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Equitas files papers for IPO: Several PE, VC investors to exit – VC Circle

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THURSDAY, OCTOBER 22, 2015

It is the fifth largest microfinance firm in the country

Chennai-based microfinance firm Equitas Holdings Ltd has filed its draft herring prospectus with the capital markets regulator Securities and Exchange Board of India for its initial public offering (IPO).

The proposed issue would make Equitas the second microfinance institution (MFI) to go public, after SKS Microfinance listed on the bourses in 2010.

The IPO of SKS Microfinance, once the largest and now the second-largest MFI in the country by loan book, had attracted widespread attention. Its share price shot up soon after listing, but regulatory flux surrounding its once key market Andhra Pradesh punctured the firm’s business.

Although SKS has restructured heavily since then to once again emerge as one of the top MFIs by size, its share price is now half its IPO price and a fraction of its all-time high.

Equitas, the fifth-largest MFI behind Bandhan, SKS, Janalakshmi and Ujjivan, is one of the eight microfinance firms to secure a small finance bank licence last month. It would be the first among its small finance bank peers to tap the primary market to raise funds and reduce foreign shareholding to the 49 per cent limit set by the Reserve Bank of India.

The firm plans to raise Rs 600 crore through a fresh issue of shares besides giving part and full exit to several private investors. It said that it may raise Rs 300 crore by selling shares to institutional investors ahead of the IPO.

The firm is yet to freeze its issue price band. But given the two equity deals in the company over the past year the issue, including the offer for sale, would make it one of the biggest IPO in several years. It would trump the just concluded issue of Coffee Day Enterprises Ltd and could be just behind the proposed issue of budget airline IndiGo.

Here’s a snapshot of the Equitas IPO:

* Fresh issue of shares to raise up to Rs 600 crore (about $93 million) and an offer for sale of up to 130.8 million equity shares.
* Bankers: Edelweiss, ICICI Securities, Axis Capital and HSBC.

Object of the issue

Of the total money to be raised through a fresh issue of shares, the company plans to use Rs 520 crore towards investment in subsidiaries to augment their capital base. While Rs 240 crore would go into Equitas Microfinance Pvt Ltd (EMFL) and a similar amount into Equitas Finance Ltd (EFL), the remaining would be used for Equitas Housing Finance Ltd (EHFL).

Company
* Incorporated in 2007, Equitas is a diversified financial services provider focused on individuals and micro and small enterprises (MSEs) that are underserved by formal financing channels.

* It is led by PN Vasudevan who holds a 3.17 per cent stake and is selling a small chunk of it as part of the offer for sale. Before founding Equitas, he had served as the head of the consumer banking group at Development Credit Bank Ltd (now DCB), for more than one-and-a-half years. He has also worked for about two decades in Cholamandalam Investment and Finance Co Ltd, part of the Murugappa Group, where he joined as a management trainee and resigned as vice president and business head of vehicle finance.

* Equitas is essentially a holding company and operates through its subsidiaries: EMFL is into microfinance lending, EFL is engaged in vehicle and MSEs lending while EHL is into housing finance.

* As of June 30, 2015, it had 520 branches across 11 states, one union territory and the NCT of Delhi.

Financials
* For the financial year ended March 31, 2015, the company’s consolidated revenue was Rs 755.93 crore against Rs 483.52 crore in FY14. Its net profit rose by over 40 per cent last year to Rs 106.6 crore. Its assets under management (AUM) as of June 30, 2015, stood at Rs 4,419.1 crore.

* Its microfinance business AUM increased at a CAGR of 43.6 per cent from Rs 723.9 crore as of March 31, 2012, to Rs 2,143.9 crore last year. This rose to Rs 2,319.4 crore as of June 30, 2015, which represented 52.4 per cent of its aggregate AUM. As of June 30, 2015, there were 2.58 million loan accounts in its microfinance business.

* In the vehicle finance business, its AUM has almost doubled annually over the last two years and ended FY15 with Rs 1,175. crore as of March 31, 2015, which represented 29.31 per cent of its aggregate AUM. Vehicle finance business AUM was Rs 1,248.9 crore as of June 30, 2015 with 45,029 loan accounts.

* The AUM of its MSE finance business increased from Rs 87.4 crore as of March 31, 2014 to Rs 510.9 crore last year. This shot up to Rs 656.1 crore as of June 30, 2015 with 29,627 loan accounts. A majority of its MSE finance business represents cross-sales to eligible higher income microfinance business customers.

