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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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MicroCred completes the sale of its Mexican operations to Creation Investments’ Portfolio Company Aspire

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MicroCred completes the sale of its Mexican operations.

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Paris, June 7th, 2010
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On June 4th, the MicroCred Group completed the successful sale of its Mexican operations. MicroCred concluded an agreement with Fig Tree Ventures (a management company of microfinance institutions based in the US) on the sale of MicroCred Mexico. The transaction includes assets of EUR 4.1 million as of April 30, 2010 and covers all Mexican activities of the MicroCred Group.
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As part of this agreement, Fig Tree Ventures and its investment partner, Creation Investments, hope to merge MicroCred Mexico with their Mexican microfinance company, Aspire.. Aspire, founded in 2008 by FTV and Creation Investments, is a micro, small and medium enterprise finance company based in Guadalajara. Aspire has two major shareholders: Fig Tree Ventures, and Creation Investments Social Ventures Fund I . Through this transaction, Aspire aims to expand its distribution network in Mexico by establishing itself in the State of Veracruz Aspire offers an individual business loan product customized for the Mexican market. After less than 20 months of operation, Aspire is break-even and managing a portfolio with PAR > 30 of 4.6 as of the end of May 2010.
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MicroCred’s Chairman of the Management Board, Mr. Arnaud Ventura, announced that: “The completion of this agreement is an important step in our strategy to focus our resources in Africa and in China. Our contract with Fig Tree Ventures also offers customers the opportunity to maintain their access to a reliable and quality funding resource.”
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Selling of MicroCred Mexico
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About Fig Tree Ventures: Fig Tree Ventures, LLC (FTV) is a management company based in the US and focused exclusively on the creation, development and management of microfinance companies. FTV is owned and operated by three partners who collectively have more than 35 years of direct microfinance company management experience globally. All three partners are currently based in Mexico and will be involved in MicroCred Mexico to ensure its success.
www.aspire.com.mx
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About Creation Investments: Creation Investments is an investment management company committed to eradicating global poverty through direct investments in economic development. Creation Investments Capital Management, LLC currently manages Creation Investments Social Venture Fund I, a private equity fund which makes investments in microfinance institutions and other social ventures. www.creationinvestments.com
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About MicroCred: MicroCred S.A. is an investment company that aims to create a group of companies and banks specialized in microfinance. MicroCred has developed an innovative model to provide microentrepreneurs excluded from the traditional banking system access to financial services. PlaNet Finance, Société Générale, Axa Belgium, the International Finance Corporation, (World Bank Group) the French Development Agency (AFD), the European Investment Bank and Developing World Markets (DWM) are among its shareholders.
www.microcredgroup.com

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Rick Halmekangas
rick@figtreeventures.com
(00 1) 202 684 6682
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Patrick Fisher
patrick.fisher@creationinvestments.com
(00 1) 312 784 3988
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For more information:
www.microcredgroup.com
Contact Presse : Marion Ivars
mivars@microcred.org
(00 33) (0)1 49 21 26 47
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With Impact Investing, a Focus on More Than Returns

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With Impact Investing, a Focus on More Than Returns

