Microfinance 2.0

Here is an interesting article from Spiegel Online (thanks Avashya for letting us know about it) on an entrepreneur’s efforts to utilize the power of private equity to scale up microfinance institutions more quickly and to provide them with the capital necessary for significant expansion. One issue that comes to mind, as is discussed further in this post, is the ability for such funds to autonomously control the direction of a microfinance fund away from their original core competencies.

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.

Despite the success of the $710 million in capital managed through multiple microfinance funds, de Schrevel wanted more control and say in their investment vehicles.

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 $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 goal here is to leverage microfinance institution’s well-developed networks and exploit them to better disseminate new technologies that may help the world poor.

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 $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.”

One word of caution by someone in the article did say that

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.

The issue of control generally is one that must be looked at more closely with regard to microfinance institutions. The sky is falling hypo is one where a PE could come in a threaten to buyout Grameen Bank in hopes of turning it more profitable, etc. One must always remember the first and primary objective of a microfinance fund, which is to provide the poorest of the poor access to loans to escape out of poverty — not to exploit such individuals for a profit.

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