* The AUM of its housing finance business has doubled annually for the past two financial years. It grew to Rs 179.5 crore as of March 31, 2015 and to Rs 194.5 crore as of June 30, 2015, spread across 3,360 loan accounts.

Investors

The firm counts around a dozen venture capital, private equity and development financial institutions as private investors. Around 93 per cent stake of the firm is held by foreign investors including overseas incorporated bodies.

IFC, CDC, India Financial Inclusion Fund, CreditAccess and Creation Investments are the top five shareholders of the firm. In the proposed offer for sale, some like Sequoia Capital, WestBridge, Aavishkaar, Lumen, Aquarius, and MVH are exiting their investments. IFC, FMO, Helion, Creation, Sarva Capital are part exiting while India Financial Inclusion Fund is offering to sell bulk of its holding.

Read more at:
http://www.vccircle.com/news/micro-finance/2015/10/17/equitas-files-papers-ipo

Commercial Credit and Finance PLC receives Rs. 1.68 billion: the Largest International PE Investment into a Sri Lankan LFC from Creation Investments

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FOR IMMEDIATE RELEASE

Commercial Credit and Finance PLC receives Rs. 1.68 billion: the Largest International PE Investment into a Sri Lankan LFC from Creation Investments

February 26, 2014 Chicago, IL USA – Leading emerging markets private equity investor, Creation Investments Capital Management LLC, through Creation Investments Social Ventures Fund II L.P. (collectively, “Creation”), has agreed to invest Rs. 1.68 billion (US$12.4 million equivalent) into one of Sri Lanka’s leading finance companies, Commercial Credit and Finance PLC (“CCF”). The transaction will involve the issuance of 80 million new shares for a consideration of Rs. 1.68 billion or approximately 25.15% of CCF. The transaction has received the necessary CBSL, SEC and CSE approvals and will be completed subject to shareholder approval.

 

This is the largest investment by an international private equity fund into a publicly listed Sri Lankan licensed finance company and is a strong validation for the success of CCF. Creation is impressed by the strength of CCF’s leadership and commitment to the mission toward serving the under-banked population in Sri Lanka. The new funds will be used by CCF for its future investment activities including further enhancing its branch network and expanding its asset and client base, and to meet the future capital adequacy requirements of the Company.

 

Creation has invested in many banks and finance companies across emerging markets and its investment into CCF will help provide guidance and support to CCF and promote best practises from its other international portfolio investments. The new equity investment will also strengthen the capitalisation of CCF and enable it to access international debt capital at attractive rates.

 

Roshan Egodage, CEO of CCF, commented on the transaction, “we are committed to providing a wide range of financial products to the Sri Lankan consumer including a variety of microfinance and SME products combined with a high quality service which is part of our core values. Our partnership with Creation will enable us to continue this journey and grow the company towards becoming Sri Lanka’s leading licensed finance company”.

 

Patrick Fisher, Managing Partner and Founder of Creation, added that “this is our first investment in Sri Lanka and the largest investment that we have made to date across our Creation Investments Social Venture Funds. We look for quality investment opportunities across many emerging and frontier markets globally. CCF exemplifies what we look for in prospective investments – market leadership, exceptional management, and alignment in the mission, vision and values. CCF is a leader in the Sri Lankan LFC sector given its tremendous growth in the past few years. We are excited to partner with the CCF team in supporting their future growth plans”.

 

Creation Investments Capital Management LLC

Creation Investments Capital Management LLC is a Chicago-based private equity firm founded in 2007 with over US$130 million under management. Its investor base includes Fortune 100 Banks, Insurance Companies, Hedge Funds, Family Offices and High Net Worth Individuals. Creation has invested in a number of financial services companies in emerging markets such as India, Mexico and Russia.

 

About Commercial Credit and Finance

Commercial Credit and Finance PLC is one of Sri Lanka’s leading finance companies with an asset base of Rs. 25.8 billion (US$198.5 million equivalent) and is listed on the CSE. CCF has a wide range of financial products including an innovative portfolio of SME and Micro products, including classic microfinance, working auto leasing, education loans, microsavings and Islamic banking, which are distributed to over 535,000 customers through 74 branches across the island. CCF has won countless awards including Gold Award for Service Brand of the Year (2012) and Excellence in Corporate Social Responsibility (2013), among many others. CCF maintains a rating of BB+ from RAM Ratings and has a reported ROE of 45.7%  as of December 31, 2013.