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By PAUL SULLIVAN
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The very phrase “impact investing” sounds rapacious, but it is an emerging hybrid of philanthropy and private equity that proponents say is about to become more widespread. It is also something that has some very rich people intrigued.
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“It’s filling the space in between this historical space around philanthropy — charitable giving to fight poverty and alleviate misery — and the traditional investing space that is return-driven,” said Julia Sze, director of investments at Wells Fargo Family Wealth, who ran an impact investing conference in San Francisco on Thursday.
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More often, impact investing is described by what it is not. It does not work in the same way as socially responsible investing, which excludes areas a person does not want to invest in — like tobacco or guns — through a simple screening process. Impact investing focuses more on bringing about change — helping the working poor in India buy a home, for instance.
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While most of the money is going into areas like helping to reduce poverty and improving the climate, it is not philanthropy. Investors expect at least a return of their capital with an adjustment for inflation and, in many cases, a lot more than that.
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And while microlending is a part of it, impact investing is different from what is offered by Web sites like Kiva. With minimum investments often around $1 million, it is also more sophisticated. In addition, these investors have a defined plan to sell their investments after a specific amount of time.
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I came to think of impact investing as a private equity fund for social change. This may sound like an oxymoron, given the criticism that private equity funds have faced recently over their management of companies they have taken private. But the structure is similar: there are three or four capital calls in the first year, and the fund is not fully invested until the fourth year. As the end of its investment period nears, the fund then starts to look for ways to sell its investments. Doing good matters to investors, but they also hope for private equitylike returns of close to 20 percent a year.
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And like private equity, these investments are illiquid and can be risky. Because the area is so new, the funds lack the traditional track records and transparency.
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For this reason, many of the people interested in impact investing are focused on more than the returns.
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“I think we have to look at investment as a positive tool in advancing human goals,” said Chris Redlich, who sold his family’s company, the Marine Terminals Corporation, in 2007.
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He has taken $10 million, or about 1 percent of his net worth, and started to invest it in a series of funds. One fund is run by Grassroots Capital and makes traditional microfinance investments. Another is a fund focused on affordable housing in India. A third concentrates on energy technology in China.
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As for returns, Mr. Redlich said he expected his children and grandchildren to reap the benefits from what he was doing now. He is also realistic about the pros and cons of what he is doing. “With each dollar, you have to understand both the positive side — building up societies — and the dark side — the impact of industrial growth is significant. We have Superfund sites today where people didn’t think what they were doing was a bad thing at the time.”
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The glow of doing a social good mixed with high returns would seem attractive to high-net-worth individuals. But impact investing is still in its infancy. The Global Impact Investing Network, a nonprofit group, said that current impact investments amounted to about $50 billion. It projects this area to grow to $500 billion by 2014, putting it at roughly 1 percent of all managed assets.
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“I think the tipping point is now,” said Camilla Seth, director of programs and operations. “This activity has been happening for 10 years but investors have been insulated.”
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Not all agree that a boom is upon us. John Skjervem, chief investment officer of Northern Trust, said his firm had long been prepared for the boom in socially responsible and impact investing but it had yet to materialize. “Impact investing hasn’t made much of an impact yet, but we’re ready for it,” he said. “There still isn’t sufficient awareness of it.”
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He said his group managed $150 billion, of which $200 million was focused on impact investing. But for the few clients who are interested in this, it is important.
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One of the main reasons for the slow growth is the lack of basic investing information. The Global Impact Investing Network is trying to remedy this. It has created standards to measure what a recipient says it is doing. “If an investor is trying to create jobs, the question is, ‘How do I create more jobs?’ ” Ms. Seth said. “Everyone was measuring it in a different way. We want a job to be a job to be a job.” She said the network had also built a reporting platform to track how investments were accomplishing their goals.
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Growth has also been slowed because making a meaningful impact investment is more difficult than putting together a traditional socially responsible investment. “Years ago, it was just easy,” said Steven Soja, a director at Credit Suisse Private Bank in San Francisco. “You took out the sin stocks, the tobacco, the pornography and other things you didn’t like.”
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Most investors need to have a net worth of at least $10 million to participate in a meaningful way in impact investing. And then they expect sizable returns for their commitment. Mr. Soja said many of his clients have shown more interest in investing in renewable energy and biofuel funds as a way to bring about change.
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For Mr. Redlich, though, the goal is different. “I think investment improves the quality of life around the world,” he said. “At the end of the day, I already have enough money. I’m not chasing yield to be wealthier. I’m chasing yield to improve society in a more capitalistic way.”
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Elisabeth Rhyne: Why are microfinance interest rates so high?

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Elisabeth Rhyne: Why are microfinance interest rates so high?

