faster than they could on their own. Thus far, more than 70,000 Mexican families have completed their projects.

CEMEX’s success can be partly attributed to their novel approach. “The process involved complete immersion into the community’s culture so that the company could develop an understanding of the population from the inside out, rather than the other way around,” Calder says. Setting up shop in their target market brought to light the reasons why conventional marketing approaches had failed in the area. Calder and his co-authors conclude that if companies can market to the bottom of the income pyramid in ways that reflect the culture and values of their audience, the companies will be rewarded with new markets and new consumers.

Related content:

Interview with Professor Bobby Calder:  Reframing the Poverty Problem. Download Audio Interview (MP3).

Serb, Chris. 2010. Leading the Field. Thoroughly revised for 2010, the second edition of Kellogg on Marketing offers the latest insights from the discipline’s top thinkers. Kellogg School of Management Web page, August 14.

Wealth Firms Lag Client Buzz over Microloans

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Article published on September 2, 2010
By Tom Stabile

Budding client demand for microfinance and other “impact investments” has yet to translate into products at big brokerages and private banks. A few advisors, managers and consultants are serving up limited fare to the hungriest clients, but few wealth management firms have scratched the surface of what observers say is fertile ground.

A big stumbling block at this early juncture is that while microfinance itself – the offering of very small, short-term loans to entrepreneurs in under-developed regions – is a well-established poverty-fighting concept, it is still novel as an investment where clients buy securities that ultimately fund these loans, expecting a return. Microfinance is one of various examples of impact or “mission-based” investments that usually promise a quantifiable social benefit in exchange for a “sub-market” investment return.

The newness of these investing options is “an understandable barrier,” says Amit Bouri, director of strategy and development for the Global Impact Investing Network, a nonprofit trying to build the sector’s infrastructure. “The early focus was on pioneer high-net-worth and institutional investors who could handle early adopter risk and the high transaction and administrative costs,” Bouri says.

For now, participation from private banks and brokerages is scant, in part because many of today’s impact investments don’t fit into their current platforms. “The amount of money to build [new] platforms is prohibitive,” says Taylor Jordan, managing director of San Francisco’s Imprint Capital Advisors.

And though innovative platforms such as PayPal’s MicroPlace offer direct access to microfinance investments, they also don’t fit into the standard brokerage business model. “Most larger institutions aren’t incentivized to go out on a limb on this yet – they need a higher client demand threshold before it makes economic sense to them,” Jordan adds.

Clients do seem interested, however. The recent “Money for Good” report – compiled by several groups led by San Francisco’s Hope Consulting – polled 4,000 individuals, including 2,000 with annual income above $300,000, and found nearly 50% expressing interest in impact investing.

The survey found 12% of those with incomes higher than $1 million saying they would slot more than $100,000 to impact investments, along with 6% of those earning $750,000 to $1 million. About a third of all respondents with more than $500,000 in income said they would invest $10,000 to $100,000. The report said those levels contributed to an estimated total “market opportunity” for impact investments of more than $120 billion.

“There is a great opportunity for the wealth management firms and private banks to step up and fill this void,” Bouri says. “There is a significant opportunity for the first movers.”

It’s also an opening for asset managers, and Bouri says boutiques should lead the way.

Still, far more professionals are versed in philanthropic advice than impact investing, says Debra Wetherby, CEO of San Francisco’s Wetherby Asset Management, an independent advisor with $3.3 billion in assets. “It’s still pretty early,” she adds.

Indeed, three of the four market-leading wirehouses – Morgan Stanley Smith Barney, Merrill Lynch, and Wells Fargo Advisors – did not have representatives available to comment on microfinance investing. Only UBS Wealth Management Americas officials addressed the topic.

Not surprisingly, little distribution infrastructure exists. One Morgan Stanley Smith Barney advisor who requested anonymity says there are virtually no microfinance investing options through standard platforms at the brokerage, leaving interested advisors to “do the work themselves.” But the advisor says it’s understandable because today’s microfinance options aren’t suited for wirehouse due diligence requirements.

The advisor also says the products must be ready for inflows from the brokerage’s 18,000 advisors. “You can raise pretty serious money, so you have to be able to say what you are going to do with all of it,” the advisor says.

And then there is the thorny question of how advisors would be compensated. “Until you can find a model that can pay the distributor and compensate the advisor for adding an allocation to the sector, it would be done on a very ad hoc basis, and there would be very little growth,” the advisor says.

But until firms build platforms and infrastructure, most advisors will have trouble educating themselves and clients about these investing options, Bouri says.

A few players are trying to break the mold. One is the MicroPlace online brokerage platform. It offers investments in interest-paying notes issued by six different intermediaries that lend the capital to microfinance institutions, which in turn extend loans to micro-entrepreneurs in under-developed regions. The platform is straightforward, letting users invest as little as $20 through their PayPal accounts while offering flexibility to choose among multiple returns and payout terms, or across a slate of 45 microfinance projects in 35 countries.