Commercial Credit and Finance PLC receives Rs. 1.68 billion from Creation Investments: the Largest International PE Investment into a Sri Lankan LFC

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Leading frontier markets private equity investor, Creation Investments Capital Management LLC (“Creation”), through its wholly owned subsidiary, Creation Investments Sri Lanka LLC (“Creation Sri Lanka”), has agreed to invest Rs. 1.68 billion (US$12.4 million equivalent) into one of Sri Lanka’s leading finance companies, Commercial Credit and Finance PLC (“CCF”). The transaction will involve the issuance of 80 million new shares for a consideration of Rs. 1.68 billion or approximately 25.15% of CCF. The transaction has received the necessary CBSL, SEC and CSE approvals and will be completed subject to shareholder approval.

 

This is the largest investment by an international private equity fund into a publicly listed Sri Lankan licensed finance company and is a strong validation for the success of CCF. Creation is impressed by the strength of CCF’s leadership and commitment to the mission toward serving the under-banked population in Sri Lanka. The offered price at a significant premium to the trading value and NAV indicates strong future growth potential for the company. The new funds will be used by CCF for its future investment activities including further enhancing its branch network and expanding its asset and client base, and to meet the future capital adequacy requirements of the Company.

 

Creation has invested in many banks and finance companies across emerging markets and its investment into CCF will help provide guidance and support to CCF and promote best practises from its other international portfolio investments. The new equity investment will also strengthen the capitalisation of CCF and enable it to access international debt capital at attractive rates.

 

York Street Partners (Pvt) Ltd. acted as Sole Financial Advisor to the transaction. Varners was the Legal Advisor to CCF and FJ&G De Saram was the Legal Advisor to Creation.

 

Roshan Egodage, CEO of CCF, commented on the transaction, “we are committed to providing a wide range of financial products to the Sri Lankan consumer including a variety of microfinance and SME products combined with a high quality service which is part of our core values. Our partnership with Creation will enable us to continue this journey and grow the company towards becoming Sri Lanka’s leading licensed finance company”.

 

Patrick Fisher, CEO of Creation, added that “this is our first investment in Sri Lanka and the largest investment that we have made to date across our Creation Investments Social Venture Funds. We look for quality investment opportunities across many emerging and frontier markets globally. CCF exemplifies what we look for in prospective investments – market leadership, exceptional management, and alignment in the mission, vision and values. CCF is a leader in the Sri Lankan LFC sector given its tremendous growth in the past few years. We are excited to partner with the CCF team in supporting their future growth plans”.

 

“This was a complex transaction that required careful negotiation through several structured options as well as regulatory approvals”, Sujendra Mather, MD at York Street Partners said reflecting on the transaction. He further added, “we are delighted to see the successful outcome of this transaction which is truly a win-win for both CCF and Creation and comes at an opportune moment when several key changes are taking place in the financial services landscape in Sri Lanka”.

 

About Creation Investments Capital Management LLC

Creation Investments Capital Management LLC is a Chicago-based private equity firm founded in 2007 with over US$130 million under management. Its investor base includes Fortune 100 Banks, Insurance Companies, Hedge Funds and High Net Worth Individuals. Creation has invested in a number of financial services companies in emerging markets such as India, Mexico and Russia.

 

About Commercial Credit and Finance

Commercial Credit and Finance PLC is one of Sri Lanka’s leading finance companies with an asset base of Rs. 24.5 billion as at December 31, 2013 and is listed on the CSE. CCF has a wide range of financial products including an innovative portfolio of SME and Micro SME products which are distributed to over 400,000 customers through 60 branches across the island. CCF has a rating of BB+ from RAM Ratings.

 

 

The Relationship Between Microfinance, Entrepreneurship And Sustainability In Reducing Poverty In Developing Nations

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Microfinance-African-Youths
Organization:

The African Youths Organization

Solution Description

The extent to which microfinance, entrepreneurship and sustainability are inter-related is dependent on the extent to which it addresses the economic development process for example. If we are looking for an action which will enable the poor to overcome their poverty, I would go for credit invested in an income generating enterprise as working capital or for productive assets leading to establishment of new enterprises or growth of an existing one, profit from the enterprise provides income and a general strengthening/A variety of financial institutions worldwide have found way to make lending to the poor sustainable and to build on the fact that even the poor are self employed repay their loans and seek savings opportunities. The challenge is to build capacity in the financial sector drawing on lessons from international best practices in micro enterprises and rural finance. However, ensuring environmental sustainability is equally important as sustaining micro enterprises financially. The Sustainable Financial Markets Facility (SFMF) recognizes the importance of promoting “environmentally and socially responsible lending and investment in emerging markets, thus stimulating sustainable markets and private sectors activity. The need to enhance other sustainable initiatives is also paramount thus the interrelated nature of microfinance entrepreneurship and sustainable development is evident, the extent to which microfinance, entrepreneurship and sustainability are interdependent in becoming increasingly recognized by experts in their respective fields of work assoc

How will it improve our quality of life?

