A recent spate of articles here and in other media has related the ongoing financial crisis in the credit markets to the funding and credit availability for microfinance institutions (MFIs). Articles appearing in the MicroCapital Monitor focus on the potential for the global financial crisis to adversely effect microbank lending. Former President Bill Clinton’s recent admonition to world credit markets to continue support of the microfinance sector is a strong voice for continued commitment in what could become a bear microfinance credit crunch. A jump of 150 to 200 basis points in the last quarter bodes ill for the sector.
One cannot help but notice the downturn in microfinance funding when you become the victim personally. As a consultant to The Grameen Foundation USA in August 2006, I was running an executive briefing on business process management for key members of the foundation’s portfolio at the Ashoka Hotel in New Delhi when a staff member came into the room and handed me a sheet of paper. It said, “… Dr. Mohammed Yunus has just been awarded the Nobel Prize for Peace….”
Like others before me, I was inspired to move from training others, to personal action and commitment. This writer experienced first hand the effects of the then-pending crisis. In June, our newly formed MicroVenture Support, a social mission initiative, was poised to launch when Morgan Stanley withdrew its microfinance unit. This caused a domino effect, which resulted in the evaporation of our committed funding.
In the late winter and early spring of this 2008, meetings at the Microfinance Club of London were awash with new microfinance units being formed by all virtually all the international investment houses. MFDAQ, a new social mission stock exchange, planned to inject USD 300 billion in socially responsible funds to support the microfinance sector. Our enterprise was to be the new exchange’s first offering. In May, MFDAQ was the darling of the market’s rush to microfinance. By mid-June, as the global maelstrom gained momentum, the decks were swept clean and the new funds evaporated. To date the exchange has yet to bring forth its first successful offering.
The MFI sector has the reputation for low-default and high-interest lending. If the perfect storm of global credit crisis continues, it is more than possible that the much-vaunted loan payback rates will begin to fall. It will be instructive to see how the original alliance of intermediaries, commercial banks and philanthropic donors will weather this storm.
The author Jerry Peloquin is old hippie from the sixties with a checkered past. He is a former US Marine and has been a rock ’n’ roll musician (founding member; Jefferson Airplane) and a US Capitol Police Officer. At present he is an organizational psychologist and Vice President of MicroVenture Support, a hybrid social-mission business providing investment and business acumen at the bottom of the pyramid. He would like to be a firefighter, but he is too fat…and too old.
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What has happened since June? How are you coming with your funding? MFDAQ doesn’t seem to have anything on it pertaining to your micro venture.
What is your next project?
Pam
Well, since the direct SR funding model collapsed for us, we devised a hybrid model and we have modified our general BDS approach to focus upon our Food Security initiative GrowFish. Growfish combines intensive aquaculture integrated into an agricultural growing method using the effluent of the fish production as a filtered highly efficient fertilizer. The model provides both food security and economic sustainability. It literally pays for itself.
Presently we are talking to The Gates Foundation and considering a partnership with The Inter American Development Bank in Peru. However, at present we are still unfunded and seeking partners.
Are we still not on the mfdaq exchange?
Reposted from MF Practice Listserve:
Jerry’s article sensitively explains the dilemma for MFDAQ.
Like WASEI, we have a large number of potential initiatives “in the wings”, but all of them naturally seek some confidence that capital is available.
Thus it was intensely disappointing to find the Banks pulling back so sharply when they were initially obtaining ‘good PR’ for their social responsibility. Now, of course, we are all a lot wiser.
But equally disappointing has been the lack of support from the established specialists in social finance (funds, donors, faith based organisations, specialist charities etc). There was an assumption that they would support a deal flow of new initiatives reaching out to attack deprivation, and that they would welcome a transparent and accountable structure.
It seems now that they preferred to keep their money on deposit in Icelandic Banks, or $400 Million of it anyway. It appears that it is probably all lost in the liquidation, a consequence of their aversion to “risk”, “lack of track record” or whatever other excuse they used for not using the money for the purpose that it was donated or collected.
If it was not so tragic one might laugh. Do you know that sort of laugh, the one that is just a fraction from desperate crying?
Yours, most sadly
Colin
Reposted from MF Practice Listserve
Posted by: “Herman Abels” herman@bluerhino.nl hermanabels
Tue Oct 14, 2008 3:16 pm (PDT)
Jerome, Colin,
What I think is this.
1. It is likely that the notion of microfinance being a distinct asset class will quickly evaporate. High repayment rates may constitute low business risk, but still represent high investment risk if most loans are not collateralized. A decade ago MicroRate, for instance, refused to actually grade MFIs as a formal grade might have given investors a false sense of security. Years later, catching up with emerging competition in the rating business, it still was reluctant to grade MFIs higher than B level, no mater how excellent they were.
2. In view of the imminent review of global risk assessment and rating policies it will be difficult for capital market players to either stay active in, or return to microfinance. At that level, microfinance will likely be considered a sub-prime or junk asset class; just as it was a decade ago. MFIs concentrating on SME and consumer finance, particularly pay-roll deduction systems, may still be considered eligible for these capital market investments, but rank-and-file MFIs will be cut off.
