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Microfinance’s Midlife Crisis – WSJ

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Microfinance’s Midlife Crisis

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

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By JULIAN EVANS

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

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

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

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

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

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[MICROFINANCE]

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

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

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

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

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The Revolution Has Gone Mobile

New York Times
Published: February 19, 2010

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

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

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

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

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

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

Mexico’s Compartamos Eyes 20% Profit Growth, Deals In 2010

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MEXICO CITY (Dow Jones)–Mexican microfinance bank Banco Compartamos SA (COMPART.MX) plans to grow its profit 20% this year and is looking for acquisitions in other Latin American countries, top executives said Tuesday.

“In Mexico, we think the best way to grow is organically, but outside of Mexico we are open to and looking for opportunities to acquire a well-managed institution with a focus similar to our own,” said Fernando Alvarez Toca, Compartamos’ chief executive, in an interview.

Alvarez Toca said the company has an internal team looking for acquisitions.

“Colombia, Peru and Brazil are countries that we think have the best environment for an operation like ours, but we aren’t ruling any [country] out,” he said.

Last week, Mexican consumer finance company Financiera Independencia SAB (FINDEP.MX) closed the acquisition of Financiera Finsol in a deal that boosted its domestic microfinance business and gave it a foothold in Brazil.

Microfinance, or the provision of small-scale financial services such as small working-capital loans, savings accounts and insurance policies, has gained popularity worldwide in recent years as a way to combat poverty.

It’s also a very lucrative business, with Compartamos, the largest microfinance lender in Latin America, reporting a whopping 43% return on equity last year.

“Compartamos’ financial structure means we are strongly capitalized and one of the best ways to make use of that capital is through acquisitions,” Alvarez Toca said.

Compartamos reported financial results Tuesday that handily beat management’s full-year 2009 guidance for a 20%-25% increase in net profit and loan growth of more than 20%.

This year, the bank expects to expand its loan portfolio by about MXN1.8 billion, add 310,000 new clients and increase net profit by about 20%, said Patricio Diez de Bonilla, director of treasury and financing.

The bank’s net profit grew 33% on the year to MXN1.49 billion in 2009 thanks to a big increase in lending even though the country suffered its worst recession since the 1995 peso crisis.

The Bank of Mexico expects the economy to grow as much as 4.2% this year, after it contracted 6.5% in 2009.

Compartamos’ total loans increased 33.4% to MXN7.64 billion at the end of December, while the number of active clients rose 30% to 1.5 million.

Compartamos provides small working-capital loans to low-income individuals and business owners, such as crafts manufacturers and food vendors, whose activities are largely recession-proof.

About three-quarters of loans corresponded to its Credito Mujer product for groups of women.

Riskier home improvement loans represented 13% of total loans last year, up from 8% in 2008, which contributed to a deterioration in asset quality.

Home improvement loans shouldn’t represent more than 15% of the overall loan portfolio in the coming years, said Toca, adding the bank’s focus will continue to be working capital loans.

The bank plans to pilot a savings account with a debit card this year with a view to make the product fully available to its clients during 2011, Alvarez Toca said.

Compartamos was one of 10 banks that received preliminary authorization from the National Banking and Securities Commission last December to offer basic financial services through banking agents, which are third parties like retailers hired by a lender to conduct transactions for their clients.

Compartamos’ clients can already pay their loans at Oxxo convenience stores and Chedraui supermarkets, and the savings account product will also rely on third parties because the bank’s network of 325 offices isn’t able to accept deposits, Alvarez Toca said.

“The first step we want to take is to offer a product for our current clients rather than the general public,” he said.

Creating a retail deposit base will allow Compartamos to diversify its sources of funding, which today depends heavily on development banks like government-run Nafin.

Last year, Compartamos boosted its liquidity by selling MXN1.5 billion in three-year notes.

Alvarez Toca said the bank has the resources to fund its growth this year, but even so will look to make another bond issuance if market conditions permit.

“The amount might be a little less than [last year’s]; the tenure, three years if possible, if we can get more we’ll go for a longer term,” he said.

Compartamos’ O shares fell 0.1% to close at MXN64.99 Tuesday. The shares rose 170% last year, compared to a 43.5% gain for the benchmark IPC stock index.

