Evolution of Microfinanance Investment Landscape and Reasons behind the growth of Social Investments

RBAP-MABS National Roundtable Conference

Planet Rating, c/o James Soukamneuth Accredited by ADA Rating Initiative

444 EDSA, 21st floor– Guadalupe Viejo Société par Actions Simplifiée au capital de 580 000 EUR

Makati 1211– Manila – Philippines Immatriculée sous le n° 483 538 369 R.C.S. Bobigny

t:+63 9 07 385 0035 [email protected] www.planetrating.com

Evolution of the Microfinance Investment Landscape and Reasons behind the Growth of Social Investments

A Broad Overview

By James Soukamneuth, Ph.D.

Asia Office Director, Planet Rating

[email protected]

Hyatt Hotel, Malate Manila June 2, 2010

Microfinance Investment Landscape and the Growth of Social Investments 2

Microfinance and Social Investments

Microfinance Institutions as Agents of Social Change

A Victim of Its Own Success: Growth and Professionalization of Microfinance

The Commercial Drift of Microfinance: From Social Goals to Capitalist Principles

Beyond Good Intentions: Assessing Social Performance in

Microfinance

The Road Ahead: Greater Transparency and Accountability in Realization of Social Goals


Microfinance Institutions

Agents of Social Change


Microfinance as a Tool for Poverty Alleviation

Out of the world’s 6.7 billion inhabitants, 3 billion live on less than 2 USD per day

80% of the world’s population has no access to financial services

Agent of Social Change


Originals of Microfinance

Microfinance has social objectives at its core


Poverty reduction





Poverty reduction

Employment creation





Poverty reduction

Employment creation

Empowerment of marginal groups





Poverty reduction

Employment creation

Empowerment of marginal groups

Social mission and commitment


Building Inclusive Financial Systems

Microfinance implies building inclusive financial systems that serve the poor

Around the world, over 10,000 MFIs provide funding to 150 million active clients (3/4 women)

66.6 million microfinance clients are

among the poorest, living on less than 1 USD per day.

Yet, poor borrowers have proven to be astonishingly creditworthy.



A High Growth Sector

Agent of Social Change Growth

MFIs manage a loan portfolio estimated at 30 B USD.

The potential demand reaches 263 B USD.

About 500 million microfinance clients have yet to be reached.

The sector enjoys an annual growth of almost 30%.

For investors, microfinance is often considered a special asset class of

socially responsible investment, balancing

financial return with

positive social impact.

Traditionally, microfinance grew with the support of government subsidies,

donor funding, and grants.



Number of MIVs, 2000-2008

Source: CGAP 2009 MIV Survey

Foreign capital investments in microfinance topped 10 B USD (2008)

103 Microfinance Investment

Vehicles (MIVs) claimed an estimated 6.6 B USD in assets under management





Growth in Assets, MIVs, 2006-2009

Foreign capital investments in microfinance topped 10 B USD (2008)

103 Microfinance Investment

Vehicles (MIVs) claimed an estimated 6.6 B USD in assets under management

MIVs are expected to grow at

double-digit rates.





Funding continues to be widely available and concentrated in the largest 150 MFIs.

Over 40% of the funding provided

by MIVs have been allocated to as low as five MFIs only.

A High Growth Sector with Imbalances

Risk Exposure, % of Microfinance Portfolio MIVs, 2006-2008




Regional Distribution of Microfinance Portfolio, MIVs, 2006-2008

Geographic concentration of microfinance funds is also skewed.

Africa and Asia, where poverty

and potential demand for microfinance are highest, receive less than 20% of foreign investments.

A High Growth Sector with Imbalances


From Extensive to Intensive Growth

Financial sustainability through professionalization is essential for massively expanding services.

A key bottleneck derives from the shortage of strong institutions and managers.

Many MFIs have experienced extensive growth marked by rapid expansion of branch networks.

Professionalization for intensive growth results from Productivity gains: economies of scale leading to improved efficiency,

reduced transaction costs, and overall profitability; Innovation: (i) diversified product offerings (e.g. savings, remittance

services, micro-insurance, and micro-housing and agricultural loans) and (ii) expanded delivery mechanisms (e.g. mobile banking); and

Improved utilization of organizational capacity.

