The Truth On Microfinance Initial Public Offerings


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This paper demonstrates that an IPO raised capital is just ANOTHER FINANCIAL / CAPITAL MANAGEMENT TOOL with the following beneficial effects on the strategic objectives and social mission of a microfinance institution:

- bolstering and diversifying equity base;
- enabling cheaper access to stock-market capital;
- ensuring a gain in respect of exposure and prestige;
- attracting and retaining the best management and employees
- creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc
- ensuring further institutional development;
- ensuring the achievement of financial performance (operational & financial sustainability) and social mission / poverty alleviation strategic targets: MORE micro-loans at similar/reasonable (but NOT HIGH !!) interest rates, to MORE poor people to support their self-empowerment, while slightly increasing / maintaining the net profit level as before the IPO.
I would appreciate the reader's comments/feed-back, whether pros or cons.

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The Truth On Microfinance Initial Public Offerings

  1. 1. MICROFINANCE BEST PRACTICES George Staicu Senior microfinance and banking consultant THE TRUTH ON MICROFINANCE INITIAL PUBLIC OFFERINGS (IPO), INTEREST RATES AND PROFITS This blog represent a consolidation of several recent comments posted by me on and, that I wanted to share here also, for the experts and institutions interested in this topic. My comments were trigered by the following statements of Mr. Muhammad Yunus, the prestigious microfinance founder and Nobel laureate, that he made in an April 2010 interview for the Microfinance Focus ( pioneer-prof-yunus-raises-concerns-over-sks-ipo/ ) at the Regional Microcredit Summit in Nairobi (Kenya), regarding the SKS (an India based fastest growing NBFC - Microfinance in the world) plans to raise $250 million through an Initial Public Offering (IPO): a) “….This is coming from the banking side, from the profit maximizing side and I am opposed to that. If they do it, I cannot stop them but I would encourage genuine Microcredit programs….”, b) “…The concern is that when you put an IPO, you are promising your investors that there is a lot of money to be made and this is a wrong message. Poor people should not be shown as an opportunity to make money out of. If you have a new kind of IPO where you can say that you can help people get out of poverty, it is a social business and if you invest here you never get any return from this then it is good...” 1. In my opinion if we use this logic then MFIs should ALSO on-lend their donor funds WITHOUT charging any interest on the group/ village banking/individual/etc loans. But then in order to cover their operational/administrative/staff/risk (loan losses) costs as well as to further develop their business volume/loan portfolio/outreach, the respective MFI will have to EXCLUSIVELY and FOREVER rely on free donor funding. 2. A MFI, as its very name shows, is actually a FINANCIAL INTERMEDIATOR INSTITUTION, dealing with risk & RETURN, with funds attracted and loaned, and with products and services
  2. 2. that are similar to the ones offered by the mainstream banking. Therefore the (loan) capital funding sources may be similarly provided / obtained by / from: a. donors / owners b. customer savings / deposits c. investment companies/funds d. commercial bank borrowings e. financial markets / stock exchanges/ bonds markets 3. There are already very many MFIs that are DO NOT rely exclusively on donor funds but are ALSO funding the expansion of their loan portfolio through the use of COMMERCIALLY PRICED / INTEREST BEARING LIQUIDITY. But this does NOT mean that the respective banks and MFIs are trying to “make a profit” by speculating the poor people financing needs. 4. If a MFI offers interest bearing savings/deposits products THEN IT IS NORMAL to charge an interest for their loans in order to pay the interest (price) for using the respective customer funds. In this particular case the MFI’s depositors obtain a PROFIT / REVENUE (the interest received for their own funds deposited with the MFI ) which has to be somehow offset by the interest charged by the respective MFI for its micro-loans (covering the interest paid to depositors, the administrative/operational/risk/business development/HR development costs ). If there are (poor) customers that make a PROFIT (earn interest) on their deposits/savings, then I do not think we should blame a MFI and its funders / IPO shareholders for the PROFIT generated through the interest / fee earned on its micro-loan portfolio. 5. THE MOST IMPORTANT THINGS that supports the idea of an IPO are the following: a. the additional capital raised through this method is VERY STABLE and, theoretically, on an indefinite LONG TERM, representing thus a VERY RELIABLE SOURCE OF FUNDING / EXPANDING THE LOAN PORTFOLIO, as opposed to commercial bank borrowings and customer savings THAT MUST BE REIMBURSED AT MATURITY b. the customer savings/deposits are also bearing the “option” risk of being, unexpectedly, liquidated BEFORE THEIR CONTRACTUAL MATURITY c. sometimes, especially in times of deep financial crisis such as the one we are currently facing worldwide, even the commercial bank borrowings/credit lines may be canceled BEFORE THEIR CONTRACTUAL MATURITY, triggering thus a major liquidity squeeze on a MFI’s business. d. the COST OF FUNDS obtained through an IPO is MUCH LOWER then the costs of funds obtained from commercial banking sources; therefore the micro-loans may have LOWER INTEREST RATES then the loans funded through commercial bank borrowings and / or customer deposits / savings.