The fundamental framework: The policy legal and regulatory framework that allows innovative financial institutions to develop and operate effectively. In institution building: Exposure to and training in best practices that banks and microfinance organization need to expand their outreach and develop sustainable operations, long with performance – based support for capacity building. Innovative Approaches: Leasing, lending and other products to increase access of small and medium size enterprises to financial services. Despite the apparent benefit of microfinance in reducing poverty, an inevitable controversy exists.

Triple Bottom Line Benefits

Entrepreneurship is the active process of recognizing an economic demand in an economy and supplying the factors of production (land, labour and capital) to satisfy the demand usually to generate a profit. High levels of poverty combined with slow economic growth in the formal sector have forced a large part of the developing world’s population into self-employment and informal activities. But this is not necessarily negative, micro enterprises contribute significantly to economic growth. Social stability and equity. The sector is one of the most important vehicles through which low-income people can escape poverty with limited skills and education to compete for formal sector jobs, these men and women find economic opportunities in micro-enterprises as business owners and employees. In most developing countries, micro-enterprises and small scale enterprises account for the majority of firms and large share of employment. In Ecuador, for example, forms with fewer than 50 employees accounted for 99 percent of firms and 55 percent of firms in 1980: in Bangladesh, enterprises with fewer than 100 workers accounted for 99 percent of enterprises and 58 percent of employment in 1986. Finally, it has been noted that small-medium enterprises constitute the most dynamic segment of many transition and developing economics. They are more innovative, faster growing and possibly more profitable as compared to larger sized enterprises. Hence, the role of entrepreneurship in reducing poverty in developing nation is promising. 

Issues, Barriers and Opportunities?

THE ROLE OF SUSTAINABILITY IN REDUCING POVERTY IN DEVELOPING COUNTRIES The concept of sustainability is difficult to define and its precise definition varies within different contexts. However regarding the development process, two primary aspects of sustainability emerge. Economic and environmental sustainability both tie in with the notion of sustainable micro-entrepreneurship, economic sustainability refers to a continual supply of finance to meet a person on community’s needs, usually in the for of secure and accessible loans from a microfinance institutions and environmental is the aim to preserve environmental resources for use by future generations providing financial services entails that they must be sustainable and that means charging interest rates that cover your costs. Microfinance institutions have convincingly demonstrated that they can become profitable and sustainable institutions while making major contributions to poverty reduction by increasing economic opportunities and employment. This affects them because the growing public awareness of corporate governance and of environmental and social issues is driving changes in consumers behaviour. Investment and policy or regulatory adjustments, all signs point to continued pressure on the private sector to demonstrate the economic growth and sustainability.

Financial Innovation and Social Impact – The Economist

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Playing with fire

Financial innovation can do a lot of good, says Andrew Palmer. It is its tendency to excess that must be curbed

Feb 25th 2012 | from the print edition

 

 

FINANCIAL INNOVATION HAS a dreadful image these days. Paul Volcker, a former chairman of America’s Federal Reserve, who emerged from the 2007-08 financial crisis with his reputation intact, once said that none of the financial inventions of the past 25 years matches up to the ATM. Paul Krugman, a Nobel prize-winning economist-cum-polemicist, has written that it is hard to think of any big recent financial breakthroughs that have aided society. Joseph Stiglitz, another Nobel laureate, argued in a 2010 online debate hosted by The Economist that most innovation in the run-up to the crisis “was not directed at enhancing the ability of the financial sector to perform its social functions”.

Most of these critics have market-based innovation in their sights. There is an enormous amount of innovation going on in other areas, such as retail payments, that has the potential to change the way people carry and spend money. But the debate—and hence this special report—focuses mainly on wholesale products and techniques, both because they are less obviously useful than retail innovations and because they were more heavily implicated in the financial crisis: think of those evil credit-default swaps (CDSs), collateralised-debt obligations (CDOs) and so on.