Agent of Social Change Growth Professionalization


The Commercial Drift of Microfinance

Agent of Social Change Growth Professionalization Commercialization

Microfinance enters the mainstream as a profitable business proposition.

This commercialization has increased market competition at both the

wholesale and retail levels, to the general benefit of microfinance lenders and borrowers alike.

The entry of private capital has improved access to diversified sources of funding.

With more funding options and higher volume, MFI managers have enhanced their negotiating power and skills to access better financing terms.

Commercialization is necessary to sustain growth in the sector, to scale up outreach, and serve a greater number of financially excluded, low-income people.


The Commercial Drift of Microfinance


A competitive marketplace tends to reduce costs and increase consumer choices.

The push to place significant amounts of additional capital in a limited pool of high-growth MFIs and regions increases the risks of the sector overheating, with

Challenges of managing accelerated growth rates in an increasingly competitive microfinance market;

Uneven management and staffing capacity at MFIs; and

MIVs taking higher exposure with medium-sized MFIs less experienced with commercial borrowing.

Moreover, this migration towards capitalist principles of profit-maximization has increased public scrutiny of the sector.


Microfinance as Sub-subprime


Lax lending practices and weak regulatory oversight, coupled with overabundant funding, can lead to irrational growth.





Commercial pursuit of profits can result in perverse incentives for quantity over quality.






Mainstreaming has allowed some MFIs to stray up-market (e.g. consumer, SME, and larger loans with extended tenors).







Rapid growth and lack of transparent pricing has led to accusations of predatory lending and aggressive collection practices by MFIs.






Rapid growth and lack of transparent pricing has led to accusations of predatory lending and aggressive collection practices by MFIs.

Over-borrowing on top of high interest rates can produce a cycle of debt that makes the poor worse off.



The Ugly Side of Microlending


The unhappy client

The bad loan officer

Photos: Kiva


A Victim of Its Own Success

The success of microfinance has led to more scrutiny of the sector, with increasing pressure to substantiate its social claims and business model.

Microfinance can be over-sold and misleadingly described, with often exaggerated, excessive, and unsupported myths of poverty impact.

With negative media coverage, the industry faces a growing challenge to demonstrate objectively that microfinance is a sound tool for aiding economic and social development.

Mere fact of investing in microfinance is no longer sufficient to demonstrate that an investor is socially responsible.


Beyond Good Intentions

Growth Professionalization Commercialization


Limited Evidence of Poverty Alleviation

Many studies on the impact of microfinance have been plagued by methodological flaws (e.g. selection bias, lack of control groups, measurement of counter-factuals, causal links, descriptive case studies, anecdotal evidence, limitations in data collection).

Rencently, more analytically rigorous studies (e.g. randomized control trials) paint a measured picture of microfinance’s impact on the poor.

There is no scientific evidence to suggest that Microfinance is a transformational tool to lift people out of poverty.

The research findings have been disappointing because the expectations of microfinance were unrealistically high.





Limited Evidence of Poverty Alleviation

Microfinance has a constructive role to play in the campaign to help the world’s poor.

Its impact is not as large and powerful as some promoters romanticize.

Nor is its contribution in the struggle against poverty as inconsequential as

critics dismissively contend.

In general, it is difficult to conduct reliable, scientific testing on the impact

of microfinance in a cost-effective way.





Questioning the Faith

Is microfinance displacing more effective anti-poverty measures?

Will the legitimate drive to maximize profits result in neglect/abuse of the interest of poor clients?

What exactly is sustainable growth in microfinance?

How can the interest of all stakeholders (from borrowers, lenders, third party businesses, and investors) be better balanced?

What lessons can be learned from the pitfalls of sub-prime lending in the US?

How can industry players ensure that microfinance plays a constructive role in alleviating poverty?




Re-evaluation of Ethical Principals


Commitment to Benefit Poor People

Without commercial foundations, microfinance would struggle to become a profitable business needed to survive.

Yet, without firm ethical principles and a strong commitment to benefit the lives of poor people, the sector has no privileged status as a vehicle for socially responsible investing.