-By Ken Parks, Dow Jones Newswires; 52-55-5980-5177; ken.parks@dowjones.com

The Revolution Has Gone Mobile

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The Revolution Has Gone Mobile

Published: February 19, 2010

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

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

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

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

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

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

Mexico’s Financiera Independencia Closes MXN530M Finsol Deal

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Interesting M&A developments in Mexican Microfinance Institutions… great to see larger firms realizing the value of smaller MFIs, and recognizing that value in 8.6x Net Book Value premiums.

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MEXICO CITY (Dow Jones)–Mexican consumer finance company Financiera Independencia SAB (FINDEP.MX) said Friday that it has closed the acquisition of lender Financiera Finsol for 530 million pesos ($41.4 million).

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The deal included MXN794.6 million in loans and 173,179 clients, Financiera Independencia said in a filing with the Mexican Stock Exchange.

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Finsol’s operations include savings-and-loan firm Financiera Popular Finsol SA, insurance broker Finsol Vida SA, and Brazilian microfinance lender Instituto Finsol Brazil.

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Financiera Independencia said the acquisition of Financiera Popular Finsol is still subject to the approval of the National Banking and Securities Commission, which it expects to obtain during the second quarter.

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The deal expands Independencia’s microfinance business, which still represents a small portion of its largely consumer-oriented loan portfolio. Finsol specializes in making small loans to groups of individuals.

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Microfinance, or the provision of small-scale financial services such as small working-capital loans, savings accounts, and insurance policies, has gained popularity worldwide in recent years as a way to combat poverty.

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Financiera Independencia, which operates as a nonbank finance company, had 198 offices and MXN4.79 billion in loans at the end of September.

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The company’s shares closed 1.1% higher at MXN11.48 on Friday.

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$9m Purchase by Sequoia Gives Kalpathi Rich Exit from India’s Equitas

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$9m Purchase by Sequoia Gives Kalpathi Rich Exit from India’s Equitas

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February 2. 2010

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Kalpathi Investments, the investment company of entrepreneur Kalpathi Suresh, recently
sold its 10 percent stake in Equitas, an Indian microfinance institution, for the local-currency
equivalent of USD 9.4 million after having purchased the stake two years earlier for USD
754,000. US-based venture capital firm Sequoia Capital acquired the stake in Equitas, which
reports total assets of USD 61 million, a gross loan portfolio of USD 43 million, 339,158
active borrowers, return on assets of 1.52 percent and return on equity of 4.02 percent.
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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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Private sector goes into development finance

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Private sector goes into development finance