This debate sometimes revolves around a simple question: is financial innovation good or bad? But quantifying the benefits of innovation is almost impossible. And like most things, it depends. Are credit cards bad? Or mortgages? Is finance as a whole? It is true that some instruments—for example, highly leveraged ones—are inherently more dangerous than others. But even innovations that are directed to unimpeachably “good” ends often bear substantial resemblances to those that are now vilified.

For a demonstration, look at Peterborough. The cathedral city in England’s Cambridgeshire is known for its railway station and an underachieving football club nicknamed “the Posh”. But it is also the site of a financial experiment that its backers hope will have big ramifications for the way public services are funded.

Peterborough is where the proceeds of the world’s first “social-impact bond” are being spent. This instrument is not really a bond at all but behaves more like equity. In September 2010 an organisation called Social Finance raised £5m ($7.8m) from 17 investors, both individuals and charities. The money is being used to pay for a programme to help prevent ex-prisoners in Peterborough from reoffending. Reconviction rates among the prisoners recruited to the scheme will be measured against a national database of prisoners with a similar profile, and investors will get payouts from the Ministry of Justice if the Peterborough cohort does better than the rest. If all goes well, the first payouts will be made in 2013.

The scheme is getting lots of attention, and not just in Britain. A mixture of social and financial returns is central to a burgeoning asset class known as “impact investing”. Linking payouts to outcomes is attractive to governments keen to husband scarce resources. And if service providers like the people running the Peterborough prisoner-rehabilitation scheme can get a lump sum up front, they can plan ahead without bearing any financial risk. There is talk of introducing social-impact bonds in Australia, Canada and the United States.

 

 

Here, surely, is a financial innovation that even the industry’s critics would agree is worth trying. Yet in fundamental ways an ostensibly “good” instrument like a social-impact bond is not so different from its despised cousins. First, at its root the social-impact bond is about creating a set of cashflows to suit the needs of the sponsor, the provider and the investor. True, the investors in the Peterborough scheme may be more willing than the average individual or pension fund to sacrifice financial returns for social benefits. But as Franklin Allen of the Wharton School at the University of Pennsylvania and Glenn Yago of the Milken Institute, a think-tank, argue in their useful book, “Financing the Future”, the thread that runs through much wholesale financial innovation is the creation of new capital structures that align the interests of lots of different parties.

Second, the social-impact bond is based on the concept of risk transfer, in this case from the government to financial investors who will get paid only if the scheme is successful. Risk transfer is also one of the big ideas behind securitisation, the bundling of the cashflows from mortgages and other types of debt on lenders’ books into a single security that can be sold to capital-markets investors. The credit-default swap is an even simpler risk-transfer instrument: you pay someone else an insurance premium to take on the risk that a borrower will default.

Third, even at this early stage the social-impact bond is grappling with the difficulties of measurement and standardisation. An obvious example is the need to create defined sets of measurements in order to work out what triggers a payout—in this case, the comparison between the Peterborough prisoners and a control group of other prisoners in a national database. Across finance, standardisation—around contracts, reporting, performance measures and the like—is what enables buyers and sellers to come together quickly and new markets to take off.

Neither angels nor demons

For all the similarities, there are two big differences between the social-impact bond and other, less lauded financial instruments. The first is that the new tool has been designed explicitly for a social purpose. But ask a pensioner how much money he wants to put into prisoner rehabilitation, and it isn’t likely to be all that much.

Whether protecting a retirement pot or signalling problems with a government’s debt burden, finance can be “socially useful” (to use a phrase popularised by Adair Turner, the outgoing chairman of Britain’s Financial Services Authority) without being obviously social. Lord Turner himself acknowledged that in a speech he gave in London in 2009: “It is in the nature of markets that there are some things which are indirectly socially useful but which in the short term will look to the external world like pure speculation.”

Many people point to interest-rate swaps, which are used to bet on and hedge against future changes in interest rates, as an example of a huge, well-functioning and useful innovation of the modern financial era. But there are more contentious examples, too. Even the mention of sovereign credit-default swaps, which offer insurance against a government default, makes many Europeans choke. There are some specific problems with these instruments, particularly when banks sell protection on their own governments: that means a bank will be hit by losses on its holdings of domestic government bonds at the same time as it has to pay out on its CDS contracts. But in general a sovereign CDS has a useful signalling function in an area tilted heavily in favour of governments (which do not generally have to post collateral and can bully domestic buyers into investing).