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May 28, 2010
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Americans often suffer sticker shock when they hear about interest rates charged in international microfinance. At annualized rates above 20 percent, most Americans start getting uncomfortable, and when they hear that in some places annual rates rise as high as 100 percent or even more, their moral outrage beepers start to malfunction. This is unfortunate, because when we are in a state of high outrage, it’s hard to listen.
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When asking “how much is too much?” it is important to reserve judgment long enough to examine the conditions that determine international microfinance interest rates. Here are three factors that international microfinance providers have to consider as they face the hard task of determining what constitutes responsible pricing.
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The arithmetic of tiny loans. Interest rates face an uncompromising arithmetic of three main cost elements, all context-specific. How big are the loans? What is the maximum loan officer caseload? How much are loan officers paid? A lender making $1,000 loans in a dense city market with a labor market that allows modest loan officer salaries can charge a much lower interest rate (think Bolivia, with rates in the 20s) than a lender making $100 loans in the rural parts of a middle income country where loan officers earn a lot (think Mexico with rates in the 60s).
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The need for sustainability to ensure coverage and permanence. Should prices support lender sustainability? Microfinance grew to reach 150 million clients worldwide by pursuing financial sustainability – and profitability — as the ticket to reaching more people permanently without heavy donor dependence. Most of today’s international microfinance providers believe the poor should be treated as clients, not recipients of charity.
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This point does involve moral judgment. Is it more moral to help (a few of) the poor through subsidies or to provide (many of) them with services on a business basis? Answers may differ in different places. The wealthier United States may be able to afford to subsidize the less fortunate, while in the resource-strapped developing world, subsidies are a luxury not available to the masses of the excluded.
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The needs and the existing options of the poor. Many people are surprised to learn that the poor in the developing world lead complex financial lives as they struggle to make their small, often intermittent incomes cover basic needs as well as unusual expenses and opportunities. Poor families are often both savers and borrowers, setting aside money in informal savings clubs, and borrowing from relatives, employers, and local grandees as well as professional moneylenders. While not all moneylenders by any means are the evil loan sharks of legend, they do generally charge rates far in excess of those charged by microlenders.
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Still, it’s fair to ask: can a microloan that tops out at a compound annual rate of say 80 percent inclusive of fees and taxes be a boon to poor borrowers? Client returns to investment are not well documented, but we do know that for short term loans, especially for the kinds of retail and restaurant businesses found in urban microfinance markets, opportunities to leverage an immediate lump sum of cash are often available. At an 80 percent APR, a microfinance client borrowing $500 for three months will pay back $600 – which many clients find to be an acceptable opportunity cost for equipment or stock that will boost a microenterprise’s earning ability or for consumption needs such as school fees or home improvements.
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That said, as interest rates come down and loan terms lengthen, microfinance loans become economically attractive to a wider range of businesses, and support longer term investments.
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In countries such as Mexico where rates are high, market entrants and regulators need to do everything they can to bring rates down. Ultimately, the best means of doing so is to promote competition, which spurs the innovation that brings better products at lower prices.
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The microfinance market in Bolivia provides a good example. In 1992 BancoSol, one of a few small microfinance loan providers at the time, charged an annual rate of 65 percent. Today, in a much more competitive environment, BancoSol and its direct competitors charge much lower rates, in the range of 18 to 22 percent. Worldwide, as microfinance has grown and many more providers have entered the market, a CGAP study found that average interest rates dropped by 2.3 percent per year from 2003 to 2006, with a median rate for profitable MFIs of about 26 percent.
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Ultimately, responsible pricing makes good business sense. With the relatively high cost of acquiring new clients in microfinance, financial service providers survive based on long term customer relationships. Setting a price that allows the client’s business to thrive helps to generate more future business for the financial institution.
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Counting the world’s unbanked – McKinsey Quarterly

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Counting the world’s unbanked

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MARCH 2010: Alberto Chaia, Tony Goland, and Robert Schiff
Source: Social Sector Practice

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Fully 2.5 billion of the world’s adults don’t use banks or microfinance institutions to save or borrow money, but unserved doesn’t mean unservable.
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Fully 2.5 billion of the world’s adults don’t use formal banks or semiformal microfinance institutions to save or borrow money, our research finds. Nearly 2.2 billion of these unserved adults live in Africa, Asia, Latin America, and the Middle East. Unserved, however, does not mean unservable. The microfinance movement, for example, has long helped expand credit use among the world’s poor—reaching more than 150 million clients in 2008 alone.1 Similarly, we find that of the approximately 1.2 billion adults in Africa, Asia, and the Middle East who use formal or semiformal credit or savings products, about 800 million live on less than $5 a day (Exhibit 1). Large unserved populations represent opportunities for institutions that are able to offer an innovative range of high-quality, affordable financial products and services. Moreover, with the right financial education and support to make good choices, lower-income consumers will benefit from credit, savings, insurance, and payments products that help them invest in economic opportunities, better manage their money, reduce risks, and plan for the future.
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http://www.mckinseyquarterly.com/Nonprofit/Performance/Counting_the_worlds_unbanked_2552#
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10 Determinants of Interest Rates in Microfinance

