The theme of the conference was Competition and Collaboration between the different players in the industry.
So many major points were brought up in the sessions that I visited. Some of these topics echo what we have been talking about in class as well as what we are reading for the upcoming class. And so I will probably raise some of the relevant issues as separate blogs.
The terminology "Patient Capital" came up in these discussions.
Matt and Amanda, feel free to chime in if you attended this session.
Some of the innovative ways to access capital in this arena: (since my background is not in Finance or Accounting, please excuse any mistakes in the descriptions.)
Bond Offerings:
Many institutions are raising money through international bond offerings. The Microfinance Bank of Azerbaijan has issued its first ever international bond issuance which is also the very first international bond offering in the country.
Growth Guarantees Transactions:
This is practiced by organizations such as Grameen Foundation.
Investors can use their assets to provide credit. The donor-guarantors do not give up their money, but enable their assets to be put to valuable use as guarantees. Commercial banks in turn issue letters of credit to local banks to support financing for the selected MFIs. Each dollar provided as a guarantee is leveraged several times for the MFI in their own currency through a variety of transaction structures such as term loans, credit lines, and bond issues.
Portfolio sale:
This is practiced by organizations such as Grameen Foundation and SKS India. Capital is raised by selling part of its portfolio to a large commercial bank. The assets of the MFI then go on the bank's books.
Securitization of Microfinance Credits (True Sale):
Assets(loans or receivables) are transferred to a special purpose vehicle (SPV) often in the form of a trust. This "true sale" shields the assets if the originator goes bankrupt. The SPV issues bonds for which the loans or receivables act as collateral. These bonds are sold to investors through an intermediary bank. The proceeds of the bonds are paid to the originator.In 2006, BRAC, the largest MFI NGO in Bangladesh, serving 5 million members, created a AAA rated micro-credit securitization which will provide it $180 million of financing over 6 years. A special purpose trust purchased the receivables from BRAC and allows it to reduce its on-balance assets and also disburse more funds.
IPOs
This is a hotly discussed subject especially in the case of the Mexican MFI Compartamos.
Here is an excerpt from the following site:
http://www.microfinancegateway.org/content/article/detail/41736
In April 2007, Mexican microfinance institution (MFI) Banco Compartamos made an initial public offering (IPO) of its stock. The original investors who created the company in 2000 sold off part of their shareholding to public investors at an astonishing profit.
The Compartamos IPO was 13 times oversubscribed, and the share price surged 22% in the first day of trading alone, even though the offering price was twelve times the book value of the company. Investors walked away with $450 million for 30% of their shares - which ultimately represented a 1,150% premium over the book value. Most of these gains went to not-for-profit development agencies - a Mexican NGO, the International Finance Corporation, and ACCION International - but a third of the proceeds went into the pockets of private shareholders.
The biggest reason for the high sales price was that Compartamos had been generating very high profits (returns on equity above 50% a year), driven by very high interest charges to borrowers (about 86% a year).
Not surprisingly, the news raised a lot of eyebrows. Two concerns predominated in discussions among industry observers.
- Did the high interest rates place an unreasonable burden on Compartamos’s borrowers, contrary to the social objectives of the company and its majority shareholders?
- Did the early donor grants that Compartamos received before it commercialized in 2000 wind up enriching private parties?
2 comments:
That was a great summary, Lata! I'm glad you took a lot away from this year's conference.
I was able to attend last year as well (as a more casual observer), and the progression of themes from one year to the next was pretty striking.
The tag line from 2007 was "The Road Ahead" and the conference was focused on innovative ways to scale up the delivery of micro-credit to the world's poor. It was very much prospective and forward looking.
This year there was a palpable sense that "we've arrived." As Elizabeth Funk, Board Chairman at Unitus, stated in her morning keynote -- There's plenty of capital in the system, and new partnerships between MFI's and capital markets are forming every day. For these partnerships to be sustainable, we have to devise clearly articulated metrics for both financial AND social returns (right now both are murky at best). Doing so will require an accurate assessment of investors' motivations and expectations. We've only begun to scratch the surface here, but the prospects for more private capital are encouraging.
The theme of this year's conference was "Competition and Collaboration." In my view both are good for the continuing development of microfinance. Healthy competition among investors and MFI's breeds efficiency and efficiency begets a lower cost of capital for working poor borrowers. Collaboration among governments, NGO's, donors and private investors is necessary to promote the sustainability of funds (akin to the hybrid model we've been discussing in class).
It was really a fabulous conference. I learned a lot and, like Lata, I wasn't always sure I understood all the finance jargon!
However, one thing I did notice is that while everyone tooted increased efficiency as a byproduct of increased competition in the sector, I did not hear a single panelist talk about effectiveness. Efficiency suggests that the cost of doing business has dropped, but no one felt comfortable saying that the industry is doing a better job meeting the needs of the poor.
Another note: there was quite an interesting backlash against the oft-used phrase "the poorest of the poor". As Matt suggested above, the increasing spectrum of hybrid models has resulted in different business models targeting different market segments (in this case, segments are determined primarily by income level). It seems that big business has discovered the "poor" market and is moving in. Although there was discussion of average loan size, I left with the feeling that many companies were "creaming", leaving the harder to serve population primarily for the high-touch, less efficient non-profits.
Finally, I definitely agree with Matt's point about metrics. Everyone danced around the issue (even Grameen Foundation's PPI index was a bit fluffy for me). My guess is that most organizations are actually very nervous to start tracking numbers. I am curious to see what metrics will finally be adopted, when they will be universally accepted (if ever) and how.... Maybe a 3rd party? Seems to me like investors will need to demand it.
Overall, a great, thought-provoking conference!
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