Archive for February 20th, 2008

Morgan Stanley Microfinance Conference

February 20, 2008

Reporting from the Morgan Stanley offices in Westchester, NY… at the first day of the Women’s World Banking conference on microfinance  

In the morning Aisha De Sequeira gave a cool talk summarizing the worldwide microfinance industry. Microfinance institutions (MFIs) are banks that require capital (equity/debt financing) like any other business, which they use in turn lend to their “clients” in small amounts of $1000 or so. Based on projected growth plans of these MFIs in the next 5-10 years, Morgan Stanley estimates that their total capital needs will be $280B, but in actuality may remain as low as $20B – what to do about the gap in order to service the needs of end users? (that’s 500 million people according to Premal Shah at Kiva). 

Aisha says MFIs can be categorized into Tier 1 (10%) which are profitable, and Tier 2 (90%) which are not profitable but most (or all) have business plans to become profitable. In afternoon sessions they were even talking about some MFIs going IPO. Profitability for 1st gen MFIs tooks 13 years, 2nd gen took 9 years, and 3rd generation are becoming profitable in as short as 4 years. The less mature MFIs usually get funded by organizations out of social responsibility, and the more mature MFIs can access commercial capital markets – they represent a diversified asset compared to other classes of investments. In funding MFIs, there is a tradeoff between absolute returns versus social responsibility – transparency allows people to make that evaluation. 

Had a few hallway/lunch conversations. Professor James Austin (HBS) helped me understand that there may be a difference between urban and rural microfinance, but information on types of the types of businesses that are funded is probably not readily available yet – the major source of information/feedback is simply whether the loans get repaid (or not). Talking afterwards to Abid Safaffe, CEO of the Kashf Foundation (an MFI based on Lahore, Pakistan) whose operations are growing at 60-80% year on year, she says they see a “higher cost of operations” in rural areas due to distance and organizational hurdles and that most of their rural clients are farm-related (animals and agriculture). The urban clients (70%) are easier to serve and they are mostly “selling small stuff.” Also spoke to Asphina Skihauli — a loan officer from a South African MFI called Women’s Development Bank (WDB) that is purely rural focused. They pointed out that most of the clients are illiterate, start off in farm opportunities (like animals or selling vegetables), then after seeing success they move onto more profitable things like sewing, artifacts, manufacturing pottery or wooden chairs, all based on ideas they come up with which the bank then supports. WDB provides education for free. 

At dinner one of the people I met expressed skepticism in the claims about microfinance. He thought that while there were lots of success stories and cases,

  1. there is not a lot of data to support microfinance as being diversified asset class yet.
  2. repayment rates are really so high as being reported due to refinancing by the MFI (instead of allowing client to default)
  3. most of the profitable MFIs are in urban microfinance, leaving the unprofitable rural operations to NGOs and non-profits

In her presentation, Roshaneh Zafar the President/founder of Kashf (means “miracle”) cited Yunis’ call to action to get started several years ago – “if you fail blame me.” 

In another talk I heard that Mexico has 106 mllion people of which 45% live on less than $2/day – in aggregate does not appear a whole lot different than India. Microfinance penetration in Mexico has been only 7%. Similarly Pakistan is 160 million people, 80% of them live on less than $2 per day, and microfinance penetration is 6-8%.

Some useful links

  • The Microfinance Information Exchange (Mix Market)
  • Consultancy Group for Advocacy for the Poor (CGAP)
  • Small Enterprise Education and Promotion Network (SEEP)