NEWS WIRE: France: Business Week Chimes in on "Taking Microfinance to the Next Level"

Original article available here.

PARIS, February 26 – Thanks in part to the Nobel Peace Prize awarded in 2006 to Mohammad Yunus, the Bangladeshi founder of Grameen Bank, there has been a surge of interest in recent years in microfinance, a tool Yunus helped pioneer. Made especially to poor people in emerging economies, these small business loans, averaging about USD 345, play a vital role in lifting millions of people out of poverty.

Yunus was far from the only devotee of microfinance, though. In 2001 a pair of Europeans, Jean-Philippe de Schrevel and Cédric Lombard, discovered they shared a mutual conviction that the best way to cure poverty is through the capital markets. So they began lending money to microfinance institutions through a Geneva vehicle called BlueOrchard. Belgian de Schrevel, a former McKinsey & Co. consultant, got his MBA at Wharton, while Lombard hails from one of the families behind Lombard Odier Darier Hentsch, among Switzerland’s oldest private banks. (Lombard is no longer involved with BlueOrchard, but has founded a Geneva company called Symbiotics that provides consulting and services to the microfinance industry.)

Seven years later, BlueOrchard Finance manages a loan portfolio of more than USD 710 million through different funds launched in partnership with major international banks such as Dexia, Rothschild, BBVA and Morgan Stanley. Along the way it has forged relationships with more than 107 microfinance institutions in 36 countries.

Now, BlueOrchard wants to do for microfinance institutions what local lenders do for loan recipients: help them expand their businesses. It is launching a Luxembourg-based private equity fund it hopes to grow to USD 100 million by the end of 2008. The fund is aimed at buying into microfinance institutions around the world and helping them launch new services for people without access to banks, including savings accounts, mortgages and insurance. One advantage of taking equity positions is that BlueOrchard will gain some influence over the strategic direction of its investment targets.

The BlueOrchard Private Equity Fund, which has already raised USD 35 million from private, institutional and individual investors, also plans to help microfinance institutions in far-flung corners of the globe expand across borders and become regional players.

Return on Investment

In recent years investors’ appetite for microfinance has exploded. A wide variety of players, including hedge funds and venture capitalists, have begun competing to lend money to the institutions that provide such loans. Among them are Omidyar Network, established by Pierre Omidyar, the founder of eBay, and his wife Pamela, as well as Sequoia Capital, the Silicon Valley-based venture firm that backed Google and YouTube.

One reason for the interest in microfinance is that, as it turns out, institutions serving especially poor customers are more profitable than those serving better-off clients, partly because of the high interest paid on microloans and partly because there tend to be fewer defaults.

Altogether there are now an estimated 85 investment vehicles lending money to microfinance institutions, according to the Consultative Group to Assist the Poor (CGAP), a microfinance industry association housed at the World Bank in Washington. But most are debt vehicles, and if microcredit institutions are taking on debt in foreign currency and lending in local currency they are vulnerable to currency movements. It is only now that equity investments are being added to the mix, a welcome development because there is only so much hard currency microfinance institutions can absorb, says Elizabeth Littlefield, CGAP’s chief executive.

A Vast Network

BlueOrchard is among only a handful of new equity funds aimed specifically at microfinance. And it’s not stopping there. The company will continue its debt financing program in parallel, and de Schrevel is also launching a USD 20 million Geneva-based investment fund, called Bamboo Finance Oasis Fund, that aims to boost young companies working on ideas that could help bring clean water, energy, education, health, housing and insurance to people living below poverty level.

The notion is to forge a link with microcredit institutions whenever possible, leveraging their access to customers as a means of distributing new products tailored for the poorest of the poor. Indeed, says de Schrevel, one of the greatest values of microfinance outfits lies in their networks. “They have the capacity to reach out to millions of people who have never been touched by any distribution channels,” he says. “In the beginning it was about lending and then collecting savings. In the future, it could be debit cards, credit cards, microinsurance. A whole range of financial products needs to be defined.”

At the same time, de Schrevel believes it may be possible to combine financial services with products geared toward the poorest of the poor. One company Oasis may invest in has developed a USD 20 lantern powered by miniature solar panels that would last 25 years or more with no maintenance. Such a product might be distributed for sale through microfinance institutions that cater mostly to people without electricity, he says.

No Longer a “Mono Product”

Clearly, today’s service offerings are just the beginning. CGAP estimates some 3 billion people of working age lack access to basic financial services. Some of the gap is closed by state-owned agricultural, development and postal banks; member-owned collectives; savings banks and low-capital local banks, which serve hundreds of millions of people ignored by commercial banks and other financiers.

These so-called alternative financial institutions, or AFIs, offer services – from savings to remittances to insurance – that are generally outside the purview of traditional microlending institutions. That AFI savings accounts outnumber loans by four to one affirms the growing need for such services, argues CGAP. It estimates that some two-thirds of small loans and microloans come from AFIs.

Yet, CGAP estimates that even with as many as 750 million accounts on their books, these institutions, combined with smaller, nongovernmental microfinance institutions, serve only one-sixth of the potential microfinance market. All the more reason to help microfinance institutions “move from a mono product to progressively offering a spread of banking services,” says Martin Velasco, a well-known European business angel and a member of BlueOrchard Private Equity Fund’s executive board.

Up to the Challenge

Littlefield cautions that private equity funds targeting microfinance lenders will face a number of challenges. For one thing, the legal structure of many such institutions prevents outside equity investments. What’s more, it’s tricky to establish fair valuations and exiting from the investments can be difficult.

De Schrevel is unfazed. When making loans from its debt vehicle, BlueOrchard isn’t able to exert any influence over strategies of the microfinance institutions it lends to. But with its new private equity arm, which will acquire minority stakes of 15 percent to 30 percent, BlueOrchard can play a more active governance role, sharing its international experience, information, networks and knowledge.

Already, the new equity fund is helping three separate South American microfinance institutions set up cross-border operations, de Schrevel says. “As an equity investor we will become shareholders, and our influence will become much stronger.” And though the fund is structured as a traditional private equity vehicle, the investment horizon will be much longer, he says.

“We are at the beginning of a huge wave,” de Schrevel says. “Market development at the bottom of the pyramid is very sustainable and will have dramatic social impact.”

By Jennifer L. Schenker, Business Week

NEWS WIRE: France: Business Week Chimes in on “Taking Microfinance to the Next Level”

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