There is a growing urgency and moral responsibility to ensure that microfinance contributes to solving social issues and not to maximize profits.

Social investors are demanding evidence of not only financial but also social returns on investments.





Commitment to Benefit Poor People




All responsible financial institutions

Consumer Protection

All MFIs Social

Performance

Best-in-class MFIs Social Impact

Do No Harm

Do Your Best

Do Good


Client Protection Principles

Avoidance of Over-indebtedness

Transparent Pricing

Appropriate Collection Practices

Ethical Staff Behavior

Mechanisms for Redress of Grievances

Privacy of Client Data




Assessing Social Viability


Social Performance Management

Measuring and managing social performance of MFIs help them fulfill their mission and increase the impact on target groups.

The sector has shifted from traditional evaluations (with their focus on end results and impact) to assessing the entire process by which impact is created.

As promoted by the Social Performance Task Force, social performance management strives to make microfinance more effective in achieving its social mission.

Effective Performance Management means the continual process of translating mission and values into practice.






Social Performance Management Principles

MFIs that manage their social performance will deliberately:

Translate its missions and values into clear, measurable objectives to capture intentional social benefits;

Design and implement systems for social responsibility, including client protection;

Track, understand, and report on whether it is achieving its social objectives;

Align its business processes to achieve both social and financial objectives; and

Ensure that decision-making considers both social and financial outcomes. Agent of

Social Change Growth Professionalization Commercialization





Contribution of Microfinance

As formal employment opportunities shrink, demand for microcredit grows.

There is strong evidence that poor people value financial services (credit, savings, insurance) as a way to cope with poverty and financial shocks.

Although claims of raising poor people’s income remain unsubstantiated, many microfinance clients tend to use microloans and savings to smooth consumption rather than purely to grow their enterprises.

By working with people in poverty, MFIs have a large capacity to empower them to better manage their own financial affairs.





Social Impact


Influencing the Agenda





Social Impact

Social Investors

Social Investors

Social Investors

Tier 3 MFIs

Tier 2 MFIs Tier 1 MFIs


The Road Ahead

Greater Transparency/Accountability in Realization of Social Goals


The Road Ahead for Social Investments in Microfinance

Recognition of social performance assessment as a completely separate and technically valid area of inclusive finance

Increased social transparency in the microfinance sector

A shift from extensive to more intensive growth

Integration of the assessment of social performance into the regular management systems of MFIs

Social performance and management

No longer viewed as a cost/burden on administrative/operational systems

An opportunity to develop sound and socially viable institutions

Assessment of social performance of social investors

Geographic outreach

Depth (rural/urban, special social group niches, low/high end segment of poverty focus, etc.)

Product diversity


Thank You

Planet Rating Asia

444 EDSA, 21st Floor

Guadalupe Viejo

Makati 1211, Philippines

Tel: +632 897 7992

Fax: +632 897 7992

James Soukamneuth, Ph.D.

Asia Office Director

[email protected]

Société par Actions Simplifiée with authorized capital of 667,000 EUR. Registration number 483 538 369 RCS Bobigny


Planet Rating

The Global Microfinance Rating Agency


Planet Rating: The Global Microfinance Rating Agency

Offices

Missions

Created in 1999 and transformed into a private, independent rating firm in 2005, Planet Rating has over ten years of experience rating microfinance institutions

Planet Rating boasts the most extensive global coverage, thanks to a network of 6 offices spread over 4 continents

Paris HQ: covering Eastern Europe

Lima Office: covering Latin America & the Caribbean

Dakar Office: covering West & Central Africa

Nairobi Office: covering East & Southern Africa

Beirut Office: covering Middle East & North Africa

Manila Office: covering Asia

Qualified & experienced team

Each senior analyst has conducted at least 12 rating missions on 3 different continents

Analyst backgrounds: investment banking, management consulting, non-profit, microfinance


GIRAFE Methodology

Created in 1999, it is the most comprehensive and transparent rating methodology

Certified and accredited by CGAP and the ADA Rating Initiative

Widely recognized worldwide by investors, donors, regulators and microfinance consultants

Specifically designed and adapted to microfinance, relevant to suit all types, sizes and stages of development of MFIs

