Round 2 with CGAP’s Gautam Ivatury

The ThinkChange India staff is committed to providing our readers with interviews with people we believe are at the brink of something special but have for the most part been overlooked by the mainstream media. Readers will be able to see other conversations under our TC-I Changemakers tag.

This week, Vinay sat down (over the phone) with Gautam Ivatury of the global microfinance center CGAP, which works to expand poor people’s access to financial services. Such services include but are not limited to microcredit and branchless banking. This interview is a follow up to one conducted on May 4, 2008, which you can read here.

Vinay Ganti: Could you please review yourself on the following topics, which we discussed in our last conversation?

  • Reaching beyond MFIs:

Gautam Ivatury: This still continues to be a major focus of CGAP’s mission. Across all of CGAP’s work we continue to look for ways to partner with a range of institutions and providers, including but not limited to MFIs, to be able to massively expand financial services for poor people.

GI: With regard to branchless banking, we set out to accomplish a number of goals. Overall we have been happy with the results of CGAP’s work in this area over the last six months, despite the fact that it has taken longer than expected for our project partners (in countries like Pakistan, Kenya, Mongolia, South Africa and elsewhere) to roll-out the branchless banking channels we helped design and finance.

Since our last talk, CGAP has expanded its policy and regulatory diagnostic work in branchless banking. New markets analyzed have included Colombia, Argentina and Indonesia, and we’ve continued to maintain close dialogue with the Reserve Bank of India and regulators elsewhere.

Also, the actual awareness of mobile banking in the field, i.e. what is and how it can work, has increased dramatically in the past. Last May we co-organized the first major annual event on “Mobile Money” for the unbanked in Cairo with the GSM Association (the industry body for the world’s 700+ mobile operators), IFC and DFID. That event got more than 500 paid attendees, most from private industry. And this week at the GSM World Congress in Barcelona, GSMA and other private sector players will announce additional activities in the space. DFID announced its new FAST program to encourage branchless banking this week. Initiatives like these are critical to get widespread adoption of the concept and to achieve scale. Moreover, major consulting and research outfits like Aite, Monitor and McKinsey have started research and published reports on the topic.

At the same time, our seven branchless banking projects have been slower to launch than we all expected two years ago. There have been some notable achievements — our Philippines partner has entered three new rural provinces and signed up about 80,000 new mobile banking clients, and Telenor bought 51 percent of Tameer Bank (our partner in Pakistan) to jumpstart its mobile banking initiatives. But in general the implementation of mobile / branchless banking has been slower than anticipated.

VG: Why do you think this is? Continue reading

Thumbs up, thumbs down for Microfinance

Thumbs up: Obopay and Grameen Solutions partner together to provide microfinance services to clients. The initiative will be called the “Bank A Billion Initiative.”

The premise of the project is to provide access to basic financial services through cell phones, reducing the need for costly personal contact between financial institutions and their customers. The initiative hopes to take advantage of the rapid spread of cell phones in developing areas, especially in areas without access to microfinance services.

Thumbs down: Hot off the heels of their decision to stifle mobile banking services, the RBI has now increased the capital adequacy requirements for MFIs, which have concerned many of them in the field.

The Reserve Bank of India (RBI) recently tightened capital adequacy standards governing microfinance institutions (MFIs) in India, and several local MFIs worry the change may lead to the need to raise additional capital and increase interest rates.

MicrofIN[DIA]nce

Here are some major headlines with regard to microfinance in India:

A new technology platform designed specifically for microinsurance providers has been launched

ICICI and others have banded together to create a rating system for MFIs

A recent study indicates that microfinance is focusing more on the urban areas than before

NABARD sponsors trip for banking representatives to observe microfinance in Sri Lanka

[All articles from Microcapital.org]

Measuring the Social Performance of Microfinance Institutions (MFIs)

As part of its InSight Series, ACCION International has published a report entitled, “Guidelines to Evaluate Social Performance,” which aims to develop a structured framework for assessing and reporting the social performance of MFIs. According to the report:

Social goals drive the strategies of many microfinance institutions, yet many of these institutions are judged primarily on their financial performance. Measuring and reporting on social performance is a key way for double bottom line institutions to define the social value they create, while holding themselves accountable for the goals articulated in their mission.

The paper reports that currently, there is are no universally adopted standards for “social reporting”, and the tools that do exist to measure “social performance” vary from organization to organization. In fact, it was not until recently, when “an industry-wide task force” took up the responsibility, that “social performance” was defined as “the effective translation of an institution’s social mission into practice in line with accepted social values.”

More after the jump. Continue reading

MFIs tend to lose focus as they ‘evolve’

A new report released by the Women’s World Banking (WWB) observes that as many microfinance institutions transform from non-profits to traditional financial intermediaries, they tend to shift away from their original focus on helping poor women and instead focus on making larger loans a la a traditional financial institution. The results were disheartening as the report found that:

… five years after “transformation” for 27 organizations and compared them to 25 that had not commercialized. On average, it found the proportion of women served by transformed institutions dropped from 88 percent to 60 percent. It also found that average loan sizes were two to three times greater than those of non-commercialized outfits.