  3. 3. e. the funds obtained through an IPO actually represent an equity/capital injection for which a MFI is not forced by the Central Bank regulations to set the so-called (liquidity) “reserve requirements” as it is required for a percentage of its customer deposits and / or borrowings from commercial banks and / or investment companies (thereby increasing the micro-loans interest rate). 6. An IPO does NOT mean that poor people are “…shown as an opportunity to make money out of..” It simply means that IF a MFI that makes use of an IPO is FINANCIALLY PERFORMANT (self-sustainable with good ROA , ROE, loan portfolio quality- low PAR) THEN: a. the value of its shares on the stock market will increase b. the MFI may decide to distribute a portion of its earnings as dividends to the respective shareholders OR to retain all the respective earnings in order to reinvest them in the further development of its business, thus serving more poor people with enterpreneurial drive. 7. CONCLUSIONS a. the funding obtained by a MFI through an IPO is, in fact, JUST ANOTHER BEST PRACTICES INSTRUMENT AND A (THEORETICALLY INDEFINITE LONG TERM) LIQUIDITY SOURCE, BUT AT LOWER COST, that it is utilized to expand its loan portfolio and, implicitly, TO SERVE MUCH MORE POOR PEOPLE WITH ENTREPRENEURIAL DRIVE , THUS CONTRIBUTING TO THE PROCESS OF POVERTY ALLEVIATION. b. some of the MAIN COMPULSORY REQUIREMENTS for a MFI to successfully use an IPO are the following: i. a professional board, senior executive management and operational staff; ii. a sound corporate governance; iii. a sound internal control system (including an integrated and comprehensive software for accounting, loan tracking, financial & risk managerial reporting - MIS ); iv. a sound, comprehensive and performant financial & risk management system (including asset & liability management for liquidity, interest rate and foreign currency risks ) v. good financial / operational performance; c. Taking into account all of the above I would have to say that, indeed, the MFIs DO HAVE A SOCIAL BUSINESS in respect to the support they provide to the self-empowering of poor people, BUT the TOOLS to achieve the respective social business/mission have to be of a commercial nature due to the basic law of “supply and demand” pertaining to a FREE MARKET ECONOMY.
  4. 4. d. The very ideas of financial / operational self-sufficiency (a major performance indicator meaning a MFI should obtain a HIGHER level of its INTEREST/FEE REVENUES then the level of its financial and operational/administrative/staff development/risk expenses), REPRESENTS, in fact, the basic PROFIT concept of any commercial undertaking. In other words, it could be wrogly interpreted that, in order to achieve the respective self- sufficiency, all MFIs that do not (yet) use the IPO tool, are already aiming to make a PROFIT, thus “demonstrating” that poor people MAY be “…shown as an opportunity to make money out of..” However, in my opinion this is NOT the way to characterize the current business of MFI’s all over the world. Therefore, with all due respect and consideration for Mr. Yunus, I disagree with his statement according to which microfinance “ a social business and IF YOU INVEST HERE YOU NEVER GET ANY RETURN FROM THIS…” . I have therefore to re-emphasize the idea that a MFI, as its very name shows, is actually a FINANCIAL INTERMEDIATOR INSTITUTION dealing with risks & (social & financial) RETURNS and, as such, it must be treated accordingly, inclusive of the IPO or any other financial commercial instrument utilized in order to raise capital and / or access liquidity funds for SOCIAL business development and poverty alleviating purposes. 8. FINAL REMARKS It seems there a misconception according to which a MFI’s IPO raised capital would lead to an increase of the interest rates charged on its micro-loans offered and, implicitly, to a social mission drift. Therefore, I would like to bring the following final clarifications: For well developed, licensed (NBFI) MFI the access to the IPO market SHOULD NOT be seen as a drift from their social mission and poverty alleviation undertaking. For a MFI or any other bank/financial institution/commercial company an IPO is only a FINANCIAL MANAGEMENT TOOL that raises capital in the stock-market, at a lower cost as compared to commercial bank borrowings and borrowings represented by customer’s savings/deposits, (both of them bearing also cost represented by the Central Bank compulsory “reserve requirements”, cost that is added to the interest rate charged to its micro-loans). From my own experience I should say that the financial and risk (liquidity, interest rate and foreign currency risks) management tools continues to be a “cinderella” / weak link in the administration of many MFIs all over the world. Actually the IPO is a TOOL that simply provides SUPPORT TO THE ACHIEVEMENT OF A MFI’s SOCIAL VISION, MISSION AND STRATEGIC OBJECTIVES due to the fact that MORE MICRO-LOANS will be disbursed to MORE POOR PEOPLE with entrepreneurial drive, thus empowering them to leave the poverty plague. Furthermore, theoretically and practically, the scaling-up of a MFI’s loan busines, obtained through the utilization of an IPO (which involves a higher volume of additional capital), should also have the effect of a lower weighted average interest rate for the micro-loan portfolio (a higher volume of micro-loans could be disbursed at a lower interest rate, while RETAINING THE SAME LEVEL OF INTEREST / FEE REVENUES