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10 Determinants of Interest Rates in Microfinance

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April 17, 2010 by Fehmeen
Source: lormet.com
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While the necessity of charging interest on microcredit has been widely accepted, there seems to be plenty of disagreement over the level of interest rate charged by microfinance providers because the factors that go into these calculations are not well known. We often hear about high transaction costs and cost of funds in microfinance as justifications of high interest rates, but there is more to it than that. This post shares some of these causes.
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Determinant 1: Cost of Funds

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A large portion of an MFI’s funds are sourced from commercial banks (a 2006 MIX Publication) and the cost of these funds is the market interest rate. In fact, this financial expense, combined with the fees paid on such loans and deposits taken from the public, account for 23% of the interest rate charged by profitable microfinance providers (2010 MIX Publication).
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Determinant 2: Operating Expense

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Personnel and administrative expenses form the largest component (62%) of interest rates charged by sustainable microfinance providers, as per the report mentioned earlier. According to an ADB publication, high transaction costs are associated with disseminating and recovering a large number of small-sized loans, often to clients in geographically dispersed areas with poor infrastructure and security conditions. However, this cost can be reduced by introducing certain technology-related solutions, such as mobile banking, ASP infrastructure model and an MIS customized for microfinance.
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Determinant 3: Contingency Reserves (Provision for Bad Debt)

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‘Provisions for bad debt’ is often a regulatory requirement for bank-led MFIs but other types of MFIs realize the importance of creating an emergency fund to provide a cushion against the risk of loan defaults. As a result, ‘portfolio losses’ account for 6% of interest rates charged by successful microfinance providers, according to data provided by Microfinance Information Exchange.
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Determinant 4: Tax expenses

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Since MFIs often operate in the form of banks, they are subject to business taxes that are often higher than those levied for other businesses. Even though an MFI’s business tax expense is factored into the interest rate calculations by 2%, clients have to pay sales tax on their borrowings as additional fees.
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Determinant 5: Profits

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The profit motivation of microfinance providers is vital for many reasons and it’s only logical that profits form a part of interest rate charged on microloans. The tricky part is ensuring that the returns generated are reasonable and not indicative of greed, as in the case of Bank Compartamos.
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Determinant 6: Credit Rating of Client

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The credit ratings associated with individual and group clients will determine whether a risk-premium is charged on interest rates to off-set the risk of default and maintain the risk-adjusted return to investors.
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Determinant 7: Inflation Levels

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Under the Fisher Effect, inflation erodes the equity levels of an MFI’s lender. As a result, microfinance providers need to raise nominal interest rates to ensure the real value of funds remains the same over time.
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Determinant 8: Higher Competition

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While greater competition among MFIs in many countries has lowered interest rates, a recent study by Financial Access Initiative shows the opposite to be true in Uganda. Greater competition has encouraged MFIs to serve ‘niches characterized by smaller scale loans’ and higher interest rate spreads. In other words, poorer clients in remote areas are targeted with comparatively higher interest rates on smaller loan sizes. Ironically, this partially serves the purpose of microfinance.

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Determinants 9 & 10: Other Factors Impacting the Interest Rate

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Two less definitive factors that impact interest rates, in the opinion of Ruth Goodwin-Groen, are:
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* Management Competence: by tweaking the business process to improve efficiencies, or altering the product design of microloans, managers can lower their operating costs and hence, interest rates.
* Financial Literacy of Clients: if clients understand the actual costs they incur, they perform better comparison shopping and negotiate lower interest rates.
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If you can think of any other factors, please be sure to share them. Alternatively, if you liked this article, you may like to read up on other areas in microfinance theory.
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How to Tell Good MFIs from Bad MFIs

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An excellent article below which enumerates the difficulty of using an interest rate only to determine “good” vs “bad”. This article also illustrates well the value of the for-profit model, driving higher financial and social returns. This seems like a contradiction in terms, but the empirical evidence begs the question of superior social impact for not-for-profits in the sector. … PLEASE READ THE ENTIRE ARTICLE …

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How to Tell Good MFIs from Bad MFIs

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by Richard Rosenberg: Tuesday, March 16, 2010

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Most of us working in microfinance want microloan clients to be paying interest rates that are as low as possible. While we have the same vision, there is disagreement about how to determine whether an interest rate is an appropriate one.

