Microfinance and Capital Markets

Ira W. Lieberman, Ph.d., [http://www.manta.com/coms2/dnbcompany_05wxrr|LIPAM International, Inc.]

The initial listing/public offering of four leading institutions. The four institutions are:
*Banco Compartamos
*Equity ank
*Bank Rakyat Indonesia (BRI)
*Brac Bank

Microfinance is changing fast now. In the early stages, it was mainly NGOs with assorted models, using mainly donor funds. It's now in the take-off stage, with players including NGOs, banks.. Capital markets represent an additional option to raise funds for MFIs.

Bank Rakya Indonesia (BRI)

Among the oldest banks in Indonesia, established in 1895. Dramatic growth 1986-1996. During the East Asian crisis 1997-2000, restructured as a micro-SME (Small and Medium Enterprise) focused bank.

Gross loan portfolio of $3 billion; savings balance of $5 billion.

Bangladesh Rural Advancement Committee (BRAC)

Started 1972 as a relief and rehabilitation effort. May be the largest and most important social NGO in the world. By 2006 it had 4.6 million borrowers. $350 million in its gross loan portfolio.

Compartamos

Started as a youth organization in Mexico; launched a village banking pilot program in 1990. Operated as an NGO until 1996. In June 2006 became a licensed commercial bank. External institutional investors -- Accion, ProFund, IFC. Gross loan portfolio of $271,098,542 in 2006.

Equity Bank

Founded in 1984. Insolvent in 1993. Restructed in 1994, received significant tecnical assistance. In 2004 was given a full banking license. Offers a full range of loan products. Gross loan portfolio, $106,374,014; $167 million in savings.

Why were these organizations ready for IPOs? Outstanding, long serving senior management; good governance; strong product base; audit and accounting practices; extensive infrastructure and tecnology investment.

BRI went public in 2003, as part of a larger process in which the government was trying to divest itself from the banking industry.

BRAC Bank was floated through an IPO on December 11, 2006, which allowed the bank to expand. Price/earnings ratio was 19.1. "This is looking like the IPO for a tech stock."

Compartamos went public on April 20, 2007. 13 times [http://www.investopedia.com/terms/o/oversubscribed.asp|oversubscribed]. Price/earnings multiple was 37.5, 18.1 times book value. 26% of capital was offered.

Equity Bank was listed on August 7, 2006.

Advantages of going public: liquidity and price discovery. Transparency in accounting and information provision. Incentives to management and emploees. A means for equity investor to exit. Future potential for acquisitions and mergers. Ability to raise funds from capital markets.

These are 4 excellent MFIs, which has allowed them to achieve massive outreach to the poor and remain highly profitable. Going public is not spur of the moment. It takes a great amount of investment in time -- very management intensive and money. We should expect to see more IPOs of MFIs in the near future.

Carlos Danel, [http://www.compartamos.com/|Compartamos]

http://www.businessweek.com/magazine/content/07_52/b4064045919628.htm
http://www.businessweek.com/magazine/content/07_52/b4064045920958.htm

Public listing is something that doesn't come easy or fast. Since Compartamos became a finance company in 2000, it has been slowly building a relationship with the markets. Even before that, the founding investors in 1997 drafted a very thorough shareholders' agreement. Within that, we proposed Compartamos to become a public institution. From the beginning, we were focused on creating an industry and a relationship with the international markets that would enable us to do that in the future. Compartamos built a very strong culture of being transparent. Having financial ratings. It was something that began many years ago. Building a relationship with the markets, speaking the language of the market, and also building the kind of corporate governance practices that the markets require and appreciate a lot. We really opened up into good governance practices. The whole bet has been that through working with the markets we would be able to scale.

It pushes the public in the direction of greater transparency and accountability.

Luca Torre

"IPO or not IPO? This is the question..."

Works for CreditSuisse, focusing on Latin America. Was on the team that brought Compartamos to the IPO.

An IPO can be a good tool for raising capital. Efficient, reliable source of financing. Also, it sets a clear value of the microfinance company, which offers benefits: Stock can be used as currency for mergers and acquisitions situions. Can align management incentive.

Several issues need to be addressed: Need to reach minimum "critical mass." The IPO process is long and cumbersome. Public investors can be daunting stakeholders.

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