Monthly Archives: July 2010

Subprime Time: Microfinance Debt Hits the Stock Exchange

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Tell me more about this microfinance.

Right now, the hot topic in microfinance is the initial public offering (IPO) of SKS Microfinance, one of the largest microfinance institutions in India with a portfolio size of over US$1 billion.  This isn’t the first time a major microfinance institution has gone public, but it is more interesting because the CEO is a disciple of Muhammad Yunus, who believes what organizations like SKS are doing undermines the social mission of microfinance.  But there is other interesting financial news in the microfinance world that is flying under the radar.  This, for example:

NYSE Euronext and Microfis plan to set up the first organised market for listing and trading of bonds based on debt from international microfinance institutions and solidarity businesses as defined by the Economic Modernisation Act (LME).

The new NYSE Euronext market segment will offer investors a range of products in an environment that is secure and transparent.  Microfis will handle origination, analysis and tracking of high-quality assets, as well as their transformation into tradable securities and their syndication.  Scheduled for launch in the last quarter of 2010, the market segment is dedicated to responsible finance. Continue reading →

The Development Umbrella: Systems Trump Solutions

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William Easterly is a development economist who runs the blog Aidwatchers.   When I read his posts, I imagine an exasperated and pragmatic man who has had it up to here with people misunderstanding and oversimplifying the problems he has devoted his life to solving.  His latest post, titled “The Answer is 42! Why Development is About Problem-Solving Systems, Not Solutions” fits this category well.   He explains exactly why some things work and some things don’t, and reveals the key to creating long-term solutions.

Here’s why direct solutions to problems cannot foster development. Each direct solution depends on lots of other complementary factors, so the solutions can seldom be generalized across different settings; Solutions must fit each local context. Solutions that generate the highest payoff in each setting should be a higher priority than the lowest payoff solutions. Since there is little or no feedback on how well each solution is working in each local situation, there is little possibility for any such adjustments.

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Microfinance on Wall Street: The Debate Rages On

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SKS CEO Vikram Akula disbursing money to a client at a center meeting

Given my post yesterday about the benefits of profitability, a new article in the Wall Street Journal about the IPO of the largest microfinance institution in India is serendipitous.  This isn’t that new of a story, though whenever microfinance makes it into the Wall Street Journal or the New York Time, you can guarantee that everyone in this industry will be talking about it.  Hopefully I will be one of the first to offer my opinion.

There are a lot of case studies that highlight the “capitalism vs. altruism” schism in the microfinance today.  After all, Compartamos in Mexico went public three years ago i topic I discussed at length one of my first posts on this blog – and there are dozens of private equity and venture capital firms focusing on the microfinance segment.  But this one is unique in that the two central players – Vikram Akula, the CEO of SKS, and Muhammad Yunus, founder of Grameen Bank and godfather of microfinance – are closely related and, on this debate, stand diametrically opposed.  Akula is a former disciple of Yunus, copying the Grameen model in SKS’ initial phases.  It is not dissimilar to Aristotle and Plato, or Luke Skywalker and Darth Vader.  My opinion on the matter has become a bit more formed over the last few months.  I tend to side with Akula and SKS in their decision.  First, some background on the path of the organization once Akula left Grameen Foundation to start SKS:

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How Profit Supports the Microfinance Social Mission

A CHF International loan officer and her client

Among some in the microfinance community, there is almost a reflexive tendency to dismiss profit as a bad thing, a corrupting force that causes microfinance institutions (MFIs) to abandon the social mission that underlies their reason for being.  I have thought a lot about the issue over the last few months and have seen a lot of upsides and downsides to the different arguments.  But more and more I have come to the conclusion that the two are really inseparable.  The idea that higher interest rates that produce extra income beyond what is needed to just continue doing business is exploitative to the poor belies the priorities of microfinance clients.  Interest rates are important in their decision-making, but more paramount is receiving a good product with attentive service from the loan officers and the ability to continue taking loans.  When higher interest rates give MFIs additional capital to pay their employees higher salaries, expand operations to new regions, and invest in technology that enhances their ability to offer their services on-time and on a larger scale, the end result is more capacity serving a larger market.  I will address some of the points one-by-one.

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The Argument Against Subsidized Interest Rates

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Microfinance institutions (MFI) the strive for operational and financial sustainability.  The former is an indicator that the MFI can, at the very least, break even based on its current operations and sources of funding, including loans, grants, and donations.  The latter takes into account where an MFI gets its money.  Since money from donors is basically free, an MFI that receives grants and is just barely breaking even would be unsustainable were that source of money to dry up.   In a perfect world, MFIs would not need to rely on any donor funding and could get all of their capital through loans at commercial rates.  To reach that point, MFIs need to operate efficiently and reduce the costs of doing business, but also charge interest rates that will allow them to make enough money to cover their costs.   When subsidized interest rates are introduced, it be damaging to the microfinance market as a whole.  Joanna Ledgerwood explains this dynamic in the Microfinance Handbook, the bible of microfinance practitioners:

Subsidized lending programs provide a limited volume of cheap loans.  When these are scarce and desirable, the loans tend to be allocated predominantly to a local elite with the influence to obtain them, bypassing those who need smaller loans (which can usually be obtained commercially only from informal lenders at far higher interest rates).  In addition, there is substaintial evidence from developing countries worldwide that subsidized rural credit programs resulti n high arrears, generate losses both for the financial institutions administering the programs and for the government and donor agencies, and depress institutional savings, and consequently, the development of profitable, viable rural financial institutions. Continue reading →

Golfing in Burma’s New Capitol

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Burma is a strange country.  It feels like the clock stopped in the 1950’s, and most forward progress along with it.  In the capitol city of Rangoon, everything is old – the cars, the buildings, the infrastructure, the money.  And this is the capitol, where most of the wealth in the country is concentrated.  Very little has been invested in modernization, mostly because it is tightly controlled by an authoritarian military junta that keeps the country isolated from the rest of the world.  Foreign Policy just included the country in its list of the 20 least free places on earth.  With the exception of other reclusive nations and kindred spirits, like North Korea, and trading partners trying to gain access to the country’s abundant natural resources, Burma keeps its distance.  A fraction of the money coming from the lucrative contracts with neighboring Asian countries for oil and gas exploration is reinvested in developing the country.  Despite money coming in, the country has its share of problems. Continue reading →

The Economics of a Cookstove

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The other day I went to the NWTF branch office in Hinigaran to interview clients that recently purchased an Envirofit cookstove. Cookstoves have received a lot of positive publicity recently as a cheap and effective solution to the problem of indoor air pollution – a problem that claims 1.4 million lives every year. The predominant stove in use by the poor – a basic design with a fire lit beneath a pot resting on three stones (a “three-stone stove”) – burns inefficiently. Much of the heat from the stove is lost due to lack of insulation and the fuel – sticks or charcoal – does not burn completely, requiring more to produce the same amount of heat. What’s more, partially-burnt fuel produces smoke containing particulate matter that is particularly harmful to the lungs when inhaled. The Envirofit cookstove, designed in conjunction with researchers at the University of Colorado, is the product of air-flow modeling and rigorous testing. It is designed for efficiency.

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