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Published: December 20 2009
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Financial Times
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The first tentative moves by western banks and fund managers into microfinance are gathering momentum. Most of the big banks have set up divisions that provide financial services to low-income clients in emerging markets, particularly to those who have or wish to set up businesses.
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Many specialist fund managers have also entered the arena in recent years, working with providers on the ground to pool large numbers of small investments.
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The infrastructure involved is burdensome and the returns uncertain, but this does not dim the belief of many in the sector that microfinance will outperform in the future.This belief is bolstered by the fact that many businesses and individuals in emerging economies are still starved of capital. Antoinette Koning, of the European Union’s ACP Microfinance Framework Programme, says a survey by her organisation shows that 2.7bn people worldwide are cut off from formal financial services.
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This is despite international state-sponsored funding increasing year after year. “Our last estimate is that $14.8bn has been provided in total,” says Ms Koning. In 2008 alone, $3bn was dispersed.
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“Donor agencies should be seen as a catalyst to attract more private capital so that permanent access to capital is eventually created,” she adds.
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However, in the wake of the credit crisis, western development finance is likely to slow considerably, potentially creating opportunities for the private sector to step into the void.
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Andrew Mold, a senior economist at the Development Centre of the Organisation for Economic Co- operation and Development, says the financing gap is widening. “The World Bank says that in 2009 the developing world needs up to $635bn as a result of the credit crisis,” he says. “In Africa, this will be $30bn-45bn.”
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The priority given to saving the western banking system has meant Africa and parts of Asia have been virtually left to fend for themselves. While 82 per cent of the International Monetary Fund’s resources have gone to European countries, only 1.6 per cent have been allocated to African countries, Mr Mold says.
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This lack of funding for emerging economies is attracting attention at a variety of levels. Friends of Europe, for instance, a prominent Brussels-based think-tank, organised a one-day conference on it this month.
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Giles Merritt, secretary general, says: “The financial crisis is far from over in my view and we need to ensure that the developing world is not wasting the opportunities presented by this crisis.”
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To date, most international public and private-sector initiatives have revolved around extending credit to the poorest areas since this is seen as the best way of achieving returns. However, this model is under attack.
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Graham Wright, programme director at MicroSave India, says: “We don’t give poor people assets by giving them access to debt. Microcredit is standardised and simple, and works for narrow market segments that can repay on a weekly basis. This is just working capital.” He says emerging economies need a range of financial services including, most notably, ones that focus on saving.
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“Imagine if you had to manage all your financial resources just with loans. It would be terribly difficult,” he adds.
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Alternative channels for finance are being created, some of which have the potential to be rolled out across continents.
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Ali Mchumo, managing director of the Dutch-headquartered Common Fund for Commodities, says his organisation allows small-scale farms to deposit their produce in a warehouse, receive a down-payment of 60 per cent of the expected price of the produce and then wait for prices to improve before selling it.
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“This protects the peasant from the cunning of middlemen who want to buy the product as soon as it is harvested, knowing that the peasant needs the money,” says Mr Mchumo. “If he can deposit the produce in a warehouse, he can’t be exploited. The peasant can earn and spend even before the final price is available.”
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This could create a virtuous circle whereby production and expenditure are functions of each other. But there is still a need to create a savings culture in societies where many people are denied access to basic bank accounts and, in any case, do not trust that institutions would treat them fairly.
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Rose Ngugi, a monetary policy committee member of the Central Bank of Kenya, says savers need access to more products, against which they could benchmark returns.
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“Savers don’t have benchmarks such as risk-free assets to decide how to invest,” she says.
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“We should think about capital markets if we want to diversify the basket, and create access to government securities at least.”
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Encouraging formal savings could have a huge impact on disposable incomes.
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A study in Uganda by MicroSave showed that people saving in the informal sector lost 22 per cent of their saved income one way or another. Mr Wright says: “Saving in cows is normal in many places. This has a higher return, but there is a risk factor involved and people really want straightforward security.”
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As well as the capital- limiting effects of the credit crisis, development funding is often not reaching emerging markets because of red tape or inefficiency.
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Paul Baloyi, chief executive of the Development Bank of Southern Africa, says: “Distribution has been problematic for poor countries. There are multiple agencies and well-meaning NGOs, but there is a huge dispersion between committed funds and funds released.”
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This only increases the emphasis on the private sector for increased funding. However, private sector institutions need to create the right products for the right people, rather than looking at the short-term profit motive.
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If they fail, western institutions, which dominate this space, may find they lose out to aggressive competitors, such as China which is leading the charge to harness African assets more productively.
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Microfinance not in the red, despite crisis

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Microfinance not in the red, despite crisis

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Published on : 13 January 2010 – 4:25pm | By Laurens Nijzink
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While major international banks have collapsed in these times of economic crisis, small microfinance institutions are still performing well. Poor women – until recently regarded as totally non-creditworthy – are paying back their loans while large companies fail to meet their repayments. How has micro-finance survived the economic storm?

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Muhammad Yunus, the godfather of microcredit and 2006 Nobel Peace Prize laureate, explained in early 2009 that his Grameen bank had hardly been affected by the financial crisis:

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“The simple reason is that we are anchored in the ‘real’ economy – not investments which exist only on paper. If we lend someone 100 dollars, that represents chickens or a cow. It’s not an imaginary asset.”

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This is a reference to the cause of the global crisis: loans based on fictional values (sub-prime) and convoluted financial constructions.

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Immune
There are, however, places where micro-finance institutions (MFIs) have not proved immune to the global crisis. From 2009, MFIs in Eastern Europe, Russia and the Caucasus, as well as Central America and the Caribbean were affected by the crisis. They became less profitable, there was reduced growth in the number of loans and overdue loans began to pile up. It’s no coincidence that the economies of these regions are more integrated into the global monetary economy, making them more sensitive to adverse economic conditions in the West.