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Some people, including Mohammed Yunus, are worried about the growing commercialization of microfinance, including the entry of profit-motivated owners and managers.  They are concerned, reasonably enough, about possible “mission drift,” especially in the form of interest rates rising to (or staying at) excessive levels. In his book and in many presentations, Professor Yunus offers a straightforward formula for judging MFIs and their objectives:

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• If you’re a real microlender who cares about the poor, then your interest margin (the difference between the rate you charge when lending to your clients and the rate you have to pay when you borrow from your funding sources) should be no more than 10%. That’s the “green zone” where true microlenders operate.
• If your interest margin is 10-15%, a big warning sign is flashing because you’re in the yellow zone.
• Anything above 15% is the red zone, where you’ve left true microcredit behind and joined the loan sharks.

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Unfortunately, when you look at the evidence, this appealingly direct formula turns out to be pretty far off the mark.

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To begin with the conceptual problem, the formula doesn’t allow enough room for legitimate differences in administrative costs among MFIs. For an MFI that makes especially small loans or serves a sparse rural clientele, administrative costs will inevitably be a higher percentage of loan portfolio, and the lion’s share of the interest rate spread goes to cover those costs. Application of the proposed formula could actually discourage outreach by such MFIs to poorer clients.

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But concepts aside, how does the formula match up against actual MFI experience? It turns out that this formula would place most of the world’s MFIs in the red zone—the average interest rate spread for MIX MFIs in 2008 was over 20%.  But to be fair to Prof. Yunus, that shouldn’t end the discussion.  After all, maybe plenty of the MFIs in the MIX are charging their borrowers rates that are way too high.

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Now let’s test the green-yellow-red formula against a group of Grameen-approved MFIs. Christoph Kneiding and I analyzed MIX data on Grameen along with several dozen MFIs that received support from the Grameen Foundation and reported to MIX. In 2007, for instance, 33 MFIs (representing about two-thirds of the Grameen Foundation recipients) reported to the MIX.  The only one in the green zone that year (interest spread below 10%) was Grameen Bank itself. Seven were in the yellow warning zone (10-15%). All the other 25 were up in the red zone (above 15%) and most of them way up in the red zone (between 30 and 55%). The three preceding years looked pretty much the same.

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The proportion of Grameen affiliates in the red zone was about the same as the worldwide proportion: for instance, 75% of all MIX MFIs were in the red zone in 2008, according to a new study by Adrian Gonzalez of MIX. NGOs were more likely to be in the red zone than for-profit MFIs, suggesting that interest spreads may be driven more by the higher costs of smaller loans than by profit maximization objectives. (Average loan size in NGOs is about a third of what it is in for-profit MFIs.)

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Has the Grameen Foundation has been fooled into working with a bunch of red-zone partner MFIs that are wolves in sheep’s clothing? Far from it. The Grameen partner MFIs that look so terrible on the green-yellow-red test actually appear quite strong—in fact, well above average—on indicators normally thought to be associated with commitment to the poor, such as average loan size.  Nor do they appear to be inefficient: they average considerably lower on cost per borrower than the other MFIs in their countries.

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It’s disappointing that simple formulas can’t help much when it comes to appraising things like mission drift or fairness of interest rates. It takes a more complex analysis (see, for example, the CGAP papers on microcredit interest rates and Banco Compartamos).  I hope we see a lot more MFI-by-MFI analysis, in which the reasonableness of interest rates is judged by the reasonableness of the costs and profits that produce those interest rates. We all want to see MFIs charging clients rates that are as low as possible, so we need analytic tools that can do a credible job of separating the sheep from the goats in that regard.