When bubbles froth, innovations are used inappropriately—to take on exposures that should not have been, to manufacture risk rather than transfer it, to add complexity

The second difference is that social-impact bonds are still in their infancy, whereas other crisis-era innovations were directly involved in a gigantic financial crisis. There are questions to answer about their culpability. A few products from that period do look inherently flawed. Only the bravest are prepared to defend the more exotic mortgage products that sprouted at the height of America’s housing bubble as lenders found ever more creative ways to bring unaffordable houses within reach. Finance professionals almost blush to recall an instrument called the constant-proportion debt obligation, a 2006 invention of ABN AMRO that added leverage when it took losses in order to make up the shortfall. The end of the structured investment vehicle (SIV), an off-balance-sheet instrument invented to game capital rules, is not much lamented. And the complexity of the “CDO-squared” has been widely condemned.

But even now it is hard to find fault with the concept, as opposed to the practical application, of many of the most demonised products. The much-criticised CDO, which pools and tranches income from various securities, is really just a capital structure in miniature. Risk-bearing equity tranches take the first hit when things go wrong, and more risk-averse investors are more protected from losses. (Euro-zone leaders like the idea enough to have copied it with their plans for special-purpose investment vehicles for peripheral countries’ sovereign debt.) The real problem with the CDOs that blew up was that they were stuffed full of subprime loans but treated by banks, ratings agencies and investors as though they were gold-plated.

 

 

As for securitisation and credit-default swaps, it would be blinkered to argue they have no problems. Securitisation risks giving banks an incentive to loosen their underwriting standards in the expectation that someone else will pick up the pieces. CDS protection may similarly blunt the incentives for lenders to be careful when they extend credit; and there is a specific problem with the way that the risk in these contracts can suddenly materialise in the event of a default.

But the basic ideas behind both these two blockbuster innovations are sound. India, with a far more conservative financial system than America, allowed its first CDS deals to be done in December, recognising that the instrument will help attract creditors and build its domestic bond market. Similarly, securitisation—which worked well for decades—allows banks to free up capital, enabling them to extend more credit, and helps diversification of portfolios as banks shed concentrations of risks and investors buy exposures that suit them. “Securitisation is a good thing. If everything was on banks’ balance-sheets there wouldn’t be enough credit,” says a senior American regulator.

Rather than asking whether innovations are born bad, the more useful question is whether there is something that makes them likely to sour over time.

Greed is bad

There is an easy answer: people. When bubbles froth, greedy folk use innovations inappropriately—to take on exposures that they should not, to manufacture risk rather than transfer it, to add complexity in order to plump up margins rather than solve problems. But in those circumstances old-fashioned finance goes mad, too: for every securitisation stuffed with subprime loans in America, there was a stinking property loan sitting on the balance-sheet of an Irish bank or a Spanish caja. “Duff credit analysis is always the cause of the problem,” says Simon Gleeson of Clifford Chance, a law firm.

This argument has a lot of power. When greed takes hold, finance in all its forms is undone. Yet blaming the worst outcomes of financial innovation on human frailty is hardly helpful. This special report will point to the features of financial innovations that can turn them into troublemakers over time and show how these can be managed better.

 

 

In simple terms, finance lacks an “off” button. First, the industry has a habit of experimenting ceaselessly as it seeks to build on existing techniques and products to create new ones (what Robert Merton, an economist, termed the “innovation spiral”). Innovations in finance—unlike, say, a drug that has gone through a rigorous approval process before coming to market—are continually mutating. Second, there is a strong desire to standardise products so that markets can deepen, which often accelerates the rate of adoption beyond the capacity of the back office and the regulators to keep up.

As innovations become more and more successful, they start to become systemically significant. In finance, that is automatically worrying, because the consequences of any failure can ripple so widely and unpredictably. In a 2011 paper for the National Bureau of Economic Research, Josh Lerner of Harvard Business School and Peter Tufano of Said Business School also argue that in a typical “S-curve” pattern, in which the earliest adopters of an innovation are the most knowledgeable, a widely adopted product is more likely to have lots of users with an inadequate grasp of the product’s risks. And that can be a big problem when things turn out to be less safe than expected.

Social impact is an integral part of investors’ agenda – Citi Microfinance

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Microfinance Focus, January 17, 2012: Bob Annibale is Global Director of Citi Microfinance and Community Development. He leads Citi’s commercial relationships with microfinance institutions, networks and investors across the globe. Bob also represents Citi on the Board of the Microfinance Information Exchange, the Council of Microfinance Equity Funds, the SEEP Network, the Microfinance Network and the Executive Committee of CGAP (World Bank).

