MICROCAPITAL BRIEF: Initial Public Offering (IPO) of India-based Microfinance Institution (MFI) SKS Microfinance Raises Questions about Ethics within the Industry

With the initial public offering (IPO) of SKS Microfinance, an Indian microfinance institution (MFI), expected to raise USD 250 million to USD 350 million for the MFI and its private equity (PE) investors, questions have been raised about the ethics of MFI investors profiting millions of dollars when their customers are poor. Two Hyderabad-based MFIs, Spandana and Share Microfin, are also aiming to access the capital market through IPOs within the next 12 months. According to a recent Reuters article, the high growth of some MFIs and their low reported default rates have been most attractive to investors. Shashi Shrivastava, vice president of Grameen Capital India, an MFI advisory firm, told India-based business newspaper, Business Standard, that PE investments in MFIs have been increasing over the past few years, with USD 300 million estimated to have been invested over the last three years. However, a variety of organizations are criticizing the influx of funds from the capital markets and PE investors. MicroCapital has reported on this debate previously, specifically around the IPO of Compartamos Banco, a Mexican MFI that earned USD 458 million from its IPO in 2007.

“The job of microfinance is to alleviate poverty, so the question to ask is: who’s going to benefit from the IPO?” said Olivia Donnelly, executive director of UK-based Shivia Microfinance, a non-profit firm that focuses on India and Nepal, in an interview with Reuters. “…is it correct to make millionaires out of shareholders when your borrowers are so poor?” Ms Donnelly commented, “MFIs are ignoring their social mission. They have a duty to educate their clients and not lend money for buying a TV or pay dowry just to add to their loan books… It’s sub-prime all over again.”

Criticism has also arisen regarding high valuations within the MFI sector. JP Morgan and the World Bank’s CGAP (Consultative Group to Assist the Poor) said in a report that PE investors have helped push valuations of Indian MFIs to “5.9 times book value, or nearly three times the global [MFI] average”. The report indicated that although listed MFIs have outperformed mainstream banks, valuations of Indian MFIs are “unsustainably high”. Xavier Reille, a co-author of the report, told Reuters, “PEs can bring greater efficiency, development plans and good management, but they can also create tension because investors tend to want to exit in three to five years.” The authors of the JP Morgan-CGAP report conjecture, “depending on the outcome [of the SKS Microfinance IPO], it is quite probable that the spotlight on the Indian microcredit sector will intensify, while triggering renewed discussion around MFIs’ profitability and social impact.”

By: Christine Chang, Research Associate

About SKS Microfinance:

SKS Microfinance is a microfinance institution (MFI), launched in 1998, that caters to women clients in India. In 2005, it transformed into a for-profit non-banking financial company (NBFC). As of September 2009, SKS had 3.5 million active borrowers and 1,676 branches, compared with 771 branches in March of 2008. According to the MIX Market, the microfinance information clearinghouse, its total assets as of 2008 were USD 596 million, with a return on assets of 3.68 percent and return on equity of 18.72 percent. SKS products include: income generating loans, mid-term loans, individual loans, loan cover insurance and health insurance.

About Compartamos Banco:

Compartamos Banco is a microfinance bank based in Mexico. It was founded in 1990. It offers both group and individual loans in rural and urban areas. Compartamos Banco provides small loans to low-income Mexican individuals and business owners, such as craft manufacturers, food vendors and other small businesses. It also offers voluntary savings, insurance, and loans specifically for home improvement. The company made its initial public offering (IPO) in 2007 on the New York and Mexican stock exchanges in a transaction worth USD 467 million, and, as of December 31, 2009, has a total loan portfolio of MXN 7.6 billion (the equivalent of USD 591 million).

Additional Resources:

Reuters website: Profiting from poverty? Microfinance IPO sparks debate, April 9, 2010: http://www.reuters.com/article/idUSTRE63814G20100409

Business Standard website: Post public issues, MFIs with PE investments set for rejig, April 9, 2010: http://www.business-standard.com/india/news/post-public-issues-mfispe-investments-set-for-rejig/391277/

JP Morgan and CGAP (Consultative Group to Assist the Poor) Paper: All Eyes on Asset Quality – Microfinance Global Valuation Survey 2010, March 2010: http://www.cgap.org/gm/document-1.9.42531/OP16R.pdf

MICROCAPITAL BRIEF: SKS Microfinance Limited, Microfinance Institution (MFI) in India, Files to Raise $250m in Initial Public Offering (IPO), March 29, 2010: https://www.microcapital.org/microcapital-brief-sks-microfinance-limited-microfinance-institution-mfi-in-india-files-to-raise-250m-in-initial-public-offering-ipo/

MICROCAPITAL BRIEF: Wall Street Journal Article Examines “Profit Versus Purpose” Debate in Microfinance Industry, March 18, 2010: https://www.microcapital.org/microcapital-brief-wall-street-journal-article-examines-%E2%80%9Cprofit-versus-purpose%E2%80%9D-debate-in-microfinance-industry/

MicroCapital.org: WHO’S WHO IN MICROFINANCE: Compartamos Banco, January 13, 2010: https://www.microcapital.org/who%E2%80%99s-who-in-microfinance-compartamos-banco/

MicroCapital Universe: SKS Microfinance: https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=SKS+Microfinance

MicroCapital Universe: Compartamos Banco: https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Compartamos+Banco

Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/

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