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India
India, on the other hand, seems completely unaffected. In fact MFIs are growing fast, by 100 or 200 percent in recent years and even last year. With more than a billion inhabitants India has an enormous domestic market and its economy is still not all that dependent on international trade. The informal economy, in which most recipients of microcredit operate, is even further removed from global financial developments.
“In India it will take two years before the lower regions of the business community are hit by the global recession, but within two years we will already be seeing signs of recovery,” says Amitabh Kundu, Professor of Economics and micro-credit specialist at Jawaharlal Nehru University in New Delhi. He emphasizes that the Indian government is actively stimulating what they refer to as “inclusive finance”: making financial services available to everyone. As a result, domestic money – both private and public – flows into MFIs, followed by more risk-avoiding foreign money. India has proved successful in attracting commercial funding from abroad. Around 178 million dollars of foreign money was invested in Indian micro-credit schemes in the financial year 2009, more than three times as much as in the previous year.

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Foreign funding
Despite the fact that their budgets have shrunk as a result of the crisis, foreign investment companies (private equity) and investors clearly regard it as advantageous to add microfinance to their portfolios. Returns have been healthy, relatively unaffected by financial developments in the West and they look good in the annual reports. Moreover, Indian microfinance has enormous potential. More than 22 million Indians current have loans from an MFI and rough estimates indicate that another 120 million households are eligible for micro-credit. That translates as a potential market for financial services totalling 50 billion dollars.

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Too soon
But let’s not celebrate too soon. The financial crisis could still penetrate into the microcredit sector: both MFIs and their customers could be affected. The development budgets of western countries are shrinking, if only because they are normally dependent on the donor country’s GNP. This could result in fewer cheap loans to MFIs in the South, and it’s unclear to what extent this can be cushioned by funds like the Bill and Melissa Gates Foundation or the online ender KIVA. This was one reason that, as early as late 2008, Dutch Development Cooperation Minister Bert Koenders announced he was earmarking 15 million euros for a fund to help compensate for dwindling funding for micro-credit.

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Refinancing
From a commercial point of view refinancing MFI loans is a risk. Loans often run for one or two year. New loans are now being granted at higher rates of interest. This is the result of increased currency risks: the chances of exchange rates adversely affecting the lender because of devaluation are greater in times of crisis. Early last year the International Finance Corporation, an affiliate of the World Bank, and the German development bank KfW set aside 500 million dollars to cushion the risks of refinancing. In order to balance their books MFIs will have to concentrate on recovering outstanding credit. This process is already underway in Africa.

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Loans
While major banks were toppling in the West, the damage to credit lenders in less wealthy parts of the world was limited to falling profits and a brake on their growth. However, in some cases, the collection of loans will become more problematic there too. The World Bank has calculated that an additional 65 million people will end up living on less than two dollars a day due to the financial crisis. A number of MFIs show an increase in the number of loans being paid back later or too late.

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Migrant money transfers
The trend is reinforced by a dramatic reduction in migrant money transfers. Their weak position in the Western labour market means migrants are often the first to be laid off during times of economic hardship. As a result they are sending less money back to relatives in their countries of origin.

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Less rosy
At first glance the microfinance sector seems to have been immune to the financial crisis. In 2008 the ten largest microfinance funds grew by 30 percent (while ‘normal’ funds shrank by a fifth). The results for 2009 look a lot less rosy in many regions. Despite a solid basis, the big question in 2010 in whether the sector can continue to stay out of the red in the wake of the global crisis.

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The Problems of Correlation in Financial Risk Management – the Contribution of Micro finance

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In this paper, the authors, Karel Janda and Barbora Svárovská, first introduce microfinance institutions as an alternative investment instrument. They argue (convincingly) that beside socially responsible features of microfinance, there exists also significant portfolio enhancement opportunity in microfinance investments. Then they provide an overview of possible ways how to evaluate the correlation between microfinance related financial instruments and conventional financial market measures of risk and return.

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This paper is available for download at: http://mpra.ub.uni-muenchen.de/19486/1/MPRA_paper_19486.pdf

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