In an exclusive interview with Microfinance Focus, Bob spoke about the vision of Citi Microfinance for the global microfinance sector.

The interview was first published in Microfinance Focus special print magazine which was distributed at the Global Microcredit Summit 2011 in Spain.

 

Microfinance Focus: How do you see the investment environment changing over the next few years? Is it going to be different from what it has been?

 

Bob Annibale: Many factors contribute to changes in the investment landscape, particularly recent global events in the equity and sovereign debt markets and slow economic growth in the U.S., Europe and Japan. In this challenging and complex global environment, microfinance is confronting additional challenges, such as the impact of rising fuel and food prices on their clients, continued income inequalities and the need for funders – philanthropic, public and commercial – to continue to invest in the growth of the sector.

As outreach and growth have been pursued in a number of markets, the scaling of microfinance has been accompanied by similar challenges and trends as in the wider financial sector, including competition, sales and collections practices; the need for greater transparency in product pricing and features; the integration of the sector with credit bureaus; and appropriate regulations and supervision.

In recent calendar quarters, growth has slowed in many countries or regions.  Though there may indeed be a slowing in the pace of growth in microfinance investment funds, in some countries this may also be in response to changes in customer needs and demand. While the capacity of for-profit and non-profit investors, specialized funds and institutional investors continues to grow, microfinance institutions [MFIs] must recognize that many donors and investors are focusing on a broader agenda that goes beyond financial access to include financial capability and varying degrees of social impact.

 

Microfinance Focus: Do you believe in the debate of social interest vs. commercial interest? Or they can be both on the same side?

 

Bob Annibale: Rather than reduce the microfinance sector to a simple dichotomy of ‘social vs. commercial,’ we believe that it will take all kinds of institutions – for-profit, mutual societies, non-profit, etc. — to achieve significant expansion of responsible financial services.  Most microfinance institutions, regardless of legal vehicle or ownership structure, began as non-profits. The ability of institutions to grow and reach those whom they seek to serve has required many to raise capital, usually including social investors, international development agencies, and specialist fund investors.

There are many examples of how institutions of all types are part of this important movement, from non-profit and cooperatives to non-bank finance companies and specialized microfinance banks.  The regulatory context is an important influence on how the microfinance sector in a country evolves. Success as measured by meeting client needs, however, depends not on the type of institutions, but rather on how well they focus and understand the needs, capability and capacity of those they serve.

Citi Microfinance engages all of Citi’s global businesses to support microfinance sector clients with appropriate products, distribution mechanisms and financing.  We seek to broaden and increase the scale and outreach of financial services through such partnerships. We work closely with microfinance institutions and networks as clients and partners as they have the greatest experience, outreach and trust in the communities that they serve.

 

Microfinance Focus: How the events in India have shaped Citi Microfinance approach towards future investments?

 

Bob Annibale: Events in India — specifically in Andhra Pradesh — and their impact on the country’s wider microfinance, non-profit and for-profit sectors provide an opportunity to reflect on the challenges of rapid growth, the ongoing need to also focus on financial education not just access, the absence of integrated credit bureaus, and the need for clarity in the regulatory and supervisory context of India, a complex federal system with both state and federal regulators and tensions.

India’s and international microfinance networks, leaders and investors are  providing  strategic input and a sense of urgency for advancing the need for common industry standards, regulatory and supervisory clarity, and a reemphasis on the need to be more client-centric and to assess social impact.  In India, microfinance has brought tens of millions of people formal financial access for the first time, but one observation is the need to ensure that the supporting infrastructure is in place, including financial education.

In India and around the world, financial inclusion remains an imperative for economic growth, at both the community and national levels, and microfinance is an important contributor to expanding outreach. Globally, Citi’s commitment to responsible finance is reflected in our focus on financial inclusion, through the philanthropic work of the Citi Foundation and through Citi Microfinance and our businesses.

 

Microfinance Focus: What are some of the risks that you think an investor needs to see in some of the fast growing microfinance markets?

 

Bob Annibale: Recent situations highlight the need to focus on the client and the market, especially with regard to the evolution of the MFI footprint; the development of the competitive landscape; the performance of data and impact assessments; and the decision to make changes in business models. The most recent Microfinance Banana Skins Survey, published in January 2011, reflects the sector’s continued growth and evolution yet also highlights the need for increased focus on clients’ needs and related credit risks.  In contrast, institutional risks dominated the attention of respondents in earlier surveys.

