World Affairs Council: Microfinance for profit

Greg, Helen, Sunita, Margarita and I made the trip up to San Francisco to see a panel organized by the World Affairs Council. The panelists were:

• (Moderator) Bruce Wydick, Professor of Economics (and Dept. Chair) at USF
  
• Kate Cochran, VP of Resource Development at Unitus
  
• Didier Thys, Executive Director of the Microfinance Information Exchange
  

Didier Thys led off with a quick comparison of for-profit (FP) and not-for-profit (NFP) microfinance institutions (MFI's). He said that on average FP MFI's have $46M in assets compared to just $13M for NFP's. For-profits are better positioned to use leverage and debt/equity to raise funds, compared to NFP's that rely more on grants. On the flip side, NFP's reach an average of 60,000 people, while for profits reach only 44,000. With loan sizes more than triple the NFPs, it seems clear that FP's reach the vulnerable non-poor, while NFP's are drawing more borrowers from the ranks of the extremely poor.

Kate Cochran gave a quick history of Unitus' founding in 1999 by 5 businessmen with a common interest in poverty eradication. Chairman Mike Murray was at Apple for the birth of the Mac, and was an early Microsoft exec as well. Unitus focuses on high potential MFI's, noting that something like the 80-20 rule applies, perhaps even more extreme, since just 2% of the MFI's reach nearly 70% of the borrowers, while 2/3 of the MFI's have fewer than 2,500 borrowers.

Kate and Didier agreed on most of the issues throughout the night, with Didier offering more quantitative justifications, and Kate representing the investor point of view. They agreed that microfinance is a way to help people and maintain their dignity. It's not a charitable transaction, but a way for people to increase their choice set. MFI's can be a good sustainable business.

Asked about trends in MFI's, the speakers identified:

• Diversification of types of loans and services
  
• More customer-centered innovation (like insurance products)
  
• More access to capital market funding
  
• More commercial funding
  
• Move to individual loans rather than group loans (enabled by IT and credit scoring applications)
  

FP MFI's were not the silver bullet: subsidies will always be needed, especially in areas of low population density. It takes, Kate said, 10,000 borrowers to be at a scale to reach break-even.

Bruce noted that in a competitive market, there was a tendency for MFI's to move "upmarket", focusing on larger, more profitable loans, leaving the poorest people unserved. This had been observed in Guatemala.

A further potentially problematic trend fostered by the movement toward FP MFI's is that grant equity was being targeted more for consultants and studies rather than startup loan capital. Didier pointed out that subsidized MFI's need to use their subsidy well (ie, serve the poorest) rather than competing (with an unfair subsidy) against other FP MFI's serving the upper echelon of the poor.

Kate said that she thought India represented the largest opportunity for microfinance. Unitus just made its 4th investment, supporting an MFI in Bangalore. Market research indicated that there was an available market of 5M people, currently served by 2 MFI's with 10,000 borrowers each.
Didier echoed this comment, claiming that poverty was split roughly into thirds, with one third in India, one-third in China, and one-third elsewhere in the world. He pointed out that Microfinance was heating up in "large economies" like Brazil, Mexico, India, and Nigeria.

Kate listed the steps of the typical Unitus relationship:

1. Initial grant to build infrastructure
   
2. Additional debt funding (from either a loan guarantee or direct loan)
   
3. Help to transfer them to a FP status (hard to do!)
   
4. Make an equity investment (looking for a 10X increase in number of borrowers over a 5-7 year time frame)
   

They don't yet have a model for an exit strategy, but that's not stopping them from raising a debt fund currently, or planning to raise an equity fund in 2005.

Didier, when asked about what fraction of existing MFI's were self-sustaining, referred to statistics from a sample of 124 that have provided MIX with more detailed information. Of those 124, 64 are sustainable (just over 50%) and of the sustainable ones 18 (about 28%) are FP and 45 (about 72%) are NFP's.

Kate said that the biggest constraints to MFI growth were capital and capacity (which included a technical/IT component as well as just the "permission" to think big). For example, SKS, a Unitus investment in India was serving 5,000 borrowers 2 years ago. Since Unitus' investment, they have now reached more than 55,000. Scaling an organization at that rate causes challenges at the personnel/policies/systems level, too.

Both speakers thought that scale would be a pressing issue in the future, with mergers and acquisitions resulting. Also, increased involvement from large commercial banks liek Deutsche Bank and Citibank.

Microfinance has really not taken off in the US, though some community development funds and credit unions are starting to take an interest.

While the financial metrics are well understood, the social aspect of the double bottom line is still being defined. Didier mentioned a 6-degree measure that included:

1. Financial Self-Sufficiency
   
2. Breadth of Outreach (how many borrowers are there?)
   
3. Depth of Outreach (how poor are borrowers?)
   
4. Scope (how many services are offered?)
   
5. Cost of Outreach (How well is the operation performing?)
   
6. Worth of Outreach (How is it valued by customers?)
   

Ironically, it is the investment funds which are pushing the search for the social bottom line.

Securitization of microfinance loans is starting to happen, with Grameen, ICICI Bank, and JP Morgan pioneering the way.

The Consultative Group to Assist the Poor are spending time lobbying to make legal/market conditions more favorable to microfinance. Didier claimed that some MFI's in Mali were shuttering operations because interest rate caps made them economically infeasible.

Kate said that Unitus had surveyed 140 MFI's in 12 months, evaluating them on criteria such as the market opportunity and country's macro economic conditions, the management team and its appetite for growth, the potential for profitability, and the average size of borrowers' first loans (a proxy for whether the poorest are being reached.)

In order to attract and retain private investors, MFI's need to build a track record, showing the possibility of achieving scale and profitability, and provide an exit strategy. Didier felt that potentially $2 TRILLION of US investment money was influenced by social considerations and could potentially be mobilized for the right terms.

Mohammed Yunus, founder of the Grameen Bank and the field of Microfinance, will be receiving an award at the World Affairs Council meeting on November 27th.