But MicroPlace hasn’t found the path to advisors, in part because many brokerage firms haven’t focused on the infrastructure issues, says Ashwini Narayanan, its general manager. “We just hired someone to help us work with the advisor market,” she adds. “We’ll evolve to figure out how to use that distribution channel.”

Imprint and a few other firms are working on another front as due diligence consultants specializing in impact investments. Imprint has served institutional clients for several years, but Jordan says it recently signed on Wetherby as its first wealth management client. “We do see it as a promising market,” he adds.

UBS has spent time looking at providers such as MicroPlace, but has yet to find a clean fit, especially to handle scale, says Mark Sloss, CIO for the wirehouse’s wealth management advice and platforms unit.

“We’re at a place now where we’re seeing a push and a pull – our clients are asking for this and our advisors are asking for it, but you’re hearing about the microcredit funds being stressed even with current levels of interest and capital,” Sloss says.

UBS offers impact investing to clients through “community investment” fixed income notes from the Calvert Funds that are customized to target social benefits, Sloss says.

Advisors intent on pursuing microfinance investing are doing most of the legwork themselves, says Matt Talbot, partner at Seattle’s Bristlecone Advisors, a multi-family office with about $800 million in assets.

“We have been [sparked] by a handful of our clients asking for this type of service from us,” Talbot adds. It has led the firm to bolster internal manager research for the specialty.

Wetherby, too, says client interest spurred her firm’s decision to hire Imprint.

Credible research is important in a market where product development is young. Talbot says while “the universe is far more robust than five or 10 years ago,” it’s too early to create a diversified portfolio of impact investing products.

Bouri says impact investing products still have to clear two hurdles as a group – greater standardization that can lower transaction costs, and tailoring of available products to conventional practices such as providing track records and fitting into asset classes.

Today, most impact investing products are in private equity form, with some mutual funds and hedge funds emerging. One recent launch is Dublin-based Ronoc’s new private equity microfinance fund, and BlueOrchard has been raising capital for another large microfinance lending private equity fund. Another outfit, Contact Fund, is trying to attract advisors to its interest-paying investment notes that fund microloans to community development nonprofit organizations within New York’s five boroughs. Yet another option is a new impact investing fund of funds from Sarona Asset Management.

But for now, connecting these investments to advisors remains a distant goal. The customized notes at UBS require extensive client education, but are popular, says Bill Sutton, head of philanthropic services.

“When they see it, they get it,” he says.

Building Microfinance Into an Asset Class

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The $44 billion global microfinance industry got a boost recently as private equity investor BlueOrchard attracted $195 million to a new fund aimed at helping microfinance lenders modernize their organizations, improve governance and risk management, and develop into fully-fledged financial institutions.

The knock-on effect is that as the industry as a whole becomes more standardized, with stronger, regulated and rated institutions, this should attract more investment and help turn microfinance into a recognized asset class, which in turn is good news for small businesses both in the US and globally that benefit from microfinance lending.

Although the US microfinance industry is viewed quite differently from global lenders geared at the very poor, as Anne Field pointed out in her blog in March, some of the biggest US microfinance lenders, including ACCION and Kiva, have operations worldwide. And most global microfinance institutions focus on small business lending as well as lending to individuals.

One of the biggest difference is in loan size: microfinance loans in the US range from $500 to $35000, and the average is $7000, according to statistics from the Association for Enterprise Opportunity. In comparison, BlueOrchard’s average loan size is $1650.

The microfinance industry in the US is becoming ever-more important to small businesses and entrepreneurs, with loan applications at US firms having increased 66 percent over the past two years, according to research by the Aspen Institute. However, lending growth from MFIs has not kept pace, leaving many small businesses to search for other sources of funding.

As microfinance as a whole becomes more of a standard asset class for investors and more investment flows into the market, this would allow MFIs to boost lending–and help out both US and global small businesses and entrepreneurs.

However, in order to take that next step, microfinance lenders must improve corporate governance and risk management to become regulated banks, according to Jean-Philippe de Schrevel, CEO of BlueOrchard Investments. This would allow them to raise more money from local institutions and not-for-profit groups–emulating the US microfinance model.

Microfinance has typically seen lower default rates than traditional bank lending. BlueOrchard cites a repayment rate of 97 percent, and Kiva of more than 98 percent. But MFIs are dealing with the outcome of the crisis like any other lenders, hence the need for improved risk management and governance, so that strong track record is maintained and more mainstream investors feel confident in the longer-term strength of the business model.

The BlueOrchard fund is targeting an internal rate of return of 20 percent. A number of other microfinance funds managers are expected to launch funds on a similar scale–including Finance In Motion and Incofin.