Written by Christina Frank, the report also highlighted the possible benefits of such a transition.

Transformed institutions tend to extend their borrower reach and diversify their product offerings. The study reveals that the number of active borrowers increased by 30 percent a year on average for commercialized MFIs, compared to 25 percent for the non-profits. Also, since many countries do not allow non-profits to take deposits, savings accounts are more widely available with transformed MFIs. The number of savings accounts grew by an average of 45 percent annually for the commercialized institutions, while those in the non-commercialized group that were already able to offer such accounts only saw 28 percent average growth.

This phenomenon is something that needs to be closely monitored, but as can be seen by the report there are arguments for both sides. Theoretically as long as new MFIs come in to serve the now abandoned population, this evolutionary cycle may not be that disastrous, but one must then question the sustainability of the microfinance growth model generally then.

[Source: Microcapital.org]

SIMFLEX: MFI Financial Statements Made Simple and Flexible

According to Microcapital.org, Sheer Intelligence, an American technology consulting and software firm, recently launched an “online product for the creation of financial statements by microfinance institutions (MFIs)” called SIMFLEX. This product is especially relevant in light of a recent report released by the Center for the Study of Financial Innovation, which found that “management and corporate governance standards are the biggest risks faced by MFIs today.” According to the report:

Much of the worry about management quality focused on the fact that MFIs tend to be dominated by ‘visionaries’ who are strong on charisma but less so on management skills and strategic flexibility.

The lack of basic corporate governance concepts at many MFIs is also a concern, especially for investors seeking transparency in their investments.

SIMFLEX, therefore, offers a “simple, flexible” reporting system, which is designed “to generate financial statements that are clear and easy for investors to understand.” Included below is a summary of what the product offers users for a licensing fee of USD 50 / year (soon to be made available in languages aside from English):

Statements could be created for any fiscal period and in any currency, and validation rules and procedures for statements and amendments are built in to enable compliance with international standards. Computation of key performance indicators and integrated data analysis and aggregation tools are included. A SIMFLEX statement would consist of an income statement, balance sheet, portfolio report, and non-financial data.

According to the founder of Vivien Ashworth, founder of Sheer Intelligence:

“There is no shortage of investors interested in microfinance,” said Vivien Ashworth, CEO of Sheer Intelligence. “Most microfinance institutions need to improve not only the data they disclose to investors but also the process of how they disclose the data. With the availability SIMFLEX, we expect more microfinance institutions will make the move to reporting in accordance with international standards.”

To download the official press release, go here.

India’s first Social Capital Exchange to be launched (I’m serious!)

According to story today on Business Standard, M-Cril, the credit rating agency is launching a platform called ‘Capital Connect’ which will enable MFIs and social enterprises to access capital from investors looking to make investments in this space. This is seen as early precursor to a equity exchange for ‘social investments’ – in other words a social capital market (a few years back, it would be utterly murderous to put words like capital, business and investment next to the word social, increasingly these words are used together – a sign of times to come). Quoting from the piece:

An equity exchange for social investments? The country may soon have such a platform for equity placements catering to social enterprises and microfinance institutions (MFIs) that will be open to institutional investors.

The exchange has been conceptualised and is being set up by credit rating agency M-Cril, which rates MFIs.

As a precursor, M-Cril is launching a company called Capital Connect in May that will be a platform for MFIs and enterprises to register themselves to access financiers who buy shares in them.

M-Cril, by the way is most ideally suited to pull this off and the timing is just brilliant. The Micro-Finance industry in India is at the tipping point, poised to unleash a wave of tremendous growth. The investor interest has also been growing (we have covered multiple deals in this space before). M-Cril is the premier credit rating agency for MFIs, and I believe first of its kind in the world, having done 480 assessments in 27 countries. Thus, in addition to building the platform, the organization can use its rating expertise to help investors make the right choices.

The platform also intends to list other social businesses in sectors like green energy, low-cost housing and health-care. This, I assume would be a tougher goal, given the lack of scalable models in these sectors (unlike the MFIs, which stand on years of operational experience and scale). Also, the need for a ‘social investment exchange’ makes ample sense in the short run, over the long run, social businesses might just well be able to merge into traditional capital markets (under the grand and idealistic premise that ‘traditional’ investors would begin attaching some value to social returns). Clearly, I would be in the idealistic fantasy-land to expect such a change in the near future, given the recent controversy surrounding the Compartmentos IPO in Mexico.

Overall, Capital Connect is a pioneer, and given the track-record of the sector to rapidly scale innovative ideas (Kiva, Microplace), it should probably take-off. Of course, we will keep our eyes and ears open.