3. At the same time the field remains open for investors that apply genuine corporate socially responsibility policies. That are players that do not adopt CSR because it fits in with public relations policies or meets feel-good considerations but because they can handle the combination of higher risk and lower return in favor of contributing to something of substance. In other words, CSR investors that clearly mandate themselves to be active in microfinance will probably stay put.
4. The ‘contributing to something of substance’ element, however, will arguably need to be more articulated in order to sustain the mandate for involvement; hence we may see a greater appetite for indicating social performance, for transparency in the market, for codes of conduct, for consumer protection and what not. CSR needs to be substantiated rather than pledged off-handedly.
5. For most MFIs the withdrawal of capital market interest will not make much of a change because they had no access to these markets in the first place due to unwillingness or incapacity to prioritize investor over client interests. Yet, they still need access to more capital to finance growth. So where to get that?
6. Assuming that donors can indeed only do so much, the remaining avenues may be these:
* Domestic capital markets.
* Member savings and, if licensed, savings and deposits from the general public.
* Public or public-private apex funds.
* The genuine CSR capital market, including people-to-people investment modules.
* International and regional development banks, primarily fueled by public sector capital.
7. It would seem to me that this genuine CRS capital market is still in an infant stage relative to its potential. To develop that potential it is imperative that it will be positioned as a distinct market; distinct from fully commercial capital markets that is. Key to that is perhaps to develop a distinct corporate culture that better appreciates social performance as a critical ingredient for that proposition.
8. That corporate culture element has been overlooked for long. To me, and I guess to many others, it is has been difficult to identify the (now dysfunctional) Wall Street investment banks with any serious notion of corporate social responsibility; it was a contradiction in terms. Now that these icons of profit maximization-at-all-cost are out of the way, it is important to not resort to sweeping statements and write off the CSR market at large, simply because it has not come to the rescue of your particular initiatives that perhaps relied too much on Wall Street involvement all along.
9. To my knowledge, there is a wide range of CSR initiatives in many parts of the world that try to do the right thing: contributing to something of substance; all within respective confinements of mandates, objectives and expectations. Nearly all of these initiatives have found their own way of pursuing their objectives: they do have active investment portfolios up and running.
10. It is not a given that your value addition or exchange initiatives are considered by these players as a necessary addition to their activities. If I were a CSR investor, I would think twice before joining an initiative sponsored by Morgan Stanley or any other Wall Street or City of London highflier; I probably would have had reservations about their CSR credentials; perhaps you should have had too. Instead, I probably would have asked the likes of Yunus, Abed or Chaudury to shoulder the initiative, tried to link up with their visions and expectations, and only then mobilize Northern CSR investors on that agenda.
Actually, many others have done so, allowing for the extraordinary current overseas expansion drives of Grameen, BRAC and ASA respectedly. You can still do the same.
This week we all received the latest benchmarks of the MIX. Indeed a piece of art, in terms of meticulous listing of (self-reported) financial reporting indicators. However, as long as this impressive work is not matched by social perfomance indicators, how do you think CSR investors can position themselves; how can they build a convincing market niche?
Cheers,
Herman.
Reposted from MF Practice Listserve
Re: Global Credit Crunch Crushes SRI Investment?
Posted by: “Colin Howard” colin.howard@comdaq.net colinmeredithhoward
Wed Oct 15, 2008 4:56 am (PDT)
Herman, you have articulated the argument in a thoroughly professional manner, and I agree 100% with what you say.
And MFDAQ was (and is) intended to be “owned” by the Industry as a specialist “double bottom line” exchange that does agree measures of CSR (whether Mix, SEEP or any other initiative that genuinely provides an agreed comparison). It is not Wall Street, it will not rely on external rating agencies, but create its own measures, and it seeks support from Grameen, et al – because “somebody has to do it”. My frustration is that those who could help it happen are not doing so.
Two points I would like to add to your treatise. The first is that I would like to interpret the term “microfinance” as being any means to help the poor advance their circumstances, and not restrict that to the narrow area of loans. Thus Jerry’s initiative to help “bottom of the pyramid” local businesses to have access to venture capital, or micro franchise ideas, all contribute to building a local domestic economy, surely the only true way forward.
Second, I would wish to repeat the statistics that I believe apply, namely that MF deploys about $30 Billion internationally, yet to give (or lend) 2 Billion “economically able” just $150 each requires funding of $300 Billion. Thus the donor/NGO/Charity contribution is maxed out at just 10% of the
(most minimal) need. To change that we have to do something radical. We have to access capital in the way that “markets” understand. That means price quotes, transparency, accountability, information, deal flows, all the things that a specialist CSR exchange can offer to link to the investment community. Herman, you say that has to happen, and I agree. So, readers, what are you doing about it?
As ever, signed with my respect for the community, but I wish all those who can help would get active, please!!