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Aravind: How low-cost eye care can be world-class

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

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Microfinance Shows Strong Equity Valuations Despite Crisis

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Microfinance Shows Strong Equity Valuations Despite Crisis

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

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While Haiti clearly needs aid and compassion now, the long term prospects will remain weak if not coupled with a rigorous rebuilding and foreign direct investment plan. The Haitian government must work toward building a legislative framework for the protection of human rights and establishment of a robust private sector.
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To Help Haiti, End Foreign Aid

It’s been a week since Port-au-Prince was destroyed by an earthquake. In the days ahead, Haitians will undergo another trauma as rescue efforts struggle, and often fail, to keep pace with unfolding emergencies. After that—and most disastrously of all—will be the arrival of the soldiers of do-goodness, each with his brilliant plan to save Haitians from themselves.
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“Haiti needs a new version of the Marshall Plan—now,” writes Andres Oppenheimer in the Miami Herald, by way of complaining that the hundreds of millions currently being pledged are miserly. Economist Jeffrey Sachs proposes to spend between $10 and $15 billion dollars on a five-year development program. “The obvious way for Washington to cover this new funding,” he writes, “is by introducing special taxes on Wall Street bonuses.” In a New York Times op-ed, former presidents Bill Clinton and George W. Bush profess to want to help Haiti “become its best.” Some job they did of that when they were actually in office.
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All this works to salve the consciences of people whose dimly benign intention is to “do something.” It’s a potential bonanza for the misery professionals of aid agencies and NGOs. And it allows the Jeff Sachses of the world to preen as latter-day saints.
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For actual Haitians, however, just about every conceivable aid scheme beyond immediate humanitarian relief will lead to more poverty, more corruption and less institutional capacity. It will benefit the well-connected at the expense of the truly needy, divert resources from where they are needed most, and crowd out local enterprise. And it will foster the very culture of dependence the country so desperately needs to break.
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How do I know this? It helps to read a 2006 report from the National Academy of Public Administration, usefully titled “Why Foreign Aid to Haiti Failed.” The report summarizes a mass of documents from various aid agencies describing their lengthy records of non-accomplishment in the country.
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Here, for example, is the World Bank—now about to throw another $100 million at Haiti—on what it achieved in the country between 1986 and 2002: “The outcome of World Bank assistance programs is rated unsatisfactory (if not highly so), the institutional development impact, negligible, and the sustainability of the few benefits that have accrued, unlikely.”
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Why was that? The Bank noted that “Haiti has dysfunctional budgetary, financial or procurement systems, making financial and aid management impossible.” It observed that “the government did not exhibit ownership by taking the initiative for formulating and implementing [its] assistance program.” Tellingly, it also acknowledged the “total mismatch between levels of foreign aid and government capacity to absorb it,” another way of saying that the more foreign donors spent on Haiti, the more the funds went astray.
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But this still fails to get at the real problem of aid to Haiti, which has less to do with Haiti than it does with the effects of aid itself. “The countries that have collected the most development aid are also the ones that are in the worst shape,” James Shikwati, a Kenyan economist, told Der Spiegel in 2005. “For God’s sake, please just stop.”
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Take something as seemingly straightforward as food aid. “At some point,” Mr. Shikwati explains, “this corn ends up in the harbor of Mombasa. A portion of the corn often goes directly into the hands of unscrupulous politicians who then pass it on to their own tribe to boost their next election campaign. Another portion of the shipment ends up on the black market where the corn is dumped at extremely low prices. Local farmers may as well put down their hoes right away; no one can compete with the U.N.’s World Food Program.”
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Mr. Sachs has blasted these arguments as “shockingly misguided.” Then again, Mr. Shikwati and others like Kenya’s John Githongo and Zambia’s Dambisa Moyo have had the benefit of seeing first hand how the aid industry wrecked their countries. That the industry typically does so in connivance with the same local governments that have led their people to ruin only serves to help keep those elites in power.
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A better approach recognizes the real humanity of Haitians by treating them—once the immediate tasks of rescue are over—as people capable of making responsible choices. Haiti has some of the weakest property protections in the world, and some of the most burdensome business regulations. In 2007, it received 10 times as much in aid ($701 million) as it did in foreign investment.
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Reversing those figures is a task for Haitians alone, which the world can help by desisting from trying to kill them with kindness. Anything short of that and the hell that has now been visited on this sad country will come to seem like merely its first circle.
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Write to bstephens@wsj.com
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Printed in The Wall Street Journal Europe, page 15
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