On May 7th 2010, the University of Chicago and Northwestern University hosted the sixth annual Chicago Microfinance Conference. I represented IFMR Capital at the event to discuss the evolution of microfinance as an asset class in the Indian context. Below are some of the highlights from the many panels and speakers, but here is the 30 second summary of what I found most interesting:
- A greater amount of intellectual honesty around the discussion of microfinance’s impact on poverty. Nearly everyone now agrees control groups are necessary to study the impacts of micro-credit properly. Consumption smoothing is recognized as important.
- Interest rates are coming down and will continue to fall at a faster pace.
- There’s a danger of short-term money in some microfinance equity markets. Longer term investors are needed, but the pension fund/large institutional funding channel needs better vehicles to invest in.
- Microfinance bubbles in Morocco, Pakistan, and Bosnia could have been prevented with more discerning investment (on the part of multilaterals mainly) and credit bureaus.
- Reaching more remote populations is the next frontier. BRI is one of the few success stories.
- M-Pesa (the mobile payment platform) now has over 9 million clients in Kenya. Wow.
The “impact of microfinance debate” has been a popular one over the past year, especially after the publication of the first few randomized evaluations in microfinance (e.g. CMF and MIT’s Spandana study) have shed light on how limited our knowledge of microcredit’s impact really is. During a panel entitled, “Impact Monitoring and Reporting,” the panelists (each from high-profile microfinance funders and networks) admitted that we do not know whether microfinance alleviates poverty. Even though some of the panelists’ websites and marketing materials do not yet reflect this admission, it is refreshing to hear in public a greater agreement upon the limitations of most previous impact evaluations, primarily due to the lack of control groups in past evaluations. Speakers also noted that even if it does not lift people out of poverty, microfinance’s ability to help smooth consumption is a praiseworthy accomplishment – an insight that many credit to Morduch, et al’s Portfolios of the Poor.
David Roodman from the Center for Global Development hosted a session discussing his Open Book Blog, in which he “shares the writing of a book about the history and impact of microfinance.” Some of the main points Roodman made in his presentation can be seen in this post he made last month. (I think the “OK Go” video really drives home his point on selection bias!)
Investment and Interest rates
Panel discussion; Peter, second from right at the panel.
On the “Microfinance and Wall St” panel, we discussed the evolution of MFI funding in recent years (e.g. more commercially driven, a bifurcation between top-tier and smaller MFIs) and how IFMR Capital is having early success working with small and medium sized MFIs to access domestic debt markets. Some panelists characterized the current global funding environment as, “too much money going after too few opportunities,” but I only see this as true if one limits the focus to the world’s 50 largest MFIs. In reality there are many underfunded but strong MFIs.
What is needed are: 1) More technical assistance providers to work with high-potential small MFIs, and 2) More conduits such as IFMR Capital to create structures linking smaller high-quality MFIs with the investment appetite of larger investors, who cannot individually go after relatively small-ticket deals.
Carlos Castello from ACCION International, and a Board Member of Banco Compartamos, was on the panel so there was a question from the audience on whether interest rates charged to customers are too high and MFIs too profitable. Mr. Castello pointed out that Compartamos has lowered their rates by about 10% the past year and reiterated their belief that high-returns will invite more competition, and that competition will be the driver for lower rates. I am still seeking to better understand why the flood of new MFI competition that markets such as India have seen is not occurring in Mexico, where Compartamos and others have proven microfinance can be a very profitable business (Compartamos’ ROE is approximately 40%).
I was pleased to highlight Bandhan’s recent interest rate slashing and drew a comparison to the Indian telecom sector as a more mature market that microfinance can continue to look to for a number of comparisons. As the Indian mobile market has shown, it is certainly exciting to see the pro-customer innovations that come once businesses realize their market will be require a low-margin, high-volume business model. This of course requires a different kind of equity investor – one with a long-term horizon vs. short-term – and will likely rattle some of the current private equity money investing in the Indian market.
Interview with IFC’s Microfinance Chief Investment Officer
The last session of the day was an interview with Martin Holtmann, who helps oversee IFC’s $1.4 billion portfolio of microfinance investments. Given how unique each country’s microfinance market is around the world, it was fascinating to hear the perspective of someone with investments in dozens of countries. When asked point blank whether multilateral organizations were responsible for the recent microfinance bubbles seen in countries like Pakistan, Bosnia, and Morocco (Nicaragua is a crisis but of a different kind), Mr. Holtmann provided an interesting response.
Given their mandate to work directly with private companies, he said the IFC had been as careful as possible to make investments where institutions had the capacity to absorb liquidity and grow, but funding from organizations like the World Bank (IFC’s parent) made subsidized loans directly to governments, such as a $100 million soft loan to Bosnia’s government, which then disbursed the funds as the government saw fit. In some cases this led to overheating the sector and damaging the market for all participants.
Turning to India, Mr. Holtmann expressed concern about the amount and kind of money chasing MFI equity ownership, and drew comparisons to the U.S. residential real estate market a few years ago, where investors looked for opportunities to “flip” investments within only a 12-24 months of investing.
I am not aware of many exits made in the Indian private equity market within two or three years of investing, with the exception of a few transactions such as Sequoia’s purchase of Kalpathi Suresh’s stake in Equitas in mid-2009. My sense is most of the PE money looking at MFIs today realize exits are at least 4+ years post-investment, but if quick exits are in fact expected by investors, then the aforementioned interest rate cut by Bandhan will hopefully spook some of this money out of the sector and allow long-term oriented investors better valuations at which to enter.
Here are my takeaways from the rest of Mr. Holtmann’s interview:
On Credit Bureaus: They make little sense in a pure group-lending environment, but in urban or individual/SME lending markets, they are crucial. In fact he thinks credit bureaus could have prevented much of the problems in Bosnia, Pakistan, and Morocco.
On Repayment Crises: In a stress situation, repayments only fall off a cliff if the growth of an MFI has been undisciplined. Contrary to prevalent opinions, if group lending is done properly then it is reasonable to believe delinquencies at an MFI could hit 10-15% and still recover. An MFI like FINCA Uganda would be almost impossible to destroy even if delinquencies were over 10% because of the overall strong culture.
What WON’T we be talking about in five years? Interest rates. They have come down globally by 150-200 bps the past two years (according to CGAP) and will continue to fall.
What WILL we be talking about in five years? We will still be talking about the difficult to reach populations/sectors (e.g. in Bosnia only 4% of MFI portfolio is in agriculture). Bank Rakyat Indonesia (BRI) is able to setup branches to serve areas with a population as small as 4,000 but for most MFIs the average population has to be much higher number in order to be profitable. Going to more remote, dispersed populations will be the next frontier.
If Mr. Holtmann is right, then kudos to KGFS and IFMR Rural Finance for taking on the next frontier (on many fronts) today.
Peter Bremberg of IFMR Capital contributed to this post.