Global Microfinance Investment Congress

The following are my notes from the [http://www.microfinancecongress.com|Global Microfinance Congress], which I'm attending today with Emily Allred from the [http://www.wccnica.org|Wisconsin Coordinating Council on Nicaragua]. I'm catching these notes on the fly, so I can't promise that I'm quoting everyone accurately or fully.

Comments by Arnaud Ventura, vice president, PlaNet Finance

Banks and international finance institutions are becoming important players in microfinance. It's more than just the talk and noise about it; it's concrete actions in the field.

We are seeing increasingly retail players such as supermarkets, chains, pharmacy and drugstore chains interested in using their networks to the benefit of microfinance clients. The growth of microfinance investments is not only an investment vehicle of some banks. It's generating involvement from a wide spectrum of players.

The total portfolio invested in microfinance worldwide is about $20 billion today. The global portfolio to be reached is 10 to 15 times larger, so there is still a huge untapped market yet to be reached. Encountering success in Latin America and Eastern Europe. You still have huge needs in Asia, India, sub-Saharan Africa. There are huge needs and huge demand there. If you look at the number of potential clients, 2/3 of them are in those regions. The future growth of microfinance will be fueled through those regions. ...

Investment instruments that are designed and implemented to support the growth of microfinance should be carefully thought out. Different regions have different needs. The most important need today is commercial funding. The second clear need that every study points out is equity instruments. That's more or less everywhere. Most debt is still done in hard currency. More investing in local currency is needed.

PlaNet Finance has about 100 programs worldwide run through about 30 local offices in Latin America, Asia and Africa. Those programs bring us to work with banks, microfinance institutions, all types of players. Basically this is financed mostly by finance institutions and individual investors. We also work to channel more funds to microfinance.

The third main activity that we manage is investment. Our role is to advise investment bankers or funds to invest in microfinance. PlaNet has adapted its services to both serve microfinance institutions, providing technical assistance, and also providing investment advice to help investors invest in microfinance.

David F.M. Stileman, CEO, The American Standard Chartered Bank

We are delighted to be here. This event, and indeed the entire subject holds a special significance to us. Our bank derives 90% of its profits from Asia, Africa and the Middle East, and our success depends on the economic and social development of these areas. We believe that by delivering banking services to these areas that we can provide the greatest service to development.

At the Clinton global initiative in 2006, $500 million microfinance facility to be spread out over five years. We committed to take a lead role in financing renewable and clean energy. Through these two public commitments, we believe that it will demonstrate that the private sector can be a force for good and also deliver shareholder value.

Returning more specifically to microfinance, Standard Chartered is working to deliver credit and financial assistance. The finance we are already providing is affecting the lives of more than 1.2 million people. Through partnership we can unlock the full financial potential of our markets. If we can actually make our customers prosper and we prosper at the same time, we will get support of our shareholders for doing more of this kind of business. Microfinance has now captured the attention of a broad range of investors. The microfinance industry is experiencing an explosion of activity. Cross-border activity has grown by $4.4 billion over the past year. The sector has sound fundamentals. Growth rate, solid returns.

What does this mean for the investor community, and how do finance institutions need to respond? Despite this very impressive growth, microfinance still reaches only one tenth of its estimated market. We need $250 billion to make a meaningful difference. The industry still displays concentration. Microfinance continues to be targeted at Latin America and Eastern Europe, even though the majority of potential clients actually live in Africa and Asia.

Very few MFIs follow established accounting procedures, have independent directors, audit committees, other necessary components of strong governance. With better structures, more MFIs would become investment ready.

I'm excited by the role that Standard Chartered can play in this industry. ... Developing the microfinance sector is a crucial element to our development strategy.

André Laude, Head, Global Financial Markets, International Finance Corporation (IFC)

IFC operates at the micro level, providing services to microcredit providers. To remain at the forefront of the industry's leadership, it is important to anticipate changes and trends within the industry. The amounts of investment through "collective investment vehicles" (CIVs) have grown most dramatically most recently. Previous growth was thorugh "greenfields" and "networks."

IFC has committed $196 million in fiscal year 2007 alone. US$840 million to date, beginning in 1999. We tried to have this wholesale approach to microfinance. Bookings done not with MFIs themselves but with collective investment vehicles.

The lion's share has gone to Latin America and Eastern Europe, but this is changing rapidly.

Collective investment vehicles are structured finance, debt and equity funds.