Colin
From: MicrofinancePractice@yahoogroups.com
[mailto:MicrofinancePractice@yahoogroups.com] On Behalf Of Herman Abels
Sent: 15 October 2008 22:08
To: MicrofinancePractice@yahoogroups.com
Subject: Re: [unsure] RE: [MFP] Global Credit Crunch Crushes SRI Investment?
Colin,
I appreciate your sense of urgency.
Against the background of the evaporation or microfinance as a distinct asset class, it is important that genuine CSR players get vocal and state their claim; present themselves as different from plain commercial investors as well as from regular donor agencies.
The first point in doing so is in branding. There is a need to define what CSR truly is, where it comes from, what it can contribute as a valuable segment of the supply side of the industry at large and what its offer actually is.
Second, it needs to get organized as a dictinct category of investors. It needs a network or platform to do so; one that breathes its very identity, its thrust, its ambition, its niche in the market. Essentially, it needs to position itself as a movement.
Third, it needs tools and instruments that are specific and relevant to that movement. That may indeed involve an exchange; that may indeed involve value-adding business concepts or investment modules; and it surely does involve a back-to-basics approach of transparency as pioneered by Chuck.
The strategic point, however, is in sequencing: from branding to movement to tools and instruments.
Many, including myself, tend to start from the third level; focusing on tools and instruments and assuming support for the first two steps rather than going through the motions of securing it; perhaps not doing our homework properly.
Let’s do things right this time: brand CSR, get players organized and only then offer tools and instruments.
Cheers,
Herman.
E: [unsure] RE: [MFP] Global Credit Crunch Crushes SRI Investment?
Right Herman, where are these players?
Other than you, they are silent.
Indeed one post (from Jan) says we are not needed!
I am not sure it matters where one enters the equation – because our platform asks both investors and social businesses to declare their targets on a double bottom line basis, which in turn declares their CSR objectives.
Some will require a reduced return on investment, 5% say, providing that a social objective is achieved – bringing fresh water to 100,000 more people? Let the organisation declare their aim, and then be measured against the delivery.
Others may not require a return at all, like the UK based Fredericks Foundation. Does it make sense to effectively “give” capital to a business? Well I would say yes, providing there is another bottom line delivery, one that is measured and transparent, a clear social return.
Yet others still see it purely as an excellent asset class – despite your view that it is ceasing to exist. As with Compartamos, they will seek high returns.
What DOES matter, is that people Do enter the arena, from whichever position most suits them.
Do you hear anybody coming?
Regards
Colin
RE: [MFP] Global Credit Crunch Crushes SRI Investment?
Colin,
Just a quick remark comment about your estimate of need/demand. 2 billion economically able people seems like a huge overesitmate. The world’s poorest 2 billion people might perhaps account for 400 million households and even if half of these would need $150, we are at the 30 billion that is available already…
Jan
If I am not mistaken, this may well be an historical moment in the history of the development of Microfinance for what these gentlemen are considering is the creation of a truly NEW ASSET CLASS … follow this discussion closely.
From Garrett Wyse: Economist, Journalist, Global PUblic Good Activiist.
I have mentioned this before and apologies for that, but it seems ever more apt these days, especially in light of Hermans post. Retail investing in MF where many individuals can turn their marginal disposable income (spent on consumerables) into productive capital for the poor seesm more and more like an answer.
Branding is simple, ‘invest in the poor, help them to help themselves, and make a competitive financial return simultaneously’ (turn your ‘most’ spare cash into education, healthcare and food for those less fortunate than yourself (by fluke of birth).
And for investors, they can see, hear, touch and feel their investments, they are as real as it gets, the flesh and blood of the poor, not even so-called beyond risk investments like bricks and mortar.
I have tried to get this idea to the next stage and have travelled and met with hundreds of people that I personally have invested in (albeit a tiny amount in the larger fund, but I am there), and the sense of elation, mixed with other emotions has been overwhelming as I have met those that I help in a small way each and ever day to help themselves, and boy does it help me make a little more sense of the world, and hopefuly make it that bit better,
Surely the Foundations, governments, IFI’s, etc. etc. can see the merit in making us all realise more that we are in this together. Kiva is a great idea, but a large fund that we can all invest in, with thousands of beneficiaries gets it from small isolated ideas to Hermans movement, tollds and instruments stage (tax-free status for such funds from developed governments, matching funds from ODA budgets, etc. ideas are plentiful, and we have just seen how quick organistions etc. can move, and obscene resources mobilised when they want to,
We have brand, we have movement (which needs to be properly mobilised), tools and instruments are there to be developed, lets just get on with it,
Garrett
[…] The following is an anecdote detailing the effect of the financial crisis on the business operations of one Indian microfinance institution (MFI). Michael Chasnow does not provide any identifying information on the MFI, but the story is an interesting counter-balance to the claims of Yunus and Clinton on the balmy, if not ameliorative, effect of the credit crisis on microfinance. For more information, please see Microcapitol’s recent coverage of the crisis’ effect on microfinance and Jerry Peloquin’s recent guest editorial on the credit crunch and socially responsible investment. […]