  5. 5. and NET REVENUES recorded BEFORE the respective IPO). I think there should be a CLEAR SEPARATION between the SOCIAL MISSION of a MFI and the TOOLS / INSTRUMENTS utilized for the purpose of achieving the respective social mission. The financial / operational self-sufficiency (MORE revenues then expenses = NET REVENUES or PROFIT) of any MFI represents the FUNDAMENTAL LINK between the SOCIAL (OUTREACH) MISSION and the TOOLS utilized to support the achievement of the respective social mission and of the poverty alleviation overall purpose/strategic objective. If the self-sufficiency factor would be ignored within this “equation”, then we would NOT have well developed, viable and performant MFIs, but only MFIs that rely exclusively on free donor funding and on the volunteer executive and operational/administrative work force (which, actually, is not possible ), with all the negative effects both on their social / outreach mission as well as on their loan portfolio quality. Currently, even WITHOUT IPOs or equity investor funds, MFIs all over the world are charging VERY HIGH INTEREST RATES ON THEIR MICRO-LOANS, way above the ones charged by the mainstream banking for SME loans. And this unfortunately negative reality is valid even for MFIs that rely exclusively on free/donor funding as well as for MFIs that borrow funds from commercial banks or microfinance funds at reasonable but competitive market rates. Although it is a very interesting and long-debated/debating issue, this is not the place to discuss in detail about the REALISTIC / NORMAL MICRO-LOAN PRICING STRATEGY that SHOULD be used by MFIs in order to be CONSISTENT TO THE SOCIAL MISSION for which they have been established by its donors/owners (this could be the subject of a future blog). But what NEED to be EMPHASIZED in this respect is that, through A SOUND AND COMPREHENSIVE CORPORATE GOVERNANCE POLICY, actually implemented by the related BOARD members, the respective DONORS DO HAVE ALSO THE ULTIMATE RESPONSIBILITY in relation to THE LEVEL OF INTEREST RATES charged for the micro- loans, in order to get the assurance that a MFI is not drifting from its social mission. Among other important strategic and monitoring tasks, the respective Board is also the ultimate committee in charge with the responsibility of monitoring and approving the interest rate levels for a MFI’s micro-loans. The consulting experience shows there are too many cases where the MFI Board, due to the fact that its meetings are rather infrequent and rather rare (especially because the board members are residents in far away countries) it delegates this responsibility to the executive management (CEO, CFO, COO) , thus forfeiting its own responsibility to monitor and approve the micro-loan interest rates. The danger triggerred by this delegation is that in too many cases even the executive management do lack the necessary professional financial and risk management knowledge and skills and, in order to hide this fundamental weakness, they make use of the high micro-loans interest rates. In fact, the micro-loans interest rate level setting is one of the major responsibility of a MFI Board. From this perspective the Board member should base their decision on information regarding the cost of funds (donor, bank borrowings, bonds, etc.), cost of capital (equity from investment funds or from IPOs), administrative and staff costs, the credit risk cost, etc and the minimum – maximum profit margin necessary to achieve BOTH
  6. 6. its strategic objectives related to operational / financial sustainability (RoA, RoE) and its social mission (poverty alleviation / self-empowerment of the poor). A MFI Board (whose members, I repeat, are appointed by its donors/owners – i.e. mostly international NGOs involved in the poverty eradication process) has a similar responsibility when deciding the level of the shareholders returns/dividends associated to an IPO , making thus sure that the respective raised capital WILL NOT generate a negative chain reaction leading to an increase of the micro-loans interest rates. Another important issue that is directly related to the micro-loans interest rate level is represented by the executive management skills in the area of asset & liability management (capital management, liquidity management, interest rate risk management, net interest margin management, etc.) . These skills are of utmost importance for a sound and successful financial and risk management of a MFI. Otherwise in today’s world capital markets, especially considering the current international financial crisis, there are no more high yields/returns investments unless the investors are willing to take high risks also. Most investors are seeking relatively risk safe opportunities that offer returns/yields above the interest rate offered by bank deposits, T Bills, etc. From this perspective equity investments in MFIs SHOULD NOT have associated high risks and therefore NO high returns. We should not forget that the launching of an IPO must be authorized by National Securities Commission in every country and in order to be eligible for a such instrument a company/MFI should have BOTH a long history of good and constant financial performance as well as good, reliable and comprehensive internal control systems (policies, procedures, accounting/loan/deposit tracking software, risk management systems, internal audit, etc.). All of the above should lead to a reasonable IPO return/dividend offered to the investors through the IPO’s flyer, and consequently, should not lead to a further increase of the micro- loans interest rates. The bottom line is that an IPO raised capital is just ANOTHER FINANCIAL / CAPITAL MANAGEMENT TOOL with beneficial effects on the strategic objectives of a MFI: - bolstering and diversifying equity base; - enabling cheaper access to stock-market capital; - ensuring a gain in respect of exposure and prestige; - attracting and retaining the best management and employees - creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc - ensuring further institutional development; - ensuring the achievement of financial performance (operational & financial sustainability) and social mission / poverty alleviation strategic targets: MORE micro-loans at similar/reasonable (but NOT HIGH !!) interest rates, to MORE poor people to support their self-empowerment, while slightly increasing / maintaining the net profit level as before the IPO.