Proven and stable methodology already employed for more than 410 ratings in over 65 countries

An enhanced GIRAFE methodology was finalized in January 2008 in order to anticipate future microfinance rating risks and challenges

Qualitative domains

Quantitative domains

Powerful framework to understand an MFI’s risk profile and evaluate its institutional sustainability

Rating Domains Weightings

G overnance 24%

I nformation 10%

R isk 10%

A ctivities 20%

F unding and liquidity 14%

E fficiency and profitability

22%


A Full Range of GIRAFE-based Rating Products

Comprehensive analysis of the MFI risk profile and organizational performance

Valuable tool for mature MFIs in search of new financing and greater international visibility

I) GIRAFE Institutional Rating

II) Social Performance Rating

Evaluation of the MFI’s ability to reach its social mission and objectives

Identification of strengths and weaknesses of its social performance management system

Interactive approach to the rating analysis that includes training

Management and internal communication tool for young MFIs in search of technical assistance and donor funding

III) GIRAFE Interactive Assessment

Theoretical and practical training with case studies over the course of 2-3 days

Flexible content and modules suitable for all kinds of participants, regardless of prior knowledge of microfinance

IV) GIRAFE Training Module


Large experience in Latin America

Mexico

11 MFIs: ADMIC, Caja Cresciencio Cruz, CONSERVA, Despeno, Durango, Empredamos Juntos, FOCRECE, PEN, Santa Fe de Guanajuato, Semisol, Unicreich

Guatemala

FUNDAP

Nicaragua

3 MFIs: 20 de Abril, FODEM, FUNDENUSE

Haïti

COD/MEH

Ecuador

1 MFI: Fundamic

Peru

11 MFIs: CAC Santa Maria de la Magdalena, COOPAC San Martín de Porres, COOPAC Tochache, Epydme Alternativa, Prisma, Finca, FONDESURCO, GCOD, Arariwa, Caritas Felices

15 ratings

Bolivia

10 MFIs: ANED, CIDRE, CRECER, Crédito Amigo, DIACONIA, Eco futuro, FADES, FONDECO, FUBODE, IMPRO

14 ratings

Chile

1 Bank: Banco del Desarrollo

Brazil

17 MFIs: Banco da Familia, BluSol Brésil, Casa do Microcredito,CEADe BRAZIL, CEAPE / MA, CEAPE / PB, CEAPE / PE, CEAPE / PI, CEAPE / RN, CEAPE / SE, CEAPE PI, Credisol, CRESOL, PortoSol, RioCred, SOCIALCRED, VivaCred

20 ratings

Dominican Republic

ECLOF


Excellent track record in the MENA region

Morocco

9 MFIs: Al Amana, Al Karama, Amos, AMSSF/MC, FCAMC, FONDEP, INMAA, Ismailia, Zakoura

20 ratings

Tunisia

1 MFI: Enda

2 ratings

Egypt

7 MFIs: ABA, Al Tadamun, ASBA, DBACD, Lead Foundation, SBACD, FMF

10 ratings

Palestine

8 MFIs: ACAD, Alrafah, Asala, FATEN, PDF, PARC-SCA, UNRWA, YMCA-SED

8 ratings

Jordan

3 MFIs: AMC, JMCC, MFW

6 ratings

Yemen

1 MFI: Hodeidah Microfinance Program

1 rating


Uganda: UML, HOFOKAM, SMS, FOCCAS, Ugafode, Terudet, SAO-MFI and 10 SACCOs

Kenya: EBS, SMEP, ECLOF, SISDO, Yehu, PAWDEP, AAR, Ebony Foundation

Ethiopia: OCSSCO, PEACE, Buusaa Gonofaa, SFPI, Eshet, Wasasa, AVFS, Harbu, Metemamen

Tanzania: SELFINA; Mozambique: Socremo Bank, Burundi: COSPEC; Malawi: CUMO; Zambia: CETZAM; Comoros: Sanduk; Central Africa Republic: CMCA, Ivory Coast: CICA, Chad: UCEC Pala, Gambia: GAWFA; Guinea Conakry: PRIDE, CRG; Cameroon: CDM, ACEP, SAILD, COMECI, SOFINA; Togo: WAGES, TIMPAC, SEBADERS, UMECTO;