 

Microfinance Focus: Andhra Pradesh is just one state of India? Do you think investors acted responsibly when they nearly froze the funding for MFIs across the nation?

 

Bob Annibale: Investors and donors have a responsibility to all stakeholders.  Some lenders’ response to the uncertainties created by the Andhra Pradesh (AP) situation — to restrict new disbursements while awaiting regulatory guidance and clarity — should be viewed in the context of the preceding period’s significant growth. The positive developments since the AP Government’s October 2010 intervention have provided more certainty along with new disbursements of lending and capital investment, but it will take time to restore confidence fully and for institutions to make the necessary changes to support growth within the changed paradigm. Elsewhere in the world we continue to see microfinance institutions expand and evolve, including in Indonesia, Bangladesh, Mexico, Peru, and other countries.

 

Microfinance Focus: What is more important for Citi – measuring risk or measuring social impact?

 

Bob Annibale: Citi’s view of risk is holistic and involves our understanding of our clients and the environments in which they operate.  Our MFI clients around the world –- more than 100 institutions in approximately 40 countries –- represent a broad spectrum. They differ in the ways they have evolved; their local regulatory and market contexts; and the clients that they serve, so we make sure to understand not only their business and operating models but also their stated and reported financial inclusion principles, client profiles, impact and objectives. Of course, we also track their performance.

 

We are very encouraged by the work that is becoming more available on social impact assessing, by both academic and industry specialists, including some of the microfinance specialized rating agencies. Such tools will help us to assess an institution’s value to its clients and community, which are important factors in our risk process.

 

Our work to expand financial inclusion includes building financial literacy, including the skills and knowledge needed to make best use of the products and services offered by MFIs and others. Financial capacity-building is one of the major components of the Citi Foundation’s support in the sector, as this combines financial education with access.

 

Microfinance Focus: Tell us how Citi assess impact on the end client?

 

Bob Annibale: We work with a wide range of financial intermediaries, from small non-profits to large, regulated financial institutions, to reach our end clients. These intermediaries have different ways to build client understanding and to assess and monitor client needs.  We and many others in the investment community consider institutional metrics provided by MFIs but we understand that historically these have focused heavily on portfolio quality and outreach.  We also analyze a number of the social impact evaluations and ratings that have been introduced. We recognize that better end-client portfolio metrics are needed in order to assess and monitor client vulnerability and over-indebtedness properly.

 

We have seen that MFIs’ portfolio and reputation problems often result from a lack of appreciation for the pressures on and behaviours of end-clients. Given the realities of the new world in which these clients operate, we must understand and monitor the composition and stress level of MFIs’ client portfolios and assess whether the MFIs have appropriate client assessment processes in place.

 

Microfinance Focus: Where do you see the next big microfinance market emerging?

 

Bob Annibale: Providing access to finance for unbanked and underserved populations is a high priority on most governments’ agendas. Financial inclusion in turn fuels economic growth through micro and small enterprises. As the economies of the Middle East and North Africa stabilize, we see significant new demand for financial access in these regions. The important microfinance market that has been poised for huge growth is China, although — as with Brazil — this could prove to be a more bank-led growth. Subject to accommodative regulatory change, China continues to have exciting potential with significant rural and low-income community needs.

 

Microfinance Focus: On which regions will Citi Microfinance focus this year? What are some of the new product or investments that Citi is working on?

 

Bob Annibale: Citi works with the sector through our local businesses yet our focus reflects our global franchise presence in more than 100 countries. The Middle East, North Africa and China are definitely high priorities for us, and we will build off of our extensive local presence in Latin America and Asia.

 

We also seek opportunities in markets like Indonesia, where financial access is limited. We recently closed a funding transaction with Bank Danamon, one of the largest institutions active in microfinance. There also are some large markets where we already have a strong footprint and are looking for innovative ways to deepen our involvement, such as Mexico. There also are significant unbanked and underserved communities in the United States and we have some very interesting partners and initiatives there too, particularly for savings and asset building.

 

At Citi, we continually look for innovative solutions to tailor our existing products to our wide variety of clients and partner MFIs and to specialized banks, microfinance funds and donors. Mobile banking and prepaid cards are areas where Citi has a significant presence and we are working to extend our exiting platforms to MFIs. We also work with our global clients to develop innovative ways to scale up the funding and banking of sustainable small producer agribusinesses.

 

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