IFC's four strategic solutions are:

1. Promoting CIVs.

2. Developing microfinance network partners.

3. Supporting individual financial institutions through strategic partnerships.

4. Engaging in selected advisory services projects at the institution, financial, infrastructure, and policy levels.

IFC commits to reach over US$1.2 billion by 2010. Investments include:
*Global Microfinance Facility (GMF)
*European Fund for Southeast Europe (EFSE)
*Solidus
*CoopEst
*ShoreCap
*Africap
*Latin American Challenge Investment Fund
*Al Jaida
*Rural Impulse Fund

Investments in holding companies & networks
*ProCredit - IPC
*AKAM
*MicroCred - PlaNet Finance
*Access - LFS
*Advance...

The Global Microfinance Facility (GMF) now has US$165 million. Citigroup is a partner sharholder and arranger for private placement in the U.S. market.

Compartamos began in 191 with creation of an NGO with capital of US $50K. In 2005 it became the first MFI in Mexico. In 2006, conversion into a bank.

Greenfields: "regulated financial institutions that started with microcredit as main line of business from their inception."

Is microfinance an asset class? It has not yet reached the status of an asset class. "Homogeneity brings it close to the definition, however it remains illiquid." Further milestones: a critical mass of exposure, larger number of investors so that willing buyers can be matched with willing sellers.

Challenges: microfinance data is less universally accepted; less diversified; higher perception of risk; current market leads to zero appetite even from socially responsible investors.

Opportunities: Rating agencies want to move in; some financial institutions are involved in CDO placements; MFIs are establishing a track record.

CDO: collateralized debt obligation

MFI: microfinance institution

Sub-prime crisis: microfinance flight to quality. MFIs do not have to be immune to the current market downturn. We need to rebrand the asset class, decouple it from the turmoil in emerging markets, point out that it is twice removed from the turmoil in western markets.

Asset class promotion should continue: ratings a must

This takes us to the core question. What kind of investors, the level of resources needed, and whether they are going to be with microfinance institutions for the long term.

Investor panel discussion: Building a risk portfolio--making successful and safe investments in microfinance

Panelists:

  • AndrĂ© Laude
  • Scott Buddge, Managing Director, Social and Community Investing, [http://www.tiaa-cref.org/|TIAA-CREF]
  • Pal DiLeo, managing partner and chief investment officer, [http://www.microcapital.org/?p=2034|Grass Roots Capital Management]
  • Christian Novak, executive director, Morgan Stanley
  • Cyrille Parant, chief executive officer, [http://www.planetfinance.org/index_en.php|PlaNet Investment Services]

Cyrille Parant. What is important is to understand the objective of the investors. ... Education is not only on the investor side. It's also on the MFI side. They need to understand the aim of the investments. They need to understand what you are doing and trying to do.

Question from the audience about the sub-prime crisis. How will the global economic turmoil affect policy? Which countries will revert to populism, and how do you manage against it?

Paul DiLeo: We have investments in a number of countries where the role of microfinance has become very prominent. We've seen this in India and certain countries in Latin America. I don't see any evidence that there's a relationship between these kinds of episodes and more global developments. As microfinance is transitioning from a closed club and a very tightly held group of participants to a larger stage of international capital markets, the question of defining and interpreting and documenting its social component becomes more challenging. Because its clients are poor people, it's inevitable that these tensions and questions are going to arise as it grows. We don't see a conflict between the financial and the social performance. We feel that having a clearly articulated and implemented social focus is very good business. Microfinance institutions that start to stray into other products end up returning to the core activity, because it's a good business opportunity. As investors/practitioners, we need to address that dimension and not take it for granted as we did in previous years.

Andre Laude: We need to speak to investors on the eve of political change with populist governments coming on board. If you want to see an increase in the scale of microfinance, maybe you can do that through an apex institution ... that could provide wholesale or financing vehicles to MFIs. To avoid any political backlash, it's very important that institutions do engage in education of consumers, namely micro-entrepreneurs themselves. Responsible lending is very important so that the ultimate borrowers understand what they are paying, and what they are paying for. That way you can build a constituency that prevents them from being affected by dramatic changes in the political scenery. ... We do engage through our local offices with regulators. Not so much directly with politicians, but with regulators: the banking superintendencies, which themselves have a dialogue with politicians.

Question from the audience: With all due respect, in the industry would you not also give credit to Citibank, Deutschebank, etc. for also being major players and helping contribute?

Andre Laude: Your point is very well taken.

Question: Regarding capacity of the microfinance institutions, Paul mentioned that specifically you've had to create startups because of local lack of microfinance capacity. Does Grassroots have its own technical assistance arm? Do you partner with other institutions to provide technical assistance?

Paul DiLeo: We don't have our own technical assistance arm. We work through partners.

Andre Laude: Our network model is one where technical assistance is embedded. First creating capacity on the ground. Expatriate managers. For the first three years, the institution develops the training capacity. You can reach break-even capacity within 24-36 months, depending on the country conditions.

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