Benin: Vital Finance, PAPME, PADME, FINADEV, FICA, FENACREP, Convergence 2000, CNACFD, CBDIBA, ASSEF

Senegal: UMECU, PAMECAS, ACEP, Delta, AFER, Caurie, Tostan

Mali: Kafo Jiginew, FCRMD, Jemeni, Kondo Jigima, Misélini, Niako, CVECA ON, Nyeta Musow, Piyeli, Soro Yriwaso, PASECA Kayes, RMCR, Nyesigiso

Niger: ASUSU, MCPEC, UMEC, MECREF, Albarka SA, Yarda Zinder, Yarda Madaoua

Burkina: RCPB, UCEC-Z, URCCOM, URCBAM

Rwanda: COOPEDU, Duterimbere, ACB, CAF Isonga

South Africa: Marang, Kuyasa Fund, NBF, Tiisha

Madagascar: Otiv de la Sava, Vola Mahasoa

Ghana: SAT, APED, CRAN, ECLOF Ghana and 9 rural banks;

The Leading Rating Agency in Sub-Saharan Africa


Diversified experience in Eastern Europe and Central Asia

Bosnia Herzegovina

10 MFIs: Mikrofin, Benefit, EKI, LOK micro, Mi-Bospo, Partner, Prizma, Sunrise, Women for Women, Sinergija Plus

23 ratings

Russia

5 MFIs: FFECCC, RWMN, VRFSBS, Doveriye, Narodnyi

7 ratings

Mongolia

2 Banks: Khan Bank, Xac Bank

1 MFI: VisionFund Mongolia

Moldova

MicroInvest

3 ratings

Armenia

3 MFIs: Aregak, MDF-Kamurj, Nor Horizon

Kosovo

KEP

Georgia

Constanta

2 ratings

Tadjikistan

1 Bank: Bank Eskhata

Bulgaria

Easy Credit

Azerbaijan

AzerdemyriolBank AzeriStar

3 ratings

Serbia Montenegro

AgroInvest

3 ratings

Ukraine

HOPE


Growing experience in Asia

China

Industry diagnostic

Training

Interactive Assessment (Harbin Bank)

India

3 MFIs: ASA Grama Vidiyal, LEAD, SWC

Cambodia

5 MFIs: CREDIT, Vision Fund Cambodia, TPC, Seilanithih, CCSF

9 ratings

Vietnam

3 MFIs: CEP, TYM Fund, Binh Minh

5 ratings

Philippines

8 MFIs: CARD, LifeBank, PMPC, CEVI, GM Bank, ECLOF, HSPFI, SEDP

Afghanistan

1 MFI: Sunduq

Indonesia

Ratings of 5 Cooperatives, including KOMIDA

Workshop

Mongolia

2 Banks: Khan Bank, Xac Bank

1 MFI: VisionFund Mongolia


Contacts

Global Headquarters

13 rue Dieumegard

93400 Saint-Ouen Paris – France

Tel: +33 1 4921 2630

Fax: +33 1 4921 2627

Latin America

Francisco de Paula Ugarriza 813 – Oficina 301

Miraflores, Lima 18 – Peru

Tel: +51 1 242 4597

Fax: +51 1 242 4597

Asia

444 EDSA 21st floor, Guadalupe Viejo

1211 Makati, Manila – Philippines

Tel/Fax: +632 897 7992

Middle East & North Africa

Picadilly Bldg #407

Hamra Street

Beirut – Lebanon

Tel: +961 3 11 96 81

West Africa & Central Africa

Boulevard Djily Mbaye

Immeuble FADH, 14th floor

BP 5695 Dakar – Senegal

Tel/Fax: +221 33 821 79 39

East Africa & Southern Africa

Shelter Afrique House – Mamlaka Road

PO Box 16658, 00100 Nairobi – Kenya

Tel: +254 20 271 42 20 www.planetrating.com - [email protected]

Business

Evolution of Microfinanance Investment Landscape and Reasons behind the growth of Social Investments